PROSPECTUS
[LOGO]
AUGMENT SYSTEMS, INC.
1,800,000 SHARES OF COMMON STOCK AND
1,800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
All of the 1,800,000 shares of common stock ("Common Stock") and 1,800,000
Redeemable Common Stock Purchase Warrants ("Warrants") offered hereby (together,
the "Securities") are being sold by Augment Systems, Inc. ("Company" or
"Augment"). Each Warrant entitles the holder to purchase one share of Common
Stock for $6.60 during the four-year period commencing one year from the date of
this Prospectus. The Company may redeem the Warrants, once they become
exercisable, at a price of $.01 per Warrant on not less than 30 days' prior
written notice if the last sale price of the Common Stock has been at least 150%
of the then-current exercise price of the Warrants (initially $9.90) for the 20
consecutive trading days ending on the third day prior to the date on which such
notice is given. See "Description of Securities."
Prior to this Offering, there has been no public market for the Securities and
there can be no assurance that any such market will develop. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price of the Securities and the exercise price of the Warrants.
The Company has applied for quotation of the Common Stock and Warrants on the
Nasdaq SmallCap Market under the symbols "AUGS" and "AUGSW," respectively.
----------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGE 6 AND
"DILUTION" AT PAGE 12 HEREOF.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share $5.50 $.495 $5.005
- --------------------------------------------------------------------------------------------------------
Per Warrant $.15 $.0135 $.1365
- --------------------------------------------------------------------------------------------------------
Total(3) $10,170,000 $915,300 $9,254,700
========================================================================================================
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(1) Does not include a 3% nonaccountable expense allowance which the Company
has agreed to pay to the Underwriters. The Company has also agreed to sell
the Underwriters an option to purchase up to 180,000 shares of Common Stock
and/or 180,000 Warrants ("Underwriters' Purchase Option") and to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance, estimated at approximately $805,700.
(3) The Company has granted the Underwriters an option, exercisable within 45
business days from the date of this Prospectus, to purchase up to an
additional 270,000 shares of Common Stock and/or 270,000 Warrants on the
same terms as set forth above, solely for the purpose of covering
over-allotments, if any. If such over-allotment option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $11,695,500, $1,052,595 and $10,642,905,
respectively. See "Underwriting."
The Securities are being offered by the Underwriters on a firm commitment basis
subject to prior sale, when, as, and if delivered to and accepted by the
Underwriters and subject to the approval of certain legal matters by counsel and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify the Offering and to reject any order in whole or in part. It is
expected that delivery of certificates representing the Securities will be made
against payment therefor at the offices of GKN Securities Corp. in New York City
on or about May 16, 1997.
GKN SECURITIES CORP. LAIDLAW EQUITIES, INC.
May 12, 1997
[LOGO] AUGMENT
[ILLUSTRATION DEPICTING AUGMENT LOCAL AREA NETWORK]
OFFERS AND SALES IN CALIFORNIA MAY BE MADE ONLY TO ACCREDITED INVESTORS WHO
MEET A SUITABILITY STANDARD OF EITHER (A) $65,000 GROSS ANNUAL INCOME AND AN
EXCLUSIVE NET WORTH (NET WORTH EXCLUSIVE OF HOME, HOME FURNISHINGS AND
AUTOMOBILES) OF NOT LESS THAN $250,000 OR (B) AN EXCLUSIVE NET WORTH OF
$500,000.
OFFERS AND SALES IN NEW JERSEY MAY BE MADE ONLY TO INVESTORS WHO MEET THE
FOLLOWING SUITABILITY STANDARDS: EITHER (A) INDIVIDUAL GROSS ANNUAL INCOME IN
EXCESS OF $100,000 AND AN EXCLUSIVE NET WORTH (NET WORTH EXCLUSIVE OF HOME, HOME
FURNISHINGS AND AUTOMOBILES) OF NOT LESS THAN $250,000; OR (B) AN EXCLUSIVE NET
WORTH OF $500,000.
Certain persons participating in this Offering may engage in transactions that
stabilize, maintain or otherwise affect the prices of the Securities, including
over-allotment, stabilizing transactions, syndicate short covering transactions
and penalty bids. For a description of these activities, see "Underwriting."
Macintosh(R) is a registered trademark of Apple Computer, Inc. and Windows NT(R)
is a registered trademark of Microsoft Corp.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements (including the notes thereto) appearing elsewhere in this
Prospectus. Each prospective investor is urged to read this Prospectus in its
entirety. Unless otherwise indicated, the information in this Prospectus has
been adjusted to reflect a .637434-for-1 reverse stock split effective as of
October 30, 1996 and a 3-for-4 reverse stock split effective as of April 24,
1997. Certain terms used in this Prospectus are defined in greater detail in the
Glossary appearing on page G-1 of this Prospectus.
THE COMPANY
Augment Systems, Inc., a development stage company, designs, develops and
sells high-end super server products designed to move large image and data files
rapidly and efficiently over computer networks. The Company's initial target
markets are the electronic publishing industry and the Internet/Intranet market.
Shipments of the Company's initial products, high-end Macintosh(R)-based super
servers, commenced in February 1997. To date the Company has shipped six systems
and recognized initial product revenue in April 1997. The Company plans to
introduce in the fourth quarter of 1997 a Windows NT(R)-based super server
targeted to meet the growing demand for Windows NT-based high performance
Internet/Intranet World Wide Web ("World Wide Web" or "WEB") servers and a super
server system designed to support multi-platform networks comprised of
Macintosh, Windows NT and UNIX-based workstations.
Electronic publishing, whether involving the preparation of high quality
color printed documents in print shops, service bureaus and internal corporate
publishing departments or interactive documents on the Internet/Intranet,
requires massive amounts of disk storage and the movement of large data and
image files over networks. The Company's technology has been designed to support
multi-platform environments and is specifically aimed at increasing the transfer
speed of large image and data files over networks. The Company believes that its
products are also well-suited for other markets that require rapid and efficient
movement of large image and data files over networks, such as medical imaging
and geophysical imaging systems ("GIS").
The Company's super server systems perform the file management function and
high speed interconnects outside of the processor running the core operating
system. This unique approach produces significant improvements in file transfer
speeds and enables the server system to maintain compatibility with Apple
Computer, Inc. ("Apple") and Microsoft Corp. ("Microsoft") operating systems
while running different application software. The Company's servers have been
designed to incorporate extensive scalable internal storage complemented by
automatic tape back-up and archiving capabilities. In addition, the Company's
server systems augment existing networks with a fibre channel arbitrated loop,
estimated by the Company to be up to 20 times faster than conventional Ethernet
networks. The Company believes that users of its server systems can retrieve
files over their networks two to three times faster than from their hard drives.
The Company also believes that the multi-platform design and scalable storage
capacity of its super server systems will allow users to upgrade easily without
expensive outlays for new operating systems and hardware.
The Company intends to sell its products in the electronic publishing and
Internet/Intranet markets through a direct sales force and through value added
resellers ("VARs"), system integrators and original equipment manufacturers
("OEMs"). The Company also intends to work with OEMs to private label and sell
its products in other markets requiring rapid transfer of large data files.
