September 1, 1995
Jerome H. Ludwig
8840 N. 57th Street
Paradise Valley, Arizona 85253
Dear Mr. Ludwig:
I am happy to advise you that you have been selected by the Board of
Directors (the "Board") of H.E.R.C. Products Incorporated (the "Company"), to
receive a non-incentive stock option and that on August 18, 1995, you were
granted an option to purchase One Hundred Thousand (100,000) shares of the
Company's Common Stock, $.01 par value, at a price of $3.625 per share (the
"Stock"). The option granted to you is subject to the terms and conditions set
forth in this letter (the "Agreement").
The Board has imposed the following terms and conditions relating to
your option and its exercise:
1. You may exercise your option, only in accordance with Paragraph 3
below, by delivery to the Company (in care of its Secretary) at the principal
offices of the Company, presently located at 3622 North 34th Avenue, Phoenix,
Arizona 85017, written irrevocable notice of exercise in the form attached to
this letter as Exhibit A. specifying the number of shares with respect to which
the option is being exercised, together with payment of the exercise price for
those shares in cash or by check. Any other form of exercise or tender may be
refused by the Company, acting through the Board or otherwise, in its
discretion.
2. Your option is not transferable other than by will or the laws of
descent and distribution and is exercisable, during your lifetime, only by you.
You may not assign or otherwise transfer or encumber your option or any interest
in your option to any person in any way.
3. (a) Your options shall vest on August 18, 1996.
(b) Notwithstanding any other provision of this Agreement
(other than Paragraph 3(h) below), your option, to the extent not
previously exercised, shall automatically terminate and be of no
further force or effect as to all remaining shares of Stock as of five
o'clock p.m., M.S.T., on August 18, 1999.
(c) In the event you leave the employment of the Company for
any reason whatsoever, including termination by your voluntary
resignation or at the direction of the Company, with or without cause,
or of your death or Permanent Disability, then, at your option, or the
option of your personal representative, you or your personal
representative may exercise the option to the extent vested and not
previously exercised or expired, such exercise to occur no later than
sixty (60) days following your last day of employment with the Company
or the date of your death or Permanent Disability, as applicable, and
the Company (or its nominee) shall have the right (but not the
obligation) to purchase any shares of Stock acquired pursuant to
exercise of options under the Plan held by you (including shares
acquired pursuant to this sentence) at a price equal to the Appraised
Value per share of such Stock, determined in accordance with Paragraph
3(e). The Company (or its nominee) shall exercise this right to
repurchase the shares of Stock, if at all, within six (6) months
following the date of the termination of your employment with the
Company by delivering written notice of exercise to you or your
personal representative. Payment on such exercise by the Company shall
be made in not more than five equal annual installments of principal
and accrued interest (at an annual interest rate, adjusted on a daily
basis, equal to the prime rate of interest publicly announced an such
from time to time by Bank One in Phoenix, Arizona due commencing on the
Company's (or its nominee's) purchase and on the next four (4)
anniversaries of such purchase. The date for consummating such purchase
shall be the sixtieth (60th) day following delivery of the Company's
notice of exercise, provided that such date may be extended by you or
your personal representative by written notice to a date not later than
the earlier of ten (10)days after all holding periods under
Jerome H. Ludwig
September 1, 1995
Page 2
Section 422A of the Internal Revenue Code expire or consummation of a
transaction (e.g., merger, consolidation, stock sale) pursuant to which
the holder of your shares would be entitled to receive consideration of
any kind.
