SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 0-22341
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AUGMENT SYSTEMS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3089539
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2 Robbins Road Westford, MA 01886
- --------------------------- -----
(Address of principal executive offices) (Zip Code)
978-392-8626
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Transitional Small Business Disclosure Format:
Yes____________ No _______X_______
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES____X_____ NO______ ______
Indicate the number of shares outstanding of each of the issuer's classes of
Stock, as of the latest practicable date: As of November 14, 1997,
Class Outstanding at November 14, 1997
- -------------------------------------- --------------------------------
Common Stock, $.01 par value per share 4,713,319
<PAGE>
AUGMENT SYSTEMS, INC.
INDEX
PAGES
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of September 30, 1997
and December 31, 1996 3
Results of Operations for the three months
and nine months ended September 30, 1997 and 1996 4
Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 5
Notes to Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 2 Changes in Securities 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security-Holders 11
Item 5 Other Information 11
Item 6 Exhibits and Reports or Form 8-K 11
Signatures 12
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<PAGE>
AUGMENT SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 219,615 $ 452,753
Accounts receivable, net 1,164,870 --
Inventories 1,098,004 589,351
Prepaid expenses 135,027 97,500
------------ ------------
Total current assets 2,617,516 1,139,604
Property and equipment, net 360,835 348,889
Capitalized software costs 265,000 --
Deferred financing costs, net -- 176,815
Other assets 100,548 13,745
------------ ------------
Total assets $ 3,343,899 $ 1,679,053
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,538,220 $ 601,274
Accrued expenses 105,883 196,104
Short term promissory notes 350,000 1,051,248
Short term advance -- 575,000
Current portion of capital lease obligations 17,115 19,013
Deferred revenue 53,279 --
------------ ------------
Total current liabilities 2,064,497 2,442,639
Convertible promissory notes 41,495 62,248
Capital lease obligations, less current portion 15,386 27,530
------------ ------------
Total liabilities 2,121,378 2,532,417
------------ ------------
Commitments
Stockholders' Equity (deficit):
Common stock, $.01 par value; 30,000,000 shares authorized; 4,713,319 and
2,865,512 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 47,133 28,655
Additional paid-in capital 13,874,710 6,177,194
Accumulated deficit (12,699,322) (7,059,213)
------------ ------------
Total stockholders' equity (deficit) 1,222,521 (853,364)
------------ ------------
Total liabilities and stockholders' equity $ 3,343,899 $ 1,679,053
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
AUGMENT SYSTEMS, INC.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales $ 776,387 $ - $ 1,343,610 $ -
Cost of sales 325,341 - 572,822 -
----------------- -----------------
Gross margin 451,046 - 770,788 -
Operating expenses:
Research and development 728,409 1,204,958 1,855,329 1,720,109
General and administrative 1,452,791 225,556 2,522,089 636,603
Sales and marketing 651,023 231,261 1,893,110 231,261
----------------- ----------------- ---------------- -----------------
Total cost and expenses $ 2,832,223 $ 1,661,775 $ 6,270,528 $ 2,587,973
----------------- ----------------- ----------------- -----------------
Loss from operations $(2,381,177) $ (1,661,775) $ (5,499,740) $ (2,587,973)
----------------- ----------------- ----------------- -----------------
Other (income) expense:
Net interest (income) expense $ (3,533) $ 24,031 $ 140,369 $ 75,374
----------------- ----------------- ----------------- -----------------
Total other (income)
expense, net $ (3,533) $ 24,031 $ 140,369 $ 75,374
----------------- ----------------- ----------------- -----------------
Net loss $(2,377,644) $ (1,685,806) $ (5,640,109) $ (2,663,347)
================= ================= ================= =================
Net loss per common share (0.50) (0.98) (1.47) (1.96)
================= ================= ================= =================
Weighted average common and common
equivalent shares outstanding 4,713,319 1,714,701 3,849,583 1,359,812
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
AUGMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (5,640,109) (2,663,347)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of fixed assets 8,850 --
Depreciation and amortization 128,854 186,340
(Increase) decrease in operating assets and liabilities:
Accounts receivable (1,164,870) --
Inventories (508,653) (149,451)
Prepaid expenses (37,527) (61,662)
Capitalized software (265,000) --
Other assets (86,803) --
Accounts payable 936,946 488,457
Accrued expenses (90,221) 217,827
Deferred revenue 53,279 --
---------- ----------
Net cash used in operating activities (6,665,254) (1,981,836)
---------- ----------
Cash flows from investing activities:
Capital expenditures (149,650) 487,265
---------- ----------
Net cash provided by (used for) investing activities (149,650) 487,265
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 8,985,240 2,518,364
