__________ Raymond L. Burke, President President and CEO Electro-Kinetic Systems, Inc. Fax. No. (201) 216-1105 AGREED and ACCEPTED this 6th day of June, 2000: STERLING MEDIA FUND MANAGERS, L.L.C. and Managers Shareholders
EXHIBIT B
INDEMNIFICATION AGREEMENT
AGREEMENT, effective as of _____________, between Sterling Media Capital Group, Inc., a Pennsylvania corporation (the "Company"), and ___________________ ("Indemnitee"). WHEREAS, Indemnitee is a director (or officer) of the Company; WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies at a time when it has become increasingly difficult to obtain adequate insurance coverage at reasonable costs; WHEREAS, in recognition of Indemnitees need for substantial protection against personal liability in order to enhance Indemnitees continued service to the Company in an effective manner, the Company wishes to provide in this Agreement for the identification of and the advancing of expenses to Indemnitee to the full extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies, regardless of any future change in the Certificate of Incorporation, By-Laws, composition of the Board of Directors, or structure of the Company.; NOW, THEREFORE, in consideration of the premises and of Indemnitee's service to the Company, directly or indirectly, including to its subsidiaries or affiliates and intending to be legally bound hereby, the parties hereto agree as follows: 1. In the event Indemnitee was, is, or becomes a party to or a witness or other participant in, or is threatened to be made a party to or a witness or other participant in, any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to any such action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise (a “Claim”) by reason of (or arising in part out of) the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity (an “Indemnifiable Event”), the Company shall indemnify Indemnitee to the full extent permitted by law (the determination of which shall be made by the Reviewing Party referred to below) as soon as practicable but in any event no later than thirty days after written demand is presented to the Company, against any and all expenses (including attorneys’ fees and all other costs, expenses, and obligations paid or incurred in connection with investigating, preparing for and defending or participating in the defense of (including on appeal) any Claim relating to any Indemnifiable Event) (collectively “Expenses”), judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement) of such Claim and, if so requested by Indemnitee, the Company shall advance (within two business days of such request) any and all such Expenses to Indemnitee; provided, however, that (i) the foregoing obligation of the Company shall not apply to a Claim that was commenced by the Indemnitee without the prior approval of the Board of Directors of the Company unless the Claim was commenced after a Change in Control (as defined in Section 5 herein); (ii) the foregoing obligation of the Company shall be subject to the condition that an appropriate person or body (the “Reviewing Party”) shall not have determined (in a written opinion in any case in which the special, independent counsel referred to in Section 4 hereof is involved) that Indemnitee would not be permitted to be indemnified for such Expenses under applicable law; and (iii) if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be indemnified for such Expenses under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid (unless Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, in which event Indemnitee shall not be required to so reimburse the Company until a final judicial determination requiring such reimbursement is made with respect thereto as to which all rights of appeal therefrom have been exhausted or lapsed) and the Company shall not be obligated to indemnify or advance any additional amounts to Indemnitee under this Agreement (unless there has been a determination by a court of competent jurisdiction that the Indemnitee would be permitted to be so indemnified or entitled to such expense advances under applicable law).
2. If there has not been a Change in Control of the Company (as hereinafter defined), the Reviewing Party shall be (1) quorum of the Board of Directors consisting of directors who are not parties to the action, suit or proceeding acting by majority vote, or, (2) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, independent legal counsel by the use of a written opinion or (3) the stockholders. If there has been a Change in Control of the Company, the Reviewing Party shall be the special, independent counsel referred to in Section 4 hereof.
3. If Indemnitee has not been indemnified by the expiration of the foregoing thirty-day period or received expense advances or if the Reviewing Party determines that Indemnitee would not be permitted to be indemnified or be entitled to receive expense advances within two days of the request therefor in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking from the court a finding that Indemnitee is entitled to indemnification and expense advances or enforcement of Indemnitee’s entitlement to indemnification and expense advances or challenging any determination by the Reviewing Party or any aspect thereof that Indemnitee is not entitled to be indemnified or receive expense advances and the burden of proving that indemnification or advancement of expenses is not appropriate shall be on the Company; any determination by the Reviewing Party in favor of Indemnitee shall be conclusive and binding on the Company, unless facts supplied by Indemnitee which form the basis for the determination are subsequently determined to have been materially incorrect at the time supplied. Indemnitee agrees to bring any such litigation in any court in the States of Delaware having subject matter jurisdiction thereof and in which venue is proper, and the Company hereby consents to service of process and to appear in any such proceeding.
4. The Company agrees that if there is a Change in Control of the Company (as hereinafter defined), then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and expense advances under this Agreement or any other agreement or By-laws now or hereafter in effect relating to Claims for Indemnifiable Events, the Company shall seek legal advice only from special, independent counsel selected by Indemnitee who a majority of the disinterested Directors approves (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Company or Indemnitee. Such counsel, among other things, shall determine whether and to what extent Indemnitee is permitted to be indemnified or is entitled to expense advances under applicable law and shall render its written opinion to the Company and Indemnitee to such effect. The Company agrees to pay the reasonable fees of the special, independent counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorney’s fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto except for willful misconduct or gross negligence.
5. For purposes of this Agreement, (a) “Change in Control of the Company” shall be deemed to have occurred if (i) any “person” (as such term is used in Sections 13(d)(3) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the combined voting power of the voting securities of the Company of such surviving entity outstanding immediately after such merger or consolidation, or if the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.
6. To the extent Indemnitee is successful in such proceeding, the Company shall indemnify Indemnitee against any and all expenses (including attorney’s fees) which are incurred by the Indemnitee in connection with any claim asserted or action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or Company By-laws now or hereafter in effect relating to Claims for Indemnifiable Events and/or (ii) recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance payment of Expenses or insurance recovery, as the case may be.
7. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of any Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in the defense of any Claim relating in whole or in part to any Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith.
8. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that Indemnitee is not entitled to indemnification or expense advance or that indemnification or expense advance is not permitted by applicable law.
9. The Company hereby agrees that, so long as Indemnitee shall continue to serve in a capacity referred to in Section 1 hereof, and thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Indemnitee served in any capacity referred to in Section 1 hereof, the Company shall maintain in effect for the benefit of Indemnitee any Directors’ and Officers’ Liability Insurance presently in force and effect, providing, in all respects, coverage at least comparable to that presently provided; provided, however, if, in the business judgment of the then Board, either (a) the premium cost for such insurance is substantially disproportionate to the amount of coverage, or (b) the coverage provided by such insurance is so limited by exclusions that there is insufficient benefit from such insurance, then and in that event the Company shall not be required to maintain such insurance but shall and hereby agrees to the full extent permitted by law to hold harmless and indemnify Indemnitee to the fullest extent of the coverage which would otherwise have been provided for the benefit of Indemnitee.
10. (a) In the event of any changes after the date of this Agreement in any applicable law, statute, or rule which expands the right of the Company to indemnify a person serving in a capacity referred to in Section 1 hereof, such change shall be within the purview of Indemnitee’s rights, and the Company’s obligations, under this Agreement. In the event of any changes in any applicable law, statute, or rule which narrow the right of the Company to indemnify a person serving in a capacity referred to in Section 1 hereof, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties’ rights and obligations hereunder.
(b) The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company’s Certificate of Incorporation, its By-laws, any agreement, any vote of stockholders or disinterested directors, laws and regulations in effect now or in the future, or otherwise, both as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office.
11. If the indemnification provided in Section 1 is unavailable and may not be paid to Indemnitee because such indemnification is not permitted by law, then in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the full extent permitted by law, to the amount of expenses, judgments, fines (including excise taxes and penalties) and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and Indemnitee on the other hand from the transaction from which such action, suit or proceeding arose, and (ii) the relative fault of the Company on the one hand and of Indemnitee on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of Indemnitee on the other shall be determined by reference to among other things, the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this paragraph were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations.
12. All obligations of the Company contained herein shall continue during the period Indemnitee serves in a capacity referred to in Section 1 hereof of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible Claim relating to an Indemnifiable Event.
13. (a) Promptly after receipt by Indemnitee of notice of the commencement of any Claim relating to an Indemnifiable Event or proceeding in which Indemnitee is made or is threatened to be made a party or a witness, Indemnitee shall notify the Company of the commencement of such Claim; but the omission so to notify the Company shall not relieve the Company from any obligation it may have to indemnify or advance expenses to Indemnitee otherwise than under this Agreement.
(b) Indemnitee shall not settle any claim or action in any manner which would impose on the Company any penalty, constraint, or obligation to hold harmless or indemnify Indemnitee pursuant to this Agreement without the Company’s prior written consent, which consent shall not be unreasonably withheld.
14. If any Claim relating to an Indemnifiable Event, commenced against Indemnitee is also commenced against the Company, the Company shall be entitled to participate therein at its own expense, and, except as otherwise provided hereinbelow, to the extent that it may wish, the Company shall be entitled to assume the defense thereof. After notice from the Company to Indemnitee of its election to assume the defense of any Claim, the Company shall not be obligated to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation, travel, and lodging expenses arising out of Indemnitee’s participation in such Claim. Indemnitee shall have the right to employ Indemnitee’s own counsel in such Claim, but the fees and expenses of such counsel incurred after notice from the Company to Indemnitee of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) otherwise authorized by the Company, (ii) Indemnitee shall have reasonably concluded, and so notified the Company, that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such Claim, or (iii) the Company shall not in fact have employed counsel to assume the defense of such Claim, in which cases the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any Claim brought by or on behalf of the Company or its stockholders or as to which Indemnitee shall have made the conclusion set forth in (ii) of this Section 14.
15. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
16. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.
17. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, By-law or otherwise) of the amounts otherwise indemnifiable hereunder.
18. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, executors, and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company or of any other enterprise at the Company’s request.
19. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the full extent permitted by law. 20. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such state, but excluding any conflicts-of-law rule or principle which might refer such governance, construction or enforcement to the laws of another state or country.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. STERLING MEDIA CAPITAL GROUP, INC. By:....................................................... Dwight L. Pierce, President INDEMNITEE ..........................................................__________EXHIBIT C
ARTICLES OF DESIGNATIONS
OF
POWERS, RIGHTS, PREFERENCES, PRIVILEGES,
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS
OF SERIES A CONVERTIBLE PREFERRED STOCK
OF
STERLING MEDIA CAPITAL GROUP, INC.
(a Pennsylvania corporation) .........Dwight L. Pierce and David C. Annin certify that: .........A. They are the duly elected and acting President and Corporate Secretary respectively of Sterling Media Capital Group, Inc., a Pennsylvania corporation (the "CORPORATION"). .........B. The Articles of Incorporation authorizes the directors to adopt resolutions fixing the rights, preferences, restrictions and other matters of wholly unissued series of Preferred Stock, and pursuant to this authority given by the Corporation's Articles of Incorporation, the Board of Directors of the Corporation has duly adopted the following recitals and resolutions: ......... WHEREAS, the Articles of Incorporation of the Corporation provides for the Preferred Stock, consisting of 10,000,000 shares issuable from time to time in one or more series; ......... WHEREAS, the Board of Directors of the Corporation is authorized to fix by resolution or resolutions the classes or series of Preferred Stock to have such designations and powers, rights, preferences, privileges, qualifications, limitations and restrictions granted to or imposed upon the Preferred Stock or any class or series thereof; ......... WHEREAS, the Corporation has no issued or outstanding shares of Preferred Stock; and .........WHEREAS, the Board of Directors desires, pursuant to its authority as aforesaid, to designate 4,276,471 shares of the Preferred Stock as “SERIES A CONVERTIBLE SENIOR PREFERRED STOCK” and to fix the powers, rights, preferences, privileges, qualifications, limitations and restrictions relating to such series of Preferred Stock.
.........RESOLVED, that the Board of Directors hereby fixes the designation and the number of shares constituting, and the powers, rights, preferences, privileges, qualifications, limitations and restrictions relating to, the Series A Convertible Preferred Stock as follows:
1. DESIGNATION. This series of Preferred Stock shall be designated "Series A Convertible ----------- Preferred Stock" (the "SERIES A PREFERRED STOCK"). 2. NUMBER OF SHARES AND PAR VALUE. The number of shares constituting the Series A Preferred ------------------------------ Stock shall be equal to 4,276,471. Each share of the Series A Preferred Stock shall have no par value.| | 3.RELATIVE SENIORITY. The Series A Preferred Stock shall, in respect of the right to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Corporation, rank (a) pari passu with the Common Stock (as defined below) of the Corporation and with any other class or series of stock of the Corporation, the terms of which specifically provide that such class or series shall rank pari passu with the Series A Preferred Stock in respect of the right to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Corporation; and (b) junior to any other class or series of stock of the Corporation, the terms of which specifically provide that such class or series shall rank senior to the Series A Preferred Stock in respect of the right to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Corporation. The term “COMMON STOCK” shall mean all shares now or hereafter authorized of any class of common stock of the Corporation. |
| | 4.NO LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of any series of Preferred Stock, having a priority on liquidation superior to that of the Series A Preferred Stock, the holders of shares of Series A Preferred Stock shall be entitled to participate with the Common Stock in all of the remaining assets of the Corporation available for distribution to its stockholders, ratably with the holders of Common Stock in proportion to the number of shares of Common Stock held by them, assuming for each holder of Series A Preferred Stock on the record date for such distribution that each holder was the holder of record of the number (including any fraction) of shares of Common Stock into which the shares of Series A Preferred Stock then held by such holder are then convertible. A liquidation, dissolution, or winding-up of the Corporation, as such terms are used in this Section 4, shall not be deemed to be occasioned by or to include any merger of the Corporation with or into one or more corporations or other entities, any acquisition or exchange of the outstanding shares of one or more classes or series of the Corporation, or any sale, lease, exchange, or other disposition of all or a part of the assets of the Corporation. |
| | 5.VOTING RIGHTS. Except as otherwise required by law, each share of outstanding Series A Preferred Stock shall entitle the holder thereof to vote on each matter submitted to a vote of the stockholders of the Corporation and to have the number of votes equal to the number (including any fraction) of shares of Common Stock into which such share of Series A Preferred Stock is then convertible pursuant to the provisions hereof at the record date for the determination of shareholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders becomes effective. Except as otherwise required by law or by this Certificate, the holders of shares of Common Stock and Series A Preferred Stock shall vote together and not as separate classes. |
| | 6.DIVIDENDS AND DISTRIBUTIONS. If any dividend or other distribution payable in cash, securities or other property, including a dividend payable in shares of Common Stock, is declared on the Common Stock, each holder of shares of Series A Preferred Stock on the record date for such dividend or distribution shall be entitled to receive on the date of payment or distribution of such dividend or other distribution the same cash, securities or other property which such holder would have received on such record date if such holder was the holder of record of the number (including any fraction) of shares of Common Stock into which the shares of Series A Preferred Stock then held by such holder are then convertible. No dividend or other distribution shall be declared or paid on the Common Stock unless an equivalent dividend or other distribution that satisfies this Section 6 is declared or paid on the Series A Preferred Stock. |
7........CONVERSION. The holders of the Series A Preferred Stock shall have conversion rights as follows: ---------- .................. (a) Optional Conversion. The holder of each share of Series A Preferred Stock shall have the right (the "CONVERSION RIGHT"), at such holder's option, to convert such share at any time, without cost, on the terms of this Section 7, into the number of fully paid and non-assessable shares of Common Stock as specified by the Conversion Ratio that is in effect at the time of conversion; provided that, and only to the extent that, the Corporation has a sufficient number of shares of authorized but unissued and unreserved Common Stock available to issue upon conversion. The initial "CONVERSION RATIO" for the Series A Preferred Stock is 100:1. The Conversion Ratio shall be subject to adjustment from time to time as provided in this Section 7. .................. (b) Mandatory Conversion. Upon the occurrence of an Increase in Authorized Common --------------------- Stock, each outstanding share of Series A Preferred Stock shall automatically be converted, without cost, on the terms set forth in this Section into the number of fully paid and non-assessable shares of Common Stock as specified by the Conversion Ratio that is in effect at the time of conversion. An "INCREASE IN AUTHORIZED COMMON STOCK" shall be deemed to occur upon either (i) effectiveness of a filing in the office of the Secretary of State of Pennsylvania, or such other state in which the Corporation is legally domiciled, of an amendment to (or amendment and restatement of) the Articles of Incorporation or other charter document of the Corporation that increases the number of authorized shares of Common Stock to a sufficient number (after taking into account all shares reserved for issuance by the Board of Directors) so as to enable the conversion of all outstanding shares of Series A Preferred Stock into such number of fully paid and non-assessable shares of Common Stock as specified by the Conversion Ratio then in effect, or (ii) the effective date of any other corporate action that enables the conversion of all outstanding shares of Series A Preferred Stock into such number of fully paid and non-assessable shares of Common Stock as specified by the Conversion Ratio then in effect. .................. (c) Mechanics of Conversion. .................. (i)Optional Conversion. A holder of any share of Series A Preferred Stock may exercise the Conversion Right of such share by surrendering the certificate therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred Stock, together with a written notice to the Corporation which shall state: (A) that such holder elects to convert the same; and (B) the number of shares of Series A Preferred Stock being converted. Thereupon the Corporation shall promptly issue and deliver to the holder of such shares a certificate or certificates for the number of whole shares of Common Stock to which such holder shall be entitled. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then fair market value (as determined in good faith by the Board of Directors of the Corporation) of the Common Stock. If the certificate evidencing the Series A Preferred Stock being converted shall also evidence shares of Series A Preferred Stock not being converted, then the Corporation shall also deliver to the holder of such certificate a new stock certificate evidencing the Series A Preferred Stock not converted. The conversion of any shares of Series A Preferred Stock shall be deemed to have been made immediately prior to the close of business on the date that the shares of Series A Preferred Stock to be converted are surrendered to the Corporation, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. Any dividends or distributions declared but unpaid at the time of conversion with respect to the Series A Preferred Stock so converted, including any dividends declared on the Common Stock to which the Series A Preferred Stock is entitled pursuant to Section 6 above, shall be paid to the holder of Common Stock issued upon conversion of the Series A Preferred Stock upon the payment date therefore.
| | The Corporation shall give written notice to each holder of a share of Series A Preferred Stock promptly upon the liquidation, dissolution or winding up of the Corporation, and not more than fifty (50) nor less than twenty (20) days before the anticipated date of consummation of any acquisition of the Corporation or any sale of all or substantially all of the assets of the Corporation and no such acquisition of the Corporation or sale of assets shall be effective until such notice shall have been given. |
.................. (ii) Mandatory Conversion. The Corporation shall give written notice to each --------------------- holder of a share of Series A Preferred Stock within ten (10) days after the effectiveness of an Increase in Authorized Common Stock. Following the conversion of such shares, each holder of shares so converted may surrender the certificate therefor at the office of the Corporation or any transfer agent for the Series A Preferred Stock. Upon such surrender, the Corporation shall issue and deliver to each holder a certificate or certificates for the number of whole shares of Common Stock to which such holder is entitled. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then fair market value (as determined in good faith by the Board of Directors of the Corporation) of the Common Stock. .................. The conversion of shares of Series A Preferred Stock shall be effective simultaneously with the effectiveness of an Increase in Authorized Common Stock, whether or not the certificates representing such shares of Series A Preferred Stock shall have been surrendered or new certificates representing the shares of Common Stock into which such shares have been converted shall have been issued and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. Any dividends or distributions declared but unpaid at the time of a mandatory conversion with respect to the Series A Preferred Stock so converted, including any dividends declared on the Common Stock to which the Series A Preferred Stock is entitled pursuant to Section 6 above, shall be paid on the payment date therefore.
