-----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, KNgCSXGj48lT7iihufllTOxvXub4awGxHZjPMAul2j4K+2FKOOvepIGpFre5TjRR 6U1IKyy4KA9rX5eBO6UVzg== 0001125282-05-002736.txt : 20050520 0001125282-05-002736.hdr.sgml : 20050520 20050520154948 ACCESSION NUMBER: 0001125282-05-002736 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050520 DATE AS OF CHANGE: 20050520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIXTAR CORP CENTRAL INDEX KEY: 0001099730 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 650722193 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15489 FILM NUMBER: 05848263 BUSINESS ADDRESS: STREET 1: 11900 BISCAYNE BLVD SUITE 262 CITY: MIAMI STATE: FL ZIP: 33181 BUSINESS PHONE: 3055038600 MAIL ADDRESS: STREET 1: 11900 BISCAYNE BLVD SUITE 262 CITY: MIAMI STATE: FL ZIP: 33181 FORMER COMPANY: FORMER CONFORMED NAME: GLOBAL ASSET HOLDINGS INC DATE OF NAME CHANGE: 19991124 10-Q 1 b406889_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM L0-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION L3 OR L5(D) OF THE SECURITIES EXCHANGE ACT OF L934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 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 011-15489 EPIXTAR CORP. ----------------- (Exact name of registrant as specified in its charter)
FLORIDA 65-0722193 - ------------------------------------------------------------- ---------------------------------------------------------- (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization) 11900 BISCAYNE BOULEVARD, SUITE 700 MIAMI, FLORIDA 33181 - ------------------------------------------------------------- ---------------------------------------------------------- (Address of principal executive offices) (Zip Code)
305-503-8600 ------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5 (d) of the Securities Exchange Act of l934 during the preceding l2 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 |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| NO |X| The number of shares of the registrant's common stock, $0.001 par value, outstanding as of May 1, 2005, was 12,150,356 shares. 1 EPIXTAR CORP. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 - 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 - 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 - 27 Item 4. Controls and Procedures 27 - 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings 29 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 5. Other Information 30 Item 6. Exhibits 30 Signatures 31 Exhibits Index 32
2 PART I. FINANCIAL STATEMENTS ITEM 1. FINANCIAL STATEMENTS EPIXTAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2005 2004 --------------- ---------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents (includes amounts held in escrow of $1,110,000 at December 31, 2004) $ 495,991 $ 1,530,052 Restricted cash 175,000 175,000 Accounts receivable, net 5,549,825 4,454,152 Deferred loan costs, current portion 416,328 423,777 Prepaid expenses and other current assets 211,232 201,045 Deferred billing costs 104,293 70,454 --------------- ---------------- Total current assets 6,952,669 6,854,480 Property and Equipment, net 7,305,187 5,103,409 Other Assets: Note receivable -- 900,000 Goodwill 4,392,991 3,360,272 Intangible assets 5,721,750 -- Deferred loan costs, net of current portion 494,432 540,886 Deposits and other 1,329,091 1,289,668 --------------- ---------------- Total other assets 11,938,264 6,090,826 --------------- ---------------- Total assets $ 26,196,120 $ 18,048,715 =============== ================ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Accounts payable $ 4,637,187 $ 2,666,713 Accounts payable, related party 1,876,992 975,000 Deferred revenue 654,820 722,328 Accrued expenses and other liabilities 4,075,165 1,277,565 Accrued interest 568,936 460,104 Current portion of borrowings 7,374,370 6,312,758 Note payable, stockholder 2,474,000 2,474,000 --------------- ---------------- Total current liabilities 21,661,470 14,888,468 Long-Term Liabilities: Borrowings, net of current portion 9,311,109 3,893,470 --------------- ---------------- Total liabilities 30,972,579 18,781,938 --------------- ---------------- Commitments and Contingencies -- -- Stockholders' Deficiency: Convertible preferred stock, $.001 par value; 10,000,000 shares authorized; 15,500 and 23,510 shares issued and outstanding; (liquidation preference of $3,100,000 and $4,702,000) 16 17 Common stock, $.001 par value, 50,000,000 shares authorized; 12,150,356 and 11,544,219 shares issued and outstanding 12,150 11,544 Additional paid-in capital 23,582,863 22,114,353 Accumulated deficiency (28,452,443) (22,838,853) Accumulated other comprehensive income (loss) 80,955 (20,284) --------------- ---------------- Total stockholders' deficiency (4,776,459) (733,223) --------------- ---------------- Total liabilities and stockholders' deficiency $ 26,196,120 $ 18,048,715 =============== ================
See Notes to Consolidated Financial Statements. 3 EPIXTAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 2005 2004 ----------------- -------------- Revenues $ 9,080,074 $ 4,876,148 ----------------- -------------- Cost of production employees 3,250,501 170,287 Billing cost 276,816 936,359 Other costs of revenue 666,864 197,708 ----------------- -------------- Total costs of revenue 4,194,181 1,304,354 ----------------- -------------- Gross profit 4,885,893 3,571,794 ----------------- -------------- Expenses: Compensation and benefits 3,426,329 1,654,770 Other selling, general and administrative 3,098,810 1,569,608 Consulting fees and reimbursements - related party 1,125,000 675,000 Provision for doubtful accounts 187,900 86,913 Depreciation and amortization 784,384 100,994 Amortization of intangible assets 373,250 -- ----------------- -------------- Total operating expenses 8,995,673 4,087,285 ----------------- -------------- Loss from operations (4,109,780) (515,491) Other Income (Expense): Other income (expense) 41,913 (8,826) Factoring fees on accounts receivable (53,623) (119,351) Interest expense (220,864) (215,887) Amortization, debt discounts (151,648) -- Amortization, cost of borrowings (145,153) -- Warrants issued in lieu of finance charges (866,732) -- Other finance charges (100,000) -- ----------------- -------------- Other income (expense), net (1,496,107) (344,064) ----------------- -------------- Loss from continuing operations (5,605,887) (859,555) Provision for income taxes (benefit) -- -- ----------------- -------------- Net loss $ (5,605,887) $ (859,555) Cumulative dividends on preferred stock (44,694) (47,020) ----------------- -------------- Loss Assignable to Common Stockholders $ (5,650,581) $ (906,575) ================= ============== Loss per common share: Basic $ (0.48) $ (0.08) ================= ============== Diluted $ (0.48) $ (0.08) ================= ==============
See Notes to Consolidated Financial Statements. 4 EPIXTAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 2005 2004 ---------------- ---------------- OPERATING ACTIVITIES: Net loss $ (5,605,887) $ (859,555) Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by (used in) operating activities: Depreciation and amortization 784,384 100,994 Provision for doubtful accounts 187,900 86,913 Stock-based compensation -- 159,375 Warrants issued in lieu of finance charges 866,732 81,654 Amortization of discount on convertible debt 151,648 43,344 Amortization of cost of borrowings 145,153 -- Amortization of discount on stockholder loan -- 26,163 Amortization of intangible assets 373,250 -- Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (119,362) 772,996 Prepaid expenses and other 8,597 (85,811) Deferred billing costs (33,840) 98,423 Deposits and other 2,025 23,810 Increase (decrease) in: Accounts payable, accrued expenses and other liabilities 1,775,592 (1,149,466) Accounts payable - related party 900,000 975,000 Accrued interest payable 108,831 -- Deferred revenues (67,508) (586,152) ---------------- ---------------- Net cash used in operating activities (522,485) (312,312) ---------------- ---------------- INVESTING ACTIVITIES: Cash paid for acquisition (50,000) -- Additions to property and equipment (602,494) (797,859) ---------------- ---------------- Net cash used in investing activities (652,494) (797,859) ---------------- ---------------- FINANCING ACTIVITIES: Proceeds from the issuance of debt, net of loan costs 676,251 -- Repayment of notes payable and capital lease obligations (636,572) (81,489) ---------------- ---------------- Net cash provided by (used in)financing activities 39, 679 (81,489) ---------------- ---------------- Net effect of exchange rates on cash 101,239 (4,512) ---------------- ---------------- Net Decrease in Cash and Cash Equivalents (1,034,061) (1,196,172) Cash and Cash Equivalents, beginning of year 1,530,052 1,342,186 ---------------- ---------------- Cash and Cash Equivalents, end of period $ 495,991 $ 146,014 ================ ================ Supplemental Disclosure of Cash Flow Information: Income Tax Paid $ -- $ -- ================ ================ Interest Paid $ 195,562 $ 16,743 ================ ================ Non Cash Transactions Conversion of 1,000 shares of preferred stock into 55,847 shares of common stock, $ 100,000 $ -- ================ ================ Equipment purchased under capital leases 136,250 ================
See Notes to Consolidated Financial Statements. 5 EPIXTAR CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED) NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Epixtar Corp. (Epixtar) was incorporated in Florida in June 1994 and was previously known as Global Asset Holdings, Inc. (Global). Epixtar Corp. and its subsidiaries are collectively known as the "Company". Epixtar, through its subsidiaries, operates primarily in two lines of business: business process outsourcing and contact center services (BPO) and internet service provider services (ISP). Basis of Presentation The accompanying unaudited consolidated financial statements of Epixtar Corp. (the Company) as of and for the periods ended March 31, 2005 and 2004 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and changes in cash flows in accordance with accounting principles generally accepted in the United States of America. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2004, filed with the SEC on April 15, 2004. Operating results for the three months ended March 31, 2005, are not necessarily indicative of the results expected for the year ending December 31, 2005. See Note 2. Significant Accounting Policies STOCK-BASED COMPENSATION In accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees", the Company currently uses the intrinsic-value method of accounting for its employee and board of director stock options and, accordingly, does not recognize compensation expense for stock option awards in the Consolidated Statement of Operations, as all option exercise prices are 100 percent of market value on the date the options are granted. See Recent Accounting Pronouncements below. The following table illustrates the pro forma effect on net loss and loss per share assuming we had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" to all previously granted stock-based awards after giving consideration to potential forfeitures. The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model. Reference is made to "Note 15: Stock Option Plan" in the Company's Annual Report on Form 10-K for Fiscal 2004, for the assumptions used in the Black-Scholes option-pricing model. The estimated fair value of options granted is amortized to expense over their vesting period, which is generally 3 years. 6
Three Months Ended March 31, 2005 2004 ------------------- ------------------- Net income (loss) available to common shareholders $ (5,650,581) $ (906,575) Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (779,087) (958,216) ------------------- ------------------- Pro forma net loss $ (6,429,668) $ (1,864,791) =================== =================== Income (loss) per share: Basic: As reported $(0.48) $(0.08) =================== =================== Pro forma $(0.55) $(0.17) =================== =================== Diluted: As reported $(0.48) $(0.08) =================== =================== Pro forma $(0.55) $(0.17) =================== ===================
Recent Accounting Pronouncements In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" (SFAS 123R), which requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value and to recognize cost over the vesting period. The adoption of SFAS 123R is not expected to have a significant effect on the Company's financial position or cash flows, but will impact its results of operations. An illustration of the impact on the Company's net loss and loss per share is presented under "Stock-Based Compensation" in this Note, assuming the Company had applied the fair value recognition provisions of SFAS 123R using the Black-Scholes methodology. The Company has not yet determined whether it will use the Black-Scholes method upon adoption of Statement 123R. Also, the Company is unable to estimate the future impact that SFAS 123R will have on its financial position, results of operations or cash flows due to unknown events, such as the type and number of share-based payments that will be granted, their terms, and their vesting periods. In April 2005, the SEC announced that companies may implement SFAS 123R at the beginning of their next fiscal year (instead of their next reporting period) starting after June 15, 2005 (or December 15, 2005 for small business issuers). This new rule moves the Company's implementation date for SFAS 123R to the first quarter of 2006. The SEC's new rule does not change the accounting required by Statement 123R; it changes only the dates for compliance. In March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, "Share-Based Payment" (SAB 107). SAB 107 provides the SEC staff's position regarding the application of SFAS 123R, which contains interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, and also provides the staff's views regarding the valuation of share-based payment arrangements for public companies. SAB 107 highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company is currently reviewing the effect of SAB 107, but it does not believe SAB 107 will have a material impact on its financial position, results of operations or cash flows. In October 2004, the FASB ratified Emerging Issues Task Force Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share" (EITF 04-8). EITF 04-8 requires that shares underlying contingently convertible debt be included in diluted earnings per share computations using the if-converted method regardless of whether the market price trigger (or other contingent features) has been met. The effective date for EITF 04-8 is for reporting periods ending after December 15, 2004. EITF 04-8 also requires restatement of earnings per share amounts for prior periods presented during which the convertible instrument was outstanding. The Company does not currently have contingently convertible debt and accordingly, adoption of EITF 04-8 is not expected to have a significant effect on the Company's financial position or cash flows, or results of operations. 7 In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies the term "conditional asset retirement obligations" as used in FASB Statement No. 143, "Accounting for Asset Retirement Obligations." FASB Statement No. 143 refers to an entity's legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. If an entity can reasonably estimate a liability for the fair value of a conditional asset retirement obligation, the entity is required to recognize the fair value of the liability when incurred. A company normally incurs this liability upon acquisition, construction, or development of the asset at issue. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company is currently reviewing FIN 47, and at the current time it does not believe that FIN 47 will have a material impact on its financial position, results of operations or cash flows. Reclassifications Certain reclassifications have been made in the 2004 financial statements to conform to the 2005 presentation. NOTE 2. GOING CONCERN CONSIDERATIONS At March 31, 2005, the Company reflected an accumulated deficit of approximately $28,452,443 as a result of net losses in each period of operation except calendar year 2003. The Company had negative cash flows from operations for the three months ended March 31, 2005 and 2004. The Company reported a net loss of $5,605,887 for the three months ended March 31, 2005 and $859,555 during the same period in 2004. The Company continues to experience certain liquidity issues primarily as a result of the Company's costs associated with the execution of its BPO operations business plan. All these factors raise significant concern about the Company's ability to continue as a going concern. In order to achieve profitability, the Company needs to be able to retain its ISP customers as well as continue to expand its customer base in its business outsourcing and call center segment. Management believes that the steps it has taken during 2004 and 2005 to implement and grow its BPO operations will allow the Company to achieve profitability. During 2004 and continuing into 2005, the Company (1) hired additional management personnel with call center experience, (2) entered into agreements for outsourcing services and (3) obtained additional debt financing. See Notes 5 and 11. The realization of assets and satisfaction of liabilities in the normal course of business is dependent upon the Company's generating additional operating capital and ultimately reaching profitable operations. No assurances can be given that the Company will be successful in these activities. Should any of these events not occur, the Company's financial condition and results of operations would be materially adversely affected. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 3. ACQUISITION In November 2004, the Company entered into an agreement to purchase all of the outstanding common shares of Innovative Marketing Strategies, Inc. (IMS), a privately-held Florida corporation with six years experience providing business process outsourcing and contact center services to the financial services market. IMS customers include banks, credit card companies and mortgage companies. These services are delivered from four call center facilities located in U.S. and one facility located in the Philippines. Select operational functions are conducted from its network operations center (NOC) in North Carolina. In July 2004, the Company had advanced IMS $600,000 and advanced an additional $300,000 in November 2004. On January 3, 2005, the Company completed the purchase of all of the outstanding common shares of IMS. This acquisition has been accounted for under the purchase method of accounting and accordingly, the results of operations of IMS have been included in the Company's consolidated financial statements since the date of acquisition. IMS is a wholly-owned subsidiary of Voxx Corporation, a wholly-owned subsidiary of the Company, and is being operated within its BPO business segment. The purchase price of approximately $6.5 million, excluding guaranteed liabilities of approximately $1.1 million, is calculated as follows: 8 Cash consideration paid $ 1,017,290 Non-interest bearing Collateral Promissory Note, payable over 24 months 5,104,594 Acquisition costs 375,000 ------------ $ 6,496,884 ============ The amount of consideration to the former shareholders of IMS amounted to $6,121,884, including $50,000 paid at closing. The purchase price allocation of the IMS acquisition resulted in goodwill of approximately $1.0 million and identifiable intangible assets of $6.1 million. The identifiable intangible assets include customer relationships of approximately $4.0 million, non-compete contracts of approximately $1.7 million and approximately $375,000 and these are being amortized on a straight-line basis over 5 and 3 years, respectively. The IMS balance sheet as of acquisition date, January 3, 2005, is as follows: ASSETS Accounts Receivable - Net $ 1,164,000 Prepaid Expenses and Other Current Assets 17,000 ----------------- Total Current Assets 1,181,000 Property and Equipment - Net 2,402,000 Goodwill 966,000 Intangible Assets 6,095,000 Other Assets 41,000 ----------------- Total Assets $ 10,685,000 ================= LIABILITIES Accounts Payable $ 2,010,000 Accrued Expenses and Other Liabilities 1,385,000 Amounts due Expixtar and Voxx 1,117,000 Debt - Current 845,000 ----------------- Total current assets 5,357,000 Debt - Long Term 5,328,000 ----------------- TOTAL LIABILITIES $ 10,685,000 ================= Pro Forma Results The following summary, prepared on a pro forma basis, presents unaudited consolidated results of operations as if IMS had been acquired as of the beginning of the period presented, after including the impact of adjustments such as amortization of intangibles. This pro forma presentation does not include any impact of acquisition synergies. Three Months Ended March 31, 2004 ------------------ Revenue - as reported $ 4,876,148 Revenue- pro forma $ 9,446,338 Net loss - as reported $ (859,555) Net loss - pro forma $ (1,721,132) Net income (loss) per diluted common share - as reported $ (0.08) Net income (loss) per diluted common share - pro forma $ (0.16) 9 The pro forma results are not necessarily indicative of the Company's results of operations had it owned IMS during the entire period presented. NOTE 4. ACCOUNTS RECEIVABLE Accounts receivable, net, amounted to $5,549,825 and $4,454,152 at March 31, 2005 and December 31, 2004, respectively. At March 31, 2005, $1,160,160 of the accounts receivable relates to IMS. The Company's accounts receivables serve as collateral for certain debt of the Company (see Note 5). NOTE 5. DEBT AND CAPITAL LEASES At March 31, 2005 and December 31, 2004, debt and capital leases consisted of the following:
March 31, December 31, 2005 2004 ---------------- ----------------- Non-interest bearing collateral promissory note due January 2007, payable in monthly installments, net of unamortized discount of $267,458 $4,622,764 $ -- 7% secured convertible notes due on demand, secured by accounts receivable 450,000 450,000 6% Notes due on demand, secured by equipment 500,000 500,000 8% unsecured convertible promissory notes, due April 2005, net of unamortized discount of $8,822 and $46,631 991,178 953,369 Secured convertible term note due May 2007, payable in monthly installments of $90,909 commencing October 2004, bearing annual interest at 2.5% over prime, not to exceed 8%, collateralized by the assets of the Company, net of unamortized discount of $489,829 and $546,860 4,055,626 4,271,322 5% unsecured joint and several subordinated convertible promissory notes, due May 2007, net of unamortized discount of $110,568 and $111,899 3,604,432 2,835,601 Non-interest bearing note payable, due June 2006, payable in monthly installments of $6,374 127,487 127,487 Non-interest bearing promissory note, due September 2005, payable in monthly installments of $40,435 364,328 404,762 Non-interest bearing assumption of equipment financing on acquisition of call center, payable through 2005 158,301 158,301 11.9% promissory notes due August 2007, secured by automobiles, payable in monthly installments of $3,008 72,597 77,738 Non-interest bearing note pursuant to asset purchase agreement, payable on demand 88,692 88,692 11% equipment financing agreement, with maturities from September 2005 through March 2006 124,248 124,248 Notes assumed in IMS acquisition: 10% Note due August 2009, payable in monthly installments 325,000 -- 8.8% Note due November 2005, secured by certain equipment, payable in monthly installments of $36,613 382,742 -- Non-interest bearing equipment financing due March 2006, payable in monthly installments of $6,348 206,715 -- Equipment financing Note due March 2007, bearing annual interest at 3.25% over prime 33,630 -- 4.0% West Virginia Development Note due April 2008, secured by certain assets as defined in a security agreement 189,556 --
(Continued) 10 Debt and Capital Leases, Continued
March 31, December 31, 2005 2004 ---------------- ----------------- 5% Ohio Valley Industrial and Business Development Note due January 137,247 -- 2013, secured by certain assets, as defined in security agreement Non-interest bearing promissory note from the Kansas Department of Commerce & Housing due May 2005, forgiven if defined job creation requirements are met 65,702 -- Capitals leases, at interest rates ranging from 9.0% to 11% in 2004 and 7% to 14% in 2003 185,234 214,708 ---------------- ----------------- 16,685,479 10,206,228 Less current portion 7,374,370 6,312,758 ---------------- ----------------- $ 9,311,109 $ 3,893,470 ================ =================