The Company was incorporated in Delaware in 1990 to develop and distribute
fiber optic printed circuit boards in the publishing and printing markets. The
Company funded the fiber optic printed circuit board business principally
through a combination of debt and equity financings. The fiber optic products
had limited success and in 1994 the Company began phasing out the fiber optic
operations and began the transition into a systems integration and engineering
consulting business. In 1995 the Company made a further strategic shift in its
business operation into the server market. Since October 1995, the Company has
been operating as a development stage company and has been engaged principally
in research and development, recruitment of personnel and financing activities.
The Company's executive offices are located at 2 Robbins Road, Westford,
Massachusetts 01886 and its telephone number is (508) 392-8626.
3
THE OFFERING
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Securities Offered 1,800,000 shares of Common Stock and 1,800,000
Warrants. Each Warrant entitles the registered
holder to purchase one share of Common Stock
for $6.60 during the four-year period
commencing one year from the date of this
Prospectus. The Company may redeem the
Warrants, once they become exercisable, at a
price of $.01 per Warrant on not less than 30
days' prior written notice if the last sale
price of the Common Stock has been at least
150% of the then current exercise price of the
Warrants (initially $9.90) for the 20
consecutive trading days ending on the third
day prior to the date on which such notice is
given. See "Description of Securities."
Common Stock Outstanding
Prior to the Offering 2,913,319 shares
Common Stock to be Outstanding
After the Offering 4,713,319 shares
Proposed Nasdaq SmallCap
Market Symbols Common Stock: AUGS
Warrants: AUGSW
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USE OF PROCEEDS
The Company intends to apply approximately $3,756,000 of the net proceeds of
this Offering to repay outstanding indebtedness, approximately $1,170,000 to
sales and marketing activities, approximately $1,430,000 to product development
and approximately $340,000 to acquire capital equipment. The remaining
$1,753,000 will be used for working capital and general corporate purposes. See
"Use of Proceeds."
RISK FACTORS
The Securities offered hereby involve a high degree of risk, including,
without limitation, the risk that the Company's products will not be accepted in
the marketplace; the risk that the Company will not be successful in developing
future products; the risk of rapid technological changes in the server industry;
the Company's limited operating history, history of losses and accumulated
deficit; the Company's need for additional capital; and the highly competitive
nature of the server industry. An investment in the Securities offered hereby
should be considered only by investors who can afford the loss of their entire
investment. See "Risk Factors."
4
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements of the Company appearing elsewhere in the Prospectus. This
information should be read in conjunction with such financial statements,
including the notes thereto.
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YEAR ENDED SIX MONTHS
JUNE 30, ENDED DECEMBER 31, CUMULATIVE PERIOD FROM
------------------- --------------------- OCTOBER 1, 1995 TO
1995 1996 1995 1996 DECEMBER 31, 1996
---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and development -- 1,388,149 155,575 1,526,384 2,914,533
General and administrative 39,273 90,274 387,150 1,083,267 1,132,878
Selling and marketing -- -- 9,500 490,735 490,735
--------- --------- --------- --------- ---------
Total operating expenses 39,273 1,478,423 552,225 3,100,386 4,538,146
--------- --------- --------- --------- ---------
Other income (expense), net -- (26,059) 25,284 (115,899) (141,958)
--------- --------- --------- --------- ---------
Loss from continuing operations (39,273) (1,504,482) (526,941) (3,216,285) (4,680,104)
Loss from discontinued operations (361,582) (7,182) (7,182) -- --
--------- --------- --------- --------- ---------
Net loss $ (400,855) $(1,511,664) $ (534,123) $(3,216,285) $(4,680,104)
========== =========== ========== =========== ===========
Net loss per share:
Loss for continuing operations (.02) (.51) (.19) (.93) (1.47)
Loss from discontinued operations (.17) -- -- -- --
--------- --------- --------- --------- ---------
Net loss per share $ (.19) $ (.51) $ (.19) $ (.93) $ (1.47)
========= ========= ========= ========= =========
Weighted average number of shares of Common Stock
and common stock equivalents outstanding 2,170,878 2,950,492 2,862,246 3,452,740 3,190,648
========= ========= ========= ========= ==========
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DECEMBER 31, 1996
---------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1)(2) AS ADJUSTED(1)(2)(3)
------ --------------- --------------------
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BALANCE SHEET DATA:
Working capital (deficit) $(1,303,035) $ (750,285) $ 7,129,713
Total assets 1,679,053 3,900,418 8,287,863
Total liabilities 2,532,417 4,342,917 1,264,544
Accumulated deficit (7,059,213) (7,059,213) (7,952,524)
Stockholders' equity (deficit) $ (853,364) $ (442,499) $ 7,023,319
</TABLE>
- --------
(1) Reflects the issuance in February 1997 of units consisting of short term
promissory notes with an aggregate face value of $2,375,000 and warrants to
purchase 605,625 shares of Common Stock in a private placement and the
repayment of a short term advance of $575,000. Reflects the exercise in
March 1997 of a warrant to purchase 47,807 shares of the Company's Common
Stock at $1.507 per share.
(2) Reflects the issuance in April and May of 1997 of long-term promissory notes
in the aggregate principal amount of $400,000.
(3) Reflects the receipt of approximately $8,449,000 in net proceeds from the
sale of the Securities offered hereby and the application thereof to the
repayment of approximately $3,606,000 of short term promissory notes and
long term convertible promissory notes and related accrued interest of
$20,875 as of December 31, 1996, and amortization of debt discount of
$548,252 and a charge of $345,059 for deferred financing costs.
Unless otherwise indicated, all shares, per-share and financial information
set forth herein assumes no exercise of (i) the Underwriters' over-allotment
option; (ii) the Warrants; (iii) the Underwriters' Purchase Option; (iv) stock
options to purchase up to 429,650 shares of Common Stock outstanding under the
Company's 1995 Stock Option Plan ("Stock Option Plan"); (v) stock options to
purchase up to 170,350 shares of Common Stock which may be granted under the
Company's Stock Option Plan; (vi) the holders' right to convert outstanding long
term convertible promissory notes and accrued interest into approximately 13,600
shares of Common Stock; and (vii) other outstanding warrants to purchase up to
969,884 shares of Common Stock.
5
RISK FACTORS
The Securities offered hereby are speculative and involve a high degree of
risk. Accordingly, in analyzing an investment in the Securities, prospective
investors should carefully consider, along with the other matters referred to
herein, the following risk factors. No investor should participate in this
Offering unless such investor can afford a complete loss of his investment.
Market Acceptance. The Company's initial target markets are the electronic
publishing industry and the Internet/Intranet market. The Company's initial
products, which were first shipped in February 1997, are high-end
Macintosh-based super servers targeted at the electronic publishing industry.
The Company plans to introduce a Windows NT-based version of its server system
during the fourth quarter of 1997 that is specifically tailored for the
Internet/Intranet and to support multi-platform networks comprised of Macintosh,
Windows NT and UNIX-based workstations. The Company's success is dependent upon
its ability to gain market acceptance of its products, which will depend upon
the ability of the Company to demonstrate the advantages of its products over
other technology offered by other companies. The failure of the Company to
penetrate its target markets would have a material adverse effect upon its
operations and prospects. See "Business--Competition."