Proceeds from issuance of convertible promissory notes -- 249,858
Proceeds from noninterest bearing loans from stockholders -- --
Proceeds from issuance of short-term promissory notes 3,125,000 --
Payments on short-term promissory notes (3,826,248) (150,000)
Repayment of short-term advance (575,000) --
Principal payments on capital lease obligations (14,042) --
Payment on long-term convertible promissory notes (20,753) --
Purchase of treasury stock -- (7,000)
Deferred financing costs (1,092,431) (165,143)
---------- ----------
Net cash provided by financing activities 6,581,766 2,446,079
---------- ----------
Net increase (decrease) in cash (233,138) (23,022)
Cash at beginning of period 452,753 242,669
---------- ----------
Cash at end of period 219,615 219,647
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
During the fiscal year ended December 31, 1996, and for the first three months
of fiscal year 1997, Augment Systems, Inc. (the "Company"), formerly Augment
Systems Incorporated, was a development stage company engaged in development of
high-end file management network systems designed to move large image and text
files rapidly and efficiently over computer networks. The Company's initial
target market is the electronic publishing industry. In September 1997 the
Company introduced a Windows NT-based client for its file management network
systems and plans to introduce UNIX client support during 1998 providing for
multi-platform networks comprised of Macintosh, Windows NT and UNIX-based
workstations. The Company also plans to introduce in 1998 a Windows NT-based
super server targeted to meet the growing demand for a Windows NT-based
high-performance file management network system.
The accompanying unaudited financial statements are presented in accordance with
the requirements for Form 10-QSB and do not include all the disclosures required
by generally accepted accounting principles for complete financial statements.
Reference should be made to the Company's Prospectus for its initial public
offering declared effective on May 12, 1997 for additional disclosures including
a summary of the Company's accounting policies.
In the opinion of management of the Company, the financial statements include
all adjustments, consisting of only normal recurring accruals, necessary for a
fair presentation of the financial position of Augment Systems, Inc. The results
of operations for the three and nine month periods ended September 30, 1997 or
any other interim period, are not necessarily indicative of the results to be
expected for the full year.
2. NET LOSS PER SHARE OF COMMON STOCK
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which the Company is required to adopt for both interim and annual
periods ending after December 15, 1997. SFAS No. 128 simplifies the earnings per
share ("EPS") calculation by replacing primary EPS with basic EPS. Basic EPS is
computed by dividing reported earnings available to common stockholders by
weighted average shares outstanding. Fully diluted EPS, now called diluted EPS,
is still required. Early application is prohibited, although footnote disclosure
of proforma EPS amounts computed is required. Under SFAS 128, proforma basic EPS
and diluted EPS for the three or nine month period ended September 30, 1997
would not have changed from the amount reported. All other EPS amounts for the
periods presented remain the same. Common stock equivalents issued prior to this
period have not been included since their effect would be anti-dilutive.
-6-
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
3. STOCKHOLDERS' EQUITY
In April 1997, the Board of Directors declared a three-for-four reverse stock
split of the Company's Common Stock. All Common Stock and per share information
discussed in the financial statements and notes have been adjusted to give
effect for this stock split.
On May 16, 1997, the Company completed its initial public offering of 1,800,000
shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four year period commencing May 12, 1998. The
net proceeds from the Company's initial public offering, after deducting
underwriting discounts and commissions and certain estimated expenses payable by
the Company were approximately $8,484,000.
In May 1997, certain warrant holders agreed to the cancellation of warrants to
purchase 235,878 shares of Common Stock issued in connection with Short Term
Promissory Notes issued between November 1996 and February 1997. No
consideration was given by the Company in connection with the cancellation of
these warrants.
4. SHORT-TERM PROMISSORY NOTES
In September 1997, the Company issued to Venture Management Consultants, LLC
("Venture Management"), of which Fred L. Chanowski, a director of the Company,
is a 20% member, a promissory note in the principal amount of $350,000 in
consideration for $350,000. The promissory note bears interest at 9% per annum
with interest and principal payable at maturity on December 1, 1997 or upon the
Company completing a financing resulting in net proceeds to the Company of
$2,000,000. In addition, the Company issued to Venture Management a five year
warrant to purchase 100,000 shares of the Company's Common Stock at $3.00 per
share. The principal balance and interest on this note were repaid in October
1997.
5. SUBSEQUENT EVENTS
In October 1997, the Company obtained a $750,000 loan from Fleet National Bank.