On January 3, 2005, the Company completed its purchase of all of the outstanding common shares of IMS. As part of the acquisition, the Company issued a $5,104,594 non-interest bearing Collateral Promissory Note payable to the IMS shareholders. This note is payable monthly over two years. At March 31, 2005, the note amounted to $4,622,724, net of unamortized discount of $267,458. In December 2003, the Company issued 7% Secured Convertible Notes in the amount of $500,000 to accredited investors. During 2004, $50,000 was repaid and the remaining notes amounting to $450,000, matured in December 2004. In October 2004, in connection with the purchase of equipment related to the contact center business, the Company issued 6% Notes maturing in December 2004, in the amount of $500,000 to the same accredited investors. The Company obtained from these lenders extensions to the 7% Secured Convertible Notes and the 6% Notes through April 29, 2005. As consideration for the extension, on April 22, 2005, a related party to the Company transferred to the lender detachable warrants it held to purchase 200,000 shares of the Company's common stock for $0.50 per share, exercisable at any time over a five year period from the date of issuance. Additionally, as part of the extension, on April 21, 2005 the Company issued 145,000 shares of common stock, in Voxx, a wholly-owned subsidiary of the Company. The extension to the Notes matured on April 29, 2005, and the Company is currently negotiating with the lenders to obtain another extension of the maturity date. In May 2004, the Company issued 8% Unsecured Convertible Promissory Notes in the amount of $1,000,000 to accredited investors. As part of the issuance of the convertible notes, the Company issued detachable warrants to purchase 132,722 shares of the Company's common stock exercisable at any time over a five year period from the date of issuance. As of March 31, 2005 these warrants were exercisable at $2.15 per share. At March 31, 2005 and December 31, 2004, these notes amounted to $991,178 and $953,369, respectively, net of unamortized discount of $8,822 and $46,631, respectively, resulting from the issuance of the warrants. On April 29, 2005, the Company repaid these notes, including interest of $82,789. On May 14, 2004, the Company issued a Secured Convertible Term Note in the amount of $5,000,000 at 2.5% over prime (not to exceed 8%) to an accredited institutional investor. As part of the convertible term note, the Company issued detachable warrants to purchase 492,827 shares of the Company's common stock exercisable at any time over a seven-year period from the date of issuance. As of March 31, 2005 these warrants were exercisable at $2.15 per share. In connection with the issuance of the convertible term note, the Company entered in to a registration rights agreement with the lender. Under the terms of the agreement, the Company was required to pay the lender $100,000 for each 30 day period after 120 days from the original issuance of the note if a registration statement filed with the Securities and Exchange Commission (SEC) covering the common stock underlying the convertible term note and detachable warrants was not declared effective (Liquidated Damages). Additionally, in accordance with the terms of the agreement, at December 31, 2004, approximately $1,110,000 of the principal amount of the note was held in a restricted account to be released upon the effectiveness of a registration statement filed with the SEC. On February 28, 2005, the Company entered into an Amendment and Waiver agreement with the lender, resulting in the waiver of the Liquidated Damages under the agreement and the authorization to release the $1,110,000 held in the restricted account at December 31, 2004. As consideration for the waiver, the Company issued to the lender warrants to purchase 1,900,000 shares of the Company's common stock at an exercise price of $2.15 per share, exercisable at any time over a seven-year period. Using the Black-Scholes model the Company estimated the fair value of the 1,900,000 warrants and allocated $1,060,065, or $0.56 per common share to the warrants. This amount, net of $193,333 of previously accrued Liquidated Damages was recognized as expense on the accompanying Consolidated Statement of Operations for the three months ended March 31, 2005. At March 31, 2005 and December 31, 2004, these notes amounted to $4,055,626 and $4,271,322, respectively, net of unamortized discount of $489,829 and $546,860, respectively, resulting from the issuance of warrants. See Note 11. 11 During the three months ended March 31, 2005, the Company and its wholly-owned subsidiary, Voxx Corporation (Voxx), sold to accredited investors, in a private placement, an additional $767,500 principal amount of 5% Joint Unsecured Subordinated Convertible Promissory Notes due May 2007. Pursuant to the notes, in the event Voxx becomes a public company, the then outstanding notes are immediately converted into shares of Voxx common stock. The rate of interest will be increased to an annual rate of 10% if Voxx does not become a public corporation on or before October 15, 2006. Until Voxx is a public company a holder may convert his entire note into shares of the Company's Common Stock for one year at a fixed conversion price related to market but not less than $2.25. Thereafter the exercise price will be the lesser of $1.00 or the average market price for a period preceding the one-year anniversary of the notes, as specified in the agreement. The notes are subordinate in all respects to the senior debt. In addition to the note each unit also consists of the right to receive in the future (i) warrants to purchase the Company's Common Stock and/or (ii) warrants to purchase Voxx's common stock. Based on the terms of the conversion associated with the notes, there was an intrinsic value associated with the beneficial conversion feature estimated at $12,153, which was recorded as deferred interest and presented as a discount on the convertible notes, net of amortization to be taken over the terms of the notes. At March 31, 2005 and December 31, 2004, these notes amounted to $3,604,432 and $2,835,601, respectively, net of unamortized discount of $110,568 and $111,899, respectively, resulting from the issuance of warrants. NOTE 6. COMMON STOCK CONVERSION OF PREFERRED STOCK During the three months ended March 31, 2005, a holder of the Company's preferred stock converted 1,000 shares of preferred stock into 55,847 shares of the Company's common stock. The holder of the preferred stock originally purchased the shares for $100,000, or $100 per share. Pursuant to the provisions of the Company's Amended Certificate of Incorporation relating to the preferred stock, cumulative dividends were added to the original purchase price and the adjusted value was converted into common stock using a conversion price of $2.00 per share COMMON STOCK On February 28, 2005, the Company issued 550,290 shares of common stock pursuant to its acquisition of IMS in January 2005. As part of the acquisition of IMS, the Company guaranteed an agreement for approximately $770,000 due an IMS shareholder for commissions, and issued the 550,290 shares of common stock as payment for $385,000 of the amount guaranteed. The valuation assigned to the common stock was based on the average volume and price of the Company's stock for the month of November 2004, as provided in the acquisition agreement. WARRANTS On February 28, 2005, the Company issued warrants to purchase 1,900,000 shares of the Company's common stock at an exercise price of $2.15 per share, exercisable at any time over a seven-year period. The Company estimated the value of the warrants, using the Black-Scholes model, to be $1,060,065, or $0.56 per common share. This amount, net of $193,333 of previously accrued fees was charged to earnings on the accompanying Consolidated Statement of Operations for the three months ended March 31, 2005. 12 NOTE 7. RELATED PARTY TRANSACTIONS On October 31, 2001, the Company issued a 7% note in the amount of $2,474,000, collateralized by accounts receivable, to a then unrelated entity. In August 2002, the creditor became a stockholder of the Company and in. November 2002, the Company entered into an agreement whereby the stockholder agreed to release its security interest in the Company's accounts receivable to the extent required to secure additional debt financing and agreed not to demand payment before January 2005 in exchange for certain consideration. Except for the demand deferral and the release of the security interest, all other terms of the note stayed in effect. The consideration given consisted of warrants to purchase 4,000,000 shares of Company common stock at an exercise price of $0.50 per share for a term of three years beginning in May 2003. At March 31, 2005 and December 31, 2004, the outstanding principal balance of the Note was $2,474,000. In October 2001, the Company entered into an agreement with Transvoice, whereby Transvoice provided certain services related to the development of the Company's internet service provider business. The Company incurred expenses of $900,000 and $450,000 during the three months ended March 31, 2005 and 2004, respectively, for services under this agreement. At March 31, 2005 and December 31, 2004, $1,500,000 and $750,000, respectively of these amounts remained unpaid and are included in accounts payable-related party. In April 2003, the Company entered into an agreement with Transvoice, whereby Transvoice provides consulting services related to the development of marketing and telemarketing aspects of the Company. The Company incurred expenses of $225,000 under this agreement in each of the three months ended March 31, 2005 and 2004. At March 31, 2005 and December 31, 2004, $375,000 and $225,000 remained unpaid and are included in accounts payable - related party. NOTE 8. EARNINGS (LOSS) PER SHARE The Company presents both basic and diluted EPS. Basic EPS is calculated by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period which is calculated using the treasury stock method for stock options and warrants, and assumes conversion of the Company's convertible notes. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. Weighted average number of shares used to compute basic and diluted loss per share for the three months ended March 31, 2005 and 2004 is the same, since the effects of the preferred stock, common stock options, warrants and convertible debt were anti-dilutive. A reconciliation of net loss and the weighted average number of common and common equivalent shares outstanding for calculating diluted earnings per share is as follows: See following page. 13
Three Months Ended March 31, -------------------------------------- 2005 2004 ----------------- ----------------- Net loss $ (5,605,887) $(859,555) Preferred stock dividends (44,694) (47,020) ----------------- ----------------- Net loss for basic and diluted EPS calculations $ (5,650,581) $(906,575) ----------------- ----------------- WEIGHTED AVERAGE NUMBER OF SHARES FOR BASIC AND DILUTED EPS 11,752,909 10,677,067 LOSS PER SHARE Basic $ (0.48) $ (0.08) ================= ================= Diluted $ (0.48) $ (0.08) ================= =================
NOTE 9. BUSINESS SEGMENTS The Company operates primarily in two segments: business process outsourcing and contact center operations (BPO) and internet service provider services (ISP). Information concerning the revenues and operating income for the three months ended March 31, 2005 and 2004, and the identifiable assets for the two segments in which the Company operates are shown in the following tables:
During the Three Months Ended March 31, -------------------------------------------- 2005 2004 -------------------- -------------------- OPERATING REVENUE - SEGMENT - ISP $ 3,099,559 $ 4,687,927 - BPO 5,980,515 188,221 -------------------- -------------------- Consolidated totals $ 9,080,074 $ 4,876,148 ==================== ==================== OPERATING REVENUE - GEOGRAPHIC (1) U.S. $ 9,080,074 $ 4,876,148 Philippines -- -- -------------------- -------------------- Consolidated totals $ 9,080,074 $ 4,876,148 ==================== ==================== INCOME (LOSS) FROM OPERATIONS - ISP $ 1,580,456 $ 1,319,013 - BPO (5,690,236) (1,834,504) -------------------- -------------------- Consolidated totals $ (4,109,780) $ (515,491) ==================== ==================== DEPRECIATION AND AMORTIZATION - ISP $ 28,751 $ 64,152 - BPO 755,633 36,842 -------------------- -------------------- Consolidated totals $ 784,384 $ 100,994 ==================== ==================== CAPITAL EXPENDITURES (2) - ISP $ -- $ -- - BPO 3,015,215 797,859 -------------------- -------------------- Consolidated totals $ 3,015,215 $ 797, 859 ==================== ====================
(Continued) 14 -------------------- --------------- At December 31, At March 31, 2005 2004 -------------------- --------------- IDENTIFIABLE ASSETS - ISP $ 4,317,797 $ 6,085,591 - BPO 21,878,323 11,963,123 -------------------- --------------- Consolidated totals $ 26,196,120 $ 18,048,714 ==================== ===============
(1) The Company allocates its geographic revenue based on customer location. All of the Company's customers are U.S based companies. Services performed for call center customers are performed in the Philippines and three call centers in the U.S. (2) The three months ended March 31, 2005, includes capital assets of $2,401,415 acquired as a result of the IMS acquisition. NOTE 10. COMMITMENTS AND CONTINGENCIES Legal Proceedings All the Company's current significant legal proceedings arise out of its ISP business. The Company believes the proceedings and their settlement will not have a significant effect on its operations since the Company no longer actively markets its ISP business and the Company believes it is in substantial compliance with the law. Private Action On January 30, 2004 Dixon Aviation, Inc. commenced an action in the Circuit Court of Alabama for Barbour County against an officer, the Company and two of its subsidiaries, a billing house and a LEC. This litigation was brought as a class action complaint for declaratory and injunctive relief, alleging that the Defendants engaged in cramming. During the second week of May 2005, the Company settled the matter for $5,000. In addition to the legal proceeding discussed above, the Company is exposed, from time to time, to other claims, legal actions, and regulatory actions in the normal course of business, some of which are initiated by the Company. Management believes that any such additional outstanding issues will be resolved without impairing the financial condition of the Company. NOTE 11. SUBSEQUENT EVENTS 1. On April 20, 2005, the board of directors of Epixtar Corp. (the "Company") granted and conveyed an aggregate of 2,000,000 shares of Voxx Corporation common stock owned by the Company (the "Restricted Shares") to certain employees and consultants of the Company, each of which grants is evidenced by a Restricted Stock Agreement between the Company and the grantee. Voxx Corporation is a subsidiary of the Company. The Restricted Period for the Restricted Shares commenced on the date of grant and will end on the date of any initial public offering of Voxx common stock. During the Restricted Period, the grantee may not sell, assign, transfer or encumber the Restricted Shares, the right to vote the Restricted Shares or the right to receive dividends on the Restricted Shares (collectively, the "Restrictions"), provided that the grantee shall have all other rights of a stockholder of Voxx which the Company previously had with respect to the shares, including, without limitation, the right to receive dividends on and the right to vote the shares. The Restricted Shares shall vest upon any initial public offering of Voxx common stock, at which time the Restrictions shall lapse with respect to such shares. The Restricted Stock Agreement provides that all rights to the Restricted Shares shall be forfeited to the Company without consideration in the event that an initial public offering of Voxx common stock does not occur prior to July 31, 2006. 15 Each grantee, as a condition of the grant, is required to elect, within 30 days of the date of grant, and upon written notice delivered to the Internal Revenue Service with a copy delivered to the Company, to recognize income for federal income tax purposes equal to the Fair Market Value of the shares as of the date the shares are transferred to the grantee, regardless of the Restrictions and the vesting schedule. If the grantee timely makes this required election and otherwise complies with the provisions of the Restricted Stock Agreement relating to such election, then on December 31, 2005, the Company will pay to each grantee, as an additional incentive payment, an amount equal to $0.30 per Restricted Share granted to such grantee. At the request of the Company, Voxx or any representative of the underwriters in connection with an initial public offering of Voxx common stock, each grantee shall be subject to a lock-up period in connection with such initial public offering with respect to the shares granted under the Restricted Stock Agreement, whether vested or still restricted. On April 20, 2005, Voxx Corporation ("Voxx"), a wholly-owned subsidiary of Epixtar Corp., adopted the Voxx Corporation 2005 Stock Incentive Plan (the "Incentive Plan") which permits the granting of awards of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock and performance shares with respect to Voxx common stock. The Incentive Plan was approved by Epixtar Corp. (the "Company") as the sole stockholder of Voxx. Awards under the Incentive Plan may be granted or awarded to employees of Voxx or its Affiliates (including the Company), persons who are hired to be employees of Voxx or its Affiliates, non-employee directors of Voxx or any of its Affiliates, and consultants and independent contractors who render key services to Voxx or its Affiliates. The maximum number of shares of common stock of Voxx that may be issued under the Incentive Plan or pursuant to awards made under the plan is 2,375,000 shares, subject to adjustment in the event of a change in corporate capitalization of Voxx. The Incentive Plan will be administered by the Board of Directors of Voxx (the "Voxx Board") unless and until the Voxx Board delegates administration to a committee of members of the Voxx Board (such committee and the Voxx Board herein collectively referred to as the "Administrator"). On April 20, 2005, the Voxx Board granted options with respect to an aggregate of 2,000,000 shares of Voxx common stock to certain employees of Voxx and its affiliates pursuant to the Incentive Plan, which options are all designated as incentive stock options to the extent permitted. The Voxx Board also granted non-qualified stock options with respect to an aggregate of 375,000 shares of Voxx common stock to certain non-employee directors pursuant to the Incentive Plan. Voxx has entered into Stock Option Agreements, pursuant to the terms of the Incentive Plan, with each optionee. The exercise price for each option that was granted is $3.00 per share. All of the granted options are exercisable immediately and will remain exercisable for a period of ten years unless the recipient's rights under the option agreement terminate earlier in accordance with the terms of the Stock Option Agreement or the terms of the Incentive Plan. 2. On April 22, 2005, the Company issued an 8% Promissory Note in the amount of $250,000 to an accredited investor. The note is payable on demand. In the event the Company is unable to repay the note upon written demand, the interest rate on the unpaid amount will increase to 18% per annum. 3. On April 29, 2005, the Company., and its majority-owned subsidiary, Voxx Corporation, entered into a financing facility with Laurus Master Fund, Ltd and affiliates of Laidlaw & Company (UK) Ltd., pursuant to which the Company and Voxx borrowed $7,000,000 represented by Senior Secured Convertible Notes (the Notes) that mature on April 29, 2008, bear interest at the rate of prime + 2% per year, and are payable beginning on October 29, 2005 at the monthly rate of $166,667 plus accrued but unpaid interest. Payments may, in certain circumstances, be made in shares of the Company and/or Voxx common stock. The Notes may be prepaid at any time at 130% of the then outstanding principal balance due at the time of prepayment. The Notes are secured by all of the assets of Voxx Corporation and its subsidiaries, the Company's shareholdings in Voxx Corporation and significantly all of its other subsidiaries, by a pledge of the Company and Voxx's contract revenues from certain sources and by certain other assets of the Company and its subsidiaries. The Notes significantly restrict the ability of Epixtar, Voxx and their subsidiaries from borrowing additional monies without the consent of the lenders. 16 The Notes are convertible into the common stock of Epixtar at $1.00 per share and/or into the common stock of Voxx in the event Voxx conducts an initial public offering of its own securities at a 15% discount to the IPO price. As additional consideration for the making of the loan, the lenders received options to purchase 31% or 4,167,028 shares of Voxx Corporation common stock computed on a fully diluted basis at the time of closing at a price of $.001 per share, warrants to purchase 556,596 shares of Voxx common stock at a price, generally, equal to the IPO price, and payments and reimbursements to the lenders and related parties of approximately $640,000. The options and warrants both provide the holder with anti-dilution protection in the event of stock splits, stock dividends and other extraordinary corporate events. The remaining proceeds of the loan were used by the Company to repay $1,100,000 of outstanding debt with the balance reserved to continue the build out of Voxx Corporation's Philippine-based contact center facilities and for general corporate purposes. As a condition of the making of this loan, the Company was also required to amend the terms of its existing $5,000,000 loan facility with Laurus to reprice to $1.00 per common share approximately 3,148,144 of previously issued warrants originally issued at prices ranging from $2.15 to $4.66 per share, including 1.9 million warrants issued for the Company's common stock on February 28, 2005 in connection with the Amendment and Waiver agreement of the facility, and to further secure the facility with certain additional contract revenues from the Company's ISP business. The Notes provide that it is an "event of default" in the event of, among other things, non-payment, a breach of a covenant or any other agreement made by the borrowers in the note purchase agreements, the appointment of a receiver, an unsatisfied money judgment against one of the borrowers or any of their subsidiaries in excess of $150,000 for more than 30 days, a change in control of the Company or Voxx (other than in connection with a Voxx IPO), the institution of a government regulatory proceeding which prevents the borrowers from utilizing a substantial portion of their assets , or the occurrence of an "event of default" in certain other agreements to which the borrowers are parties. If an "event of default" should occur and continue beyond any applicable grace period, 110% of the then outstanding principal balance of the Notes plus accrued but unpaid interest becomes immediately due and payable. The $7,000,000 loan is convertible into the Company's common stock at $1.00 per share or Voxx common stock at a price equal to 85% of the IPO price and included the issuance of options and warrants to acquire shares of the Company's principal subsidiary, Voxx Corporation, at $0.001 per share and the IPO price, respectively. All of these securities were issued and sold pursuant to Section 4(2) of the Securities Act of 1933, as amended, as securities sold by an issuer in a transaction "not involving any public offering." The transaction was privately negotiated with representatives of accredited investors with whom the Company had pre-existing business relationships only and did not involve any general solicitation or advertising. As a result of the transaction described above, certain rights to acquire, or to convert certain debt obligations of Epixtar Corp. and Voxx Corporation into, shares of common stock of Epixtar Corp. and/or Voxx Corporation that were outstanding at the time of such transaction will be modified by (i) increasing the number of such shares which may be acquired upon the exercise of such rights or the conversion of such obligations and (ii) reducing the price of such shares at which such acquisition or conversion is effected. The dilutive effect of the issuance of Epixtar Corp. equity securities and the re-pricing of certain previously issued securities, as per this agreement, could, if all of the debt was converted and all of the warrants were exercised, result in an increase in the Company's issued and outstanding common stock by 9,915,726, shares or an increase of 81.6% of the number of common shares outstanding as of May 1, 2005. This dilutive effect includes the effects from re-pricing other equity securities, but it excludes the potential dilutive effect on the Company's percentage ownership of its Voxx subsidiary as a result of equity securities held by the lender to purchase Voxx common stock. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The following Management's Discussion and Analysis (MD&A) is intended to help the reader understand Epixtar. MD&A is provided as a supplement to, should be read in conjunction with and is qualified in its entirety by reference to, the Company's Consolidated Financial Statements and related Notes to Consolidated Financial Statements (Notes) appearing under Item 1 in this report. In addition, reference is made to the Company's audited Consolidated Financial Statements and related Notes thereto and related MD&A included in its Annual Report on Form 10-K for Fiscal 2004. Except for the historical information contained herein, the discussions in MD&A contain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under "Forward-Looking Statements" and "Risk Factors that May Affect Future Results." The following are the sections of MD&A contained in this report, together with the Company's perspective on the contents of these sections of MD&A, which it hopes will make reading these pages and understanding of the Company's operations more beneficial. Recent Events - description of acquisition of IMS, Voxx new stock options plan and options granted, and financing obtained on April 29, 2005. Operations Review - an analysis of the Company's consolidated results of operations and of the results in each of our two operating segments, to the extent the operating segment results are material to an understanding of the Company's business as a whole, for the periods presented in its Consolidated Financial Statements. Liquidity and Capital Resources - an analysis of cash flows, capital structure and resources, off-balance sheet arrangements, commercial commitments and contractual obligations. Discussion of Critical Accounting Policies and New Accounting Pronouncements - a discussion of accounting policies that require critical judgments and estimates, and of accounting pronouncements that have been issued but not yet implemented by the Company and their potential impact. Forward-Looking Statements - cautionary information about forward-looking statements. RECENT EVENTS On January 3, 2005, the Company completed its purchase all of the outstanding common shares of Innovative Marketing Strategies, Inc. (IMS), a privately-held Florida corporation with six years experience providing business process outsourcing and contact center services to the financial services market. IMS customers include banks, credit card companies and mortgage companies. These services are delivered from four call center facilities located in U.S. and one facility located in the Philippines. Select operational functions are conducted from its network operations center (NOC) in North Carolina. On April 20, 2005, the board of directors of Epixtar Corp. (the "Company") granted and conveyed an aggregate of 2,000,000 shares of Voxx Corporation common stock owned by the Company (the "Restricted Shares") to certain employees and consultants of the Company, each of which grants is evidenced by a Restricted Stock Agreement between the Company and the grantee. Voxx Corporation is a subsidiary of the Company. The Restricted Period for the Restricted Shares commenced on the date of grant and will end on the date of any initial public offering of Voxx common stock. During the Restricted Period, the grantee may not sell, assign, transfer or encumber the Restricted Shares, the right to vote the Restricted Shares or the right to receive dividends on the Restricted Shares (collectively, the "Restrictions"), provided that the grantee shall have all other rights of a stockholder of Voxx which the Company previously had with respect to the shares, including, without limitation, the right to receive dividends on and the right to vote the shares. The Restricted Shares shall vest upon any initial public offering of Voxx common stock, at which time the Restrictions shall lapse with respect to such shares. The Restricted Stock Agreement provides that all rights to the Restricted Shares shall be forfeited to the Company without consideration in the event that an initial public offering of Voxx common stock does not occur prior to July 31, 2006. 18 Each grantee, as a condition of the grant, is required to elect, within 30 days of the date of grant, and upon written notice delivered to the Internal Revenue Service with a copy delivered to the Company, to recognize income for federal income tax purposes equal to the Fair Market Value of the shares as of the date the shares are transferred to the grantee, regardless of the Restrictions and the vesting schedule. If the grantee timely makes this required election and otherwise complies with the provisions of the Restricted Stock Agreement relating to such election, then on December 31, 2005, the Company will pay to each grantee, as an additional incentive payment, an amount equal to $0.30 per Restricted Share granted to such grantee. At the request of the Company, Voxx or any representative of the underwriters in connection with an initial public offering of Voxx common stock, each grantee shall be subject to a lock-up period in connection with such initial public offering with respect to the shares granted under the Restricted Stock Agreement, whether vested or still restricted. On April 20, 2005, Voxx Corporation ("Voxx"), a wholly-owned subsidiary of Epixtar Corp., adopted the Voxx Corporation 2005 Stock Incentive Plan (the "Incentive Plan") which permits the granting of awards of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock and performance shares with respect to Voxx common stock. The Incentive Plan was approved by Epixtar Corp. (the "Company") as the sole stockholder of Voxx. Awards under the Incentive Plan may be granted or awarded to employees of Voxx or its Affiliates (including the Company), persons who are hired to be employees of Voxx or its Affiliates, non-employee directors of Voxx or any of its Affiliates, and consultants and independent contractors who render key services to Voxx or its Affiliates. The maximum number of shares of common stock of Voxx that may be issued under the Incentive Plan or pursuant to awards made under the plan is 2,375,000 shares, subject to adjustment in the event of a change in corporate capitalization of Voxx. The Incentive Plan will be administered by the Board of Directors of Voxx (the "Voxx Board") unless and until the Voxx Board delegates administration to a committee of members of the Voxx Board (such committee and the Voxx Board herein collectively referred to as the "Administrator"). On April 20, 2005, the Voxx Board granted options with respect to an aggregate of 2,000,000 shares of Voxx common stock to certain employees of Voxx and its affiliates pursuant to the Incentive Plan, which options are all designated as incentive stock options to the extent permitted. The Voxx Board also granted non-qualified stock options with respect to an aggregate of 375,000 shares of Voxx common stock to certain non-employee directors pursuant to the Incentive Plan. Voxx has entered into Stock Option Agreements, pursuant to the terms of the Incentive Plan, with each optionee. The exercise price for each option that was granted is $3.00 per share. All of the granted options are exercisable immediately and will remain exercisable for a period of ten years unless the recipient's rights under the option agreement terminate earlier in accordance with the terms of the Stock Option Agreement or the terms of the Incentive Plan. On April 29, 2005, the Company., and its majority-owned subsidiary, Voxx Corporation, entered into a financing facility with Laurus Master Fund, Ltd and affiliates of Laidlaw & Company (UK) Ltd., pursuant to which the Company and Voxx borrowed $7,000,000 represented by Senior Secured Convertible Notes (the Notes) that mature on April 29, 2008, bear interest at the rate of prime + 2% per year, and are payable beginning on October 29, 2005 at the monthly rate of $166,667 plus accrued but unpaid interest. Payments may, in certain circumstances, be made in shares of the Company and/or Voxx common stock. The Notes may be prepaid at any time at 130% of the then outstanding principal balance due at the time of prepayment. The Notes are secured by all of the assets of Voxx Corporation and its subsidiaries, the Company's shareholdings in Voxx Corporation and significantly all of its other subsidiaries, by a pledge of the Company and Voxx's contract revenues from certain sources and by certain other assets of the Company and its subsidiaries. The Notes significantly restrict the ability of Epixtar, Voxx and their subsidiaries from borrowing additional monies without the consent of the lenders. 19 The Notes are convertible into the common stock of Epixtar at $1.00 per share and/or into the common stock of Voxx in the event Voxx conducts an initial public offering of its own securities at a 15% discount to the IPO price. As additional consideration for the making of the loan, the lenders received options to purchase 31% or 4,167,028 shares of Voxx Corporation common stock computed on a fully diluted basis at the time of closing at a price of $.001 per share, warrants to purchase 556,596 shares of Voxx common stock at a price, generally, equal to the IPO price, and payments and reimbursements to the lenders and related parties of approximately $640,000. The options and warrants both provide the holder with anti-dilution protection in the event of stock splits, stock dividends and other extraordinary corporate events. The remaining proceeds of the loan were used by the Company to repay $1,100,000 of outstanding debt with the balance reserved to continue the build out of Voxx Corporation's Philippine-based contact center facilities and for general corporate purposes. As a condition of the making of this loan, the Company was also required to amend the terms of its existing $5,000,000 loan facility with Laurus to reprice to $1.00 per common share approximately 3,148,144 of previously issued warrants originally issued at prices ranging from $2.15 to $4.66 per share, including 1.9 million warrants issued for the Company's common stock on February 28, 2005 in connection with the Amendment and Waiver agreement of the facility, and to further secure the facility with certain additional contract revenues from the Company's ISP business. The Notes provide that it is an "event of default" in the event of, among other things, non-payment, a breach of a covenant or any other agreement made by the borrowers in the note purchase agreements, the appointment of a receiver, an unsatisfied money judgment against one of the borrowers or any of their subsidiaries in excess of $150,000 for more than 30 days, a change in control of the Company or Voxx (other than in connection with a Voxx IPO), the institution of a government regulatory proceeding which prevents the borrowers from utilizing a substantial portion of their assets , or the occurrence of an "event of default" in certain other agreements to which the borrowers are parties. If an "event of default" should occur and continue beyond any applicable grace period, 110% of the then outstanding principal balance of the Notes plus accrued but unpaid interest becomes immediately due and payable. The $7,000,000 loan is convertible into the Company's common stock at $1.00 per share or Voxx common stock at a price equal to 85% of the IPO price and included the issuance of options and warrants to acquire shares of the Company's principal subsidiary, Voxx Corporation, at $0.001 per share and the IPO price, respectively. All of these securities were issued and sold pursuant to Section 4(2) of the Securities Act of 1933, as amended, as securities sold by an issuer in a transaction "not involving any public offering." The transaction was privately negotiated with representatives of accredited investors with whom the Company had pre-existing business relationships only and did not involve any general solicitation or advertising. As a result of the transaction described above, certain rights to acquire, or to convert certain debt obligations of Epixtar Corp. and Voxx Corporation into, shares of common stock of Epixtar Corp. and/or Voxx Corporation that were outstanding at the time of such transaction will be modified by (i) increasing the number of such shares which may be acquired upon the exercise of such rights or the conversion of such obligations and (ii) reducing the price of such shares at which such acquisition or conversion is effected. The dilutive effect of the issuance of Epixtar Corp. equity securities and the re-pricing of certain previously issued securities, as per this agreement, could, if all of the debt was converted and all of the warrants were exercised, result in an increase in the Company's issued and outstanding common stock by 9,915,726, shares or an increase of 81.6% of the number of common shares outstanding as of May 1, 2005. This dilutive effect includes the effects from re-pricing other equity securities, but it excludes the potential dilutive effect on the Company's percentage ownership of its Voxx subsidiary as a result of equity securities held by the lender to purchase Voxx common stock. 20 OPERATIONS REVIEW Highlights Operations highlights for the first quarter of fiscal 2005 include: Revenues increased 86.2% to $9,080,074 in the first quarter of fiscal 2005, from $4,876,148 in the first quarter of fiscal 2004. Loss from continuing operations increased $4,746,332, to $5,605,887, in the first quarter of fiscal 2005, from $859,555 in the first quarter of fiscal 2004; BPO segment achieved revenue growth of $5,792,294. The Company's new IMS acquisition contributed $5,156,998 to the increase. Operating income declined $3,855,732, compared to the first quarter of fiscal 2004 primarily as a result of the Company's expansion of its BPO operations in 2004 and continuing in 2005. ISP segment revenue declined $1,588,368 as a result of its declining customer base. Operating income increased $448,194, or 33.9%, compared to the first quarter of fiscal 2004 primarily due to lower direct and administrative costs as the Company has suspended its marketing efforts. Business Segments The Company engages in two primary lines of business: business process outsourcing concentrating on contact center activities (BPO) and internet service provider services (ISP). Through 2003, the Company's revenues were primarily derived from its ISP business, which provides Internet services, including unlimited Internet access and email, to small business subscribers. As a result of the ISP's ongoing business interaction with the contact center industry, combined with extensive analysis of the contact center industry, management made the strategic decision to focus the Company's energies and resources in developing and operating offshore contact centers. BPO services complement the ISP business and consequently, the Company continues to maintain and service its ISP business customers while concentrating the Company's efforts in growing the business process outsourcing and contact center services business. Business Processing Outsourcing and Contact Center Business The Company began developing its contact center business in the latter part of 2003 and continued throughout 2004 and now has approximately 1,525 operational seats in the Philippines and the United States, including approximately 500 seats added through the Company's acquisition of IMS, supporting several major clients. The Company is actively marketing its contact center services and, depending on financing, will continue to build out infrastructure and hire additional personnel. See Recent Events, above for a description of financing obtained in April 2005. Revenues from contact center operations are derived from telemarketing, tele-verification, and customer support services provided to clients based on individual business requirements. Depending on the contract under which services are provided, the company may earn revenues on a commission basis, a performance basis, an hourly basis, or a blend of the three. Cost of generating revenue consists of direct payroll costs, recruitment and training of personnel and communication costs. On an ongoing basis, the most significant expense of the Company's contact center business will be labor costs for agents, supervisors and administrators as well as commissions paid to brokers, as well as rental expense for leased facilities. ISP Business While the Company is not presently marketing its ISP business, it is continuing to service its existing customer base. The Company's ISP operations consisted essentially of the marketing of value-added internet service provider services, primarily through third party facilities. The Company does not operate its own network but uses third parties to obtain access to the Internet for its clients. Prior to 2004 when the Company suspended its marketing efforts, the customer base kept growing as a direct result of the marketing efforts. ISP revenues are derived from monthly fees charged customers for value-added internet services. 21 Cost of generating revenue associated with ISP operations include the costs of maintaining the Company's customer base including customer care and telecommunication costs for Internet access. Because the Company is not marketing the ISP business, cost of revenue has and should continue to decline thereby increasing gross profit margins for this business. The ISP customer base now consists of seasoned customers and based on current attrition rates the Company believes it will continue to derive revenues on a declining basis for several years. Current Trends The trend of the Company's revenue and income over the next several quarters depends upon several variables, some of which cannot at this time be ascertained definitively. Revenue from ISP sources will decline as a result of suspended ISP marketing activity and a declining customer base. The Company will continue to incur losses as a result of development costs associated with contact center operations. In January 2005, the Company acquired IMS to increase its contact center penetration. BPO revenues and overall revenue should increase as a result of this acquisition; however, since IMS has been incurring losses, there is no assurance we will be able to operate this new subsidiary profitably. As a result of the IMS acquisition, and depending on obtaining additional new contracts and implementing existing ones, the Company believes revenue from its contact centers will increase, offsetting declining ISP revenues in the future. Because the Company has elected to proceed with the expansion of its contact center business, it will have a need for substantial capital during the next several quarters. Results of Operations The Company reported a net loss of $5,605,887, or $0.48 per basic and diluted common share, for the three months ended March 31, 2005, compared with a net loss of $859,555, or $0.08 per basic and diluted common share for the comparable period in 2004. The increase in the loss for the March 2005 quarter compared with the same period in 2004 was due to the Company's expansion during 2004 and 2005 into business process outsourcing and contact center services operations (BPO), including its acquisition of IMS in January 2005, a decline of approximately 21.6% in the gross profit of its internet service provider services operations (ISP) as a result of a declining customer base, and approximately $900,000 of expense associated with the valuation of 1.9 million warrants issued by the Company to a lender during the March 2005 quarter as consideration for the release of escrowed funds and the waiver of registration rights. On a pro forma basis, assuming the acquisition of IMS had been in January 2004, the Company would have reported a net loss of $1,721,132, or $0.16 per basic and diluted common share, for the three months ended March 31, 2004. IMS' gross profit margin for the period was approximately $1,832,000, or 40%; however, high administrative expenses resulted in a loss from operations of approximately $400,000. Set forth below are comparisons of financial results of operations for the three months ended March 31, 2005 and 2004. These comparisons are intended to aid in the discussion that follows. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and accompanying Notes, which appear in Item 1. Financial Statements, in this Quarterly Report on Form 10-Q. See following page. 22 THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2004
----------------------------------------------------------- Variance 2005 2004 $ % --------------- --------------- -------------- ------------ Revenue $ 9,080,074 $4,876,148 $4,203,926 86.2% Cost of revenue 4,194,181 1,304,354 2,889,827 221.6 --------------- --------------- -------------- Gross profit 4,885,893 3,571,794 1,314,099 36.8 --------------- --------------- -------------- Operating expenses (exclusive of depreciation, and amortization of intangibles) 7,838,039 3,986,291 3,851,748 96.6 Depreciation, and amortization of intangibles 1,157,634 100,994 1,056,640 1046.2 Other non operating expenses, net 1,496,107 344,064 1,152,043 334.8 --------------- --------------- -------------- Net loss $(5,605,887) $(859,555) $(4,746,332) (552.2) =============== =============== ============== Net loss per share $ (0.48) ($0.08) =============== ===============