No Assurance of Successful Future Product Development; Rapid Technology
Change; Technological Obsolescence; Introduction of New Products. The Company
has not yet completed the development of its Windows NT-based server product nor
has the Company developed the hardware and software needed to support
multi-platform networks comprised of Macintosh, Windows NT or UNIX-based
workstations. If the Company is unsuccessful in developing these products, then
the Company's sales and operations will be adversely affected. There can be no
assurance that any of the Company's future products will be successfully
developed or, if developed, will be successfully marketed. The server market is
characterized by extensive research and development and rapid technological
change resulting in product life cycles of 18 to 24 months. The Company's future
success will depend in large part on the Company's ability to develop and
introduce new products that keep pace with technological developments, achieve
market acceptance and respond to customer requirements that are constantly
evolving. Development by others of new or improved products, processes or
technologies may make the Company's products or proposed products obsolete or
less competitive. The Company will be required to devote substantial efforts and
financial resources to enhance its existing products and to develop new
products. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements or any significant delays
in product development or introduction could result in a loss of competitiveness
or could materially and adversely affect the Company's operating results. See
"Business--Research and Development."
Limited Operating History; History of Losses and Accumulated Deficit; No
Assurance of Significant Revenues or Operating Profit; Independent Certified
Public Accountants' Qualified Report. To date, the Company has not recognized
any revenues from product sales and has experienced significant operating losses
since inception. As of December 31, 1996, the Company's accumulated deficit was
approximately $7,059,000, its working capital deficit was approximately
$1,303,000 and its stockholders' deficit was approximately $853,000. The Company
expects to incur substantial additional costs, including costs related to
ongoing research and development activities, resulting in operating losses for
at least the next 12 months following the completion of this Offering. The
Company's ability to achieve significant revenue and profitability is dependent
on successful marketing of its existing products and successful completion of
the development of its future Windows NT-based server and multi-platform
products, of which there can be no assurance. The report of the Company's
independent certified public accountants with respect to the financial
statements of the Company for the year ended December 31, 1996 contains a
paragraph regarding the Company's ability to continue as a going concern. Among
the factors cited by the auditors as raising substantial doubt as to the
Company's ability to continue as a going concern is that the Company has
incurred recurring operating losses and is dependent on the net proceeds of this
Offering or obtaining financing by alternative means to continue its operations.
See "Management's Discussion and Analysis of Financial Condition and Plan of
Operation," the Financial Statements of the Company and the notes thereto and
the Report of Independent Certified Public Accountants included herein.
6
Need for Additional Capital. The Company's future capital requirements will
depend on many factors, including cash flow from operations, continued progress
in its research and development programs, competing technological and market
developments and the Company's ability to market its products successfully.
Although the Company believes that the proceeds of this Offering will be
sufficient to continue its operations for the 12 months following the completion
of this Offering, there can be no assurance that this will be the case. To the
extent that the funds generated by this Offering are insufficient to fund the
Company's activities, it will be necessary to raise additional funds through
other equity or debt financings. 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 would be a material adverse
affect on the Company's ability to continue its operations. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Plan of Operation."
Competition. The high-end super server market is highly competitive. Many of
the Company's competitors, including Sun Microsystems Inc. ("Sun"),
Hewlett-Packard Co. ("Hewlett-Packard"), International Business Machines Corp.
("IBM"), Apple, Digital Equipment Corporation and Silicon Graphics Inc. ("SGI"),
have significantly greater market recognition and greater financial, technical,
marketing and human resources than the Company. The Company's competitors can be
expected to continue to improve the design and performance of their products and
to introduce new products with competitive price-to-performance characteristics.
Competitive pressures often necessitate price reduction which can adversely
affect operating results. Although the Company believes that it presently has
certain technical and other advantages over its competitors, maintaining such
advantages will require a continued high level of investment by the Company in
research and development and sales and marketing. There can be no assurance that
the Company will have sufficient resources to continue to make such investment
or that the Company will be able to make the technological advances necessary to
maintain such competitive advantages. There can be no assurance that the Company
will be able to compete successfully against existing competitors or new
entrants to the marketplace. See "Business--Competition."
Dependence on Suppliers and Manufacturers. The Company will rely on
independent high-volume manufacturers for the production of its components,
which may result in reliance on a single source or a limited group of suppliers.
Although the Company believes that there are a number of manufacturers capable
of producing the hardware components, any delays in obtaining hardware
components on a timely basis could have a material adverse effect on the
Company's sales and operations. The Company currently depends upon Toshiba as
its sole source supplier of customized Application Specific Integrated Circuits
("ASICs"). The Company has no contract with Toshiba requiring Toshiba to supply
the Company with ASICs. The Company's inability to obtain the customized ASICs
would have a material adverse effect on its business. Furthermore, a significant
increase in the price of one or more of these components could adversely affect
the Company's results of operations. See "Business--Manufacturing and
Suppliers."
Dependence on Proprietary Technology of Others. The Company's current
products incorporate technology licensed from Radius, Inc. ("Radius"), a
publicly-held company that manufactures Macintosh controller cards and
accessories. The license is exclusive except as to Radius, which has retained
rights to its technology. If the Company fails to sell the minimum number of
units required to be sold pursuant to the Radius agreement for two consecutive
calendar quarters, Radius may license the technology to other parties. In
addition, if the Company fails to fulfill its other obligations under the Radius
agreement, including its obligation to pay royalties, Radius may terminate the
license. The Company's current products also incorporate certain critical
technology licensed from Polybus Systems Corporation ("Polybus"). If the Company
fails to fulfill its obligations under the Polybus agreement, including its
obligation to pay royalties, Polybus may license the technology to third parties
in the publishing market. See "Business -- Technology."
Dependence on Proprietary Know-how and Trade Secrets; Lack of Patented
Technology; Risk of Infringement. The Company relies on unpatented proprietary
know-how and trade secrets, and employs various methods, including
confidentiality agreements with employees, consultants and marketing partners,
to protect its trade secrets and know-how. There can be no assurance, however,
that the Company will be able to maintain the confidentiality of any of its
proprietary technology, know-how or trade secrets, or that others will not
independently develop substantially equivalent technology. The failure or
inability to protect these rights could have a material adverse effect on the
Company's results of operations. Moreover, there
7
can be no assurance that the Company's proposed products will not infringe on
the rights of others. The Company may be forced to expend substantial resources
if the Company is required to defend against any such infringement claims. The
Company also may desire or be required to obtain licenses from others in order
to develop new products or applications for its products. There can be no
assurance that such licenses will be obtainable on commercially reasonable
terms, if at all, that the patents underlying such licenses will be valid and
enforceable or that the proprietary nature of the unpatented technology
underlying such licenses will remain proprietary. "See Business--Technology."
Significant Portion of Proceeds Used to Satisfy Indebtedness; Benefit to
Insiders. Approximately $3,756,000, or 44.5%, of the net proceeds received by
the Company from this Offering will be used to repay outstanding indebtedness
and related interest, and, therefore, will not be available for future
operations. Approximately $52,000 of such amount will be paid to the Stanley A.
Young Family Limited Partnership, of which Stanley A. Young, a director of the
Company, is a partner. Approximately $1,753,000, or 20.8%, of the net proceeds
of the Offering has been allocated to working capital and general corporate
purposes. Included in this amount are accrued consulting fees of approximately
$67,250 payable to Young Management Group, Inc., of which Mr. Young is a
majority stockholder. See "Use of Proceeds" and "Certain Transactions."