The loan is secured by all of the Company's assets, bears interest at the Fleet
Bank's Prime Rate plus 2%, with principal and interest payable by December 31,
1997 or upon completion of a financing resulting in net proceeds to the Company
of at least $5,000,000. The $3,000,000 working line of credit the Company
secured in July from Fleet National Bank has been temporarily suspended until
the Company can secure a financing resulting in net proceeds of $5,000,000 or
more. When the Company completes its anticipated financing, borrowings on the
facility will bear interest at prime plus 0.50%. Borrowings are limited to 75%
of eligible domestic accounts receivable and are secured by all assets of the
Company.
-7-
<PAGE>
AUGMENT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE AND
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
INTRODUCTION
Since October 1995 and through March 1997, the Company had been operating as a
development stage company and had been engaged principally in research and
development, recruitment of personnel and financing activities. The Company had
engaged in limited marketing activities and did not commence shipments of its
initial products, which are high-end file management network systems, until
February 1997. During the second quarter ended June 30, 1997, the Company
commenced commercial shipment of its server product and recognized initial
revenue in April 1997.
The Company's initial target market is the electronic publishing industry, which
requires the rapid and efficient movement of large image and data files over
networks. In September 1997 the Company introduced a Windows NT-based client for
its file management network systems and plans to introduce UNIX client support
during 1998 providing for multi-platform networks comprised of Macintosh,
Windows NT and UNIX-based workstations. The Company also plans to introduce in
1998 a Windows NT-based super server targeted to meet the growing demand for a
Windows NT-based high-performance file management network system.
RESULTS OF OPERATION
During the three and nine month periods ended September 30, 1997, the Company
recognized initial product revenues of $776,387 and $1,343,610 respectively.
Gross product margins on product sales were 58% and 57%, respectively. The
Company anticipates increased revenues for the balance of 1997 with the
continued development of its sales channel. Gross product margins may vary with
the distribution of products into OEM's, third party resellers and end users.
Prior to the second quarter ended June 30, 1997, the Company was a development
stage company and had not recognized any revenue.
The Company recognized a net loss of $2,377,644 and $5,640,109 for the three and
nine month periods ended September 30, 1997 as compared to net losses of
$1,685,806 and $2,663,347 for the same periods in 1996. The increases in net
loss of $691,838 and $2,976,762 for the three and nine month periods,
respectively, are primarily attributable to an increase in personnel to support
research and development, sales and marketing and administration activities. In
addition, the Company increased the level of spending to support engineering
development of its file management network systems products, began a marketing
program consisting of attending trade shows and distributing promotional sales
material and began to establish a worldwide sales organization.
Research and development costs for the three and nine month periods ended
September 30, 1997 were $728,409 and $1,855,329 as compared to $1,204,958 and
$1,720,109 for the same periods in 1996. The $476,549 decrease in the three
month period ended September 30, 1997 compared to the three month period ended
September 30, 1996 is primarily due to the capitalization of software
development costs related to the Company's development of Windows NT Client
support. The $135,220 increase in the nine month period ended September 30, 1997
compared to the nine month period ended September 30, 1996 is primarily
attributable to additional engineering personnel and increased use of
consultants associated with product development. The Company also increased
spending for associated engineering supplies and prototype materials used in the
development of its server product. The Company anticipates that research and
development costs will continue to increase through the balance of 1997 as
compared to comparable periods in 1996. These costs are expected to be incurred
in connection with the development of additional products to support Windows NT
and Unix platforms.
-8-
<PAGE>
General and administrative costs for the three and nine month periods ended
September 30, 1997 were $1,452,791 and $2,522,089 as compared to $225,556 and
$636,603 for the same periods in 1996. The $1,227,235 and $1,885,486 increases
for the three and nine month periods, respectively, are primarily attributable
to additional administrative support, increased spending for outside legal and
accounting support and other normal operating expenses.
Selling and marketing costs for the three and nine month periods ended September
30, 1997 were $651,023 and $1,893,110 as compared to $231,261 and $231,261 for
the same periods in 1996. The $419,762 and $1,661,849 increases are attributable
to an increase in marketing support and sales personnel, participation in
various trade shows and increased spending on sales promotion material. The
Company anticipates that selling and marketing expenses will continue to
increase through the balance of 1997 as the Company develops its sales and
distribution channels and expands its marketing efforts.