(d) In the event any shares of Stock acquired pursuant to
exercise of options hereunder or any interest therein, are to be
transferred, voluntarily or involuntarily (including, without
limitation, any sale, encumbrance, foreclosure or transfer in lieu
thereof, or by operation of law, any division of marital property on
account of divorce or legal separation being deemed a "transfer" for
purposes hereof, but excluding transfers to which Paragraph 3(c) hereof
applies), the Company (or its nominee) shall have a right of first
refusal as follows: You (or the holder of such shares if not you) shall
give the Company advance written notice detailing all the terms of the
proposed transfer. The Company (or its nominees) shall have the right
(but not the obligation), exercisable upon delivery to the transferring
shareholder of written notice of acceptance within thirty (30) days
following receipt of the notice of proposed transfer described in the
preceding sentence, to repurchase all or any of such shares on the
terms and conditions set-forth in such notice; provided that the per
share purchase price shall be the lesser of (i) the price, plus the
Appraised Value of any non-cash consideration (determined in accordance
with the procedures specified in Paragraph 3(e) below) (or, if
applicable, 110% of the loan amount), stated in the notice or (ii) the
Appraised Value of the shares, determined in accordance with Paragraph
3(e) (and shall be the Appraised Value, determined in accordance with
Paragraph 3(e), in the event of a transfer not involving any
consideration); and provided further than the purchase price shall be
payable, at the election of the Company (or its nominees), either on
the terms set forth in the transferor's notice or in up to five equal
annual installments of principal and accrued interest (at an annual
interest rate, adjusted on a daily basis, equal to the prime rate of
interest publicly announced as such from time to time by Bank One in
Phoenix, Arizona) due commencing on the Company's (or its nominee's)
purchase and on the next four (4) anniversaries of such purchase. The
date for consummating such purchase shall be the sixtieth (60th) day
following delivery of the Company's (or its nominees') notice of
exercise, provided that such date may be extended by the transferring
shareholder by written notice to a date not later than the earlier of
ten (10) days after all holding periods under Section 422A of the Code
expire. Failure by the Company (or its nominees) (without default by
the transferring shareholder) to close such purchase within the above
60 day period shall give the transferring shareholder the right to
transfer such shares or interest therein on the terms and to the person
described in the notice during the 60 days following expiration of the
original 60-day period; provided that the shares or interest therein to
be transferred shall for all purposes remain subject to this Agreement.
If the transferring shareholder fails to close the proposed transfer on
those terms within such second 60-day period, the proposed transfer
shall again be subject to the terms of this Paragraph 3(d).
Notwithstanding the foregoing, such shares may be transferred or
retransferred without invoking this right of first refusal between you
and trusts of which you and/or your spouse are the sole beneficiaries
by giving prior written notice certifying such a transfer is to be
made; provided that following any such transfer, such shares shall
remain subject to this right of first refusal and all the other
provisions of this agreement.
(e) The "Appraised Value" of a share of the Stock shall mean
that value which is determined pursuant to this Paragraph 3(e). The
Appraised Value may be mutually agreed upon by the selling and
acquiring parties of the shares of Stock. If the parties cannot
mutually agree on the Appraised Value of a share of Stock within ten
(10) days after delivery of a written notice of exercise of a purchase
right or obligation hereunder, then the Appraised Value of a share of
Stock shall be equal to the fair market value of such share as
determined as of the date of termination of your employment with the
Company and in the following manner: the fair market value shall be
determined by a Board of Arbitration comprised of three (3) members,
one of whom shall be selected by the selling party and another of whom
shall be selected by the acquiring party. The third arbiter shall be
appointed by the two arbiters so selected. If either side fails to
select an arbiter within fifteen (15) days after written request to do
so, then the other party's arbiter shall unilaterally establish the
Appraised Value in a written opinion. The decision of the majority of
said arbiters, or of the single arbiter if applicable, shall be binding
upon the parties hereto. If no two arbiters agree upon a single fair
market value, it shall be the arithmetic average of the values
Jerome H. Ludwig
September 1, 1995
Page 3
determined by the two arbiters whose estimates are closest in value,
which average value shall be binding upon the parties hereto. The
arbiters shall render a written decision and shall conduct all
proceedings pursuant to the Uniform Arbitration Act as adopted in the
State of Arizona and to the then existing rules of the American
Arbitration Association governing commercial transactions to the extent
such rules are not inconsistent with such Act and this Agreement. Costs
of arbitration shall be borne as determined by the arbiters. In
determining the Appraised Value, no value shall be placed on the good
will or name of the Company (except that good will may be valued at an
amount not exceeding its unamortized cost to the extent it represents a
cost to the Company, and all shares shall be valued equally, i.e.,
without regard to majority or minority status of such shares.