Related Party Transactions; Possible Conflicts of Interest. The Company has
engaged in certain transactions with certain of its directors, and is a party to
a consulting agreement with an affiliate of one of its directors which will
continue after the consummation of this Offering. Ownership interests of
directors of the Company in entities providing services to the Company or
service as a director of both the Company and such entities could create, or
appear to create, potential conflicts of interest. All future transactions
between the Company and any of its officers, directors, principal stockholders
or affiliates will be approved by a committee of the Board of Directors, a
majority of the members of which shall be independent directors, or, if required
by law, a majority of disinterested directors, and will be on terms no less
favorable to the Company than could be obtained in arm's length transactions
from unaffiliated third parties. See "Certain Transactions."
Dependence on Chief Executive Officer; Dependence on Qualified Personnel.
The Company relies on the efforts of Lorrin Gale, its President and Chief
Executive Officer. Although the Company has entered into an employment agreement
with Mr. Gale expiring on December 31, 1998 and has obtained "key person"
insurance on his life in the amount of $1,000,000, under which the Company will
be the beneficiary, the loss of the services of Mr. Gale could have a material
adverse effect on the Company. Additionally, the ability to attract and retain
other highly competent executives, professionals, sales personnel and other
employees is critical to the ongoing success of the Company. The Company has not
experienced any difficulties in attracting and retaining qualified personnel,
although there can be no assurance that it will not encounter such problems in
the future. See "Management."
Immediate and Substantial Dilution. The existing stockholders of the Company
acquired their respective equity interests at prices substantially below the
offering prices in this Offering. Purchasers of the Common Stock offered hereby
will incur an immediate and substantial dilution of approximately 74% of their
investment in the Common Stock because the net tangible book value of the
Company's Common Stock after this Offering will be approximately $1.49 per share
as compared with the initial public offering price of $5.65 per share of Common
Stock attributing no value to the Warrant. Accordingly, to the extent that the
Company incurs losses, the public investors will bear a disproportionate risk of
such losses. See "Dilution."
Broad Discretion in Application of Proceeds. The Company will have broad
discretion regarding how and when the proceeds of this Offering allocated to
working capital and general corporate purposes (approximately $1,753,000 or
20.8% of the net proceeds) will be applied and will use a portion of such
proceeds to pay salaries, including salaries of its executive officers. See "Use
of Proceeds."
No Prior Market; No Assurance of Market Development; NASDR Investigation of
Managing Underwriter. There has been no prior market for the Company's Common
Stock or Warrants, and there can be no assurance that a public market for the
Common Stock or Warrants will develop or be sustained after the Offering.
Although the Company has applied for quotation of the Common Stock and Warrants
on the Nasdaq SmallCap Market ("Nasdaq"), there can be no assurance that an
active trading market in the Common Stock or Warrants will develop or be
maintained. In order to continue to be quoted on Nasdaq
8
after the Offering, the Company must satisfy certain maintenance criteria,
including an additional obligation imposed by Nasdaq to have five market makers
for the Common Stock and Warrants. The failure to meet these maintenance
criteria in the future may result in the Common Stock and Warrants becoming
ineligible for quotation on Nasdaq and trading, if any, of the Common Stock or
Warrants would thereafter be conducted on the OTC Bulletin Board. As a result of
such ineligibility for quotation, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Common Stock. See "Underwriting."
NASD Regulation, Inc. ("NASDR") recently conducted an investigation of GKN
Securities Corp. ("GKN"), the managing underwriter of this Offering. The NASDR
staff informed GKN that a District Business Conduct Committee has authorized the
filing of a complaint against GKN, members of GKN's senior management,
supervisory personnel and current and former brokers. GKN expects that the
complaint will allege that it violated the anti-fraud provisions of the
Securities Exchange Act of 1934 ("Exchange Act") and the fair pricing provisions
of the NASDR Conduct Rules by charging excessive markups in the sale of certain
warrants it underwrote and for which it acted as a market maker. GKN understands
that the NASDR staff will allege that the aggregate amount of such excessive
markups was approximately $1.1 million. GKN anticipates that the complaint will
seek monetary restitution from GKN to its customers and monetary and
non-monetary sanctions and other relief against GKN and individuals. GKN has
advised the Company that, while there can be no assurance, GKN does not believe
that the pendency or resolution of this NASDR matter will affect its ability to
complete the underwriting of this Offering or to act as a market maker for the
Company's securities after the Offering.
Penny Stock Regulations; Illiquid Securities. The regulations of the
Securities and Exchange Commission ("Commission") promulgated under the Exchange
Act require additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock. Commission
regulations generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Unless
an exception is available, those regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors (generally institutions). In
addition, the broker-dealer must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. Moreover,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. If the Company's securities become subject to the
regulations applicable to penny stocks, the market liquidity for the Company's
securities could be severely affected. In such an event, the regulations on
penny stocks could limit the ability of broker-dealers to sell the Company's
securities and thus the ability of purchasers of the Company's securities to
sell their securities in the secondary market.
Arbitrary Offering Price; Volatility of Stock Price. The public offering
price of the Common Stock and Warrants and the exercise price of the Warrants
were established by negotiation between the Company and the Underwriters and may
not be indicative of prices that will prevail in the trading market. In the
absence of an active trading market, purchasers of the Common Stock and Warrants
may experience substantial difficulty in selling their securities. The trading
prices of the Company's Common Stock and Warrants are expected to be subject to
significant fluctuations in response to variations in quarterly operating
results, changes in analysts' earnings estimates, general conditions in the
computer and publishing industries and other factors. In addition, the stock
market is subject to price and volume fluctuations that affect the market prices
for companies and that are often unrelated to operating performance. See
"Description of Securities" and "Underwriting."
Common Stock Eligible for Future Sale; Registration Obligations. Sales of
the Company's Common Stock in the public market after this Offering by existing
stockholders and by holders of outstanding options and warrants could adversely
affect the market price of the Common Stock. The Company has agreed to register,
no later than 13 months after the effective date of this Offering, 1,871,998
shares of issued and outstanding Common Stock and approximately 13,600 shares of
Common
9
Stock issuable upon the conversion of outstanding principal of and accrued
interest on certain long term convertible promissory notes. In connection with a
consulting agreement with Young Management Group, Inc. ("Young Management"), a
Company founded by Stanley A. Young, a director of the Company, the Company has
agreed to use its best efforts to register 179,279 shares of issued and
outstanding Common Stock as part of any registration of securities by the
Company, subject to the discretion of the managing underwriter, if any, to
exclude such shares from registration. In addition, the Company has agreed to
register warrants to purchase 678,310 shares of Common Stock and the 678,310
shares of Common Stock underlying these warrants no later than 12 months and one
day after the date of this Prospectus. If the shares and warrants are not
registered within 12 months and one day after the date of this Prospectus, then
the Company shall use its best efforts to register these shares and warrants as
part of any other registration of securities by the Company until November 30,
2002. The Company has also agreed to use its best efforts to register 47,807
shares of Common Stock issued pursuant to the exercise of a warrant, as well as
the shares underlying warrants to purchase in the aggregate 269,608 shares of
Common Stock as part of any registration of securities by the Company, subject
to the discretion of the managing underwriter, if any, to exclude such shares
from registration. In addition, the Company has agreed to register the shares
underlying warrants to purchase up to 21,966 shares of Common Stock issued to a
placement agent in connection with a private placement completed in May 1996 no
later than 13 months after the effective date of this Offering. See "Certain
Transactions" and "Shares Eligible for Future Sale."