The Company currently has 42 full-time employees and 12 independent contractors
and plans to hire an additional 50 full-time employees in various capacities
over the next 12 months. Additional personnel may be required depending on the
level of business activity. The Company expects, however, to continue its
current practice of utilizing independent consultants on an as-needed basis
rather than exclusively hiring additional full-time employees.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since October 1995 principally from a
combination of debt and equity financings totaling approximately $15,045,000.
From October 1995 through April 1996, the Company issued convertible promissory
notes in the aggregate principal amount of approximately $864,000. Approximately
$802,000 of the principal balance of these notes plus accrued interest was
converted into shares of Common Stock in November 1996 at a conversion price of
$4.00 per share. In December 1996 and February 1997, the Company raised gross
proceeds of $3,585,000 in a private placement of promissory notes and common
stock purchase warrants. The promissory notes, bearing interest at 12% per
annum, were repaid from the proceeds of its initial public offering. In
addition, from September 1995 through August 1996, the Company issued 1,653,623
shares of its Common Stock for approximately $3,372,000 in gross proceeds. In
each of April 1997 and May 1997 the Company issued to Venture Management, of
which Fred Chanowski, a director of the Company, is a 20% member, a promissory
note in the principal amount of $200,000 in consideration for $200,000. The
promissory notes had an interest rate of 18% per annum with interest and
principal payable at maturity on May 31, 1998 and June 30, 1998, respectively.
The principal balance of these notes and the related interest were repaid in
August 1997.
On May 16, 1997, the Company completed its initial public offering of 1,800,000
shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four year period commencing May 12, 1998. The
net proceeds from the Company's initial public offering, after deducting
underwriting discounts and commissions and estimated expenses payable by the
Company were approximately $8,484,000.
In July 1997, the Company obtained a $3,000,000 working line of credit from
Fleet National Bank. Borrowings on the facility will bear interest at prime plus
0.50%. Borrowings are limited to 75% of eligible domestic accounts receivable
and are secured by all assets of the Company. In October 1997, the use of this
facility was temporarily suspended until the Company can complete a minimum
financing of $5,000,000.
In September 1997 the Company issued to Venture Management, of which Fred
Chanowski, a director of the Company, is a 20% member, a promissory note in the
principal amount of $350,000 in consideration for $350,000. The promissory note
carried an interest rate of 9% per annum with interest and principal payable at
maturity on December 1, 1997 or upon the Company completing a financing
resulting in net proceeds to the Company of $2,000,000. In addition, the Company
issued to Venture Management a five year warrant to purchase 100,000 shares of
the Company's Common Stock at $3.00 per share. The principal balance and
accrued interest on this note were repaid in October 1997.
-9-
<PAGE>
In October 1997, the Company obtained a $750,000 loan from Fleet National Bank.
The loan is secured by all of the Company's assets, bears interest at 9% per
annum with principal and interest payable on the earlier of December 31, 1997 or
upon completion of a financing resulting in net proceeds to the Company of at
least $5,000,000.
The net proceeds of the Company's initial public offering plus cash anticipated
to be generated from operations and funds available under the Company's line of
credit, were expected to meet the Company's funding needs for at least 12 months
from the date of the offering. While initial shipments of the Company's server
systems met customers expectations with a limited number of clients attached to
a network, larger installations with more clients caused systems crashes and
loss of data. The Company subsequently modified its software and hardware as
well as its vendors software and hardware to support larger networked systems.
This unanticipated extension in the development of the Company's initial server
system severely impacted development of the Company's sales channels and
anticipated revenues. The funds generated from the Company's initial public
offering will not be sufficient to fund the Company's activities. The Company
will need to raise additional funds through equity or debt financing. There can
be no assurance that the Company will be able to obtain additional funding on
terms favorable to the Company, if at all. If adequate funds are not available,
there will be a material adverse affect on the Company's ability to continue its
operations as a going concern.
In October 1997, the Company entered into an agreement with Oscar Gruss & Son
Incorporated, a New York based investment banking operation, to act as its
exclusive agent for a period of six months in connection with a proposed private
placement.
As a result of the Company's recurring losses, the Company's auditors have
expressed substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recovery and classification of recorded asset amounts or the
amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that describe the Company's
business prospects. These statements involve risks and uncertainties including,
but not limited to, rapid technology changes, regulatory uncertainty, level of
demand for the Company's products and services, product acceptance, industry
wide competitive factors, timing of completion of major equipment projects and
political, economic or other conditions. Furthermore, market trends are subject
to changes that could adversely affect future results. Reference should be made
to the Company's Prospectus for its initial public offering declared effective
on May 12, 1997 for additional discussion concerning such risk factors.