Revenue for the first quarter of 2005 increased to $9,080,074 in 2005 from $4,876,148, or 86.2%. The Company's BPO operations contributed $5,792,294 to the increase, including $5,156,998 from its new IMS acquisition, partially offset by a decline of approximately $1,588,368 in revenue from ISP operations. Since the Company is focusing its resources solely on its contact center business and the Company and is no longer marketing its ISP services, there is no growth in the ISP customer base. The Company expects a gradual continued decline of revenues from its ISP operations offset by growth in its BPO business revenue. Cost of revenue for the first quarter of 2005 increased to $4,194,181 in 2005 from $1,304,354 in 2004, or 221.6%. The increase in the cost or revenue is due primarily to a $3,650,698 increase in costs associated with BPO operations, including $3,672,604 from IMS, offset in part by reduced ISP costs of approximately $760,870. Cost of BPO production personnel contributed approximately $3,045,484 to the increase, as a result of the Company's expansion of its BPO business. The number of BPO production employees increased by approximately 1,260, to 1,325, from 65 at March 31, 2004. IMS accounted for an increase of 650 in the number of production employees. Gross profit for the first quarter of 2005 was $4,885,893 compared with $3,571,794 in 2004, or an increase of 36.8%. BPO gross profit increased approximately $2,141,596, of which $1,484,394 was attributable to IMS. The gross profit margin for ISP decreased approximately $827,498 as a result of lower sales and fixed direct costs associated with the operations. Operating expenses, exclusive of depreciation, and amortization of intangibles, were $7,838,039, or a 96.6% increase for the first quarter of 2005 compared with $3,986,291 in 2004. Compensation and employees benefits increased $1,771,559, to $3,426,329, or 107.1% for the first quarter of 2005, compared with $1,654,770, for the same period in 2004. This increase was primarily the result of an increase in the number of BPO sales, marketing and administrative employees, to 360 at March 31, 2005 from 60 in 2004. Occupancy, advertising and marketing, travel and professional fees were also higher during the first quarter of 2005. The increases in these costs are reflective of the Company's expansion of its BPO operations in the Philippines and its acquisition of three call centers in the U.S. Depreciation and amortization expense for the first quarter of 2005 was $784,384 compared to $100,994 in 2004. This increase was due to depreciation of significant acquisitions of property and equipment related to the development of call centers in the Philippines in 2004 and 2005, and the acquisition of property and equipment on the IMS purchase. Amortization of intangibles resulting from the valuation of IMS acquired assets and liabilities was $373,250 for the first quarter of 2005. 23 The increase in non-operating expenses, net, was due primarily to expenses associated with the issuance of equity and debt securities during the second half of 2004 and the first quarter of 2005. Amortization of debt discounts and costs associated with borrowings amounted to approximately $396,801 in 2005. Interest expense of $220,864 was recognized during the first quarter of 2005 compared to $219,804 in 2004. On February 28, 2005, the Company entered into an Amendment and Waiver agreement with a lender. As consideration for this agreement, the Company issued to the lender warrants to purchase 1,900,000 shares of the Company's common stock at an exercise price of $2.15 per share, exercisable at any time over a seven-year period. The fair value of these warrants were estimated to be approximately $1,060,065, or $0.56 per common share. This amount, net of $193,333 of previously accrued debt fees was recognized as expense during the March 2005 quarter. Liquidity and Capital Resources Historical Cause of Liquidity Issues Prior to the FTC proceeding in October 2003, the Company expected it would continue to meet its obligations arising from its existing ISP business through cash flow from operations but would require additional financing to fund its entry to the business outsourcing process and contact center business. As a result of the FTC proceeding the Company was deprived of substantial cash because of the asset freeze and escrow imposed by the FTC, and incurred substantial expenses and interruption of services to customers, and therefore of revenue. As a consequence the Company was unable to pay all of its expenses in the normal course of business. The Company was therefore compelled to take several measures including the reduction of personnel, temporary reduction of executive salaries, and postponement of most activity relating to its start-up of its BPO operations. The Company's liquidity problems have continued particularly as it determined to proceed with its contact center business. This direction required increased capital expenditures and operating expenses in excess of cash flow. In 2004 the Company received additional financing which enabled it to proceed with the implementation of its BPO operations. The Company has continued to proceed with the implementation of its call center business, in the belief that financing would be available and commitments have been made based on that belief. Since some obligations became due ahead of financing receipts the Company has experienced significant cash flow problems. Indebtedness aggregating approximately $20,036,000 was outstanding at March 31, 2005, excluding related party financing of $2,474,000. See Recent Events. CASH SOURCES AND USES The primary sources of cash for the Company have been proceeds from the issuance of long-term debt and equity securities. The primary uses of cash have been working capital, and capital expenditures. Operations The Company's cash and cash equivalents as of March 31, 2005 were $495,991 compared with $1,530,052 at December 31, 2004. The working capital deficit was approximately $14,708,801 as of March 31, 2005, compared with $8,033,988 at December 31, 2004, an 83.1% increase. During the first quarter of 2005 the Company used $522,485 of cash for operations compared with $312,312 used during the comparable period of 2004. The increase in negative cash flow from operations for 2005 was primarily the result of a $5,605,887 loss from operations compared with a loss of $859,555 in 2004, a change of $4,746,332. Increases in accounts receivable and accounts payable and accrued expenses of $892,358 and $2,925,058, respectively, as well as a decrease of approximately $518,664 in deferred revenue, partially offset the decline in cash resources during the quarter. INVESTING ACTIVITIES Net cash used for investing activities during the first quarter of 2005 was $652,494 compared to $797,859 in 2004. This capital spending was the result of the continued development of the Company's contact center business in the Philippines and the acquisition of IMS. 24 FINANCING ACTIVITIES Net cash provided by financing activities for the first quarter of 2005 was $39,679 compared with a use of cash of $81,489 in 2004. During the first quarter of 2005 the Company sold to accredited investors, in a private placement, an additional $767,500 principal amount of 5% Joint Unsecured Subordinated Convertible Promissory Notes due May 2007 and repaid approximately $602,000 of notes and capital leases. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. In addition, the Company has not entered into any derivative contracts. DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS - ---------------------------------------------------------------------------- Critical Accounting Policies The Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10-K for the year ended December 31, 2004 a discussion of the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has not made changes in any critical accounting policies during the first quarter of 2005. Any changes in critical accounting policies and estimates are discussed with the Audit Committee of the Board of Directors of the Company during the quarter in which a change is made. New Accounting Pronouncements In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" (SFAS 123R), which requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value and to recognize cost over the vesting period. The adoption of SFAS 123R is not expected to have a significant effect on the Company's financial position or cash flows, but will impact its results of operations. In April 2005, the SEC announced that companies may implement SFAS 123R at the beginning of their next fiscal year (instead of their next reporting period) starting after June 15, 2005 (or December 15, 2005 for small business issuers). This new rule moves the Company's implementation date for SFAS 123R to the first quarter of 2006. The SEC's new rule does not change the accounting required by Statement 123R; it changes only the dates for compliance. In March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, "Share-Based Payment" (SAB 107). SAB 107 provides the SEC staff's position regarding the application of SFAS 123R, which contains interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, and also provides the staff's views regarding the valuation of share-based payment arrangements for public companies. SAB 107 highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company is currently reviewing the effect of SAB 107, but it does not believe SAB 107 will have a material impact its financial position, results of operations or cash flows. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies the term "conditional asset retirement obligations" as used in FASB Statement No. 143, "Accounting for Asset Retirement Obligations." FASB Statement No. 143 refers to an entity's legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. If an entity can reasonably estimate a liability for the fair value of a conditional asset retirement obligation, the entity is required to recognize the fair value of the liability when incurred. A company normally incurs this liability upon acquisition, construction, or development of the asset at issue. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company is currently reviewing FIN 47, and at the current time it does not believe that FIN 47 will have a material impact on its financial position, results of operations or cash flows. 25 Forward-Looking Statements This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements which may be contained in this Quarterly Report on Form 10-Q, are made as of the date that such statements are originally published or made, and the Company undertakes no obligation to update any such forward-looking statements. No undue reliance should be placed on forward-looking statements, which reflect management's opinions only as of the date made. Forward-looking statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995. Such forward looking statements are subject to various known and unknown risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause the Company's results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements: of the Company's plans, strategies and objectives for future operations; concerning new products, services or developments; regarding future economic conditions, performance or outlook, including statements relating to the outcome of contingencies; as to the value of Company contract awards and programs; of expected cash flows or capital expenditures; of belief or expectation; and of assumptions underlying any of the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as "believes," "expects," "may," "should," "would," "will," "intends," "plans," "estimates," "anticipates" or similar words. The Company's consolidated results and the forward-looking statements could be affected by many factors, including: o the ability to achieve growth in markets that are highly competitive where the Company may be unable to compete with businesses that have greater resources; o the ability to raise capital, when needed; o participation in markets that are often subject to uncertain economic conditions, which makes it difficult to estimate growth in the Company's markets and, as a result, future income and expenditures; o the consequences of future geo-political events, which may affect adversely the markets in which the Company operates, its ability to insure against risks, to protect its operations and profitability; o strategic acquisitions and the risks and uncertainties related thereto, including the Company's ability to manage and integrate acquired businesses and o customer credit risk; ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to certain market risks that arise in the ordinary course of business. A discussion of the Company's primary market risk exposure and interest rate risk is presented below. Interest Rate Sensitivity - At March 31, 2005, the Company had cash, cash equivalents totaling $495,991. These amounts were invested primarily in money market funds. The unrestricted cash and cash equivalents are held for working capital requirements, general corporate purposes and potential acquisition of assets. The Company does not enter into financial instrument transactions for trading or speculative purposes. Some of the Company's borrowings are through floating rate debt, subject to changes in the prime rate. Accordingly, the Company's interest expense will increase with any future increase in prime rates. The Company however, believes that it has no material exposure to changes in interest rates. 26 Effect of Changing Prices - The principal effect of inflation on the Company's operating results is to increase costs. The Philippines has historically experienced periods of high inflation but the inflation rate has been below 10% since 1999 and we anticipate that this trend will continue in 2005. The high inflation rates experienced in the Philippines have historically been offset the deflationary force on wages due to the fast growing population, high unemployment rate and high number of college graduates entering a market that can not absorb them. A reversal of this trend could result in increased costs that could harm the Company's operating results. However, subject to normal competitive market conditions, the Company believes it has the ability to raise selling prices to offset cost increases over time. In recent years the general rate of inflation has not had a significant adverse impact on the Company. Foreign Currency Exchange Risk - The Company's results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Philippine peso. The Company generates expenses in the Philippines, primarily in Philippine pesos and derives all of its revenues in U.S. dollars. An increase in the value of the U.S. dollar relative to the Philippine peso would reduce the expenses associated with the Company's Philippine operations, and conversely a decrease in the relative value of the U.S. dollar would increase the cost associated with these operations. Expenses relating to the Company's operations outside the United States have increased since March 31, 2004 due to increased costs associated with higher revenue generation and customer management services partially offset by the increase in the value of the U.S. dollar relative to the Philippine peso. The Company funds its Philippine operations through U.S. dollar denominated accounts held in the Philippines. Payments for employee-related costs, facilities management, other operational expenses and capital expenditures are converted into Philippine pesos on an as-needed basis. To date, the Company has not entered into any hedging contracts. Historically, the Company have benefited from the ongoing decline in the Philippine peso against the U.S. dollar. ITEM 4. CONTROLS AND PROCEDURES. a. Evaluation of disclosure controls and procedures: The Company maintains "disclosure controls and procedures," as such term is as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act) pursuant to Rule 13a-15 of the Exchange Act that are designed to ensure that information required to be disclosed in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified by the SEC rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. The Company's internal control over financial reporting is a process designed under the supervision of the Company's principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. In designing internal control over financial reporting and evaluating the Company's disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives, and management is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 27 As required by Rule 13a-15(e) of the Exchange Act, as of the end of the March 31, 2005 quarter, management of the Company carried out an evaluation, with the participation of the Company's CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's CEO and CFO concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company's disclosure controls and procedures are adequate and effective, at a reasonable assurance level. b. Changes in Internal Control over Financial Reporting The Company is currently reviewing its internal control over financial reporting as part of its on going efforts to ensure compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In addition, the Company routinely reviews its system of internal control over financial reporting to identify potential changes to its processes and systems that may improve controls and increase efficiency, while ensuring that it maintains an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating the activities of acquired business units, formalizing policies and procedures, improving segregation of duties, and adding additional monitoring controls. In addition, when the Company acquires new businesses, it incorporates its controls and procedures into the acquired business as part of the Company's integration activities. There have been no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in the Company's internal control over financial reporting during the quarter ended March 31, 2005, that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 28 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS All the Company's current significant legal proceedings arise out of its ISP business. While the results of these proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings and their settlement will not have a material adverse effect on the Company's consolidated financial statements, results of operations or cash flows, as the Company no longer actively markets its ISP business and the Company believes it is in substantial compliance with the law. The Dixon Aviation action disclosed in Item 3, Legal Proceedings on the Company's Annual Report on Form 10-K for the year ended December 31, 2004 has been settled in return for a cash payment of $5,000. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On February 28, 2005, the Company issued 550,290 shares of common stock pursuant to its acquisition of IMS in January 2005. As part of the acquisition of IMS, the Company guaranteed an agreement for approximately $770,000 due an IMS shareholder for commissions, and issued shares of common stock as payment for $385,000 of the amount guaranteed. All of these securities were issued pursuant to Section 4 (2) of the Securities Act of 1933, as amended, as securities sold by an issuer in a transaction "not involving any public offering". This transaction was privately negotiated with accredited investors only and did not involve any general solicitation or advertising. The valuation assigned to the common stock was based on the average volume and price of the Company's stock for the month of November 2004, as provided in the acquisition agreement. Also refer to Form 8-K filed with the Securities and Exchange Commission on May 5, 2005, which is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS As reported on the Company's Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission on April 15, 2005, the Company held a Special Meeting for 2004 (in lieu of an Annual Meeting) on February 15, 2005. The following matters were voted upon, with the following results: Election of Directors: The nominees listed below were elected directors for a one-year term or until their successors are elected and qualified, with the respective votes set forth opposite their names For Against Abstain --------- ------- ------- Ilene Kaminsky 6,406,000 0 0 David Srour 6,406,000 0 0 Irving Greenman 6,406,000 0 0 David Berman 6,406,000 0 0 John W. Cooney 6,406,000 0 0 Kenneth Elan 6,406,000 0 0 Sheldon Goldstein 6,406,000 0 0 Robert Palmer 6,406,000 0 0 Ratification of Amendment to Stock Option Plan: The shareholders ratified an amendment to the Company's 2001 Stock Option Plan to change the number of shares subject to the Plan from 4,000,000 shares of the Company's common stock to 6,000,000 shares by the following vote: For Against Abstain --- ------- ------- 6,406,000 0 0 29 There were no other matters submitted to a vote of security holders during the quarter ended March 31, 2005. ITEM 5. OTHER INFORMATION During the three months ended March 31, 2005, the Company filed with the Securities and Exchange Commission Current Reports on Form 8-K on January 13 and March 23, 2005. ITEM 6. EXHIBITS (a) Exhibits: The following exhibits are filed herewith: EXHIBIT NO. DESCRIPTION OF DOCUMENT
10.15 Epixtar Corp. Restricted Stock Agreement 10.16 Voxx Corporation 2005 Stock Incentive Plan 10.16(a) Voxx Corporation 2005 Stock Incentive Plan - Form of Stock Option Agreement 10.17 Collateral Promissory Note 11 Statement re Computation of Per Share Earnings is incorporated by reference to Part I., Item 1. Financial Statements, Note 8, Earnings (Loss) Per Share. 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
30 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. EPIXTAR CORP. (Registrant) Dated: By: /s/ Ilene Kaminsky May 20, 2005 ---------------------------- Ilene Kaminsky Chief Executive Officer Dated: By: /s/ Irving Greenman May 20 2005 Irving Greenman, ---------------------------- Chief Financial Officer and Chief Accounting Officer 31 EXHIBITS TABLE OF CONTENTS
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ----------- ----------------------- 10.15 Epixtar Corp. Restricted Stock Agreement 10.16 Voxx Corporation 2005 Stock Incentive Plan 10.16(a) Voxx Corporation 2005 Stock Incentive Plan - Form of Stock Option Agreement 10.17 Collateral Promissory Note 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32 EX-10.15 2 b406889_ex10-15.txt RESTRICTED STOCK AGREEMENT EXHIBIT 10.15 EPIXTAR CORP. RESTRICTED STOCK AGREEMENT This RESTRICTED STOCK AGREEMENT (this "Agreement") is entered into as of the 20th day of April, 2005 (the "Date of Grant"), by and between Epixtar Corp., a Florida corporation (the "Company"), and ___________ ("Grantee"). Grant of Shares. The Company hereby awards to Grantee ___________ shares (the "Shares") of the common stock, par value $0.001 per share (the "Voxx Common Stock"), of Voxx Corporation, a Florida corporation ("Voxx") which on the Date of Grant is a subsidiary of the Company, subject to the terms and conditions of this Agreement. Fair Market Value of the Shares. The Company and Grantee agree that the fair market value per share of the Shares as of the Date of Grant is $.65 per share (the "Fair Market Value"); provided, however, that Grantee acknowledges that such determination of the Fair Market Value of the Shares is not binding upon the Internal Revenue Service or any other governmental authority (a "Governmental Authority"), and that a Governmental Authority may take the position that the fair market value of the Shares as of the Date of Grant for federal or other income tax purposes is different from the Fair Market Value provided in this Section 2. Restrictions on Transferability of Shares; Vesting. Restricted Period. For purposes of this Agreement, the term "Restricted Period" shall mean the period commencing on the Date of Grant and ending on the date of the sale by Voxx of Voxx Common Stock for Voxx's own account pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, in an underwritten public offering (the "Public Offering Date"). Restrictions. During the Restricted Period, Grantee shall not sell, assign, transfer, exchange, pledge, hypothecate, or otherwise encumber (each a "Transfer") (i) the Shares with respect to which the restrictions set forth in this Section 3(b) have not lapsed in accordance with Section 3(d) of this Agreement (the "Restricted Shares"), (ii) the right to vote the Restricted Shares, or (iii) the right to receive dividends on the Restricted Shares (collectively, the "Restrictions"); provided, however, that Grantee shall have all other rights of a stockholder of Voxx which the Company previously had with respect to the Shares, including, without limitation, the right to receive dividends on and the right to vote the Shares. Any attempted or purported Transfer of the Restricted Shares shall be void and without effect, and neither the Company nor Voxx shall be obligated to recognize or give effect to any such transfer. Forfeiture in the Event of Termination. Subject to Section 6 of this Agreement, in the event of the termination of Grantee's employment or consulting relationship with the Company or any affiliate of the Company for any reason whatsoever, including, without limitation, by reason of the death, disability, involuntary termination without cause of Grantee's employment or consulting relationship or agreement by the Company or such Affiliate, prior to the end of the Restricted Period, all rights to the Restricted Shares which have not vested in accordance with Section 3(d) of this Agreement at that time shall be forfeited to the Company without consideration. Vesting. The Shares shall vest on the Public Offering Date (the "Vesting Date"). Termination (Lapse) of the Restrictions. On the Vesting Date, the Restrictions shall lapse with respect to the Shares. Those Shares with respect to which the Restrictions have lapsed are sometimes referred to herein as "Vested Shares." Vested Shares shall not be subject to forfeiture under Section 3(c) above. Forfeiture in Event Shares Do Not Vest Prior to Expiration Date. Subject to Section 6, of this Agreement, in the event that the Vesting Date does not occur prior to July 31, 2006 (the "Termination Date"), all rights to the Restricted Shares shall be forfeited to the Company without consideration. 