Effect of Outstanding Options and Warrants. Immediately after the Offering,
assuming full exercise of the Underwriters' over-allotment option, the Company
will have outstanding warrants to purchase an aggregate of up to 3,039,884
shares of Common Stock. This amount includes 2,070,000 shares underlying the
Warrants and 969,884 shares underlying warrants outstanding prior to this
Offering with exercise prices between $1.507 per share and $4.125 per share. In
addition, there will be outstanding stock options granted pursuant to the
Company's Stock Option Plan to purchase an aggregate of approximately 429,650
shares of Common Stock at exercise prices ranging from $1.507 per share to $5.50
per share and the Underwriters' Purchase Option pursuant to which the
Underwriters have the right to acquire up to 180,000 shares of Common Stock for
$9.075 per share and 180,000 Warrants for $.2475 per Warrant. The exercise of
any such outstanding Warrants, other warrants, stock options or the
Underwriters' Purchase Option will dilute the percentage ownership of the
Company's stockholders, and any sales in the public market of Common Stock
underlying such Warrants, other warrants, stock options and the Underwriters'
Purchase Option may adversely affect prevailing market prices for the Common
Stock. Moreover, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected, since the holders of such
outstanding securities can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in such Warrants, other
warrants, stock options and the Underwriters' Purchase Option. See
"Management--Stock Option Plan," "Certain Transactions," "Description of
Securities" and "Underwriting."
Potential Adverse Effects of Issuance of Preferred Stock; Anti-takeover
Provisions. The Company is authorized to issue up to 2,000,000 shares of
preferred stock, $.01 par value ("Preferred Stock"). Preferred Stock may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the Board of Directors, without further action by stockholders,
and may include voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and liquidation, conversion and
redemption rights and sinking fund provisions. No Preferred Stock is currently
outstanding and the Company has no present plans for the issuance thereof.
Issuance of such Preferred Stock, depending upon the rights, preferences and
designations thereof, may have the effect of delaying, deterring or preventing a
change in control of the Company, or could result in the dilution of the voting
power of the Common Stock purchased in this Offering. In addition, certain
"anti- takeover" provisions of the Delaware General Corporation Law, among other
things, may restrict the ability of the stockholders to effect a merger or
business combination or to obtain control of the Company. See "Descriptions of
Securities--Preferred Stock" and "--Delaware Law."
Possible Influence of Directors and Officers. The Company's directors and
executive officers and certain of their affiliates will beneficially own
approximately 15.8% of the Company's outstanding shares of Common Stock upon
completion of this Offering. Accordingly, these stockholders acting together
10
will have the ability to influence corporate actions requiring stockholder
approval, including the election of the Company's directors. See "Management,"
"Principal Stockholders" and "Description of Securities."
No Dividends. The Company has never paid any cash dividends on its Common
Stock. The Board of Directors anticipates that for the foreseeable future the
Company's earnings, if any, will be retained for use in the business and that no
cash dividends will be paid on the Common Stock. See "Dividend Policy."
Current Prospectus and State Blue Sky Registration Required to Exercise
Warrants. The Company will be able to issue shares of its Common Stock upon
exercise of the Warrants only if there is then a current prospectus relating to
such Common Stock and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the jurisdictions
in which the various holders of the Warrants reside. The Company has undertaken
to file and keep current a prospectus which will permit the purchase and sale of
the Common Stock underlying the Warrants, but there can be no assurance that the
Company will be able to do so. Although the Company intends to seek to qualify
for sale the shares of Common Stock underlying the Warrants in those states in
which the securities are to be offered, no assurance can be given that such
qualification will occur. The Warrants may be deprived of any value and the
market for the Warrants may be limited if a current prospectus covering the
Common Stock issuable upon the exercise of the Warrants is not kept effective or
if such Common Stock is not qualified or exempt from qualification in the
jurisdictions in which the holders of the Warrants then reside. See
"Underwriting."
Potential Adverse Effect of Redemption of Warrants. The Warrants may be
redeemed by the Company with the prior written consent of the Underwriters at
any time that they are exercisable at a redemption price of $.01 per Warrant on
not less than 30 days' prior written notice if the last sale price of the Common
Stock has been at least 150% of the then-exercise price of the Warrants
(initially $9.90) for the 20 consecutive trading days ending on the third
trading day prior to the date of the notice of redemption. Notice of redemption
of the Warrants could force the holders to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for them to do so, to
sell the Warrants at the current market price when they might otherwise wish to
hold the Warrants, or to accept the redemption price which would be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities--Warrants."
11
DILUTION
The difference between the initial public offering price per share of Common
Stock (attributing no value to the Warrants) and the pro forma net tangible book
value per share of Common Stock after this Offering constitutes the dilution per
share of Common Stock to investors in this Offering. Net tangible book value per
share is determined by dividing the net tangible book value (total tangible
assets less total liabilities) by the number of outstanding shares of Common
Stock. As of December 31, 1996, based on 2,913,319 shares of Common Stock
outstanding pro forma at December 31, 1996, which includes 2,865,512 shares of
Common Stock outstanding at December 31, 1996, and 47,807 shares of Common Stock
issued in March 1997 upon the exercise of a warrant for 47,807 shares of the
Company's Common Stock, the Company had a pro forma net tangible book value of
$(877,429) or approximately $(.30) per share of Common Stock. After giving
effect to the sale of the Securities offered hereby (less underwriting discounts
and estimated expenses of this Offering) and the application of the net proceeds
therefrom, the pro forma net tangible book value at that date would have been
$7,023,319, or approximately $1.49 per share. This represents an immediate
increase in net tangible book value of approximately $1.79 per share to existing
stockholders and an immediate dilution of approximately $4.16 per share or
approximately 74% to investors in this Offering.
The following table illustrates the per share dilution without giving effect
to operating results of the Company subsequent to December 31, 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price of the Common Stock $ 5.65
Net tangible book value before Offering $(.36)
Increase attributable to pro forma adjustments before Offering .06
---
Pro forma net tangible book value before Offering (.30)
Increase attributable to investors in this Offering $1.79
-----
Pro forma net tangible book value after Offering 1.49
----
Dilution to investors in this Offering $ 4.16
======
</TABLE>
The following table summarizes the number and percentage of shares of Common
Stock purchased from the Company, the amount and percentage of consideration
paid, and the average price per share paid by existing stockholders and by
investors pursuant to this Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders 2,913,319 61.8% $ 6,616,714 39.4% $2.27
Investors in this Offering 1,800,000 38.2 10,170,000 60.6 $5.65
--------- ---- ---------- ----
Total 4,713,319 100.0% $16,786,714 100.0%
========= ===== =========== =====
</TABLE>
The foregoing analysis assumes no exercise of outstanding options or
warrants. In the event any such options or warrants are exercised, the
percentage ownership of the investors in this Offering will be reduced and the
dilution per share of Common Stock to investors in this Offering may increase.