-10-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1996 a lawsuit was filed against the Company in
Suffolk Superior Court (Massachusetts) by an executive
recruitment agency alleging a breach of contract and seeking
damages in the amount of $50,000. The lawsuit was subsequently
settled by the Company in September 1997 for $55,000.
In September 1997 a lawsuit was filed against the Company in
Middlesex Superior Court (Massachusetts) by a third party
alleging a breach of contract and seeking damages in the
amount of $40,000.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 10.22 - Placement Agent Agreement with Oscar Gruss & Son
Incorporated.
(b) No Reports on Form 8-K were filed during the quarter
ended September 30, 1997.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUGMENT SYSTEMS, INC.
Date: November 14, 1997 By: /s/Lorrin G. Gale
-----------------
Lorrin G. Gale
President & Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1997 By: /s/Duane A. Mayo
-----------------
Duane A. Mayo
Chief Financial Officer, Treasurer
and Secretary
(Principal Financial & Accounting Officer)
-12-
October 22, 1997
Augment Systems, Inc.
2 Robbins Road
Westford, MA 01886-4113
Attention: Duane Mayo
Chief Financial Officer
Gentlemen:
This letter agreement (the "Agreement") confirms our understanding that
Augment Systems, Inc. (which together with its subsidiaries and affiliates is
hereinafter referred to as the "Company") has engaged Oscar Gruss & Son
Incorporated ("Gruss") to act as exclusive agent to the Company for a period of
six months commencing upon your acceptance of this Agreement in connection with
a private placement of between $5 and $10 million of securities (the
"Securities") (the "Proposed Financing") on a reasonable best efforts basis on
terms satisfactory to the Company.
Our services to the Company will include: (i) assistance in the
preparation of the Company's Offering Materials described below; (ii) assistance
in structuring the Proposed Financing and its terms; (iii) identifying and
contacting selected qualified purchasers (the "Purchasers") of the Proposed
Financing and furnishing them, on behalf of the Company, with copies of the
Offering Materials; and (iv) negotiating under your guidance the financial
aspects of the Proposed Financing. Gruss' undertaking is subject to our
continued satisfaction with the results of our ongoing review of the Company's
business and affairs.
As compensation for the services to be provided by Gruss hereunder, the
Company agrees to pay to Gruss (i) a cash fee equal to 10% of the gross proceeds
of the Proposed Financing (the "Success Fee"), (ii) a retainer fee of $10,000
upon the execution of this Agreement and $30,000 upon the receipt of interim
funding, such fee to be credited against the Success Fee, and (iii) warrants to
purchase a number of shares of common stock equal to 10% of the number of shares
sold (or 10% of the number of underlying common shares in the case of a
convertible security) in the Proposed Financing, which warrants shall be
exercisable for a period of four years from the date of the Proposed Financing
at a price per share equal to 165% of the price of the shares sold in the
Proposed Financing, and shall contain typical provisions concerning demand and
piggyback registration rights. Said warrants shall be payable upon the execution
of commitment letters or purchase agreements between the Company and the
Purchasers, and shall be paid at the closing (the "Closing") of the Proposed
Financing. In addition, the Company shall pay to Gruss an expense allowance on a
non-accountable basis equal to 3% of the gross proceeds of the Proposed
Financing. In the event the Proposed Financing is not consummated, then the
Company shall promptly reimburse Gruss for all out-of-pocket expenses (e.g.,
telephone, telecopier, facsimile, messenger,
Augment Systems, Inc.
October 22, 1997
Page 2
copying, mail and courier expenses) and for all travel and other reasonable
expenses incurred by it or its employees or agents in connection with services
rendered hereunder, including expenses incurred by counsel. In the event that up
to $1 million of the Proposed Financing is placed with an investor identified by
the Company, then the cash fee described in (i) above shall be reduced to 5%,
but all other terms of compensation shall remain the same.
The Company acknowledges and agrees that Gruss has been retained solely
to provide the advice or services set forth in this Agreement. Gruss shall act
as an independent contractor, and any duties of Gruss arising out of its
engagement hereunder shall be owed solely to the Company. As Gruss will be
acting on your behalf in such capacity, it is our firm practice to be
indemnified in connection with engagements of this type and the Company agrees
to the indemnification and other obligations as set forth in Schedule I hereto,
which Schedule is an integral part hereof.