.................. (d) Adjustment of Conversion Ratio. The Conversion Ratio for each share of Series A Preferred Stock and the kind of securities issuable upon the conversion of any share of Series A Preferred Stock shall be adjusted from time to time as follows: .................. (i) Subdivision or Combination of Shares. If the Corporation at any time --------------------------------------- effects a subdivision or combination of the outstanding Common Stock, the Conversion Ratio shall be increased, in the case of a subdivision, or decreased, in the case of a combination, in the same proportions as the Common Stock is subdivided or combined, in each case effective automatically upon, and simultaneously with, the effectiveness of the subdivision or combination which gives rise to the adjustment. .................. (ii) Reclassification, Consolidation or Merger. If at any time, as a result ------------------------------------------- of (A) a capital reorganization or reclassification (other than a subdivision or combination which gives rise to an adjustment of the Conversion Ratio pursuant to Section 7(d)(i)); or (B) a merger or consolidation of the Corporation with another corporation (whether or not the Corporation is the surviving corporation), the Common Stock issuable upon the conversion of the Series A Preferred Stock shall be changed into or exchanged for the same or a different number of shares of any class or classes of stock of the Corporation or any other corporation, or other securities convertible into such shares, then, as a part of such reorganization, reclassification, merger or consolidation, appropriate adjustments shall be made in the terms of the Series A Preferred Stock (or of any securities into which the Series A Preferred Stock is changed or for which the Series A Preferred Stock is exchanged), so that: (x) the holders of Series A Preferred Stock or of such substitute securities shall thereafter be entitled to receive, upon conversion of the Series A Preferred Stock or of such substitute securities, the kind and amount of shares of stock, other securities, money and property which such holders would have received at the time of such capital reorganization, reclassification, merger, or consolidation, if such holders had converted their Series A Preferred Stock immediately prior to such capital reorganization, reclassification, merger, or consolidation, and (y) the Series A Preferred Stock or such substitute securities shall thereafter be adjusted on terms as nearly equivalent as may be practicable to the adjustments theretofore provided in this Section 7(d). No consolidation or merger in which the Corporation is not the surviving corporation shall be consummated unless the surviving corporation shall agree, in writing, to the provisions of this Section 7(d)(ii). The provisions of this Section 7(d)(ii) shall similarly apply to successive capital reorganizations, reclassifications, mergers, and consolidations. .................. (iii) Other Action Affecting Common Stock. If at any time the Corporation --------------------------------------- takes any action affecting its Common Stock which, in the opinion of the Board of Directors of the Corporation, would have an adverse effect upon the Conversion Rights of the Series A Preferred Stock and the foregoing conversion ratio adjustment provisions are not strictly applicable but the failure to make any adjustment would adversely affect the Conversion Rights, then the Conversion Ratio and the kind of securities issuable upon the conversion of Series A Preferred Stock shall be adjusted to preserve, without dilution, the Conversion Rights in such manner and at such time as the Board of Directors of the Corporation may in good faith determine to be equitable in the circumstances. .................. (iv) Notice of Adjustments. Whenever the Conversion Ratio or the kind of ----------------------- securities issuable upon the conversion of any one of or all of the Series A Preferred Stock shall be adjusted pursuant to Sections 7(d)(i) - (iii) above, the Corporation shall make a certificate signed by its Chief Financial Officer, Secretary or Assistant Secretary, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of the Corporation made any determination hereunder), and the Conversion Ratio and the kind of securities issuable upon the conversion of the Series A Preferred Stock after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail postage prepaid) to each holder of Series A Preferred Stock promptly after each adjustment. .................. (e) Full Consideration. All shares of Common Stock which shall be issued upon the conversion of any Series A Preferred Stock (which is itself fully paid and non-assessable) will, upon issuance, be fully paid and non-assessable. The Corporation will pay such amounts and will take such other action as may be necessary from time to time so that all shares of Common Stock which shall be issued upon the conversion of any Series A Preferred Stock will, upon issuance and without cost to the recipient, be free from all pre-emptive rights, taxes, liens and charges with respect to the issue thereof. .................. (f) No Impairment. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 7 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock against impairment. .................. (g) Cancellation of Series A Preferred Stock. No share of Series A Preferred Stock acquired by the Corporation upon conversion, redemption or purchase shall be reissued and all such shares shall be canceled, retired and returned to the status of authorized and unissued shares of undesignated preferred stock. The Corporation may take such appropriate corporate action to reduce the authorized number of Series A Preferred Stock accordingly.| | 8.PROTECTIVE PROVISIONS. In addition to any other rights provided by law, so long as at least one share of Series A Preferred Stock is outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of the outstanding shares of the Series A Preferred Stock voting together as a single class: |
| | (a) amend or repeal any provision of the Corporation’s Articles of Incorporation, Bylaws or this Articles of Designations if such action would materially and adversely alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred Stock; |
(b) increase or decrease (other than by conversion) the total number of authorized shares of Series A Preferred Stock;| | (c) create or issue any series or class, reclassify any authorized capital stock of the Corporation into stock of any series or class, increase the authorized or issued amount of any class or series of stock, or authorize, create, issue or reclassify any obligation or security convertible or exchangeable into or evidencing a right to purchase capital stock of any class or series, that ranks prior to the Series A Preferred Stock as to dividends or rights upon liquidation, dissolution or winding up; |
| | (d) issue any Common Stock after the date on which Series A Preferred Stock has been last issued and sold, whether or not subsequently reacquired or retired by the Corporation, for a consideration per share less than fair market value of the Common Stock (as determined in good faith by the Board of Directors of the Corporation) at such issuance or deemed issuance other than: (1) shares of Common Stock issued in transactions giving rise to adjustments under Sections 7(d)(i) or (ii) above, (2) shares of Common Stock issued upon conversion of shares of Series A Preferred Stock, or (3) shares issued upon the conversion of Convertible Securities (as defined below) if the issuance of such Convertible Securities did not violate Section 8(e) below; |
| | (e) issue any Convertible Securities with respect to which the Effective Price is less than the fair market value of the Common Stock (as determined in good faith by the Board of Directors of the Corporation), at such issuance or deemed issuance. “CONVERTIBLE SECURITIES” means all rights or options for the purchase of, or stock or other securities convertible into, Common Stock (other than Common Stock issued for the purposes set forth in Sections 8(d)(1) or (2) above) or other Convertible Securities, whenever and each time issued. The “EFFECTIVE PRICE” with respect to any Convertible Securities means the result of dividing: (1) the sum of (x) the total consideration, if any, received by the Corporation for the issuance of such Convertible Securities, plus (y) the minimum consideration, if any, payable to the Corporation upon exercise or conversion of such Convertible Securities (assuming that the full amount of securities issuable upon exercise or conversion are issued), plus (z) the minimum consideration, if any, payable to the Corporation upon exercise or conversion of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities, by: (2) the maximum number of Common Stock (other than Common Stock issued for the purposes set forth in Sections 8(d)(1) or (2) above) issuable upon exercise or conversion of such Convertible Securities or of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities; or |
| | (f) sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of. |
| | 9.SEVERABILITY OF PROVISIONS. If any voting powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as such resolution may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations, and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. |
C. The authorized number of shares of Preferred Stock of the Corporation is 10,000,000 and the number of shares constituting the Series A Convertible Preferred Stock, consisting of the shares authorized hereby, is 4,276,471..........IN WITNESS WHEREOF, the undersigned have executed this certificate as of July 5, 2000, on behalf of the Corporation, and certify under penalty of perjury that this is the act and deed of the Corporation, and that the facts stated herein are true.
STERLING MEDIA CAPITAL GROUP, INC.