12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby, after deducting underwriting discounts and commissions and estimated
expenses payable by the Company in connection with this offering, are estimated
to be approximately $8,449,000 ($9,791,440 if the Underwriters' over-allotment
option is exercised in full). The Company intends to apply the net proceeds
approximately as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT
----------------------- ------ -------
<S> <C> <C>
Repayment of debt $3,756,000 44.5%
Product development 1,430,000 16.9
Sales and marketing 1,170,000 13.8
Capital expenditures 340,000 4.0
Working capital and general corporate purposes 1,753,000 20.8
--------- ----
Total $8,449,000 100.0%
========== =====
</TABLE>
Approximately $3,756,000 of the net proceeds will be used to repay
$3,585,000 of outstanding short term promissory notes, $21,000 of outstanding
long term convertible promissory notes and approximately $150,000 of interest on
such promissory notes accrued as of the date of this Offering, including
repayment of principal and interest of approximately $52,000 owed to the Stanley
A. Young Family Limited Partnership, of which Stanley A. Young, a director of
the Company, is a partner. See "Certain Transactions." The $3,585,000 of short
term promissory notes bear interest at 12% per annum and are due and payable
upon the closing of this Offering. As of the date of this Prospectus, the
Company has outstanding long term convertible promissory notes in the principal
amount of $62,248 which bear interest at 10% per annum. These long term
convertible promissory notes plus accrued interest are to be repaid: (i) one
third upon the completion of this Offering; (ii) one third on the first
anniversary of the closing of this Offering; and (iii) one third on the second
anniversary of the closing of this Offering, unless converted prior to such
date. The net proceeds from these borrowings were used to fund product
development and engineering, marketing activities and working capital. See
"Management's Discussion and Analysis of Financial Condition and Plan of
Operation."
Approximately $1,430,000 of the net proceeds will be used to continue the
development of the Company's server products to increase their performance and
capabilities, and to develop a Windows NT-based server and a super server system
to support networks comprised of Macintosh, Windows NT and UNIX-based
workstations. Included in this amount are salaries for product development and
engineering personnel aggregating approximately $1,000,000.
Approximately $1,170,000 of the net proceeds will be used to develop a
direct sales and marketing organization, including the establishment of regional
sales offices in the United States, Europe and the Far East, and for promotional
activities, trade shows and sales materials. Included in this amount are
salaries for marketing and sales personnel aggregating approximately $750,000.
Approximately $340,000 of the net proceeds will be used for the purchase of
capital equipment, including test equipment, sales office demonstration
equipment and personal computers.
The balance of the net proceeds of this Offering will be used for working
capital and general corporate purposes including, among other things, payment of
expenses incurred or to be incurred by the Company in connection with its
operations, costs associated with additional inventory, payment of general
corporate expenses, including salaries of officers, and the payment of
approximately $67,250 in accrued consulting fees payable to Young Management
Group, Inc., a corporation of which Stanley A. Young, a director of the Company,
is the majority stockholder. See "Certain Transactions." If the Underwriters
exercise the Underwriters' over-allotment option in full, the Company will
realize additional net proceeds of approximately $1,342,440, which will be added
to the Company's working capital.
13
Based on its current operating plan, the Company anticipates that the
proceeds of the Offering, together with existing resources and cash generated
from operations will be sufficient to satisfy the Company's contemplated cash
requirements for at least 12 months. There can be no assurance, however, that
the Company's cash requirements during this period will not exceed its available
resources or that these funds will be sufficient to meet the Company's longer
term cash requirements for operations. In the event the Company's plans or
assumptions change or prove to be inaccurate, or the proceeds of the Offering
together with cash generated from future revenues, if any, prove to be
insufficient to fund operations (due to unanticipated expenses, problems or
other factors), the Company may find it necessary and/or advisable to reallocate
some of the proceeds within the above-described categories and therefore
management will have significant discretion regarding how and when such proceeds
will be applied.
Proceeds not immediately required for the purposes described above will be
invested in United States government securities, short term certificates of
deposit, money market funds or other investment grade short term
interest-bearing investments.
14
CAPITALIZATION
The following table sets forth the short term debt and capitalization of the
Company: (i) at December 31, 1996; (ii) pro forma to reflect certain significant
transactions occurring subsequent to December 31, 1996; and (iii) pro forma as
adjusted to reflect the issuance and sale of the Securities offered hereby and
the application of the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1)(2) AS ADJUSTED(3)
------ --------------- --------------
<S> <C> <C> <C>
Short term debt:
Short term advance $ 575,000 $ -- $ --
--------- --------- ----------
Short term promissory notes 1,051,248 3,036,748 --
--------- --------- ----------
Current portion of obligations under capital leases 19,013 19,013 19,013
------ ------ ------
Long term debt:
Long term promissory notes 62,248 462,248 441,498
------ ------- -------
Obligations under capital leases, less current portion 27,530 27,530 27,530
------ ------ ------
Stockholders' equity:
Preferred Stock, par value $.01 per share; 2,000,000 shares
authorized, no shares issued and outstanding -- -- --
Common Stock, par value $.01 per share; 30,000,000 shares
authorized; 2,865,512 shares issued and outstanding, actual;
2,913,319 shares issued and outstanding, pro forma; 4,713,319
shares issued and outstanding, pro forma as adjusted 28,655 29,133 47,133
Additional paid-in capital 6,177,194 6,587,581 14,928,710
Accumulated deficit (7,059,213) (7,059,213) (7,952,524)
---------- ---------- ----------
Total stockholders' equity (deficit) (853,364) (442,499) 7,023,319
-------- -------- ---------
Total capitalization $ 881,675 $ 3,103,040 $ 7,511,360
=========== =========== ===========
</TABLE>
- --------
(1) Reflects the issuance in February 1997 of units consisting of short term
promissory notes with an aggregate face value of $2,375,000 and warrants to
purchase 605,625 shares of Common Stock in a private placement and the
repayment of a short-term advance of $575,000. Reflects the exercise in
March 1997 of a warrant to purchase 47,807 shares of Common Stock at $1.507
per share.
(2) Reflects the issuance in April and May of 1997 of long-term promissory
notes in the aggregate principal amount of $400,000.
(3) Reflects the receipt of approximately $8,449,000 in net proceeds from the
sale of the Securities offered hereby and the application thereof to the
repayment of approximately $3,606,000 of short term promissory notes and
long term convertible promissory notes and related accrued interest of
$20,875 as of December 31, 1996, and amoritization of debt discount of
$548,252 and a charge of $345,059 for deferred financing costs.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and it is currently the intention of the Company not to pay cash dividends
on its Common Stock in the foreseeable future. Management intends to reinvest
earnings, if any, in the development and expansion of the Company's business.
Any future declaration of cash dividends will be at the discretion of the Board
of Directors and will depend upon the earnings, capital requirements and
financial position of the Company, general economic conditions and other
pertinent factors.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATION
The discussion and analysis below should be read in conjunction with the
Financial Statements of the Company and the Notes to Financial Statements
included elsewhere in this Prospectus.