It shall be the Company's obligation to bear all of its expenses in
connection with the Proposed Financing, including, but not limited to, the
following: filing fees, legal, business and environmental investigatory matters
and expenses, printing costs, postage and mailing expenses with respect to the
transmission of the Offering Materials, registrar and transfer agent fees,
issuer's and placement agent's counsel) and accounting fees, issue and transfer
taxes, if any, and Blue Sky counsel fees and expenses. It is agreed that Gruss'
outside counsel shall perform the required Blue Sky legal services. In this
connection, Blue Sky applications shall be made in such states and jurisdictions
as shall be requested by Gruss.
Please note that Gruss is a full service securities firm engaged in
securities trading and brokerage activities, as well as providing investment
banking and financial advisory services. In the ordinary course of our trading
and brokerage activities, Gruss or its affiliates may at any time hold long or
short positions, and may trade or otherwise effect transactions, for its or
their accounts or on the accounts of customers, in equity securities of the
Company or other entities that may be involved in the Proposed Financing. We
recognize our responsibility for compliance with Federal laws in connection with
any such activities.
The Company will prepare and furnish Gruss with a private placement
memorandum (which, together with the appendices and exhibits thereto and any
amendments or supplements thereto, is herein referred to as the "Offering
Materials") relating to the Proposed Financing. The Company authorizes Gruss to
transmit the Offering Materials to prospective Purchasers of the Proposed
Financing, and represents and warrants that the Offering Materials, at all times
through the Closing, will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading. The Company will not, without first obtaining
Gruss' approval, contact or solicit potential financing sources with respect to
the Proposed Financing and all inquiries and offers received by the Company with
respect thereto shall be referred to Gruss. The Company will also cause to be
furnished to Gruss at the Closing copies (addressed to Gruss if requested) of
such agreements, opinions, certificates and other documents delivered at the
Closing as Gruss may reasonably request including, without limitation, an
opinion of Company counsel to the effect that the placement of the Securities
was exempt from registration under the Securities Act.
Augment Systems, Inc.
October 22, 1997
Page 3
The Company will also make available to Gruss all financial and other
information concerning its business and operations and the Proposed Financing
which Gruss reasonably requests and will provide access to the Company's
officers, directors, employees, independent accountants and legal counsel. Gruss
shall be entitled to rely without investigation upon all information that is
available from public sources as well as all other information supplied to it by
or on behalf of the Company or its other advisors and shall not in any respect
be responsible for the accuracy or completeness of, or have any obligation to
verify, the same or to conduct any appraisal of assets. To the extent consistent
with legal requirements and except as otherwise set forth in the Offering
Materials, all information given to Gruss by the Company, unless publicly
available or otherwise available to Gruss without restriction or breach of any
confidentiality agreement ("Confidential Information"), will be held by Gruss in
confidence and will not be disclosed to anyone other than Gruss' agents and
advisors without the Company's prior approval or used for any purpose other than
those referred to in this Agreement; provided that nothing herein shall, in
itself, prevent Gruss from engaging in future transactions involving companies
in a similar industry to the Company or, provided no Confidential Information is
directly used in connection with such engagement, be deemed to violate any of
the terms hereof.
Any advice, written or oral, provided by Gruss pursuant to this
Agreement will be treated by the Company as confidential, will be solely for the
information and assistance of the Company in connection with the Proposed
Financing and may not be quoted, nor will any such advice or the name of Gruss
be referred to, in any report, document, release or other communication, whether
written (including, without limitation, the Offering Materials) or oral,
prepared, issued or transmitted by the Company or any affiliate, director,
officer, employee, agent or representative of any thereof, without, in each
instance, Gruss' prior written consent.
The Company has not taken, and will not take, any action, directly or
indirectly, so as to cause the transactions contemplated by this Agreement to
fail to be entitled to exemption under Section 4(2) of the Securities Act of
1933, as amended.
During the term of Gruss' engagement hereunder, Gruss shall have the
exclusive right (but not the obligation) (i) to act as managing underwriter in
the event that the Company determines to make a public offering of any of its
securities and (ii) if the Company determines to engage a financial or other
investment banking advisor in connection with any acquisition or disposition of
any subsidiary, assets or securities, to act as such exclusive financial or
investment banking advisor. In either of such events, the Company and Gruss will
enter into a customary underwriting agreement or engagement letter, as
applicable, containing customary terms and conditions and in form and substance
acceptable to Gruss and its counsel.
Upon completion of the Proposed Financing, the Company grants Gruss the
right of first refusal through December 31, 1998 to provide or arrange for any
future financings including the role of lead manager for any public offering of
the Company, placement agent for any private placement of the Company, and
investment banking advisor in any merger and acquisition transaction. During the
12 month period ending December 31, 1999 Gruss shall have the same rights,
except that in the event of a public offering of securities of the Company, then
Gruss shall have the right of first refusal to act as co-manager, and its
compensation as co-manager shall not be less that 40% of the total compensation
payable to the managing underwriters of such public offering. Gruss will have
Augment Systems, Inc.