By: .............. ------------------------------------------------- Dwight L. Pierce, PresidentATTEST:
By:............... -------------------------------------------------- David C. Annin, SecretaryEXHIBIT D
PRESS RELEASE STERLING MEDIA CAPITAL GROUP, INC. 4570 WESTGROVE DRIVE, SUITE 220, ADDISON, TX 75001 Telephone (972) 248-4411 - Facsimile (972) 248-4815 - ---------------------------------------------------------------------------------------------------------------------------------------Contact: Dwight L. Pierce, President & CEO
STERLING MEDIA CAPITAL GROUP, INC. (FORMERLY ELECTRO-KINETIC SYSTEMS) ANNOUNCES COMPLETION OF THE FIRST STEP OF THE ACQUISITION OFSTERLING MEDIA CAPITAL GROUP
DALLAS, Texas - July 7, 2000 - Sterling Media Capital Group, Inc. (formerly Electro-Kinetic Systems, Inc., OTC BB: EKSIA, now OTC BB: SMCIA.) ("Sterling Media") announced today that it has completed the first step of the planned acquisition of Sterling Media Fund Managers, L.L.C. dba Sterling Media Capital Group ("Sterling Managers"). Sterling Managers is a privately-held asset management group operating in the media/communications and financial services industries. Upon completion of both steps of a two-step acquisition, the stockholders of Sterling Managers will own approximately 91.5% of the equity and voting rights of Sterling Media, (which has changed the name of Electro-Kinetic Systems to Sterling Media Capital Group, Inc.) Under the Letter Agreement previously announced June 8, 2000, following the first step of the acquisition, Dwight L. Pierce, President and Chief Executive Officer of Sterling Managers has been appointed President, CEO and a director of Sterling Media. Raymond L. Burke has resigned from these positions with the parent company upon Mr. Pierce's appointment. Mr. Pierce has appointed Paul Nussbaum as Chairman of the Board of Directors, Gilbert F. Amelio as Vice Chairman of the Board and Director, David C. Annin as Vice President, Secretary, Treasurer and Director and Bob L. McGiboney as Executive Vice President and Director. The acquisition is to be completed in two steps. The first step was completed today, July 7, 2000, by the issuance of 46,000,000 (a majority) of the common stock to the shareholders of Sterling Managers in exchange for approximately 15% of the equity interests of Sterling Managers. The parent company has today changed its name to Sterling Media Capital Group, Inc. The second step will be completed early next week by the acquisition of the remaining 85% of Sterling Managers, by the issuance of 3,535,358 shares of Sterling Media Series "A" convertible preferred shares followed by an issuance of 741,113 of these same convertible preferred shares which will be held in reserve for future issuance to convertible securities and option holders. After completion of the second step of the acquisition process, Sterling Managers will be a wholly-owned subsidiary of Sterling Media and the present stockholders of Sterling Managers will own approximately 91.5% of the outstanding equity interest and voting rights of the parent company, Sterling Media. It is expected that following completion of the acquisition, the stockholders of Sterling Media will be presented a proposal to "reverse-split" the outstanding shares of common stock and amend the Articles of Incorporation to increase the number of shares of common stock that Sterling Media is authorized to issue. If the "reverse-split" is approved and the amendment to the Articles is authorized, upon completion of the acquisition, there will be approximately 17,000,000 outstanding common shares. Approximately 15,555,000 common shares (91.5%) will be held by the old Sterling Managers stockholders and approximately 1,445,000 common shares (8.5%) will be held by the old Electro-Kinetic stockholders. Mr. Pierce stated "Sterling Media is one of the first financial service entities in the world to convert under utilized media and internet properties into investment capital. Sterling Managers currently manages a pool of non-cash media based assets with a total net value, based on third party appraisals, of approximately $500,000,000 and it is expected to grow rapidly over the next few years, which gives Sterling Media significant investment resources." Sterling Media and Sterling Managers use the assets under management to raise investment capital, which they, in turn, invest in emerging growth companies as venture capital. The assets managed now and presumably in the future by Sterling provide a "profits interest" to Sterling in concert with other third parties. Sterling Media's executive offices are to be located in Dallas, TX, the subsidiary Sterling Managers will continue to be located in with its administrative offices in Tulsa, Okalahoma. Sterling Media presently has 10 employees, most of whom are shareholders. Except for historical information, all of the statements, expectations and assumptions contained in the foregoing are forward-looking statements. The realization of any or all of these expectations is subject to a number of risks and uncertainties and it is possible that the assumptions made by management may not materialize.EXHIBIT E
- ---------------------------------------------------------------------------------------------------------------------------------------AMENDED PERIODIC REPORT ON FORM 8-K FILED JULY 28, 2000
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT - ......... Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: July 7, 2000
STERLING MEDIA CAPITAL GROUP, INC.
(formerly Electro-Kinetic Systems, Inc.)
(Exact name of registrant as specified in its charter)
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Pennsylvania 2-85175W 22-1954716
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(State or other jurisdiction (Commission File Number) (I.R.S. Employer
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Of incorporation) Identification No.)
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7136 S. Yale Ave., Suite 300 Tulsa, OK 74136 (Address of principal offices) (Zip Code) Registrants telephone number, including area code: (918)524-3715 525 Washington Blvd.(36th Floor) Jersey City New Jersey 07310 (Former Address)Table of Contents
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................................................................................................1
BALANCE SHEET
...........................................................................................................................5
STATEMENT OF OPERATIONS ...................................................................................................6
STATEMENT OF CHANGES IN MEMBERS' EQUITY ................................................................6
STATEMENT OF CASH FLOWS .....................................................................................................7
NOTES TO FINANCIAL STATEMENTS..........................................................................................7
UNAUDITED INTERIM BALANCE SHEET...................................................................................10
UNAUDITED INTERIM STATEMENT OF OPERATIONS ...........................................................11
UNAUDITED INTERIM STATEMENT OF CHANGES IN MEMBERS' EQUITY.......................12
UNAUDITED INTERIM STATEMENT OF CASH FLOWS............................................................13
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS...............................................13
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET.............................................17
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS .....................18
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ........19
ITEM 9. FINANCIAL STATEMENTS AND EXHIBITS This Current Report on Form 8-K/A (Amendment No. 1) amends the Current Report on Form 8-K previously filed with the Commission on July 24, 2000, relating to the acquisition of Sterling Media Fund Managers L.L.C., an Oklahoma corporation (the "Registrant" or "Sterling"), by Electro Kinetic Systems, Inc., a Pennsylvania corporation ("EKS") on July 7, 2000. The following documents are included as part of this report: (a) Financial Statements of the Business Acquired. (i) Audited Financial Statements.The following audited financial statements of Sterling are hereby included as part of this report:
Report of Independent Auditors........................................F-1
Balance Sheet as of December 31, 1999.................................F-2
Statement of Operations for the period from inception (April 5, 1999)
to December 31, 1999, ................................................F-3
.........Statement of Changes in Members' Equity for the period from inception
.........(April 5, 1999) to December 31, 1999 ...............................F-4
Statement of Cash Flows for the period from inception to (April 5, 1999)
to December 31, 1999 ................................................F-5
Notes to Financial Statements.........................................F-6
(ii) Interim Financial Statements (Unaudited). The following interim financial statements of Sterling are hereby included as part of this report.
Unaudited Interim Balance Sheet as of June 30, 2000.................F-7
Unudited Interim Statement of Operations for the six months ended
June 30, 2000 ......................................................F-8
......... Unaudited Interim Statement of Changes in Members' Equity for the
six months ended June 30, 2000 .....................................F-9
Unaudited Interim Statement of Cash Flows for the six months ended
June 30, 2000.......................................................F-10
Notes to Unaudited Interim Financial Statements.....................F-11
(b) Pro Forma Financial Information (Unaudited). The pro forma financial statements of the Registrant are hereby included as part of this report:
Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1999..............................................................PF-1
3
Unaudited Pro Forma Consolidated Statement of Operations for the six
months ended June 30, 2000.......................................PF-2
Notes to Unaudited Pro Forma Consolidated Financial Statements for the
six months ended June 30, 2000 .................................PF-3
(c) Exhibits. None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 28, 2000. STERLING MEDIA FUND MANAGERS L.L.C. By: /s/ Dwight L. Pierce
Dwight L. Pierce, President and Chief Executive Officer INDEPENDENT AUDITORS' REPORT To the Board of Managers and Members Sterling Media Fund Managers, L.L.C.We have audited the accompanying balance sheet of Sterling Media Fund Managers, L.L.C. (“SMFM”)(an Oklahoma Limited Liability Company) as of December 31, 1999, and the related statements of operations, changes in members’ equity and cash flows for the period from inception (April 15, 1999) to December 31, 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SMFM as of December 31, 1999 and the results of its operations and its cash flows for the period from inception (April 15, 1999) to December 31, 1999, in conformity with accounting principles generally accepted in the United States.
/s/ Tullius, Taylor, Sartain and Sartain Tulsa, Oklahoma July 27, 2000 F-1THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK
4
5 Sterling Media Fund Managers, L.L.C. Balance Sheet as of December 31, 1999
ASSETS
- ------
Current Assets
Cash in bank $ 2,856
Accounts Receivable from Related Company 88,839
------
Total Current Assets 91,695
------
Non-Current Assets
Notes Receivable from Related Parties 257,147
Accrued Interest Receivable 8,809
Fixed Assets 9,534
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Total Non-current Assets 275,490
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TOTAL ASSETS $367,185
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LIABILITIES and MEMBERS' EQUITY
- -----------------------------
LIABILITIES
Current Liabilities
Accounts Payable $ 2,146
Advances from Related Company 100,000
Accrued Interest Payable 9,981
Current Portion of Notes Payable 200,000
Convertible Notes Payable 400,000
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Total Current Liabilities 712,127
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Long-Term Liabilities
Total Long-Term Liabilities 0
-
TOTAL LIABILITIES 712,127
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MEMBERS' EQUITY
Membership Interests, 135,000 shares authorized; 0
110,000 shares issued and outstanding 1,000
Contributed Capital 136,000
Accumulated Deficit (481,942)
---------
TOTAL MEMBERS EQUITY (DEFICIENCY) (344,942)
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TOTAL LIABILITIES and MEMBERS' EQUITY $367,185
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ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F2 THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK 5 .........6 Sterling Media Fund Managers, L.L.C. Statement of Operations for the period from inception (April 15, 1999) to December 31,1999
REVENUES
$0
--
TOTAL REVENUES 0
-
EXPENSES
Accrued Officer's Compensation 136,000
Interest 16,479
Professtional Services 4,393
Rent 89,782
Other General and Administrative 18,918
Payroll and Payroll taxes 44,650
Telephone 32,274
Travel 148,257
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TOTAL EXPENSES 490,753
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LOSS FROM OPERATIONS (490,753)
---------
OTHER INCOME (EXPENSE)
Interest Income 8,811
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TOTAL OTHER INCOME (EXPENSE) 8,811
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NET LOSS $ (481,942)
===============
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTSF3
Sterling Media Fund Manager, L.L.C. Statement of Changes in Members' Equity for the period from inception (April 15, 1999) to December 31, 1999
Contributed Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Shares of Membership Interest 110,000 $1,000 $0 $0 $1,000
Net Loss 0 0 (481,942) (481,942)
Contributed Services 136,000 136,000
---------- ---------- -------------- ------------ -------------
Balance at December 31, 1999 110,000 $1,000 $136,000 ($481,942) ($344,942)
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ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTSF4
6
.........7 Sterling Media Fund Managers, L.L.C. Statement of Cash Flows for the period from inception (April 15, 1999) to December31, 1999
Cash flows from operating activities:
Net Loss ($481,942)
Adjustments to reconcile net profit/(loss) to net cash used in operations
Contributed services 136,000
Funds advanced to related entities (345,986)
Accrued interest income (8,809)
Accounts payable and accrued liabilities 12,127
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Net Cash Provided/(Used) from/in Operations (688,610)
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Investing Actiivities
Property and Equipment (9,534)
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Net Cash Provided from Investing Activities (9,534)
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Financing Activities
Advances from Related Company 100,000
Proceeds from Notes Issued 600,000
Proceeds from issuance of members' interests 1,000
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Net cash provided from Financing Activities 701,000
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Net increase in cash 2,856
Cash balance - beginning of period 0
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Cash balance - end of period $2,856
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ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F5Sterling Media Fund Managers, L.L.C.