INTRODUCTION
The Company was incorporated in 1990 to develop and distribute fiber optic
printed circuit boards in the publishing and printing markets. The fiber optic
products had limited success and in fiscal 1994 the Company began phasing out
the fiber optic operations and began the transition into a systems integration
and engineering consulting business. In 1995 the Company made a further
strategic shift in its business operation into the server market. In connection
therewith, the Company acquired the rights to server technology developed by
Radius. Since October 1995, the Company has been operating as a development
stage company and has been engaged principally in research and development,
recruitment of personnel and financing activities. The Company has engaged in
limited marketing activities and did not commence shipments of its initial
products, which are high-end Macintosh-based super servers, until February 1997.
To date the Company has shipped six systems and recognized initial product
revenue in April 1997.
For the periods October 1, 1995 to December 31, 1996, the Company incurred a
cumulative net loss of approximately $4,680,000. Since December 31, 1996, the
Company has continued to incur losses and anticipates that it will continue to
incur significant losses until, at the earliest, the Company generates
sufficient revenues to offset the substantial up-front capital expenditures and
operating costs associated with developing and commercializing its products.
From October 1, 1995 through December 31, 1996, the Company expended
approximately $2,915,000 on research and development.
The initial target market for the Company's super server is the electronic
publishing industry, both for the creation and preparation of printed material
(prepress) and for electronic publishing via the Internet/Intranet. The Company
believes that its products are also well-suited for additional markets such as
medical imaging and GIS. Each of these markets requires the rapid and efficient
movement of large image and data files over networks. The Company plans to
introduce during 1997 a Windows NT-based server targeted to meet the growing
demand for high performance Windows NT-based Internet/Intranet WEB servers.
Additionally, the Company plans to introduce during 1997 a super server system
designed to support a multi-platform network comprised of Macintosh, Windows NT
and UNIX-based workstations.
PLAN OF OPERATION
The Company requires the proceeds of this Offering to continue development
efforts on product enhancements and new products, to commence full scale
marketing of its products, including opening sales offices in the United States,
Europe and the Far East, and to fund inventory purchases and accounts
receivable, as well as other working capital expenditures. The Company expects
that these efforts will require significant up-front expenditures which will
result in losses for the foreseeable future. The Company anticipates that it
will require approximately $3,756,000 of the proceeds of this Offering for the
repayment of outstanding debt, approximately $1,170,000 to establish a marketing
and sales organization and to promote the Company's products, approximately
$1,430,000 for product development efforts, and approximately $1,753,000 for
working capital and general corporate purposes. During the next 12 months, the
Company estimates that it will expend approximately $340,000 for capital
equipment, including hardware and software purchases. See "Use of Proceeds." The
Company's management believes that the net proceeds of this Offering, together
with existing resources and cash generated from operations, will be sufficient
to fund the Company's operations for the next 12 months. The Company may,
however, attempt to supplement its cash position through bank financing for
working capital and lines of credit for capital equipment leasing.
The Company currently has 46 full-time employees and 12 independent
contractors and plans to hire an additional 50 full-time employees in various
capacities during the 12 months following the consummation of this Offering.
Additional personnel may be required depending on the level of business
16
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. See "Business--Employees."
The Company has funded its operations since October 1995 principally from a
combination of debt and equity financings totalling approximately $8,110,000.
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 were
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 bear interest at 12% per annum and
are to be repaid from the proceeds of this 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 Consultants, LLC, of which
Fred Chanowski, a director of the Company, is a 20% member, a promisory note in
the principal amount of $200,000 in consideration for $200,000. The promisory
notes both bear interest at 18% per annum with interest and principal payable at
maturity on May 31, 1998 and June 30, 1998, respectively.
The Company is in the development stage, and as such, success of future
operations is subject to a number of risks described elsewhere in this
Prospectus. 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 Company's ability to continue as a going
concern is dependent upon the anticipated net proceeds from this Offering or
obtaining financing by alternative means. The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
NEW ACCOUNTING STANDARDS
Effective July 1, 1996, the Company adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company will continue to account
for stock-based compensation for employees under Accounting Principles Board
Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. The
Company has disclosed the pro forma net loss and per share amounts in the notes
to the financial statements using the fair-value-based method beginning in the
period ending December 31, 1996, with comparable disclosures for the year ended
June 30, 1996.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," issued by the Financial Accounting Standards Board ("FASB"), is effective
for financial statements for fiscal years beginning after December 15, 1995. The
new standard establishes new guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment and certain identifiable
intangible assets and goodwill, should be recognized and how impairment losses
should be measured. The Company does not expect the adoption of this standard to
have a material effect on its financial position or results of operations.
17
BUSINESS
GENERAL
Augment Systems, Inc., a development stage company, designs, develops and
sells high-end super server products designed to move large image and text files
rapidly and efficiently over computer networks. The Company's initial target
markets are the electronic publishing industry and the Internet/Intranet market.
Shipments of the Company's initial products, high-end Macintosh(R)-based super
servers, commenced in February 1997. To date the Company has shipped six systems
and recognized initial product revenue in April 1997. The Company plans to
introduce in the fourth quarter of 1997 a Windows NT-based super server targeted
to meet the growing demand for Windows NT-based high performance
Internet/Intranet WEB servers and a super server system designed to support
multi-platform networks comprised of Macintosh, Windows NT and UNIX-based
workstations.
Electronic publishing, whether involving the preparation of high quality
color printed documents in print shops, service bureaus and internal corporate
publishing departments or interactive documents on the Internet/Intranet,
requires massive amounts of disk storage and the movement of large text and
image files over networks. The Company's technology has been designed to support
multi-platform environments and is specifically aimed at increasing the transfer
speed of large image and data files over networks. The Company believes that its
products are also well-suited for other markets that require rapid and efficient
movement of large image and data files over networks, such as medical imaging
and GIS.
The Company's super server products perform the file management functions
and high speed interconnects outside of the processor running the core operating
system. This unique approach produces significant improvements in file transfer
speeds and enables the server system to maintain compatibility with Apple and
Microsoft operating systems while running different application software. The
Company's servers have been designed to incorporate extensive scalable internal
storage of up to 100 gigabytes ("GBs") with Redundant Array of Independent Disks
("RAID") complemented by 96 GBs of automatic tape back-up and archiving
capabilities. In addition, the Company's server systems augment existing
networks with a fibre channel arbitrated loop, estimated by the Company to be up
to 20 times faster than conventional Ethernet networks. The Company believes
that users of its server systems can retrieve files over their networks two to
three times faster than from their hard drives. The Company also believes that
the multi-platform design and scalable storage capacity of its super server
systems will allow users to upgrade easily without expensive outlays for new
operating systems and hardware.
INITIAL TARGET MARKETS
ELECTRONIC PUBLISHING
Electronic publishing, whether involving the preparation of high quality
printed documents in print shops, service bureaus and internal corporate
publishing departments or interactive documents on the World Wide Web, requires
massive amounts of disk storage and the ability to transfer large amounts of
data quickly. Consequently, the electronic publishing market is continually
searching for solutions to improve network performance, central storage, and the
management and movement of large image files. Powerful centralized file servers
generally yield higher production efficiencies than networks that use
distributed files.