(f) "Permanent Disability" means that you (1) are under a
legal decree of incapacity or disability pursuant to title 14 of
Arizona Revised Statutes or other applicable statutes the date of such
decree being deemed to be the date on which such disability occurred
for purposes of this agreement), or (2) submit any claim for disability
insurance benefits or for early distribution of the amounts from a
qualified pension or profit-sharing plan maintained by the Corporation
on account of disability (the date of the earliest of such claims shall
be the date on which such disability shall be deemed to have occurred),
or (3) are determined to be disabled pursuant to a Determination of
Disability. A determination of Disability means a determination that
you, because of a medically determinable disease, injury, or other
mental or physical disability, are unable to perform substantially all
of your regular duties and that such disability is determined or
reasonably expected to last at least twelve (12) months, based on
then-available medical information. The Determination of Disability
will be based on the written opinion of the physician regularly
attending you. If the Company disagrees with the opinion of such
physician (the First Physician"), it may engage at its own expense
another physician (the "Second Physician") to examine you. The Second
Physician shall confer with the First Physician and, if they together
agree in writing that you are or are not disabled, their written
opinion shall be conclusive as to such disability. If the First and
Second Physicians do not agree, they shall choose a third consulting
physician (the expense of which shall be borne by the Company), and the
written opinion of a majority of these three (3) physicians shall be
conclusive as to such disability. The date of any written opinion which
is conclusive to such disability is the date on which such disability,
if that is the conclusion, will be deemed to have occurred unless the
opinion expressly establishes the date of occurrence. In conjunction
with this Section, you consent to such examination, to furnish any
medical information requested by any examining physician, and to waive
any applicable physician-patient privilege that may arise because of
such examination. All physicians except the First Physician selected
hereunder must be board-certified in the specialty most closely related
to the nature of the disability alleged to exist.
(g) For so long as the Company's right to repurchase the Stock
as set forth in this Paragraph 3 remains effective, neither you, nor
your personal representative(s), devisee(s), heir(s), successor(s), or
assignee(s) shall sell, assign or otherwise transfer any shares of
Stock or interest therein without obtaining the written agreement of
the purchaser, assignee or transferee that the shares remain subject to
this repurchase right, and you evidencing the Stock may be legended to
reflect the foregoing restrictions.
(h) In its sole discretion, the Board may waive or accelerate
vesting of options, or waive or extend expiration dates, other than the
final expiration date.
4. The Company will reserve or keep available at all times sufficient
shares of its common stock to permit the exercise of your option and all other
options granted or to be granted.
5. It is contemplated that the common stock in the Company to be issued
to you upon exercise of your option will not be registered under the Securities
Act of 1933, as amended (the "Act") or any applicable state securities laws, in
reliance on exemptions from registration thereunder. If in the opinion of
counsel satisfactory to the Company no exemption from registration is then
available, or if such issuance is otherwise in violation of applicable law at
the time purchase rights are exercised under this option, then the Company's
obligation to issue shares of its common stock upon exercise of your option
shall terminate. If such an exemption is available in the opinion of such
counsel, and such issuance is not
Jerome H. Ludwig
September 1, 1995
Page 4
otherwise in violation of applicable law you (or your personal
representative(s), devisee(s), or heir(s)) will deliver to the Company as a
condition precedent to giving notice of each exercise, an investment letter
agreement in form and substance satisfactory to the Company to enable the
Company to comply with the Act or other applicable securities laws and which
may, among other things, limit or condition the right to dispose of shares of
Stock acquired by exercise of your option will be permitted only if in the
opinion of counsel satisfactory to the Company Ouch disposition is not in
violation of the Act, any applicable state securities laws or any other
applicable law, regulation or rule, and you (or your personal representative(s),
devisee(s), or heirs(s)) deliver to the Company a letter agreement in form and
substance satisfactory to the Company whereby your successor(s) or assign (6)
agrees to be bound by the terms and conditions of paragraph 3 above and this
Paragraph 5. You (and your personal representative(s), devisee(s), or heirs(s))
agree to pay all costs of obtaining any legal opinions and all costs in
connection with proposed exercise of your option or dispositions of shares
acquired pursuant to your option.