Notes to Financial Statements
for the period from inception (April 15, 1999) to December 31, 1999NOTE A - Organization
Organization
Sterling Media Fund Managers, L.L.C. ("SMFM" or the "Company") is an Oklahoma Limited Liability Company. It is the General Partner and 1% owner of Sterling Media Investment Group, L.P., ("SMIG") an Oklahoma Limited Partnership. SMIG will act as portfolio manager and funding affiliate for Sterling Media Capital Fund I, L.P. ("SMCF I"), an Oklahoma Limited Partnership. SMCF I is an investment7
..................8fund capitalized with prepaid broadcast and print media advertising time and space (“Media Credits”). SMIG will use several techniques to employ the media credits to raise funds to invest in various venture capital opportunities. Such techniques may include the sale of certain of the media credits, or issuance of bonded indebtedness secured by the media credits.SMFM will manage the funds so raised and the pool of media credits invested in SMCF I. SMFM will also direct the investment of capital raised by SMIG into venture capital opportunities. SMFM will receive traditional “placement fees” for this activity. Such placement fees are projected at 5-8% of the venture capital investments in the initial year, and 2% per year thereafter. In addition, SMFM will receive a profit participation in all the profits received by SMIG from these investments and from the disposition of any of the media credits.
NOTE B - Summary of Significant Accounting Policies Fiscal Year - ----------- SMFM has adopted the calendar year as its fiscal year.Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure during the reporting period. Actual results could differ from those estimates.
NOTE C - Accounts and Notes Receivable
Accounts Receivable from Related Companies
SMFM has funded many of the necessary organization and other related costs for certain related companies.There is no collateral for these advances.The advances are non-interest bearing and have no definite repayment term.
Notes Receivable
Members of the Company’s management have provided services to the Company without compensation. The Company has made advances to these individuals in the amount of $ 257,147 at December 31, 1999. The notes provide for interest at 8% annually on the outstanding balance and are due no later than December 31, 2002. There is no collateral for these advances.
NOTE D - Notes Payable and Convertible Notes Payable
NOTES PAYABLE
Part of the initial funding for the Company came from the issuance of Company notes. To date, the Company has issued $200,000 in regular notes. These notes carry an interest rate of 10% per year and are due and payable on August 3, 2000. The notes are collateralized by stock held by one of the principals of the Company. It is anticipated that this note will be extinguished from proceeds received from the sale of additional stock as a part of the pending merger and reorganization (see NOTE H - - Subsequent Events for a more complete description of these activities.) Interest of $ 1,433 has been accrued through December 31, 1999. Interest of $6,498 was paid in 1999.
Convertible Notes Payable
The Company borrowed $400,000 under convertible notes payable. These notes accrue interest ranging from 10% to 18%. The notes are due and payable at various times throughout the 2000 and 2001 fiscal years. These notes are collateralized by stock pledged by one of the Company’s principals. These notes contain a conversion feature that allows the note holders to convert their notes into shares of SMFM membership interests. It is expected that the Convertible Note Holders will convert their note positions to equity positions subsequent to the financial statement date. See NOTE H - Subsequent Events, below for a more detailed explanation. Interest of $ 8,548 has been accrued through December 31, 1999.
8
..................9NOTE E - Members’ Equity
The Company has authorized 135,000 shares of membership interests and has 113,877 shares issued and outstanding. The balance of 21,123 shares are held for the conversion of Convertible Note Holders, Option Holders, and other account payable holders. Options have been issued and are outstanding to allow option holders to purchase a total of 10,093 membership interests at an option price of $100.00 per share.
NOTE F - Income Taxes
As a Limited Liability Company, SMFM is treated as a partnership for federal and state income tax purposes. As required, all items of income, deductions, credits, etc. are allocated among the members and reported by them, individually, on their tax returns. Therefore, no liability for income taxes has been accrued.
NOTE G - Subsequent Events
On July 7, 2000, SMFM underwent a merger with Electro Kinetic Systems, Inc. (“EKS”) resulting in SMFM becoming a wholly owned subsidiary of EKS. Immediately after the merger, EKS changed its name to Sterling Media Capital Group, Inc. (“SMCG”). After the transaction was completed, the former members of SMFM owned approximately 91.5% of the equity and voting rights of EKS and the former stockholders of EKS owned the remaining 8.5%. The acquisition will be accounted for as a purchase of EKS by SMFM.
It is currently contemplated that the shareholders of SMCG will authorize a “reverse-split” to reduce the number of SMCG shares authorized to 17,000,000 shares. After conversion of Convertible Note Holders, Option Holders and others, as discussed below, SMCG will have 17,000,000 shares of common stock issued and outstanding with 15,555,000 of these shares, (91.5%), held by the old shareholders of SMFM and 1,445,000 shares will be held by the old shareholders of EKS.
Current SMFM members will own 13,121,111 shares of SMCG common stock after the exchange and “reverse-split”. It is anticipated that the Convertible Note Holders will exercise their conversion features and receive, in aggregate, 1,155,736 shares of SMCG common stock after the exchange and “reverse-split”. It is anticipated that the Option Holders will exercise their options and receive, in aggregate, 1,162,930 shares of SMCG common stock after the exchange and “reverse-split”. Other account payable holders will receive 115,223 shares of SMCG common in extinguishment of their amounts due.
After the exercise, the Convertible Notes Payable in the amount of $925,000 will become SMCG stockholders’ equity. At the time of exercise, SMCG will receive option proceeds totaling $1,009,300 in cash that is not presently shown in this financial statement.
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..................11 Sterling Media Fund Managers, L.L.C. Unaudited Interim Balance Sheet as of June 30, 2000
ASSETS
- ------
Current Assets
Cash in bank $ 103,056
Accounts receivable from related companies 196,062
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Total Current Assets 299,118
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Non-Current Assets
Notes Receivable from Related Parties 341,060
Accrued Interest Receivable 20,665
Fixed Assets 20,493
Media Credits 2,500,000
---------
Total Non-current Assets 2,882,218
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TOTAL ASSETS $ 3,181,336
====================
LIABILITIES and MEMBERS' EQUITY
- -----------------------------
LIABILITIES
Current Liabilities
Accounts Payable $ 77,477
Advances from Related Company 100,000
Accrued Interest Payable 58,315
Current Portion of Notes Payable 200,000
Convertible Notes Payable 900,000
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Total Current Liabilities 1,335,792
---------
Long-Term Liabilities
Total Long-Term Liabilities 0
-
TOTAL LIABILITIES 1,335,792
---------
MEMBERS' EQUITY
Membership Interests, 135,000 shares authorized;
113,877 issued and outstanding 2,501,000
Contributed Capital 232,000
Accumulated Deficit (887,456)
---------
TOTAL MEMBERS EQUITY 1,845,544
---------
TOTAL LIABILITIES and MEMBERS' EQUITY $ 3,181,336
====================
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS Sterling Media Fund Managers, L.L.C. Unaudited Interim Statement of Operations for the six months ended June 30, 2000
REVENUES
$0
--
TOTAL REVENUES 0
-
EXPENSES
Accrued Officer's Compensation 96,000
Interest 50,500
Professtional Services 12,318
Rent 95,228
Other General and Administrative 33,198
Payroll and Payroll taxes 37,056
Telephone 29,683
Travel 63,441
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TOTAL EXPENSES 417,424
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LOSS FROM OPERATIONS (417,424)
---------
OTHER INCOME (EXPENSE)
Interest Income 11,910
TOTAL OTHER INCOME (EXPENSE) 11,910
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NET LOSS $ (405,514)
====================
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTSF8
THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK Sterling Media Fund Manager, L.L.C. Unaudited Interim Statement of Changes inMembers’ Equity
for the sixmonths ended June 30, 2000
Contributed Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance at December 31, 1999 110,000 $1,000 $136,000 ($481,942) ($344,942)
Shares issued for assets 3,877 2,500,000 2,500,000
Net Loss for the Period (405,514) (405,514)
Contributed Services 96,000 96,000
--------- ------------ ------------ ------------- -------------
Balance at June 30, 2000 113,877 $2,501,000 $232,000 ($887,456) $1,845,544
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Sterling Media Fund Managers, L.L.C. Unaudited Interim Statement of Cash Flows for the six months endedJune 30, 2000
Cash flows from operating activities:
Net Profit (Loss) ($405,514)
Adjustments to reconcile net profit/(loss) to net cash used in
operations
Contributed Services 96,000
Increase in receivables from related entities (191,136)
Increase in accounts payable and accrued expenses 123,665
Increase in accrued interest income (11,856)
--------
Net cash used in operations (388,841)
-----------------
Investing Actiivities
Property and Equipment (10,959)
-----------------
Net cash used in investing activities (10,959)
-----------------
Financing Activities
Proceeds from Notes Issued 500,000
-----------------
Net cash provided from Financing Activities 500,000
-----------------
Net Cash from activities 100,200
Cash balance - beginning of period 2,856
-----------------
Cash balance - end of period $103,056
=================
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-10Sterling Media Fund Managers, L.L.C.