October 22, 1997
Page 4
such exclusive right until Gruss has stated to the Company in writing that Gruss
will not provide or arrange for any such financing or services. If Gruss
provides any such additional services, the Company and Gruss will enter into a
separate agreement to be mutually agreed upon, including provision of additional
fees.
This Agreement may be terminated by either the Company or Gruss at any
time upon receipt of written notice to that effect by the other party. Upon the
expiration or termination of this Agreement, Gruss will be entitled to prompt
reimbursement of all its out-of-pocket expenses as described above. If at any
time prior to 6 months after the termination or expiration of this Agreement the
Company consummates a financing, including the Proposed Financing, with any
party, Gruss will be entitled to 50% of the compensation described in the third
paragraph of this Agreement.If at any time prior to 18 months after the
termination or expiration of this Agreement, the Company consummates a financing
transaction, including the Proposed Financing, with any party contacted
regarding the Proposed Financing during the term of our engagement, Gruss will
be entitled to payment in full of the compensation described in the third
paragraph of this Agreement. In the event that the Proposed Financing is
completed pursuant to this Agreement, then the preceeding two sentences are
void. Promptly following any termination or expiration of this Agreement, Gruss
will provide the Company with written notice of the parties contacted by Gruss
regarding the Proposed Financing during the term of our engagement. The Company
further agrees that it will not enter into any financing transaction described
in this paragraph unless, prior to or simultaneously with such transaction,
adequate provision is made with respect to the payment of all amounts payable to
Gruss hereunder. The indemnity and other provisions contained in Schedule I will
also remain operative and in full force and effect regardless of any expiration
or termination of this Agreement.
This Agreement shall not give rise to any express or implied commitment
by Gruss to purchase or place any securities of the Company.
This Agreement including Schedule I hereto incorporates the entire
understanding of the parties and supersedes all previous agreements relating to
the subject matter hereof and shall be governed by, and construed and enforced
in accordance with, the laws of the State of New York. This Agreement shall be
binding upon and inure to the benefit of the Company, Gruss, each Indemnified
Person (as defined in Schedule I hereto) and their respective successors and
assigns.
Augment Systems, Inc.
October 22, 1997
Page 5
After reviewing this Agreement, please confirm that the foregoing is in
accordance with your understanding by signing and returning the duplicate of
this letter attached hereto, whereupon it shall be our binding Agreement.
Very truly yours,
Oscar Gruss & Son Incorporated
By: /s/ Stephen McGrath
------------------------
Stephen McGrath
Managing Director
Accepted and agreed to
this 22nd day of October, 1997.
By: /s/ Duane Mayo
----------------------------
Duane Mayo
Chief Financial Officer
Augment Systems, Inc.
SCHEDULE I
This Schedule I is a part of and is incorporated into that certain
Agreement (together, the "Agreement") dated October 22, 1997 by and between
Augment Systems, Inc. (the "Company"); and Oscar Gruss & Son Incorporated
("Gruss ").
The Company will indemnify and hold harmless Gruss, its affiliates, and
the respective directors, officers, agents and employees of Gruss and its
affiliates (Gruss and each such entity or person, an "Indemnified Person") from
and against any losses, claims, damages, judgments, assessments, costs and other
liabilities (collectively "Liabilities"), and will reimburse each Indemnified
Person for all fees and expenses (including the reasonable fees and expenses of
counsel) (collectively, "Expenses") as they are incurred in investigating,
preparing, pursuing or defending any claim, action, proceeding or investigation
(collectively, "Actions"), (i) caused by, or arising out of or in connection
with, any untrue statement or alleged untrue statement of a material fact
contained in the Offering Materials (including any amendments thereof and
supplements thereto) or by any omission or alleged omission to state therein a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (other than untrue
statements or alleged untrue statements in, or omissions or alleged omissions
from, information relating to an Indemnified Person furnished in writing by or
on behalf of such Indemnified Person expressly for use in the Offering
Materials) or (ii) otherwise arising out of or in connection with advice or
services rendered or to be rendered by any Indemnified Person pursuant to this
Agreement, the transactions contemplated hereby or any Indemnified Person's
actions or inactions in connection with any such advice, services or
transactions; provided that, in the case of clause (ii) only, the Company will
not be responsible for any Liabilities or Expenses of any Indemnified Person
that are determined by a judgment of a court of competent jurisdiction which is
no longer subject to appeal or further review to have resulted solely from such
Indemnified Person's gross negligence or willful misconduct in connection with
any of the advice, actions, inactions or services referred to above. The Company
also agrees to reimburse each Indemnified Person for all Expenses as they are
incurred in connection with enforcing such Indemnified Person's rights under
this Agreement (including, without limitation, its rights under this Schedule
I).