1 Grantee's Representations. By receipt of the Shares and by execution of this Agreement, Grantee represents to the Company and to Voxx, as a third party beneficiary of this Agreement with respect to such representations and the other agreements on the part of Grantee contained herein in order to induce Voxx to permit the transfer of the Shares to Grantee on Voxx's stock transfer books, that: Grantee understands that the Shares are securities, the transfer by the Company to Grantee of which requires compliance with federal and state securities laws. Grantee understands that the Shares are being transferred to Grantee only on the condition that Grantee makes the representations contained in this Section 4 to the Company and Voxx. Grantee has made a reasonable investigation of the business and affairs of the Company and Voxx sufficient to be well informed as to the rights and the value of the Shares. (i) Grantee understands that the Shares constitute "restricted securities" under the Securities Act of 1933, as amended (the "Securities Act"), and have not been registered under the Securities Act in reliance upon one or more exemptions contained in the Securities Act, which may depend upon (A) Grantee's bona fide investment intention in acquiring the Shares, (B) Grantee's intention to hold the Shares in compliance with federal and state securities laws, (C) Grantee having no present intention of selling or transferring any part thereof in violation of applicable federal and state securities laws, and (D) there being certain restrictions on transfer of the Shares. In this connection, Grantee understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if Grantee's representation was predicated solely upon a present intention to hold these Shares for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Shares, or for a period of one year or any other fixed period in the future. Grantee understands that (A) the Shares, in addition to other restrictions on transfer, must be held indefinitely unless subsequently registered under the Securities Act, or unless an exemption from registration is available, (B) Rule 144, the usual exemption from registration, requires the resale to occur not less than one year after the later of the date the Shares were granted by the Company (which the SEC may view as the Vesting Date) or the date the Shares were sold by an "affiliate" of Voxx, within the meaning of Rule 144; and, in the case of acquisition of the Shares by an "affiliate" of Voxx, or by a non-affiliate who subsequently holds the Shares less than two (2) years, the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an "affiliate," (2) the availability of certain public information about Voxx, (3) the amount of Shares being sold during any three (3) month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable, (C) there is no certainty that a public market for the Shares will exist, and (D) it may be necessary that the Shares be sold pursuant to another exemption from registration which may be difficult to satisfy. Grantee acknowledges and understands that Voxx is under no obligation to register the Shares or the transfer thereto and that the Company is under no obligation to cause Voxx to register the shares or the transfer thereof. Grantee understands that the certificate evidencing the Shares will be imprinted with a legend which prohibits the transfer of the Shares unless they are registered or such registration is not required in the opinion of counsel satisfactory to Voxx and any other legend required under applicable state securities laws. Grantee represents that Grantee has sufficient knowledge and experience in financial and business matters to enable Grantee to evaluate the risks and merits of acquiring the Shares pursuant to this Agreement. Grantee is able to bear the economic risk of Grantee's investment in the Shares resulting from the election to be made by Grantee pursuant to Section 5 (b) of this Agreement. Grantee acknowledges that, because the Shares have not been registered under the 1933 Act or any state securities law, nor has the sale or transfer thereof, (i) no sale, pledge, hypothecation, assignment, transfer or other disposition shall be permitted except in compliance with such laws or in compliance with an exemption from such laws, and (ii) the investment in the Shares is not a liquid investment. 2 Grantee is an "accredited investor" within the meaning of Regulation D under the 1933 Act. Grantee acknowledges that Grantee has conducted his or her own investigation as to the operations, financial condition, financial statements, business, affairs, prospects or management of the Company and Voxx and that Grantee, in entering into this Agreement and effecting the transactions contemplated hereby, has not relied upon any representation or warranty with respect to the Company and Voxx, or the foregoing matters, express or implied. Grantee has been afforded such access to the Company and Voxx, and their respective officers, directors and management, and their properties and records as Grantee has requested and has had the opportunity to make such inquiry of the officers, directors and management of the Company and Voxx and other persons associated therewith as Grantee has requested. (e) Grantee has had the opportunity to review with Grantee's tax advisor the potential ramifications of the election to made pursuant to Section 5(b) of this Agreement and understands that in the event the Shares are forfeited to the Company, Grantee will not be able to recover under the tax laws any loss resulting from the forfeiture of the Shares. Certain Tax Matters; Withholding Obligations. Withholding. No later than the date on which Grantee makes the election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") in accordance with Section 5(b) of this Agreement, Grantee hereby agrees to pay to the Company, or to make arrangements satisfactory to the Company regarding, any federal, state or local taxes of any kind which may be required to be withheld with respect to the issuance and vesting of the Shares; and the Company shall, to the extent permitted by law, have the right to deduct and withhold from any payments of any kind otherwise due to Grantee from the Company or its Affiliates any federal, state or local taxes of any kind required by law to be withheld with respect to the issuance and vesting of the Shares. Section 83(b) Election. Grantee shall elect, within thirty (30) days of the Date of Grant, and upon written notice delivered to the Internal Revenue Service with a copy delivered to the Company, to recognize income for federal income tax purposes equal to the Fair Market Value of the Shares as of the date the Shares are transferred to Grantee, regardless of the Restrictions and the vesting schedule in Section 3(d) of this Agreement. At the time Grantee makes such election, Grantee shall make arrangements satisfactory to the Company to pay in the current year any federal, state or local taxes required to be withheld with respect to the issuance and vesting of the Shares. If Grantee fails to make such payments to the Company, the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct and withhold in the year of this grant any federal, state or local taxes of any kind required by law to be withheld with respect to the granting and vesting of the Shares. (c) Cash Incentive Payment. If Grantee timely makes the election required in, and otherwise complies with the provisions of, Sections 5(a) and 5(b) of this Agreement, then, notwithstanding any other provision of this Agreement to the contrary, on December 31, 2005, the Company shall pay Grantee, as an additional incentive payment, an amount equal to $0.30 times the number of Shares initially granted to Grantee hereunder. The Company shall have the right to deduct and withhold from such payment any federal, state or local taxes of any kind required by law to be withheld with respect thereto or any such amounts relating to the granting and vesting of the Shares and the related election under Section 83(b) of the Code remaining unpaid by the Grantee on such date. Change of Control; Termination of Employment Without Cause. If a Change in Control occurs, then any remaining Restrictions shall lapse automatically, without any action on the part of the Company or Grantee, and any Restricted Shares shall therefore automatically become Vested Shares. 3 (b) If the Company or one of its Affiliates terminates Grantee's employment or consulting relationship other than for Cause prior to the end of the Restricted Period, then Grantee shall continue to retain such rights as Grantee then has to the Restricted Shares which have not vested in accordance with Section 3(d) of this Agreement, until the Shares either vest in accordance with Section 3(d) of this Agreement or are forfeited to the Company without consideration in accordance with Section 3(f) of this Agreement. For purposes of this Agreement, "Cause" means: (a) conviction of Grantee for a felony involving moral turpitude; (b) commission by Grantee of any act of criminal fraud, misappropriation of funds or embezzlement in connection with Grantee's employment by or consulting for the Company or an Affiliate; (c) breach by Grantee of any material provision of any employment or consulting agreement between Grantee and the Company or any of its Affiliates; (d) Grantee's willful or reckless material misconduct in the performance of the Grantee's duties with respect to the Company or an Affiliate; or (e) Grantee's habitual neglect of duties with respect to the Company or an Affiliate; provided, however, that for purposes of clauses (d) and (e), Cause shall not include any one or more of the following: bad judgment, negligence or any act or omission believed by the Grantee in good faith to have been in or not opposed to the interests of the Company or its Affiliates (without intent of the Grantee to gain, directly or indirectly, a profit to which the Grantee was not legally entitled). A Grantee who agrees to resign from Grantee's affiliation with the Company or an Affiliate in lieu of being terminated for Cause may be deemed to have been terminated for Cause for purposes of this Agreement. Required Participation in Certain Transactions. If during the term of this Agreement, Voxx or any of its stockholders shall receive a bona fide written offer pursuant to which any party offers to: purchase all or substantially all of Voxx's assets; purchase all of the then issued and outstanding shares of Voxx Common Stock or Voxx Common Stock equivalents for the same consideration and upon the same terms and condition for each such share or share equivalent; or merge or consolidate with Voxx upon terms and conditions which are identical as to each share of Voxx Common Stock or Voxx Common Stock equivalents; and the holders of record of shares of Voxx Common Stock holding shares entitled to cast a majority of votes entitled to be cast by the holders of the Voxx Common Stock (the "Majority Stockholders") desire to accept such offer, then the Majority Stockholders shall promptly deliver a copy of such written offer and their desire to accept such offer to Grantee. In such event, Grantee shall be obligated to (i) vote all of Grantee's Shares in favor of such sale of Voxx's assets and any subsequent liquidation of Voxx, (ii) vote all Grantee's Shares in favor of such merger or consolidation, or (iii) sell all of Grantee's Shares in connection with such sale of the Voxx Common Stock, but only if Grantee is to receive the same consideration, per share of Voxx Common Stock, as the other holders of Voxx Common Stock or Voxx Common Stock equivalents. Stock Certificates. Each stock certificate for the Shares issued to Grantee shall have conspicuously written, printed, typed or stamped upon the face thereof, or upon the reverse thereof with a conspicuous reference on the face thereof, of the following legend: THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING THE RISKS OF FORFEITURE AND RESTRICTIONS AGAINST TRANSFER) CONTAINED IN AN AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND EPIXTAR CORP. RELEASE FROM SUCH TERMS AND CONDITIONS SHALL BE MADE ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT, COPIES OF WHICH ARE ON FILE IN THE OFFICE OF THE SECRETARY OF VOXX CORPORATION. Grantee agrees to deposit any and all stock certificates representing the Restricted Shares with the Company or its designee until such time as the Restrictions shall have lapsed. Severability; Construction. In the event that any provision in this Agreement shall be invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. This Agreement shall be construed as to its fair meaning and not for or against either party. 4 Damages. The parties agree that any violation of this Agreement (other than a default in the payment of money) cannot be compensated for by damages, and any aggrieved party shall have the right, and is hereby granted the privilege, of obtaining specific performance of this Agreement in any court of competent jurisdiction in the event of any breach hereunder. Governing Law. This Agreement shall be deemed to be made under and governed by and construed in accordance with the laws of the State of Delaware, without regard to conflicts of law principles. Delay. No delay or failure on the part of the Company or Grantee in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. Lock-Up Period. Grantee hereby agrees that if so requested by the Company, Voxx or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of Voxx under the Securities Act, Grantee shall not sell or otherwise transfer any Shares or other securities of Voxx during the 180-day period (or such longer period as may be requested in writing by the Managing Underwriter and agreed to in writing by Voxx) (the "Market Standoff Period") following the effective date of a registration statement of Voxx filed under the Securities Act; provided, however, that such restriction shall apply only to the first registration statement of Voxx to become effective under the Securities Act that includes securities to be sold on behalf of Voxx to the public in an underwritten public offering under the Securities Act. Voxx may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Secretary of the Company at its principal offices. Any notice required to be given or delivered to Grantee shall be in writing and addressed to Grantee at the address indicated in the employment records of the Company or to such other address as the Grantee may designate in writing from time to time to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by facsimile or telecopier. Adjustment of Shares. In the event of any change in corporate capitalization, such as a stock dividend or stock split, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of Voxx, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Internal Revenue Code of 1986) or any partial or complete liquidation of Voxx, any additional shares of the Voxx Common Stock, or any other securities of Voxx or any other entity received by Grantee in connection with such transaction in respect of the Shares, shall become subject to this Agreement, and the term "Shares" as used herein, shall be deemed to include such additional shares of Voxx Common Stock or such other securities, as appropriate. Definitions. In this Agreement, except where the context otherwise indicates, the following capitalized terms shall have the meanings ascribed to them below: "Affiliate" means, with respect to any Person (as defined below), any other Person that directly or indirectly controls or is controlled by or is under common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person or the power to elect directors, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Change in Control" means the occurrence of any of the following: 5 (a) when any "person," as such term is used in Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than those Persons in control of the Company as of the Date of Grant or the Company or any subsidiary or any employee benefit plan of the Company or any subsidiary (including its trustee)), is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly of securities of the Company or Voxx representing more than fifty percent (50%) of the combined voting power of the Company's or Voxx's outstanding securities; (b) any transaction or event relating to the Company or Voxx required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act; or (c) any transaction requiring stockholder approval for the acquisition of the Company or Voxx by an entity other than the Company or any subsidiary through purchase of assets, or by merger, or otherwise. Notwithstanding the foregoing, a transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's or Voxx's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's or Voxx's securities immediately before such transaction, and a Change in Control shall not be deemed to occur if (i) Voxx files a registration statement with the Securities and Exchange Commission for the initial offering of Voxx Common Stock to the public or (ii) the Company's distributes the Voxx Common Stock to the stockholders of the Company. "Person" means, unless otherwise specially defined in this Agreement, any natural person, association, trust, cooperative, corporation, general partnership, joint venture, limited partnership, limited liability company, real estate investment trust, regulatory body, governmental agency or instrumentality, unincorporated organization or organizational entity. Complete Agreement. This Agreement constitutes the entire agreement between the parties with respect to its subject matter, and supersedes all other prior or contemporaneous agreements and understandings whether oral or written. This Agreement may only be amended in a writing signed by the Company and the Grantee. SIGNATURE ON NEXT PAGE. 6 IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as of the date first set forth above. EPIXTAR CORP. By: ________________________________ Name: ________________________________ Its: ________________________________ Grantee acknowledges and agrees that this Agreement, the transactions contemplated by this Agreement and the Restricted Period set forth in this Agreement do not constitute an express or implied promise of continued engagement as an employee or consultant for the Restricted Period, for any period, or at all, and shall not interfere with Grantee's right or the Company's or its Affiliates' right to terminate Grantee's employment or consulting engagement at any time, with or without cause. Grantee represents that Grantee is familiar with the terms and provisions hereof, and hereby accepts this Agreement subject to all of the terms and provisions hereof. Grantee has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Grantee understands and acknowledges that Grantee may at any time prior to the end of the third day following the date set forth beneath Grantee's signature below, void this Agreement without liability on the part of Grantee or within three days after Grantee delivers to the Company the election required to be made by Grantee pursuant to Section 5(d) of this Agreement, whichever occurs later. _____________________________________ Grantee Dated: ______________________________ 7 EX-10.16 3 b406889_ex10-16.txt STOCK INCENTIVE PLAN EXHIBIT 10.16 VOXX CORPORATION 2005 STOCK INCENTIVE PLAN Article 1. ESTABLISHMENT, PURPOSE, TYPES OF AWARDS AND DURATION. 1.1. Establishment. Voxx Corporation, a Florida corporation (the "Company"), hereby establishes an incentive compensation plan for key employees, directors and consultants providing material services to the Company, as described herein, which shall be known as the "2005 Stock Incentive Plan" (the "Plan"). 1.2. Purpose. The purpose of the Plan is to enhance stockholder investment by attracting, retaining and motivating key employees, directors and consultants of the Company, and to encourage stock ownership by such persons by providing them with a means to acquire a proprietary interest in the Company's success, and to align the interests of management with those of stockholders. 1.3. Types of Awards. The Plan permits the granting of the following types of awards ("Awards"): o Non-statutory Stock Options. o Incentive Stock Options. o Stock Appreciation Rights. o Restricted Stock. o Performance Shares. 1.4. Duration. The Plan shall become effective on April 20, 2005, the date of its approval by the Board of Directors of the Company (the "Effective Date"); provided that this Plan will be submitted to the Company's stockholders for approval, and if not approved by the stockholders in accordance with Applicable Laws (as determined by the Committee in its discretion) within twelve (12) months from the Effective Date, this Plan and any Awards shall be null, void and of no force and effect. Awards granted under this Plan prior to approval of this Plan by the stockholders shall be granted subject to such approval, and no Shares shall be distributed before such approval. The Plan shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 14 hereof, until all Shares subject to it shall have been purchased or acquired according to the provisions hereof; provided that Incentive Stock Options may not be granted under the Plan after April 19, 2015. Article 2. DEFINITIONS. In this Plan, except where the context otherwise indicates, the following definitions shall apply: 2.1. "Affiliate" means, with respect to any Person (as defined below), any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person or the power to elect directors, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. 2.2. "Applicable Law" means the legal requirements relating to the administration of the Plan under applicable U.S. federal and state laws, the Code, any applicable stock exchange or automated quotation system rules or regulations, as such laws, rules, regulations and requirements shall be in place from time to time. 2.3. "Award" means, individually or collectively, a grant under this Plan of Non-statutory Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock or Performance Shares. 2.4. "Award Agreement" means any written document setting forth the terms of an Award that has been authorized by the Committee. The Committee shall determine the form or forms of documents to be used, and may change them from time to time for any reason. 2.5. "Board" means the Board of Directors of the Company. 2.6. "Change in Control" means the occurrence of any of the following: (a) when any "person," as such term is used in Section 13(d) or 14(d) of the Exchange Act (other than those Persons in control of the Company as of the Effective Date or the Company or any subsidiary or any employee benefit plan of the Company or any subsidiary (including its trustee)), is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's outstanding securities; 1 (b) any transaction or event relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act. (c) when, during any period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board cease, for any reason, to constitute at least a majority thereof, unless the election or the nomination for election by the Company's stockholders of each director first elected during such period was approved by a vote of at least two-thirds of the directors then still in office who were directors of the Company at the beginning of any such period; or (d) any transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or any subsidiary through purchase of assets, or by merger, or otherwise. Any other provision of this Section 0 notwithstanding, a transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction, and a Change in Control shall not be deemed to occur if (i) the Company files a registration statement with the Securities and Exchange Commission for the initial offering of Common Stock to the public or (ii) the Company's parent corporation, Epixtar Corp., distributes the Common Stock of the Company to the stockholders of Epixtar Corp. 2.7. "Code" means the Internal Revenue Code of 1986, as amended. 2.8. "Committee" means a committee or subcommittee of the Board appointed by the Board to administer this Plan or to make and/or administer specific Awards under this Plan. If no such appointment is in effect at any time, "Committee" shall mean the Board. 2.9. "Common Stock" means the Common Stock, par value $.001 per share, of the Company. 2.10. "Company" means Voxx Corporation, a Florida corporation, and any successor as provided in Section 17.5 hereof. 2.11. "Consultant" means any person, including an advisor or counselor, who is engaged by the Company or any Affiliate to render services and is compensated for such services. 2.12. "Date of Grant" means the date on which an Award is granted under this Plan (or, in the case of an amendment to the Option Price, the date of such amendment). 2.13. "Director" means any individual who is a member of the Board. 2.14. "Disability" or "Disabled" means an Eligible Person who (a) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) has, by reason of any medically determinable physical or mental impairments which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, received income replacement benefits for a period of not less than 3 months under an accident or health plan covering employees of the Company. 2 2.15. "Earnings per Share" means the consolidated "earnings per share" of the Common Stock determined in accordance with generally accepted accounting principles. 2.16. "Effective Date" means the date described in Section 1.4 hereof. 2.17. "Eligible Person" means (a) any person who is an Employee, (b) any person who is hired to be an Employee, (c) any Non-Employee Director, and (d) any Consultant or independent contractor to the Company or an Affiliate who is determined by the Committee to render key services to the Company or an Affiliate. 2.18. "Employee" means any person determined by the Committee to be an employee of the Company or an Affiliate, including any such employee who is on an approved leave of absence, layoff, or has been subject to a disability which does not qualify as a Disability. Without limiting the foregoing, a person does not cease to be an Employee when such person goes on a bona fide leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. However, for purposes of determining whether an Option is entitled to be treated as an Incentive Stock Option, an Employee's service as an employee will be treated as terminating 90 days after such Employee went on leave, unless such Employee's right to return to active work is guaranteed by law or by a contract. An Employee's service terminates in any event when the approved leave ends, unless such Employee immediately returns to active work. The Company shall determine which leaves count toward meeting service or vesting requirements applicable to an Award, and when an Employee's service terminates for all purposes under the Plan. 2.19. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.20. "Exercised Option" has the meaning set forth in Section 6.4 2.21. "Fair Market Value" means as of any date, the value of a Share determined as follows: (a) if the Shares are listed on any established stock exchange or a national market system, the Fair Market Value of a Share shall be the closing sales price for such Shares (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of, or the last market trading day prior to, the day of determination, as reported in the Wall Street Journal or such other source as the Committee deems reliable; (b) if the Shares are regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of the Shares shall be the mean between the high bid and the low asked prices for the Shares on the day of, or the last market trading day prior to, the day of determination, as reported in the Wall Street Journal or such other source as the Committee deems reliable, or (c) in the absence of an established market for the Shares, the Fair Market Value shall be determined in good faith by the Committee. 2.22. "Freestanding SARs" means SARs granted independently of any Options. 2.23. "Incentive Stock Option" means an Option intended to qualify as an incentive stock option under Section 422 of the Code, as designated in the applicable Award Agreement. 2.24. "Independent Director" means a Director who is not an Employee of the Company. 2.25. "Non-Employee Director" means any member of the Company's or an Affiliate's Board of Directors or Advisory Board of Directors who is not an Employee. 2.26. "Non-statutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option, as designated in the applicable Award Agreement. 2.27. "Option" means an Award granted pursuant to Article 6 of this Plan. 2.28. "Option Period" means the period during which an Option may be exercised. 3 2.29. "Option Price" means the price per Share at which an Option may be exercised. 2.30. "Participant" means an Eligible Person who has received an Award hereunder. 2.31. "Performance Shares" means an Award granted pursuant to Article 9 of this Plan. 2.32. "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, at its discretion), and such Shares are subject to a substantial risk of forfeiture, as provided in Article 8 of this Plan. 2.33. "Person" means, unless otherwise specially defined in the Plan, any natural person, association, trust, cooperative, corporation, general partnership, joint venture, limited partnership, limited liability company, real estate investment trust, regulatory body, governmental agency or instrumentality, unincorporated organization or organizational entity. 2.34. "Plan" means the Voxx Corporation 2005 Stock Incentive Plan, as amended from time to time. 2.35. "Public Trading Date" means the date on which the Company first has registered any class of the equity securities pursuant to Section 12 of the Exchange Act. 2.36. "Qualifying Performance Criteria" has the meaning set forth in Article 10. 2.37. "Reload Number" has the meaning set forth in Section 6.4. 2.38. "Reload Option" has the meaning set forth in Section 6.4. 2.39. "Reporting Person" means as officer, Director or ten-percent beneficial owner of the Company within the meaning of Rule 16a-2 under the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange Act. 2.40. "Required Withholding" has the meaning set forth in Article 15. 2.41. "Restricted Stock" means Shares subject to restrictions imposed pursuant to Article 8 of this Plan. 2.42. "Share" means a share of Common Stock. 2.43. "Stock Appreciation Right" or "SAR" means an Award granted to a Participant alone or in tandem with a related Option pursuant to Article 7 hereof which is designated as an SAR and which grants such Participant the right to receive payment of an amount equal to the appreciation in the value of Shares. 2.44. "Tandem SAR" means an SAR that is granted in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall similarly be canceled). 2.45. "Ten-Percent Stockholder" means a Participant who (applying the rules of Section 424(d) of the Code) owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or an Affiliate. Article 3. ADMINISTRATION. 3.1. Administrator. Unless and until the Board delegates administration to a Committee as set forth below, the Plan shall be administered by the Board. The Board may delegate administration of the Plan to a Committee or Committees of one or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. Notwithstanding the foregoing, however, from and after the Public Trading Date, a Committee of the Board shall administer the Plan and the Committee shall consist solely of two or more Independent Directors each of whom is both an "outside director," within the meaning of Section 162(m) of the Code, and a "non-employee director" within the meaning of Rule 16b-3. Within the scope of such authority, the Board or the Committee may (i) delegate to a committee of one or more members of the Board who are not Independent Directors the authority to grant awards under the Plan to Eligible Persons who are either (1) not then "covered employees," within the meaning of Section 162(m) of the Code and are not expected to be "covered employees" at the time of recognition of income resulting from such award or (2) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or (ii) delegate to a committee of one or more members of the Board who are not "non-employee directors," within the meaning of Rule 16b-3, the authority to grant awards under the Plan to Eligible Persons who are not then subject to Section 16 of the Exchange Act. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may only be filled by the Board. 4 3.2. Authority of the Committee. Except as limited by law, or by the Certificate of Incorporation or Bylaws of the Company, and subject to the provisions hereof, the Committee shall have full power to designate the Eligible Persons who shall participate in the Plan; determine the sizes and types of Awards; determine the terms and provisions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend, or waive rules and regulations for the Plan's administration; to delegate to the chief executive officer of the Company the power to grant Options and Restricted Shares from time to time to specified categories of Eligible Persons in amounts and on terms to be specified by the Committee; provided that no such grants shall be made to individuals who are then Reporting Persons; to delegate to officers, employees or independent contractors of the Company matters involving the routine administration of the Plan and which are not specifically required by any provision of this Plan of to be performed by the Committee; and (subject to the provisions of Article 14 hereof), amend the terms and provisions of any outstanding Award to the extent such terms and provisions are within the discretion of the Committee as provided in the Plan, including, without limitation, (i) to accelerate the exercisability (including exercisability within a period of less than six months after the Grant Date) of, and to accelerate or waive any or all of the terms and conditions applicable to, any Award or any group of Awards for any reason and at any time, including in connection with a Participant ceasing to provide services to the Company or an Affiliate or otherwise ceasing to be an Eligible Person; (ii) subject to Section 6.6, to extend the time during which any Award or group of Awards may be exercised; and (iii) to make such adjustments or modifications to Awards to Participants who are working outside the United States as are advisable to fulfill the purposes of the Plan or to comply with applicable local law. The Committee shall make all other decisions relating to the operation of the Plan, and all other determinations which may be necessary or advisable for the administration of the Plan. The Board may also authorize one or more officers of the Company to designate Employees, other than a Reporting Person, to receive Awards and/or to determine the number of such Awards to be received by such persons; provided, however, that the Board shall specify the total number of Awards that such officers may so award. 3.3. Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan shall be final, conclusive and binding on all persons, including the Company, its stockholders, Employees, Participants, and their estates and beneficiaries. 3.4. No Liability; Indemnification. Neither the Board or any Committee member, nor any Person acting at the direction of the Board or the Committee, shall be liable for any act, omission, interpretation, construction or determination made in good faith with respect to the Plan, any Award or any Award Agreement. The Company and its Affiliates shall pay or reimburse any member of the Committee, as well as any Director, Employee or Consultant who takes action in connection with the Plan, for all expenses incurred with respect to the Plan, and to the full extent allowable under Applicable Law shall indemnify each and every one of them for any claims, liabilities, and costs (including reasonable attorney's fees) arising out of their good faith performance of duties under the Plan. The Company and its Affiliates may obtain liability insurance for this purpose. Article 4. ELIGIBILITY. 4.1. Grant of Awards. Awards may be granted or awarded only to Eligible Persons. 4.2. General Rule. Incentive Stock Options may only be issued to Employees. Incentive Stock Options may be granted to officers or Directors of the Company or an Affiliate, provided they are also Employees of the Company or an Affiliate. Payment of a Director's fee shall not be sufficient to constitute employment by the Company or an Affiliate. Incentive Stock Options shall not be granted under this Plan to any Employee if such grant would result in such Employee holding the right to exercise for the first time in any one calendar year, under all Incentive Stock Options granted under this Plan or any other plan maintained by the Company, with respect to Shares having an aggregate Fair Market Value, determined as of the date the Option is granted, in excess of $100,000. Should it be determined that an Incentive Stock Option granted under this Plan exceeds such maximum for any reason other than a failure in good faith to value the Shares subject to such option, the excess portion of such Option shall be considered a Non-statutory Stock Option. To the extent the Employee holds two (2) or more such Options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such Options as Incentive Stock Options under the federal tax laws shall be applied on the basis of the order in which such Options are granted. If, for any reason, an entire Option does not qualify as an Incentive Stock Option by reason of exceeding such maximum, the portion of such Option which does not qualify as an Incentive Stock Option shall be considered a Non-statutory Stock Option. 5 4.3. Limits on Awards. No Participant may receive Awards under this Plan during any calendar year that relate to more than Five Hundred Thousand (500,000) Shares. The Committee shall adjust these limitations pursuant to Section 5.3 below. 4.4. Replacement Awards. Subject to Applicable Laws (including any associated stockholder approval requirements), the Committee may, in its sole discretion and upon such terms as it deems appropriate, require as a condition of the grant or an Award to a Participant that the Participant surrender for cancellation some or all of the Awards that have previously been granted to the Participant under this Plan or otherwise. An Award that is conditioned upon such surrender may or may not be the same type of Award, may cover the same (or a lesser or greater) number of Shares as such surrendered Award, may have other terms that are determined without regard to the terms or conditions or such surrendered Award, and may contain any other terms that the Committee deems appropriate. Article 5. STOCK SUBJECT TO PLAN. 5.1. Shares Reserved. Subject to adjustment as provided in Section 5.3 of this Plan, the maximum number of Shares that may be issued under this Plan or pursuant to Awards made under this Plan is Two Million Three Hundred Seventy-Five Thousand (2,375,000) Shares. 5.2. Lapsed Awards. If any Award granted hereunder is canceled, terminates, expires or lapses for any reason (with the exception of the termination of a Tandem SAR upon exercise of the related Option, or the termination of a related Option upon exercise of the corresponding Tandem SAR), any Shares subject to such Award shall again be available for the grant of an Award under the Plan. 5.3. Adjustments in Authorized Shares. (a) In the event of any change in corporate capitalization, such as a stock dividend or stock split, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, such adjustment shall be made in the number and class of Shares reserved under the Plan, and in the number, class and price of Shares subject to outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be a whole number. (b) To the extent not previously exercised or settled, Options, SARs and Performance Shares shall terminate immediately prior to the dissolution or liquidation of the Company. (c) In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement shall provide for: (i) The continuation of the outstanding Awards by the Company, if the Company is a surviving corporation; (ii) The assumption of the outstanding Awards by the surviving corporation or its parent or subsidiary; 6 (iii) The substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding Awards; (iv) Full exercisability or vesting and accelerated expiration of the outstanding Awards; or (v) Settlement of the full value of the outstanding Awards in cash or cash equivalents followed by cancellation of such Awards. (d) Except as provided in this Section 5.3, a Participant shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Option Price or grant price of Shares subject to an Award. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. Article 6. STOCK OPTIONS. 6.1. Grant of Options. Options granted under this Plan to Eligible Persons shall be either Incentive Stock Options or Non-statutory Stock Options, as designated by the Committee; provided, however, that Incentive Stock Options may not be granted to Eligible Persons who are not Employees. 6.2. Award Agreement. Each Option granted under this Plan shall be clearly identified either as a Non-statutory Stock Option or an Incentive Stock Option and shall be evidenced by an Award Agreement that specifies the terms and conditions of the grant. Options shall be subject to the terms and conditions set forth in this Article 6 and such other terms and conditions not inconsistent with this Plan as the Committee may specify. 6.3. Option Price. The Option Price shall be determined by the Committee, subject to this Section 6.3. The Option Price for an Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock on the Date of Grant. Notwithstanding the foregoing, in the case of an Incentive Stock Option granted to a Participant who is a Ten Percent Stockholder, the Option Price shall not be less than one hundred and ten percent (110%) of the Fair Market Value of the Common Stock on the Date of Grant. 6.4. Grant of Reload Options. The Committee may in connection with the grant of an Option or thereafter provide that a Participant who (i) is an Eligible Person when he or she exercises an Option ("Exercised Option") and (ii) satisfies the Option Price or Required Withholding applicable thereto with Shares (including Shares that are deemed to have been delivered as payment for all or any portion of the Option Price of an Exercised Option by attestation or otherwise) shall automatically be granted, subject to Article 5, an additional option ("Reload Option") in an amount equal to the sum ("Reload Number") of the number of Shares tendered (including Shares that are deemed to have been tendered) to exercise the Exercised Option plus, if so provided by the Committee, the number of Shares, if any, retained by the Company in connection with the exercise of the Exercised Option to satisfy any federal, state, local or foreign tax withholding requirements. 6.5. Conditions on Reload Options. Reload Options shall be subject to the following terms and conditions: (a) the Grant Date for each Reload Option shall be the date of exercise of the Exercised Option to which it relates; (b) subject to Section 6.5(c), the Reload Option may be exercised at any time during the Option Period of the Exercised Option (subject to earlier termination thereof as provided in the Plan or in the applicable Award Agreement); and (c) the terms of the Reload Option shall be the same as the terms of the Exercised Option to which it relates, except that, unless otherwise provided in the Award Agreement, the Option Price for the Reload Option shall be 100% of the Fair Market value of a Share on the Grant Date of the Reload Option. 7 6.6. Term of Options. The Option Period shall be determined by the Committee and specifically set forth in the Agreement; provided, however, that an Option shall not be exercisable after ten (10) years (five (5) years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from its Date of Grant. 6.7. Restrictions on Transfer. The Committee may impose such restrictions on the transfer of Shares acquired pursuant to the exercise of an Option granted under this Article as it may deem advisable, including, without limitation, under Applicable Laws. 6.8. Exercise of Options. The Shares subject to an Option may be purchased in such installments and on such exercise dates as shall be set forth in the Award Agreement. Any Shares not purchased on the applicable exercise date may be purchased thereafter at any time prior to the final expiration of the Option. In no event shall any Option be exercised, in whole or in part, after its expiration date. 6.9. Payment. Options shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company either: (a) in cash or its equivalent, or (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the aggregate Option Price (provided that the Shares which are tendered have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), or (c) by a combination of (a) and (b). The Committee also may allow cashless exercise through a registered broker-dealer pursuant to such cashless exercise procedures which are, subject to applicable securities laws restrictions, deemed acceptable by the Committee or by any other means which the Committee determines to be consistent with the Plan's purpose and Applicable Law. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.10. Termination of Service. Each Award Agreement with respect to Options granted hereunder shall set forth the extent to which the Participant shall have the right to exercise the Options following termination of the Participant's service with the Company or its Affiliates, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement, need not be uniform among all Options issued pursuant to this Article, may reflect distinctions based on the reasons for termination of service and may include provisions relating to a Participant's competition with the Company after termination of service. In that regard, if an Award Agreement permits exercise of an Option following the death of the Participant, the Award Agreement shall provide that such Option shall be exercisable to the extent provided therein by any person that may be empowered to do so under the Participant's will or, if the Participant shall fail to make a testamentary disposition of the Option or shall have died intestate, by the Participant's executor or other legal representative. 6.11. Additional Termination Provisions for Incentive Stock Options. No Incentive Stock Option may be exercised more than three (3) months after the Participant's termination of employment for any reason other than Disability or death, unless (a) the Participant dies during such three-month period, and (b) the Award Agreement and/or Committee permits later exercise. No Incentive Stock Option may be exercised more than one year after the Participant's termination of employment on account of Disability, unless (a) the Participant dies during such one year period, and (b) the Award Agreement and/or the Committee permit later exercise. 6.12. Nontransferability of Options. (a) Incentive Stock Options. No ISO granted under this Article may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to a Participant shall be exercisable during his or her lifetime only by such Participant. (b) Non-statutory Stock Options. Except as otherwise provided in an Award Agreement, no Non-statutory Stock Option granted under this Article may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in an Award Agreement, all such Options granted to a Participant shall be exercisable during his or her lifetime only by such Participant. 8 Article 7. STOCK APPRECIATION RIGHTS 7.1. Grant of SARs. Subject to the terms and conditions of this Article, and to such other terms and conditions as the Committee may determine, SARs may be granted to Eligible Persons at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs, or any combination of such forms of SARs. The Committee shall have complete discretion in determining the number of Shares covered by SARs granted hereunder (subject to Section 4.3 hereof) and in determining the terms and provisions pertaining to such SARs. The number of Shares covered by a Freestanding SAR shall be counted against the number of Shares available for grants of Awards under Section 5.1 or which may be granted to a single Participant under Section 4.3 hereof, but the number of Shares covered by a Tandem SAR shall not be so counted. The grant price of a Freestanding SAR shall equal the Fair Market Value of a Share on the Date of Grant of the SAR. The grant price of a Tandem SAR shall equal the Option Price of the related Option. 7.2. Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. In no event shall the exercise period for a Tandem SAR exceed the exercise period for the related Option. Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will expire no later than the expiration of the underlying ISO; (ii) the value of the payout with respect to the Tandem SAR shall not exceed the difference between the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO. 7.3. Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and provisions the Committee, in its sole discretion, imposes upon them. 7.4. Award Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the grant price, the term of the SAR, and such other provisions as the Committee shall determine. 7.5. Term of SARs. The term of an SAR granted under the Plan shall be determined by the Committee, in its sole discretion; provided, however, that such term shall not exceed 10 years. 7.6. Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company equal to the product of (i) the difference between the Fair Market Value of a Share on the date of exercise over the Option Price or grant price, as applicable, and (ii) the number of Shares with respect to which the SAR is exercised. At the discretion of the Committee, payment upon exercise may be in cash, in Shares of equivalent value, or in some combination thereof; provided, however, that from and after the date of a Change in Control, the exercise of an SAR may be settled only in cash. 7.7. Rule 16b-3 Requirements. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on exercise of an SAR (including, without limitation, the right of the Committee to limit the time of exercise to specified periods) as may be required to satisfy the requirements of Section 16 of the Exchange Act. 7.8. Termination of Service. Each Award Agreement with respect to SARs granted hereunder shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant's service with the Company or its Affiliates, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement, need not be uniform among all SARs issued pursuant to the Plan, may reflect distinctions based on the reasons for termination of service and may include provisions relating to a Participant's competition with the Company after termination of service. In that regard, if an Award Agreement permits exercise of an SAR following the death of the Participant, the Award Agreement shall provide that such SAR shall be exercisable to the extent provided therein by any person that may be empowered to do so under the Participant's will, or if the Participant shall fail to make a testamentary disposition of the SAR or shall have died intestate, by the Participant's executor or other legal representative. 