Notes to Unaudited Interim Financial Statements
for the period ended June 30, 2000
NOTE A - Organization
Organization
Sterling Media Fund Managers, L.L.C. (“SMFM” or the “Company”) is an Oklahoma Limited Liability Company. It is the General Partner and 1% owner of Sterling Media Investment Group, L.P., (“SMIG”) an Oklahoma Limited Partnership. SMIG will act as portfolio manager and funding affiliate for Sterling Media Capital Fund I, L.P. (“SMCF I”), an Oklahoma Limited Partnership. SMCF I is an investment fund capitalized with prepaid broadcast and print media advertising time and space (“Media Credits”).
13
..................14SMIG will use several techniques to employ the media credits to raise funds to invest in various venture capital opportunities. Such techniques may include the sale of certain of the media credits, or issuance of bonded indebtedness secured by the media credits.SMFM will manage the funds so raised and the pool of media credits invested in SMCF I. SMFM will also direct the investment of capital raised by SMIG into venture capital opportunities. SMFM will receive traditional “placement fees” for this activity. Such placement fees are projected at 5-8% of the venture capital investments in the initial year, and 2% per year thereafter. In addition, SMFM will receive a profit participation in all the profits received by SMIG from these investments and from the disposition of any of the media credits.
NOTE B - Summary of Significant Accounting Policies Fiscal Year - ----------- SMFM has adopted the calendar year as its fiscal year.INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying interim financial statements, which have not been audited, reflect all adjustments necessary to present fairly the results for the interim period. All of the accounting adjustments reflected in the accompanying interim financial statements are of a normal recurring nature. These interim financial statements should be read in conjunction with the Company’s annual financial statements.
The accompanying interim financial statements have been prepared on the accrual basis of accounting in accordance with the accounting principles generally accepted in the United States for interim financial information, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets liabilities as of June 30, 2000 and revenues and expenses for the six month period ended June 30, 2000. Actual results may differ from the estimates and assumptions used. The results of operations for the six months ended June 30, 2000, are not necessarily indicative of the results to be expected for the year ended December 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure during the reporting period. Actual results could differ from those estimates.
NOTE C - Accounts and Notes Receivable
Accounts Receivable from Related Companies
SMFM has funded many of the necessary organization and other related costs for certain related companies.There is no collateral for these advances.The advances are non-interest bearing and have no definite repayment term.
Notes Receivable
Members of the Company’s management have provided services to the Company without compensation. The Company has made advances to these individuals in the amount of $ 341,060 at June 30, 2000. The notes provide for interest at 8% annually on the outstanding balance and are due no later than December 31, 2002. There is no collateral for these advances.
NOTE D Media credit trade due bill
In June 2000, SMFM issued 3,877 shares of its membership interests for a media credit trade due bill in the amount of $2,500,000. The media credit trade due bill represents a $2,500,000 undivided portion of a
14
..................15 $10,000,000 credit trade due bill issued in favor of an SMCF I limited partner. The amount of the trade due bill is based on the appraised value of the Media Credits. Media Credit assets have been appraised by Satterfield & Perry, Inc., media brokers, appraisers and consultants based on research and a preliminary evaluation provided by JWT Specialized Communications, a division of J. Walter Thompson Advertising Agency.
NOTE E - Notes Payable and Convertible Notes Payable
NOTES PAYABLE
Part of the initial funding for the Company came from the issuance of Company notes. To date, the Company has issued $200,000 in regular notes. These notes carry an interest rate of 10% per year and are due and payable on August 3, 2000. The notes are collateralized by stock held by one of the principals of the Company. It is anticipated that this note will be extinguished from proceeds received from the sale of additional stock as a part of the pending merger and reorganization (see NOTE H - - Subsequent Events for a more complete description of these activities.) Interest of $ 16,219 has been accrued through June 30, 2000.
Convertible Notes Payable
The Company borrowed $900,000 under convertible notes payable. These notes accrue interest ranging from 10% to 18%. The notes are due and payable at various times throughout the 2000 and 2001 fiscal years. These notes are collateralized by stock pledged by one of the Company’s principals. These notes contain a conversion feature that allows the note holders to convert their notes into shares of SMFM membership interests. It is expected that the Convertible Note Holders will convert their note positions to equity positions subsequent to the financial statement date. See NOTE H - Subsequent Events, below for a more detailed explanation. Interest of $ 42,096 has been accrued through June 30, 2000. If the Convertible Note Holders exercise their conversion rights, as is expected, $12,279 of this interest amount would no longer be due and payable.
NOTE F - Members’ Equity
The Company has authorized 135,000 shares of membership interests and has 113,877 shares issued and outstanding. The balance of 21,123 shares are held for the conversion of Convertible Note Holders, Option Holders, and other account payable holders. Options have been issued and are outstanding to allow option holders to purchase a total of 10,093 membership interests at an option price of $100.00 per share.
NOTE G - Income Taxes
As a Limited Liability Company, SMFM is treated as partnership for federal and state income tax purposes. As required, all items of income, deductions, credits, etc. are allocated among the members and reported by them, individually, on their tax returns. Therefore, no liability for income taxes has been accrued.
NOTE H - Subsequent Events
On July 7, 2000, SMFM underwent a merger with Electro Kinetic Systems, Inc. ("EKS") resulting in SMFM becoming a wholly owned subsidiary of EKS. Immediately after the merger, EKS changed its name to Sterling Media Capital Group, Inc. ("SMCG"). After the transaction was completed, the former15
..................16members of SMFM owned approximately 91.5% of the equity and voting rights of EKS and the former stockholders of EKS owned the remaining 8.5%. The acquisition will be accounted for as a purchase of EKS by SMFM.
It is anticipated that the shareholders of SMCG will authorize a “reverse-split” to reduce the number of SMCG shares authorized to 17,000,000 shares. After conversion of Convertible Note Holders, Option Holders and others, as discussed below, SMCG will have 17,000,000 shares of common stock issued and outstanding with 15,555,000 of these shares, (91.5%), held by the old shareholders of SMFM and 1,445,000 shares will be held by the old shareholders of EKS.
Current SMFM members will own 13,121,111 shares of SMCG common stock after the exchange and “reverse-split”. It is anticipated that the Convertible Note Holders will exercise their conversion features and receive, in aggregate, 1,155,736 shares of SMCG common stock after the exchange and “reverse-split”. It is anticipated that the Option Holders will exercise their options and receive, in aggregate, 1,162,930 shares of SMCG common stock after the exchange and “reverse-split”. Other account payable holders will receive 115,223 shares of SMCG common in extinguishment of their amounts due.
After the exercise, the Convertible Notes Payable in the amount of $925,000 will become SMCG stockholders’ equity. At the time of exercise, SMCG will receive option proceeds totaling $1,009,300 in cash that is not presently shown in this financial statement.