Upon receipt by an Indemnified Person of actual notice of an Action
against such Indemnified Person with respect to which indemnity may be sought
under this Agreement, such Indemnified Person shall promptly notify the Company
in writing; provided that failure so to notify the Company shall not relieve the
Company from any liability which the Company may have on account of this
indemnity or otherwise, except to the extent the Company shall have been
materially prejudiced by such failure. The Company shall, if requested by Gruss,
assume the defense of any such Action including the employment of counsel
reasonably satisfactory to Gruss. Any Indemnified Person shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person, unless: (i) the Company has failed promptly to assume
the defense and employ counsel or (ii) the named parties to any such Action
(including any impleaded parties) include such Indemnified Person and the
Company, and such Indemnified Person shall have been advised by counsel that
there may be one or more legal defenses available to it which are different from
or in addition to those available to the Company; provided that the Company
shall not in such event be responsible hereunder for the fees and expenses of
more than one firm of separate counsel in connection with any Action in the same
jurisdiction, in addition to any local counsel. The Company shall not be liable
for any settlement of any Action effected without its written consent (which
shall not be unreasonably withheld). In addition, the Company will not, without
prior written consent of Gruss , settle, compromise or consent to the entry of
any judgment in or otherwise seek to terminate any pending or threatened Action
in respect of which indemnification or contribution may be sought hereunder
(whether or not any Indemnified Person is a party thereto) unless such
I-1
settlement, compromise, consent or termination includes an unconditional release
of each Indemnified Person from all Liabilities arising out of such Action.
In the event that the foregoing indemnity is judicially determined to
be unavailable to an Indemnified Person (other than in accordance with the terms
hereof), the Company shall contribute to the Liabilities and Expenses paid or
payable by such Indemnified Person in such proportion as is appropriate to
reflect (i) the relative benefits to the Company and its shareholders, on the
one hand, and to Gruss, on the other hand, of the matters contemplated by this
Agreement or (ii) if the allocation provided by the immediately preceding clause
is not permitted by the applicable law, not only such relative benefits but also
the relative fault of the Company, on the one hand, and Gruss, on the other
hand, in connection with the matters as to which such Liabilities or Expenses
relate, as well as any other relevant equitable considerations; provided that in
no event shall the Company contribute less than the amount necessary to ensure
that all Indemnified Persons, in the aggregate, are not liable for any
Liabilities and Expenses in excess of the amount of fees actually received by
Gruss pursuant to this Agreement. For purposes of this paragraph, the relative
benefits to the Company and its shareholders, on the one hand, and to Gruss, on
the other hand, of the matters contemplated by this Agreement shall be deemed to
be in the same proportion as (a) the total value paid or contemplated to be paid
or received or contemplated to be received by the Company or the Company's
shareholders, as the case may be, in the transaction or transactions that are
within the scope of this Agreement, whether or not any such transaction is
consummated, bears to (b) the fees paid or to be paid to Gruss under this
Agreement.
The Company also agrees that no Indemnified Person shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Company for or in connection with advice or services rendered or to be rendered
by any Indemnified Person pursuant to this Agreement, the transactions
contemplated hereby or any Indemnified Person's actions or inactions in
connection with any such advice, services or transactions except for Liabilities
(and related Expenses) of the Company that are determined by a judgment of a
court of competent jurisdiction which is no longer subject to appeal or further
review to have resulted primarily from such Indemnified Person's gross
negligence or willful misconduct in connection with any such advice, actions,
inactions or services.
If any term, provision, covenant or restriction contained in this
Schedule I is held by a court of competent jurisdiction or other authority to be
invalid, void, unenforceable or against its regulatory policy, the remainder of
the terms, provisions, covenants and restrictions contained in this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
The reimbursement, indemnity and contribution obligations of the
Company set forth herein shall apply to any modification of this Agreement and
shall remain in full force and effect regardless of any termination of, or the
completion of any Indemnified Person's services under or in connection with,
this Agreement.
Accepted and agreed to
this 22nd day of October, 1997.
By: /s/ Duane Mayo
-----------------------
Duane Mayo
Chief Financial Officer
Augment Systems, Inc.
I-2
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