9 7.9. Nontransferability of SARs. Except as otherwise provided in an Award Agreement, no SAR may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in an Award Agreement, all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. Article 8. RESTRICTED STOCK 8.1. Grant of Restricted Stock. Subject to the terms and conditions of this Article, and to such other terms and conditions as the Committee may determine, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to Eligible Persons in such numbers as the Committee shall determine. 8.2. Award Agreement. Each Restricted Stock grant shall be evidenced by an Award Agreement that shall specify the Period or Periods of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine. 8.3. Transferability. Except as provided in this Article, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the Committee in its sole discretion and set forth in the Award Agreement. All rights with respect to Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant. 8.4. Other Restrictions. The Committee may impose such conditions or restrictions on any Shares or Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a certain purchase price for each Share of Restricted Stock, restrictions based upon the achievement of specific performance goals (Company-wide, divisional, or individual), time-based restrictions on vesting following the attainment of the performance goals and restrictions under Applicable Laws. The Company shall retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and restrictions applicable to such Shares have been satisfied. Except as otherwise provided in this Article or in the applicable Award Agreement, or as otherwise required by law, Shares of Restricted Stock shall become freely transferable by the Participant after the last day of the Period of Restriction. 8.5. Voting Rights. During the Period of Restriction, Participants owning Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to such Shares. 8.6. Dividends and Other Distributions. During the Period of Restriction, Participants owning Shares of Restricted Stock granted hereunder may be credited with regular cash dividends paid with respect to the underlying Shares while they are so owned. The Committee may apply any restrictions to the dividends that the Committee deems appropriate. In the event that any dividend constitutes a "derivative security" or an "equity security" pursuant to Section 16 under the Exchange Act, such dividend shall be subject to a vesting period equal to the remaining vesting period of the Shares of Restricted Stock with respect to which the dividend is paid. 8.7. Termination of Service. Each Award Agreement with respect to Restricted Stock granted hereunder shall set forth the extent to which the Participant shall have the right to receive unvested Restricted Shares following termination of the Participant's service with the Company or its Affiliates, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement, need not be uniform among all Shares of Restricted Stock issued pursuant to the Plan, may reflect distinctions based on the reasons for termination of service and may include provisions relating to a Participant's competition with the Company after termination of service. In amplification but not limitation of the foregoing, in the case of an Award of Restricted Stock to an executive officer which is intended to qualify for the Performance-Based Exception, the Award Agreement may provide that such Restricted Stock may become payable in the event of a termination of service by reason of death, becoming Disabled or a Change in Control, provided, that payment of such Award may not occur prior to attainment of the related Qualifying Performance Criteria. Article 9. PERFORMANCE SHARES 9.1. Grant of Performance Shares. Subject to the terms and conditions of this Article and to such other terms and conditions as the Committee may determine, Performance Shares may be granted to eligible Employees in such amounts, upon such terms and at such times as shall be determined by the Committee. The number and vesting of Performance Shares granted shall be conditioned upon the degree of attainment of specified performance goals or other conditions over a specified period (the "Performance Period") as determined by the Committee, subject to Section 3.1 hereof. The terms and provisions of an Award of Performance Shares shall be evidenced by an appropriate Award Agreement. 10 9.2. Form and Timing of Payment of Performance Shares. The Committee shall establish the amount of payment to be made under an Award of Performance Shares if the performance goals or other conditions are met. Such Award shall be expressed in terms of Shares. After the completion of a Performance Period, the performance of the Company, subsidiary, division or individual, as the case may be, shall be measured against the performance goals or other conditions, and the Committee shall determine whether all, none or a portion of an Award shall be paid. The Committee shall pay any earned Performance Shares as soon as practicable after they are earned in the form of cash, Shares or a combination thereof (as determined by the Committee) having an aggregate Fair Market Value equal to the value of the earned Performance Shares as of the date they are earned. In addition, the Committee, in its discretion, may cancel any earned Performance Shares and grant Stock Options to the Participant which the Committee determines to be of equivalent value based on a conversion formula stated in the applicable Award Agreement. The Committee, in its discretion, may also grant dividend equivalent rights with respect to earned but unpaid Performance Shares as evidenced by the applicable Award Agreement. Such rights, if granted, will entitle the Employee to be credited with an amount equal to all cash dividends paid on the number of Shares in which the Award is expressed while the Award is outstanding. Dividend equivalents may be converted into additional units of Performance Shares. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions (including without limitation, any forfeiture conditions) as the Performance Shares to which they attach. Performance Shares shall have no voting rights. Any Shares used to pay earned Performance Shares (including those issued pursuant to dividend equivalent rights) may be issued subject to any restrictions deemed appropriate by the Committee. 9.3. Termination of Service. Each Award Agreement with respect to Performance Shares granted hereunder shall set forth the extent to which the Participant shall have the right to receive unearned Performance Shares following termination of the Participant's service with the Company and its Affiliates, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreements, need not be uniform among all Performance Shares awarded pursuant to the Plan, may reflect distinctions based on the reasons for termination of service and may include provisions relating to a Participant's competition with the Company after termination of service. 9.4. Nontransferability. Except as otherwise provided in an Award Agreement with respect to Performance Shares granted hereunder, Performance Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in an Award Agreement, a Participant's rights under the Plan shall be exercisable during the Participant's lifetime only by the Participant. Article 10. PERFORMANCE MEASURES The number of Shares or other benefits granted, issued, retainable and/or vested under an Award may be made subject to the attainment of performance goals for a specified period of time relating to one or more of the following performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or Subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years' results or to a designated comparison group or index, in each case as specified by the Committee in the Award: (a) cash flow, (b) earnings per share, (c) earnings before interest, taxes and amortization, (d) return on equity, (e) total stockholder return, (f) share price performance, (g) return on capital, (h) return on assets or net assets, (i) revenue, (j) income or net income, (k) operating income or net operating income, (l) operating profit or net operating profit, (m) operating margin or profit margin, (n) return on operating revenue, (o) return on invested capital, or (p) market segment shares ("Qualifying Performance Criteria"). The Committee may appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to exclude any of the following events that occurs during a performance period: (i) asset write-downs, (ii) litigation or claim judgments or settlements, (iii) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results, (iv) accruals for reorganization and restructuring programs and (v) any extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in managements' discussion and analysis of financial condition and results of operations appearing in the Company's annual report to stockholders for the applicable year. The Committee shall determine the Qualifying Performance Criteria not later than the 90th day of the performance period, and shall determine and certify, for each Participant, the extent to which the Qualifying Performance Criteria have been met. The Committee may not in any event increase the amount of compensation payable under the Plan upon the attainment of a Qualifying Performance Criteria to a Participant who is a "covered employee" within the meaning of Section 162(m) of the Code. 11 Article 11. BENEFICIARY DESIGNATION Each Participant may, from time to time, designate any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. Article 12. DEFERRALS The Committee may permit or require a Participant to defer such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option or SAR, the lapse or waiver or restrictions with respect to Restricted Stock, or the satisfaction or any requirements or goals with respect to Performance Shares. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. Article 13. CHANGE IN CONTROL Upon the occurrence of a Change in Control, unless otherwise specifically prohibited under Applicable Laws: (i) any and all Options and SARs granted hereunder shall become immediately exercisable, and shall remain exercisable throughout their entire term; (ii) any restriction periods and restrictions imposed on Shares of Restricted Stock shall lapse; (iii) the target payout opportunities attainable under all outstanding Awards of Restricted Stock and Performance Shares shall be deemed to have been fully earned for the entire Performance Period(s) as of the effective date of the Change in Control; and (iv) the vesting of all Awards shall be accelerated as of the effective date of the Change in Control. Article 14. TERMINATION OR AMENDMENT. The Board may amend, alter or terminate this Plan in any respect at any time; provided, however, that, after this Plan has been approved by the stockholders of the Company, no amendment, alteration or termination of this Plan shall be made by the Board without approval of (a) the Company's stockholders to the extent stockholder approval of the amendment is required by Applicable Laws, if any, and (b) each affected Participant if such amendment, alteration or termination would adversely affect his or her rights or obligations under any Award made prior to the date of such amendment, alteration or termination. Article 15. WITHHOLDING. The Company's obligation to deliver Shares or pay any amount pursuant to the terms of any Award hereunder shall be subject to satisfaction of applicable federal, state and local and foreign tax withholding requirements ("Required Withholding"). To the extent provided in the applicable Award Agreement and in accordance with rules prescribed by the Committee, a Participant may satisfy any such withholding tax obligation by any of the following means or by a combination of such means: (a) tendering a cash payment; (b) authorizing the Company to withhold Shares otherwise issuable to the Participant; or (c) delivering to the Company already owned and unencumbered Shares. Article 16. CONDITIONS UPON ISSUANCE OF SHARES. Notwithstanding any other provision of the Plan or any Award Agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for failure, to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with Applicable Law, with such compliance determined by the Company in consultation with its legal counsel. 12 Article 17. GENERAL PROVISIONS. 17.1. No Participation Rights. The establishment of this Plan shall not confer upon any Eligible Person any legal or equitable right against the Company, any Affiliate or the Committee, except as expressly provided in this Plan. 17.2. No Employment Rights. This Plan does not constitute inducement or consideration for the employment or service of any Eligible Person, nor is it a contract between the Company or any Affiliate and any Eligible Person. Participation in this Plan shall not give an Eligible Person any right to be retained in the service of the Company or any Affiliate. 17.3. No Bar to Additional Awards. Neither the adoption of this Plan nor its submission to the stockholders, shall be taken to impose any limitations on the powers of the Company or its Affiliates to issue, grant, or assume options, warrants, rights, or restricted stock, or other awards otherwise than under this Plan, or to adopt other stock option, restricted stock, or other plans or to impose any requirement of stockholder approval upon the same. 17.4. Awards Not Subject to Creditors. The interests of any Eligible Person under this Plan are not subject to the claims of creditors and may not, in any way, be assigned, alienated or encumbered except as provided in an Agreement. 17.5. Successors. All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all substantially all of the business or assets of the Company. 17.6. Governing Law. This Plan shall be governed, construed and administered in accordance with the laws of the State of Delaware, without regard to conflicts of law principles. 17.7. Securities Law Compliance. The Committee may require each person acquiring Shares pursuant to Awards hereunder to represent to and agree with the Company in writing that such person is acquiring the Shares without a view to distribution thereof. The certificates for such Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for Shares issued pursuant to this Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any securities exchange upon which the Common Stock is then listed or automatic interdealer quotation system upon which the Common Stock is then quoted, and any applicable federal or state securities laws. The Committee may place a legend or legends on any such certificates to make appropriate reference to such restrictions. 17.8. Nature of Payments. Awards shall be special incentive payments to the Participant and shall not be taken into account in computing the amount of salary or compensation of the Participant for purposes of determining any pension, retirement, death or other benefit under (a) any pension, retirement, profit-sharing, bonus, insurance or other employee benefit plan of the Company or any Affiliate or (b) any agreement between (i) the Company or any Affiliate and (ii) the Affiliate, except as such plan or agreement shall otherwise expressly provide. 17.9. Compliance with the Code. The Plan shall be governed, construed and administered in compliance with the deferred compensation provisions of Section 409A of the Code and shall be amended as necessary to maintain compliance with the provisions of Section 409A. The Committee may place such restrictions or provisions in any Award Agreement as may be necessary to comply with the provisions of Section 409A of the Code. 17.10. Notification under Code Section 83(b). If a Participant, in connection with any exercise of an Option, or the grant of Restricted Shares, makes the election permitted under Section 83(b) of the Code to include in such Participant's gross income in the year of transfer the amounts specified in Section 83(b) of the Code, then such Participant shall notify the Company of such election within 10 days of filing the notice of the election with the Internal Revenue Service, in addition to filing any notification required pursuant to regulation issued under Section 83(b) of the Code. The Committee may, in connection with the grant of an Award or at any time thereafter prior to such an election being made, prohibit a Participant from making such an election. 13 17.11. Requirements of Law. The Company shall not be required to issue any certificate or certificates for Shares with respect to Awards under this Plan, or record any person as a holder of record of such Shares, without obtaining, to the complete satisfaction of the Committee, the approval of all regulatory bodies deemed necessary by the Committee, and without complying to the Board's or Committee's complete satisfaction, with all Applicable Laws. The Company shall not be liable to a Participant or other persons as to: (a) the non-issuance or sale of Shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares under the Plan; and (b) any tax consequences expected, but not realized, by any Participant or other person due to the receipt, exercise or settlement of any Award granted under the Plan. 14 EX-10.16A 4 b406889_ex10-16a.txt FORM OF STOCK OPTION AGREEMENT EXHIBIT 10.16 (A) VOXX CORPORATION 2005 STOCK INCENTIVE PLAN FORM OF STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Voxx Corporation 2005 Stock Incentive Plan (the "Plan") shall have the same defined meanings in this Stock Option Agreement (this "Option Agreement"). NOTICE OF STOCK OPTION GRANT [Optionee] [Address] You ("Optionee") have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement. The terms of your grant are set forth below: Date of Grant: ________________ Vesting Commencement Date: ________________ Exercise Price per Share: $______ per share Total Number of Shares Granted: ________________ Total Exercise Price: $______ Type of Option (check one): ____ Incentive Stock Option ____ Non-Qualified Stock Option Term/Expiration Date: ________________, unless your rights under this Option Agreement terminate earlier in accordance with its terms or the terms of the Plan as a result of your ceasing to be an Eligible Person or otherwise Exercise and Vesting Schedule: The Shares subject to this Option shall vest according to the following schedule: [Insert Vesting Schedule] Termination Period: This Option may be exercised, to the extent vested, for ninety (90) days after Optionee ceases to be an Eligible Person, or such other period as may be applicable upon the termination of the Optionee's status as an Eligible Person for Cause or for death or Disability of Optionee as provided herein (or, if not provided herein, then as provided in the Plan), but in no event later than the Term/Expiration Date as provided above. AGREEMENT Grant of Option. The Company hereby grants to the Optionee an Option to purchase the Common Stock (the "Shares") set forth in the Notice of Stock Option Grant (the "Notice of Grant") above, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"). Notwithstanding anything to the contrary anywhere else in this Option Agreement, this grant of an Option is subject to the terms, definitions and provisions of the Plan adopted by the Company, which is incorporated herein by reference. 1 If designated in the Notice of Grant as an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code; provided, however, that to the extent that the aggregate Fair Market Value of stock with respect to which Incentive Stock Options (within the meaning of Code Section 422, but without regard to Code Section 422(d)), including the Option, are exercisable for the first time by the Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company or any Affiliate) exceeds $100,000, such options shall be treated as not qualifying under Code Section 422, but rather shall be treated as Non-Qualified Stock Options to the extent required by Code Section 422. The provisions set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this paragraph, the Fair Market Value of the Shares shall be determined as of the time the option with respect to such Shares is granted. Exercise of Option. This Option is exercisable as follows: Right to Exercise. This Option shall be exercisable cumulatively according to the vesting schedule set out in the Notice of Grant. For purposes of this Option Agreement, Shares subject to this Option shall vest based on Optionee's continued status as an Eligible Person. This Option may not be exercised for a fraction of a Share. In the event of Optionee's death, Disability, termination of the Optionee's status as an Eligible Person for Cause (as defined herein) or other termination of the Optionee's status as an Eligible Person, the exercisability of the Option is governed by Sections 7, 8, 9 and 10 below. In no event may this Option be exercised after the Term/Expiration Date of this Option as set forth in the Notice of Grant. Method of Exercise. This Option shall be exercisable by written Exercise Notice (in the form attached hereto as Exhibit A) (the "Notice"). The Notice must state the number of Shares for which the Option is being exercised, and such other representations and agreements with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. The Notice must be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Notice must be accompanied by payment of the Exercise Price, including payment of any applicable withholding tax. This Option shall be deemed to be exercised upon receipt by the Company of such written Notice accompanied by the Exercise Price and payment of any applicable withholding tax. By delivery of the Notice, Optionee shall be deemed to have agreed to all the provisions contained in the Notice, and the Shares for which Optionee has delivered the Notice shall be delivered subject to the provisions of the Notice and the Plan. No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. Optionee's Representations. If the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B. 2 Lock-Up Period. Optionee hereby agrees that if so requested by the Company or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such longer period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "Market Standoff Period") following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: cash; check; with the consent of the Committee, surrender of other shares of Common Stock of the Company which (A) in the case of Shares acquired from the Company, have been owned by the Optionee for more than six (6) months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; with the consent of the Committee, surrendered Shares issuable upon the exercise of the Option having a Fair Market Value on the date of exercise equal to the aggregate Exercise Price of the Option or exercised portion thereof; with the consent of, and in accordance with procedures approved by, the Committee, delivery of a notice that the Optionee has placed a market sell order with a broker with respect to Shares then issuable upon exercise of the Option and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the aggregate Exercise Price; provided, that payment of such proceeds is then made to the Company upon settlement of such sale. The Company's obligation to deliver Shares under this Option Agreement is subject to satisfaction by the Optionee of applicable federal, state and local and foreign tax withholding requirements ("Required Withholding"). Except as otherwise permitted by the Committee in its sole discretion, Optionee may satisfy any such withholding tax obligation only by tendering a cash payment in the amount of the Required Withholding to the Company contemporaneously with the delivery to the Company of the Notice and Exercise Price. Restrictions on Exercise. This Option may not be exercised until the Plan has been approved by the stockholders of the Company. If the issuance of Shares upon such exercise or if the method of payment for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, then the Option may also not be exercised. The Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation before allowing the Option to be exercised. Termination of Status as Eligible Person. If Optionee ceases to be an Eligible Person (other than by termination of Optionee's service for Cause or by reason of the Optionee's death or the Disability of the Optionee), Optionee may exercise this Option during the Termination Period set out in the Notice of Grant, to the extent the Option was vested at the date of such termination. To the extent that Optionee was not vested in this Option at the date on which Optionee ceases to be an Eligible Person, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate. Termination for Cause. If Optionee ceases to be an Eligible Person as a result of termination of service for Cause, this Option shall terminate immediately. For purposes of this Agreement, "Cause" means: (a) conviction of Optionee for a felony involving moral turpitude; (b) commission by Optionee of any act of criminal fraud, misappropriation of funds or embezzlement in connection with Optionee's employment by the Company or an Affiliate; (c) breach by Optionee of any material provision of any employment agreement between Optionee and the Company or any of its Affiliates; (d) an Optionee's willful or reckless material misconduct in the performance of the Optionee's duties with respect to the Company or an Affiliate; or (e) an Optionee's habitual neglect of duties with respect to the Company or an Affiliate; provided, however, that for purposes of clauses (d) and (e), Cause shall not include any one or more of the following: bad judgment, negligence or any act or omission believed by the Optionee in good faith to have been in or not opposed to the interests of the Company or its Affiliates (without intent of the Optionee to gain, directly or indirectly, a profit to which the Optionee was not legally entitled). An Optionee who agrees to resign from his or her affiliation with the Company or an Affiliate in lieu of being terminated for Cause may be deemed to have been terminated for Cause for purposes of this Option Agreement. 