6. You agree to pay to the Company or to make arrangements satisfactory
to the Board to pay to the Company, at such time as any income is recognized by
you with respect to this option, any Federal, state, or local taxes of any kind
required by law to be withheld on such income by the Company. In the event of
disposition or other transfer by you of common stock issued to you upon exercise
of your options, you agree to provide to the Company promptly written notice
describing in reasonable detail the disposition or transfer, including without
limitation the sale price, if any, and date of transfer or disposition.
7. This option granted to you is governed by, and shall be interpreted
according to, the laws of the State of Arizona.
8. Each party hereto agrees to do all such things and take all such
actions, and to make, execute and deliver such other documents and instruments,
as shall be reasonably requested to carry out the provisions, intent and purpose
of this Agreement.
This letter only grants the options described above and is not an
employment agreement or a promise or assurance of continued employment for any
period of time including any period of time necessary to permit full exercise of
the options under Paragraph 1 above.
Please acknowledge your receipt of this letter, together with the
materials referred to herein and your agreement to the terms and conditions of
your option as set forth herein by signing the enclosed copy of this letter and
returning it promptly to the Secretary of the Company at the address set forth
in Section 1 of this letter. Any questions concerning any matter relating to
your non-incentive stock option should also be addressed to the Secretary.
Very truly yours,
H.E.R.C. Products Incorporated
Jerome H. Ludwig
September 1, 1995
Page 5
By /s/ Gary S. Glatter
------------------------------
Its Chief Operating Officer
------------------------------
ACCEPTED AND AGREED:
/s/ Jerome Ludwig
- ------------------------------------
Jerome Ludwig
EXHIBIT "A"
NOTICE OF EXERCISE OF OPTION
TO PURCHASE SHARES OF H.E.R.C. PRODUCTS INCORPORATED
AND RECORD OF STOCK TRANSFER
I hereby exercise my Stock Option granted pursuant to a letter dated
September 1, 1995 (the "Agreement") subject to all the terms and provisions
referred to in the Agreement, and notify you of my desire to purchase
_______________ shares of Common Stock of H.E.R.C. Products Incorporated (the
Jerome H. Ludwig
September 1, 1995
Page 6
"Company") which were offered to me pursuant to said Option. Enclosed is my
check in the sum of $______________ in full payment for such shares.
I hereby represent that the __________ shares of the Company's Common
Stock to be delivered to me pursuant to the above-mentioned exercise of the
Option granted to me on August 18, 1995 are being acquired by me as an
investment and not with a view to, or for sale in connection with, the
distribution of any such shares. I also represent that I have read and fully
understand the Agreement, including without limitation the restrictions on
transfer of the shares hereby being acquired and the Company's repurchase rights
with respect to such shares. I agree to indemnify the Company and its
subsidiaries, together with their respective officers and directors, against any
and all liabilities, losses, damages and expenses (including reasonable attorney
fees) arising from or in connection with any disposition of the shares hereby
being acquired, or any interest therein, in violation of applicable securities
laws or regulations. I further represent that I have been given access to all
information necessary to allow me to make a decision as to the advisability of
an investment in the Company's stock and the value of such stock, and that I
have the skill and experience necessary to make such decision.
DATED:_____________________, 19 ___ .
_________________________________
Employee 's Signature
_________________________________
Signature of Employee's Spouse
Receipt is hereby acknowledged of the delivery to me by _____________________ on
_______________ of stock certificates for _______ shares of Common Stock
purchased by me pursuant to the terms and conditions of the Agreement referred
to above, which shares were transferred to me on H.E.R.C. Products
Incorporated's stock record books on _______________, 19___.
_________________________________
Employee