F-11THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK
16
..................17 Sterling Media Fund Managers L.L.C. Unaudited Consolidated Pro-Forma Balance Sheet as of June 30, 2000
PRO FORMA As
SMFM, L.L.C. ADJUSTMENTS Adjusted
------------ ----------- - --------
ASSETS
- ------
Current Assets
Cash in bank $103,056 $6,182 (1) $109,238
Accounts receivable from related companies 196,062 196,062
Subscriptions Receivable 25,000 0 25,000
------- ------
Total Current Assets 324,118 6,182 330,300
-------- ------ -------
Non-Current Assets
NotesReceivable from related parties 341,060 341,060
Interest Receivable 20,665 20,665
Fixed Assets 20,493 20,493
Media Credits 2,500,000 2,500,000
Goodwill 0 196,317 (1) 196,317
-- -------- -------
Total Non-current Assets 2,882,218 196,317 3,078,535
---------- -------- ---------
TOTAL ASSETS $3,206,336 $202,499 $3,408,835
================ =============== ==================
LIABILITIES and MEMBERS' EQUITY
- -----------------------------
LIABILITIES
Current Liabilities
Accounts Payable $77,477 $11,345 (1) $88,822
Advances from Related Company 100,000 100,000
Accrued Interest Payable 58,315 58,315
Notes Payable 200,000 200,000
Convertible Notes Payable 925,000 35,000 (1) 960,000
-------- ------- -------
Total Current Liabilities 1,360,792 46,345 1,407,137
---------- ------- ---------
Long-Term Liabilities
Total Long-Term Liabilities 0 0 0
-- --
TOTAL LIABILITIES 1,360,792 46,345 1,407,137
---------- ------- ---------
MEMBERS' EQUITY
Membership interests 2,501,000 (2,501,000) (2)
Common Stock 0 2,792,111 (2) 2,792,111
Additional Paid-in-Capital 0 97,043 (2) 97,043
Contributed Capital 232,000 (232,000) (2) 0
Retained Earnings (887,456) 0 (887,456)
--------- ---------
TOTAL SHAREHOLDERS EQUITY (655,456) 2,657,154 2,001,698
--------- ---------- ---------
TOTAL LIABILITIES and MEMBERS' EQUITY $705,336 $2,703,499 $3,408,835
================ =============== ==================
(1) - to record the allocation of purchase price to acquired assets and assumed liabilities with the excess recorded as goodwill. (2) - to remove capital structure for SMFM and record EKS capital ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS 1 17 ..................18 Sterling Media Fund Managers L.L.C. Unaudited Pro Forma Consolidated Statement of Operations for the six months ended June 30, 2000
PRO FORMA As
SMFM, L.L.C. ADJUSTMENTS Adjusted
------------ ----------- - --------
REVENUES
$0 $0 $0
--- --- --
TOTAL REVENUES 0 0 0
-- -- -
EXPENSES
Accrued Officer's Compensation 96,000 96,000
Interest 50,500 44,945 (1) 95,445
Professtional Services 12,318 12,318
Rent 95,228 95,228
Payroll and Payroll taxes 37,056 37,056
Telephone 29,683 29,683
Travel 63,441 63,441
Other General and Administrative 33,198 52,016 (2)(1) 85,214
------- -------
TOTAL EXPENSES 417,424 96,961 514,385
-------- ------- -------
INCOME (LOSS) FROM OPERATIONS (417,424) (96,961) (514,385)
--------- -------- ---------
OTHER INCOME (EXPENSE)
Interest Income 11,910 11,910
------- ------
TOTAL OTHER INCOME (EXPENSE) 11,910 0 11,910
------- -- ------
NET INCOME (LOSS) $ (405,514) $ (96,961) $ (502,475)
================ ============= =============
EARNINGS PER SHARE:
Operations ($0.0052) ($0.0013) ($0.0065)
Weighted avg. no. of common shares 77,362,369 77,362,369 77,362,369
(1) - to consolidate the results of operations of the acquired company. (2) - to record amortization of goodwill. ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS PF-2 THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK 18 ..................19 Sterling Media Fund Managers, L.L.C. Notes to Unaudited Pro Forma Consolidated Statements for the six months ended June 30, 2000 NOTE A - Organization Organization - ------------ On July 7, 2000, Electro Kinetic Systems, Inc. ("EKS") acquired 100% of the outstanding stock of Sterling Media Fund Managers, L.L.C. ("SMFM" or the "Company") in exchange for 91.5% of the outstanding stock, common and preferred, of EKS. NOTE B - Summary of Significant Accounting Policies Principles of Consolidation The Pro Forma Consolidated Financial Statements include the accounts of EKS and its wholly owned subsidiaries, Israel Imaging Technologies, Inc., Electronic Textbook Corporation, and Medical Compliance Monitoring, Inc. All material intercom any transactions have been eliminated. NOTE C - Business Combination ----------------------------- On July 7, 2000, the Company purchased 91.5% of the outstanding stock of Electro Kinetic Systems, Inc., ("EKS") a publicly traded (OTC BB) Pennsylvania corporation. The Company acquired EKS through a reverse acquisition giving up 8.5% of its stock to former EKS shareholders. The 91.5% of EKS acquired was valued at approximately $155,000. The acquisition is being accounted for as a purchase with the purchase price paid allocated over the assets acquired and the liabilities assumed. The excess of the purchase price paid over the assets acquired less the liabilities assumed has been recorded as goodwill in the amount of $ 196,317. Due to the limited going concern value of EKS, this goodwill is being amortized over the next five years resulting in a charge to earnings of approximately $40,000 per year. These statements, prepared on an unaudited pro forma basis, combines the Company's balance sheet and results of operations with EKS's balance sheet and results of operations as if EKS had been acquired at the Company's inception. The pro forma results are not necessarily indicative of what would have occurred if the acquisition had been in effect for the periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies from combined operations. PF-3 19EXHIBIT F PENNSYLVANIA STATUTES - --------------------------------------------------------------------------------------------------------------------------------------- SUBCHAPTER D. DISSENTERS RIGHTS ss.1571. Application and effect of subchapter (a)......General Rule. Except as otherwise provided in subsection (b), any shareholder of a business corporation shall have the right to dissent from, and to obtain payment of the fair value of his shares in the event of, any corporate action, or to otherwise obtain fair value for his shares, where this part expressly provides that a shareholder shall have the rights and remedies provided in this subchapter. See: ..................Section 1906(c) (relating to dissenters rights upon special treatment). ..................Section 1930 (relating to dissenters rights). ..................Section 1931(d) (relating to dissenters rights in share exchanges). ..................Section 1932(c) (relating to dissenters rights in asset transfers). ..................Section 1952(d) (relating to dissenters rights in division). ..................Section 1962(c) (relating to dissenters rights in conversion). ..................Section 2104(b) (relating to procedure). Section 2324 (relating to corporation option where a restriction on transfer of a security is held invalid). Section 2325(b) (relating to minimum vote requirement). Section 2704(c) (relating to dissenters rights upon election). Section 2705(d) (relating to dissenters rights upon renewal of election). Section 2907(a) (relating to proceedings to terminate breach of qualifying conditions). Section 7104(b)(3) (relating to procedure). (b)......Exceptions. (1) Except as otherwise provided in paragraph (2), the holders of the shares of any class or series of shares that, at the record date fixed to determine the shareholders entitled to notice of and to vote at the meeting at which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to be voted on, are either: (i) listed on a national securities exchange; or (ii) held of record by more than 2,000 shareholders; shall not have the right to obtain payment of the fair value of any such shares under this subchapter. ..................(2) Paragraph (1) shall not apply to and dissenters rights shall be available without regard to the exception provided in that paragraph in the case of: (i) Shares converted by a plan if the shares are not converted solely into shares of the acquiring, surviving, new or other corporation or solely into such shares and money in lieu of fractional shares. (ii) Shares of any preferred or special class unless the articles, the plan or the terms of the transaction entitle all shareholders of the class to vote thereon and require for the adoption of the plan or the effectuation of the transaction the affirmative vote of a majority of the votes cast by all shareholders of the class. (iii) Shares entitled to dissenters rights under section 1906(c) (relating to dissenters rights upon special treatment). (3) The shareholders of a corporation that acquires by purchase, lease, exchange or other disposition all or substantially all of the shares, property or assets of another corporation by the issuance of shares, obligations or otherwise, with or without assuming the liabilities of the other corporation and with or without the intervention of another corporation or other person, shall not be entitled to the rights and remedies of dissenting shareholders provided in this subchapter regardless of the fact, if it be the case, that the acquisition was accomplished by the issuance of voting shares of the corporation to be outstanding immediately after the acquisition sufficient to elect a majority or more of the directors of the corporation. (c)......Grant of optional dissenters rights. The bylaws or a resolution of the board of directors may direct that all or a part of the shareholders shall have dissenters rights in connection with any corporate action or other transaction that would otherwise not entitle such shareholders to dissenters rights. (d)......Notice of dissenters rights. Unless otherwise provided by statute, if a proposed corporate action that would give rise to dissenters rights under this subpart is submitted to a vote at a meeting of shareholders, there shall be included in or enclosed with the notice of meeting: (i) a statement of the proposed action and a statement that the shareholders have a right to dissent and obtain payment of the fair value of their shares by complying with the terms of this subchapter; and (ii) a copy of this subchapter. (e)......Other statutes. The procedures of this subchapter shall also be applicable to any transaction described in any statute other than this part that makes reference to this subchapter for the purpose of granting dissenters rights. (f)......Certain provisions of articles ineffective. This subchapter may not be relaxed by any provision of the articles. (g)......Cross references. See sections 1105 (relating to restriction on equitable relief), 1904 (relating to de facto transaction doctrine abolished) and 2512 (relating to dissenters rights procedure). ss.1572. Definitions The following words and phrases when used in this subchapter shall have the meanings given to them in this section unless the context clearly indicates otherwise: ........."Corporation." The issuer of the shares held or owned by the dissenter before the corporate action or the successor by merger, consolidation, division, conversion or otherwise of that issuer. A plan of division may designate which of the resulting corporations is the successor corporation for the purposes of this subchapter. The successor corporation in a division shall have sole responsibility for payments to dissenters and other liabilities under this subchapter except as otherwise provided in the plan of division. ........."Dissenter." A shareholder or beneficial owner who is entitled to and does assert dissenters rights under this subchapter and who has performed every act required up to the time involved for the assertion of those rights. ........."Fair value." The fair value of shares immediately before the effectuation of the corporate action to which the dissenter objects, taking into account al relevant factors, but excluding any appreciation or depreciation in anticipation of the corporate action. ........."Interest." Interest from the effective date of the corporate action until the date of payment at such rate as is fair and equitable under all the circumstances, taking into account all relevant factors, including the average rate currently paid by the corporation on its principal bank loans. ss.1573. Record and beneficial holders and owners (a)......Record holders of shares. A record holder of shares of a business corporation may assert dissenters rights as to fewer than all of the shares registered in his name only if he dissents with respect to all the shares of the same class or series beneficially owned by any one person and discloses the name and address of the person or persons on whose behalf he dissents. In that event, his rights shall be determined as if the shares as to which he has dissented and his other shares were registered in the names of different shareholders. (b)......Beneficial owners of shares. A beneficial owner of shares of a business corporation who is not the record holder may assert dissenters rights with respect to shares held on his behalf and shall be treated as a dissenting shareholder under the terms of this subchapter if he submits to the corporation not later than the time of the assertion of dissenters rights a written consent of the record holder. A beneficial owner