3 Disability of Optionee. If Optionee ceases to be an Eligible Person as a result of his or her Disability, Optionee may exercise the Option to the extent the Option was vested at the date on which Optionee ceases to be an Eligible Person, but only within twelve (12) months following such date (and in no event later than the expiration date of the term of this Option as set forth in the Notice of Grant). To the extent that the Option is not vested at the date on which Optionee ceases to be an Eligible Person, or if Optionee does not exercise such Option within the time specified herein, the Option shall terminate. Death of Optionee. If Optionee ceases to be an Eligible Person as a result of the death of Optionee, the vested portion of the Option may be exercised at any time within twelve (12) months following the date of death (and in no event later than the expiration date of the term of this Option as set forth in the Notice of Grant) by Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. To the extent that the Option is not vested at the date of death, or if the Option is not exercised within the time specified herein, the Option shall terminate. Certain Transactions. In the event of any transaction described in Section 5.3 of the Plan, the terms of this Option (including, without limitation, the number and kind of Shares subject to this Option and the Exercise Price) shall be adjusted as set forth in, or as contemplated by, Section 5.3 of the Plan. Non-Transferability of Option. This Option may not be transferred in any manner except by will or by the laws of descent or distribution. It may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and permitted assigns of the Optionee. [Signature page follows] This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall constitute one document. VOXX CORPORATION By:________________________________ Name:______________________________ Title:_____________________________ OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THIS OPTION IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY OR ITS AFFILIATES (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S 2005 STOCK INCENTIVE PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY OR ITS AFFILIATES, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S (OR ITS AFFILIATES') RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE. 4 Optionee acknowledges receipt of a copy of the Plan and represents that he is familiar with the terms and provisions thereof. Optionee hereby accepts this Option subject to all of the terms and provisions hereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. Dated: __________________ ____________________________________ [OPTIONEE] Residence Address: ____________________________________ ____________________________________ 5 EXHIBIT A VOXX CORPORATION 2005 STOCK INCENTIVE PLAN EXERCISE NOTICE Voxx Corporation Attention: Exercise of Option. Effective as of today, ___________, _____, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase _________ shares of the Common Stock (the "Shares") of Voxx Corporation (the "Company") under and pursuant to the Voxx Corporation 2005 Stock Incentive Plan (the "Plan") and the [ ] Incentive [ ] Non-Qualified Stock Option Agreement dated _____________, _____, (the "Option Agreement"). Representations of Optionee. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement. Optionee agrees to abide by and be bound by their terms and conditions. Rights as Stockholder. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Shares subject to the Option, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in the Plan. Optionee shall enjoy rights as a stockholder until such time as Optionee disposes of the Shares or the Company and/or its assignee(s) exercises the Right of First Refusal hereunder. Upon such exercise, Optionee shall have no further rights as a holder of the Shares so purchased except the right to receive payment for the Shares so purchased in accordance with the provisions of this Agreement, and Optionee shall forthwith cause the certificate(s) evidencing the Shares so purchased to be surrendered to the Company for transfer or cancellation. Optionee's Rights to Transfer Shares. Company's Right of First Refusal. Before any Shares held by Optionee or any permitted transferee (each, a "Holder") may be sold, pledged, assigned, hypothecated, transferred, or otherwise disposed of (including transfer by gift or operation of law and, collectively, "Transfer" or "Transferred"), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). Notice of Proposed Transfer. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise Transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be Transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to Transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). Exercise of Right of First Refusal. Within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may elect in writing to purchase all, but not less than all, of the Shares proposed to be Transferred to any one or more of the Proposed Transferees. The purchase price will be determined in accordance with subsection (c) below. 1 Purchase Price. The purchase price ("Purchase Price") for the Shares repurchased under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. Payment. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within thirty (30) days after receipt of the Notice or in the manner and at the times set forth in the Notice. Holder's Right to Transfer. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise Transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other Transfer is consummated within one hundred twenty (120) days after the date of the Notice and provided further that any such sale or other Transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section and of Section 4 of the Option Agreement shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not Transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal as provided herein before any Shares held by the Holder may be sold or otherwise Transferred. Exception for Certain Family Transfers. Anything to the contrary contained in this Section notwithstanding, the Transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to the Optionee's Immediate Family or a trust for the benefit of the Optionee's Immediate Family shall be exempt from the Right of First Refusal. As used herein, "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister or stepchild (whether or not adopted). In such case, the transferee or other recipient shall receive and hold the Shares so Transferred subject to the provisions of this Section (including the Right of First Refusal) and there shall be no further Transfer of such Shares except in accordance with the terms of this Section. Termination of Right of First Refusal. The Right of First Refusal shall terminate as to all Shares upon the first to occur of (i) a sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended (a "Public Offering"), or (ii) a sale of the Company (whether by merger, consolidation, sale or all or substantially all of the Company's assets or sale of all of the Company's capital stock) which is approved by the holders of the Company's securities representing at least fifty percent (50%)of the combined voting power of all outstanding securities of the Company. Repurchase Provisions. The Company shall have the right, but not the obligation, to purchase all or any portion of the Shares held by the Optionee at a purchase price equal to the Fair Market Value of such Shares for a period of ninety (90) days after any of the following events: an attempt by a creditor to levy upon or sell any of the Optionee's Shares; the filing of a petition by the Optionee under the United States Bankruptcy Code or any insolvency laws; the filing of a petition against the Optionee under any insolvency or bankruptcy laws by any creditor of the Optionee if such petition is not dismissed within thirty (30) days of filing; the entry of a decree of divorce between the Optionee and the Optionee's spouse; or upon the cessation of the Optionee's employment by the Company for any reason whatsoever, with or without Cause, including the death or Disability of the Optionee or upon Optionee otherwise ceasing to be an Eligible Person. 2 The Optionee shall provide the Company written notice of the occurrence of any such event within thirty (30) days of such event. The provisions of this Section 6 shall terminate upon the completion by the Company of a Public Offering. Tax Matters. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. Optionee understands that, if Optionee disposes of any Shares which Optionee acquires pursuant to the Option Agreement under Options which were intended to be Incentive Stock Options within two (2) years after the Date of Grant or within one (1) year after such Shares were transferred to Optionee (a "Disqualifying Disposition"), Optionee will be treated for Federal income tax purposes as having received ordinary income at the time of such Disqualifying Disposition in any amount generally measured as the difference between the price paid for the Shares and the lower of the fair market value of the Shares at the date of exercise or the fair market value of the Shares at the date of the Disqualifying Disposition. Any gain recognized on such premature sale of the Option Shares in excess of the amount treated as ordinary income will be characterized as capital gain. Optionee hereby agrees to notify the Corporation in writing within thirty (30) days after the date of any such Disqualifying Disposition. Restrictive Legends and Stop-Transfer Orders. Legends. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. Stop-Transfer Notices. Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 3 Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and permitted assigns. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by the Company forthwith to the Company's Board of Directors or the committee thereof that administers the Plan (the "Committee"), which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Committee shall be final and binding on the Company and on Optionee. Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware excluding that body of law pertaining to conflicts of law. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement. Delivery of Payment. Optionee herewith delivers to the Company the full Exercise Price for the Shares, as well as any applicable withholding tax. Entire Agreement. The Plan and Stock Option Agreement are incorporated herein by reference. This Exercise Notice, the Plan, the Stock Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof. Submitted by: Accepted by: OPTIONEE: Voxx Corporation By: - --------------------------------- ---------------------------------- Its: ---------------------------------- Address of Optionee: Address of Company: - ------------------- ------------------ - --------------------------------- ---------------------------------- - --------------------------------- ---------------------------------- - --------------------------------- ---------------------------------- 4 EXHIBIT B INVESTMENT REPRESENTATION STATEMENT OPTIONEE : COMPANY : VOXX CORPORATION SECURITY : COMMON STOCK AMOUNT : DATE : In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: [Insert the following paragraphs (a) through (d) for exercise of options granted in offerings under Rule 701 under the Securities Act] Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company and any other legend required under applicable state securities laws. Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Optionee and the Option was granted pursuant thereto, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of Securities being sold during any three (3) month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. 1 In the event that the Company does not qualify under Rule 701 at the time of grant of the Option or the Option was not granted pursuant thereto, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two (2) years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. [Insert the following paragraphs (a) through (f) for exercise of Options under Regulation D under the Securities Act] Optionee understands that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon one or more specific exemptions contained in the Securities Act, which may include reliance on Rule 701 promulgated under the Securities Act, if available, or which may depend upon (i) Optionee's bona fide investment intention in acquiring the Securities, (ii) Optionee's intention to hold the Securities in compliance with federal and state securities laws, (ii) Optionee having no present intention of selling or transferring any part thereof in violation of applicable federal and state securities laws, and (iv) there being certain restrictions on transfer of the Securities. Optionee understands that (i) the Securities, in addition to other restrictions on transfer, must be held indefinitely unless subsequently registered under the Securities Act, or unless an exemption from registration is available, (ii) Rule 144, the usual exemption from registration, is only available after the satisfaction of certain holding periods and in the presence of a public market for the Securities, (iii) there is no certainty that a public market for the Securities will exist, and (iv) it will be necessary that the Securities be sold pursuant to another exemption from registration which may be difficult to satisfy. Optionee acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company and any other legend required under applicable state securities laws. Optionee represents that Optionee has sufficient knowledge and experience in financial and business matters to enable Optionee to evaluate the risks and merits of acquiring the Securities pursuant to this Agreement. Optionee is able to bear the economic risk of Optionee's investment in the Securities. Optionee acknowledges that, because the Securities have not been registered under the 1933 Act or any state securities law, nor has the sale or transfer thereof, (i) no sale, pledge, hypothecation, assignment, transfer or other disposition shall be permitted except in compliance with such laws or in compliance with an exemption from such laws, and (ii) the investment in the Securities is not a liquid investment; Optionee is an "accredited investor" within the meaning of Regulation D under the 1933 Act; 2 Optionee acknowledges that Optionee has conducted his or her own investigation as to the operations, financial condition, financial statements, business, affairs, prospects or management of the Company and that Optionee, in exercising this Option and effecting the transactions contemplated hereby, has not relied upon any representation or warranty with respect to the Company or the foregoing matters, express or implied. Optionee has been afforded such access to the Company, its officers, directors and management, and its properties and records as Optionee has requested and has had the opportunity to make such inquiry of the officers, directors and management of the Company and other persons associated therewith as Optionee has requested; Signature of Optionee: ____________________________________ Date: _______________________, 20__ 3 EX-10.17 5 b406889_ex10-17.txt COLLATERAL PROMISSORY NOTE EXHIBIT 10.17 COLLATERAL PROMISSORY NOTE $5,104,593.75 January__, 2005 FOR VALUE RECEIVED, Epixtar Corp., a Florida corporation ("Epixtar" or the "Maker"), hereby promises to pay to (i) Steve Rasmussen, David Mullaney and Brad Yeater (the "Holder" or "Holders") according to the Percentages (as hereinafter defined) set forth below the principal sum of Five Million One Hundred Four Thousand Five Hundred Ninety Three Dollars and Seventy Five Cents ($5,104,593.75) in lawful money of the United States of America, subject to the terms and conditions of the Subordination Agreement executed by Holders on January 3, 2005. The Maker shall pay to each Holder directly, pursuant to payment instructions given by each Holder at the closing of the purchase and sale of Innovative Marketing Strategies, Inc. ("IMS"), his corresponding Percentage of each payment made pursuant to this non-interest bearing Collateral Promissory Note (the "Note"), and the Percentages of each of the Holders shall be as set forth below: Steve Rasmussen 70% Brad Yeater 21.1% David Mullaney 8.9% This Note is issued pursuant to an Acquisition Agreement dated as of November 29, 2004, among Epixtar and each Holder (the "Acquisition Agreement"), subject to set-offs as set forth in Article 10 thereof. The amount shall be paid in twenty-four (24) monthly installments of Two Hundred Twelve Thousand Six Hundred Ninety One Dollars and Forty One Cents ($212,691.41). beginning thirty (30) days after the closing date and thereafter on the same corresponding day of the month that the closing occurred, or next business day if said date falls on a weekend or holiday. All payments on this Note shall be made directly to each Holder and at such place in the United States of America as each Holder shall designate to the Maker in writing at the closing of the Acquisition Agreement. If any payment on this Note is due on a day that is not a business day, such payment shall be due on the next succeeding business day. To secure the payment of all the indebtedness under this Note, the shares of IMS have been placed in escrow and Maker has agreed to grant a security interest in the Shares pursuant to a Pledge and Escrow Agreement dated of even date herewith. The Maker may, without premium or penalty, at any time from time to time, prepay all or any portion of the outstanding balance due under this Note. Such prepayments shall be credited to succeeding installments due in chronological order or as the case may be. Each of the following, if uncured, shall constitute an "Event of Default" under this Note: failure of the Maker to make any payment under this Note when due; or the appointment of a receiver for any part of Maker's property, any assignment for the benefit of Maker's creditors or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Maker, any of which are not dismissed within sixty (60) days; or a default under any other agreements between Maker and Holders that is not cured within any applicable cure period Maker shall have fifteen (15) business days after receipt of written notice from Holder of an Event of Default in which to cure the stated Event of Default. If Maker cures the stated Event of Default within the allotted fifteen (15) day cure period, the cured Event of Default will be deemed to have not occurred. Upon the occurrence of an Event of Default Holder may, by notice in writing to Maker (the "Acceleration Notice"), declare the entire principal amount of this note and all accrued interest to be immediately due and payable without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived. 1 Upon the occurrence or existence of an Event of Default, all outstanding principal of this Note shall be due and payable immediately, (i) without notice of default, declaration of acceleration of the amount, or other act on the part of the Holders and without the need for any consent thereto and (ii) without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Maker. Upon the occurrence of an Event of Default hereunder, any Holder may exercise any and all rights and remedies available to it under applicable law, including without limitation the right to collect from the Maker all sums due under this Note. The Maker shall be obligated to pay all reasonable costs and expenses, including attorneys' fees and costs, incurred by or behalf of any Holder in connection with any Holder's exercise of any or all of his rights and remedies under this Note, including without limitation any investigation by, enforcement by, or proceeding in connection with the rights of, a Holder under this Note. The provisions of this Note may be changed only by a written agreement executed by the Maker and by each Holder. This Note shall be binding on the Maker and the successors and assigns of Maker, and shall inure to the benefit of the Holders, their heirs, successors and assigns. The rights and remedies of a Holder under this Note shall be cumulative and not alternative. No waiver by a Holder of any right or remedy under this Note shall be effective unless in writing signed by a Holder. Neither the failure nor any delay in exercising any right, power or privilege under this Note will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege by a Holder will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right of a Holder arising out of this Note can be discharged by Holder, in whole or in part, by a waiver or renunciation of the claim or right unless in a writing signed by Holder; (b) no waiver that may be given by a Holder will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on the Maker will be deemed to be a waiver of any obligation of the Maker or of the right of a Holder to take further action without notice or demand as provided in this Note. Any Holder may sell, assign, pledge or otherwise transfer all or any portion of its interest in this Note at any time or from time to time without prior notice to, or consent of, and without releasing any party liable or becoming liable hereon. If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. This Note shall be construed pursuant to the laws of the State of Florida and any action to enforce or interpret this Note may be brought in any court or other forum with competent jurisdiction. In connection with, and notwithstanding, the foregoing, the Maker specifically consents to any state or federal court of competent jurisdiction in the State of Florida and irrevocably waives any claim or defense of inconvenient forum or lack of personal jurisdiction in such forum or right of removal or right of jury trial under any applicable law or decision (or both). This Note is executed on _____________ [date]. Epixtar Corp. By___________________ Name: Title: Title: 2 EX-31.1 6 b406889_ex311.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, Ilene Kaminsky, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Epixtar Corp.; 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 20, 2005 /s/ Ilene Kaminsky ----------------------- Ilene Kaminsky Chief Executive Officer EX-31.2 7 b406889_ex312.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, Irving Greenman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Epixtar Corp.; 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 20, 2005 /s/ Irving Greenman ----------------------- Irving Greenman Chief Financial Officer EX-32.1 8 b406889_ex321.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Epixtar Corp. ("Company") Quarterly Report on Form 10-Q for the period ended March 31, 2005 ("Report"), the undersigned certifies that: 1. 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 results of operations of the Company. Date: May 20, 2005 /s/ Ilene Kaminsky ----------------------- Ilene Kaminsky Chief Executive Officer EX-32.2 9 b406889_ex322.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Epixtar Corp. ("Company") Quarterly Report on Form 10-Q for the period ended March 31, 2005 ("Report"), the undersigned certifies that: 1. 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 results of operations of the Company. Date: May 20, 2005 /s/ Irving Greenman ----------------------- Irving Greenman Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----