may not dissent with respect to some but less than all shares of the same class or series owned by the owner, whether or not the shares so owned by him are registered in his name. ss.1574. Notice of intention to dissent If the proposed corporate action is submitted to a vote at a meeting of shareholders of a business corporation, any person who wishes to dissent and obtain payment of the fair value of his shares must file with the corporation, prior to the vote, a written notice of intention to demand that he be paid the fair value for his shares if the proposed action is effectuated, must effect no change in the beneficial ownership of his shares from the date of such filing continuously through the effective date of the proposed action and must refrain from voting his shares in approval of such action. A dissenter who fails in any respect shall not acquire any right to payment of the fair value of his shares under this subchapter. Neither a proxy nor a vote against the proposed corporate action shall constitute the written notice required by this section. ss.1575. Notice to demand payment (a)......General rule. If the proposed corporate action is approved by the required vote at a meeting of shareholders of a business corporation, the corporation shall mail a further notice to all dissenters who gave due notice of intention to demand payment of the fair value of their shares and who refrained from voting in favor of the proposed action. If the proposed corporate action is to be taken without a vote of shareholders, the corporation shall send to all shareholders who are entitled to dissent and demand payment of the fair value of their shares a notice of the adoption of the plan or other corporate action. In either case, the notice shall: (1) State where and when a demand for payment must be sent and certificates for certificated shares must be deposited in order to obtain payment. (2) Inform holders of uncertificated shares to what extent transfer of shares will be restricted from the time that demand for payment is received. (3) Supply a form for demanding payment that includes a request for certificate of the date on which the shareholder, or the person on whose behalf the shareholder dissents, acquired beneficial ownership of the shares. (4) Be accompanied by a copy of this subchapter. (b)......Time for receipt of demand for payment. The time set for receipt of the demand and deposit of certificated shares shall be not less than 30 days from the mailing of the notice. The basic purpose of this section is to require the corporation to tell all actual or potential dissenters what they must do in order to take advantage of their right to dissent. The requirements of what the notice must contain are spelled out in detain to ensure that the notice serves this basic purpose. In the case of an action that is submitted to a vote of shareholders, the notice must be sent only to those persons who gave notice of their intention to dissent and who refrained from voting in favor of the proposed actions. IN the case of a transaction not involving a vote by shareholders, the notice must be sent to all persons who are eligible to dissent and demand payment. The notice must contain or be accompanied by a form which a person asserting dissenters rights may use to complete the demand for payment. The form must specify the date by which it must be received by the corporation , which date must be at least 30 days after the date of ailing of the notice of how to demand payment. This section contemplates the retention by the corporation of the share certificates (or prohibition of transfer in the case of uncertificated securities) rather than the notation of the claim of dissenters rights provided for in Section 5151 of the prior law. There is no requirement that the procedures mandated by this section be completed before the proposed corporation action can be consummated. It is intended rather that the proposed corporate action may be consummated as soon as it has been approved without the necessity of waiting until the dissenters rights procedures have been completed. Prior to the 1988 BCL, dissenters rights were not available in a context where a meeting of shareholders was not to be held. The provision of subsection (a) relating to dissenters rights in the case of corporate action taken without a vote of shareholders opens the way for the introduction into Pennsylvania law of the short form merger (equivalent to the Delaware certificate of ownership and merger) procedure of 15 Pa.C.S.ss.ss.1924(b)(3) and 1926, and similar changes. The following terms used in this section are defined in 15 Pa.C.S.ss.1103: ........."business corporation" ........."plan" ........."share certificate" ........."shareholder" ........."shares" ........."voting" The following terms used in this section are defined in 15 Pa.C.S.ss.1572: ........."corporation" ........."dissenter" ........."fair value" ss.1576. Failure to comply with notice to demand payment, etc. (a)......Effect of failure of shareholder to act. A shareholder who fails to timely demand payment, or fails (in the case of certificated shares) to timely deposit certificates, as required by a notice pursuant to section 1575 (relating to notice to demand payment) shall not have any right under this subchapter to receive payment of the fair value of his shares. (b)......Restriction on uncertificated shares. If the shares are not represented by certificates, the business corporation may restrict their transfer from the time of receipt of demand for payment until effectuation of the proposed corporate action or the release of restrictions under the terms of section 1577(a)( (relating to failure to effectuate corporate action). (c)......Rights retained by shareholder. The dissenter shall retain all other rights of a shareholder until those rights are modified by effectuation of the proposed corporate action. ss.1577. Release of restrictions or payment for shares (a)......Failure to effectuate corporate action. Within 60 days after the date set for demanding payment and depositing certificates, if the business corporation has not effectuated the proposed corporate action, it shall return any certificates that have been deposited and release uncertificated shares from any transfer restrictions imposed by reason of the demand for payment. (b)......Renewal of notice to demand payment. When uncertificated shares have been released from transfer restrictions and deposited certificates have been returned, the corporation may at any later time send a new notice conforming to the requirements of section 1575 (relating to notice to demand payment), with like effect. (c)......Payment of fair value of shares. Promptly after effectuation of the proposed corporate action, or upon timely receipt of demand for payment if the corporate action has already been effectuated, the corporate shall either remit to dissenters who have made demand and (if their shares are certificated) have deposited their certificates the amount that the corporation estimates to be the fair value of the shares, or give written notice that no remittance under this section will be made. The remittance or notice shall be accompanied by: (1) The closing balance sheet and statement of income of the issuer of the shares held or owned by the dissenter for a fiscal year ending not more than 16 months before the date of remittance or notice together with the latest available interim financial statements. (2) A statement of the corporation's estimate of the fair value of the shares. (3) A notice of the right of the dissenter to demand payment or supplemental payment, as the case may be, accompanied by a copy of this subchapter. (d)......Failure to make payment. If the corporation does not remit the amount of its estimate of the fair value of the shares as provided by subsection (c), it shall return any certificates that have been deposited and release uncertificated shares from any transfer restrictions imposed by reasons of the demand for payment. The corporation may make a notation on any such certificate or on the records of the corporation relating to any such uncertificated shares that such demand has been made. If shares with respect to which notation has been so made shall be transferred, each new certificate issued therefore or the records relating to any transferred uncertificated sharers shall bear a similar notation, together with the name of the original dissenting holder or owner of such shares. A transferee of such shares shall not acquire by such transfer any rights in the corporation other than those that the original dissenter had after making demand for payment of their fair value. ss.1578. Estimate by dissenter of fair value of shares (a)......General rule. If the business corporation gives of its estimate of the fair value of the shares, without remitting such amount, or remits payment of its estimate of the fair value of a dissenter's shares as permitted by section 1577(c) (relating to payment of fair value of shares) and the dissenter believes that the amount stated or remitted is less than the fair value of his shares, he may send to the corporation his own estimate of the fair value of the shares, which shall be deemed a demand for payment of the amount or the deficiency. (b)......Effect of failure to file estimate. Where the dissenter does not file his own estimate under subsection (a) within 30 days after the mailing by the corporation of its remittance or notice, the dissenter shall be entitled to no more than the amount stated in the notice or remitted to him by the corporation. ss.1579. Valuation proceedings generally (a)......General rule. Within 60 days after the latest of: (1) effectuation of the proposed corporation action; (2) timely receipt of any demands for payment under section 1575 (relating to notice to demand payment); or (3) timely receipt of any estimates pursuant to section 1578 (relating to estimate by dissenter of fair value of shares); if any demands for payment remain unsettled, the business corporation may file in court an application for relief requesting that the fair value of the shares be determined by the court. (b)......Mandatory joinder of dissenters. All dissenters, wherever residing, whose demands have not been settled shall be made parties to the proceeding as in an action against their shares. A copy of the application shall be served on each such dissenter. If a dissenter is a nonresident, the copy may be served on him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53 (relating to bases or jurisdiction and interstate and international procedure).1 (c)......Jurisdiction of the court. The jurisdiction of the court shall be plenary and exclusive. The court may appoint an appraiser to receive evidence and recommend a decision on the issue of fair value. The appraiser shall have such power and authority as may be specified in the order of appointment or in any amendment thereof. (d)......Measure of recovery. Each dissenter who is made a party shall be entitled to recover the amount by which the fair value of his shares is found to exceed the amount, if any, previously remitted, plus interest. (e)......Effect of corporation's failure to file application. If the corporation fails to file an application as provided in subsection (a), any dissenter who made a demand and who has not already settled his claim against the corporation may do so in the name of the corporation at any time without 30 days after the expiration of the 60-day period. If a dissenter does not file an application with the 30-day period, each dissenter entitled to file an application shall be paid the corporation's estimate of the fair value of the shares and no more, and may bring an action to recover any amount not previously remitted. ss.1580. Costs and expenses of valuation proceedings (a)......General rule. The costs and expenses of any proceeding under section 1579 (relating to valuation proceedings generally), including the reasonable compensation and expenses of the appraiser appointed by the court, shall be determined by the court and assessed against the business corporation except that nay part of the costs and expenses may be apportioned and assessed as the court deems appropriate against all or same of the dissenters who are parties and whose action in demanding supplemental payment under section 1578 (relating to estimate by dissenter of fair value of shares) the court finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith. (b)......Assessment of counsel fees and expert fees where lack of good faith appears. Fees and expenses of counsel and of experts for the respective parties may be assessed as the court deems appropriate against the corporation and in favor of any or all dissenters if the corporation failed to comply substantially with the requirements of this subchapter and may be assessed against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights provided by this subchapter. (c)......Award of fees for benefits to other dissenters. If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and should not be assessed against the corporation, it may award to those counsel reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited. - -------- 1 42 Pa.C.S.A.ss.5301 et seq.