Color prepress is the publishing industry term for the graphic arts
processes required to design and prepare press film or plates for high quality
multi-color printing. Traditional color prepress operations involve large-format
cameras, masks, color filters, and special films and manual cutting, placement
and photo retouching performed by highly skilled technicians.
The publishing industry is rapidly changing due to the availability of new
technology ranging from fundamental changes in the printing process which enable
low volume print runs and fast turn-around, to the explosive growth of
electronic publishing driven by the Internet/Intranet and the World Wide
18
Web. The process in today's color prepress industry is almost entirely digital
and electronic, using color scanners, high-powered computer editing systems,
digital image processing, and computer-controlled output directly to paper, film
or a printing plate.
Modern digital color prepress operations involve multiple users manipulating
very large data files using specialized software running on powerful computing
systems. General purpose desktop and server technology available on the open
market cannot meet all of the user's needs. The Company's products specifically
address the industry need for high-volume, production-line data handling and
effective job process management. The Company's products, which combine
high-performance interconnect technology and a scalable server, have been
optimized for the production flow of large data files.
The Company's initial products are Macintosh-based high-end servers targeted
at the Macintosh user community. Apple currently dominates specialized markets
such as high-end publishing, graphic design, prepress production, video editing,
imaging and education. Users who have made significant investments in Apple
equipment need to gain the benefits of a client server model while preserving
file integrity, which is not currently provided by Apple. The Company believes
that Apple's introduction of UNIX-based file servers has provided a significant
market opportunity for the Company's Macintosh- based servers, which preserve
file integrity and do not require proficiency in UNIX. The Company believes that
its server products will provide solutions sought by the Macintosh user
community by eliminating bottlenecks of large file transfer and by centralizing
files and data. The Company believes that Macintosh-networked systems tend to
use distributed files because of inadequate end-to-end throughput and the users'
inability or reluctance to execute Macintosh applications using other operating
systems. The Company also believes that its server provides a true Macintosh
solution with a price-to-performance ratio equal to or better than UNIX-based
super servers.
INTERNET/INTRANET
The Internet evolved from a network developed in the 1970s by the U.S.
Advanced Research Projects Agency. For many years use of the Internet was
limited and, even when released from government control, it was initially slow
to come into widespread use due to its obscure and difficult-to-use user
interface that had evolved for the low bandwidth networks that were available to
early designers. The growth in the use and popularity of the Internet started
with the introduction of the World Wide Web. The WEB is a means of publishing
documents on the Internet in a fashion that makes them interactive and provides
a user interface needed for the network.
The use of the WEB both for Internet and Intranet access is growing at
phenomenal rates. The Company believes that this trend will continue into the
foreseeable future with the WEB becoming the dominant means of distributing
information both within companies and on wide area networks, including the
Internet. At the same time that the number of users of this technology is
exploding, the complexity of the information is increasing. The use of graphics,
video, audio, and imaging information within WEB pages is pushing the
requirements for bandwidth and disk storage for WEB servers to higher levels.
There are currently three platforms for Internet WEB servers: UNIX, Windows
NT and Macintosh. The current installed base is largely UNIX systems, but
Windows NT is rapidly increasing in popularity.
The Company's initial server will support the Macintosh WEB server software.
The Company believes that its product will be popular as a WEB server in market
segments in which Macintosh is popular. The Company believes that the great
majority of WEB servers installed in the foreseeable future however, whether
from Microsoft, Netscape or others, will most likely be Windows NT-based. The
introduction of the Company's Window NT-based WEB server is intended to coincide
with what the Company believes will be an extraordinary demand for very high
performance, scalable systems to meet the requirements of the market. The
Company believes that it will be well positioned with a unique solution that can
cost-effectively meet the demands of that market.
TECHNOLOGY
The Company's technology incorporates (i) end-to-end high-speed fiber
connectivity, (ii) a superior disk storage subsystem, (iii) centralized
input/output ("I/O") services for multiple processors and (iv) file management
software in a server product tuned to transfer large files over a network.
Independent
19
plug-in processors are key elements in the Company's servers, making it possible
to expand the capacity of each server to meet a wide range of needs. Support for
different processor types and operating system environments allows users to
choose among many application software packages. This modular hardware structure
supports incremental expansion and component technology upgrades, largely by
using standard products from major industry suppliers.
The Company's super servers include a high speed file system that appears to
the desktop applications as a local hard drive, but can provide shared access of
up to 100 GBs of data (expandable to more than a terabyte) complemented by 96
GBs of automatic tape back-up and archiving capabilities, and speeds two to
three times faster than a local hard drive. The Company's super servers move the
file management function and the high speed interconnects outside of the
processor running the core operating system. This unique approach produces
significant improvements in file transfer speeds and enables the server system
to maintain compatibility with Apple and Microsoft operating systems while
running different application software.
The Company's server includes a RAID controller driven by customized ASICs
chips that provide both high performance and reliability. The I/O devices and
disk storage can be partitioned among several plug-in processors, or
alternatively, specific devices can be reserved for control by any single
processor. Operating the disk array in RAID mode does not require any additional
software support in the client computers; it is handled transparently by the
file system control processor. Access to the server is provided by an operating
system device driver in each desktop machine. The user's local area network is
complemented with a one gigabit/second fibre channel arbitrated loop to provide
data transfers between the server and the desktop systems at speeds that
significantly exceed local disk transfer rates.
Each server contains (i) an embedded I/O control processor, (ii) a
hardware-assisted parallel disk array, (iii) two NuBus-90 backplanes for
application and network processors and (iv) a power supply, in a deskside
low-boy cabinet. The server supports up to 30 internal 3.5" disks in a parallel
array, two serial ports and a separate SCSI connected to the Macintosh console.
Each backplane supports up to six I/O control processors. The parallel disk
array can operate as five independent SCSI interfaces or in parallel RAID 3
configurations.
The Company's server systems include proprietary software and hardware
developed by the Company, hardware and software components manufactured by third
party vendors, proprietary software and hardware technology licensed from Radius
and proprietary software technology licensed from Polybus.
On September 27, 1995, the Company obtained a worldwide license from Radius
to use certain of Radius' technology in its products. The license is exclusive
except as to Radius, which has retained rights to its technology. Under the
agreement with Radius, the royalties payable by the Company initially are the
greater of $1,500 per unit or two percent of the purchase price per unit for the
first 200 units, declining in increments based on the number of units sold to
the greater of $750 per unit or one percent of the purchase price per unit after
1001 units are sold. Royalties will be paid until the cumulative total of
royalties paid equals $10,000,000 at which time the Company will have a royalty-
free license. If the Company fails to sell the minimum number of units required
to be sold pursuant to the agreement for two consecutive calendar quarters, the
technology may be licensed to other parties. In addition, the Company has
granted to Radius an irrevocable, perpetual, non-exclusive, worldwide,
royalty-free license to any modifications to the Radius technology made by the
Company.
The Company entered into a Development and License Agreement dated August 1,
1996 with Polybus pursuant to which the Company obtained an irrevocable,
perpetual, worldwide, nonexclusive (except as to publishing for which the
license is exclusive) license to a high speed file manager software package in
consideration for royalty payments. The royalties payable by the Company
pursuant to the Development and License Agreement are initially $800 per server
and $400 per workstation, declining in increments based upon the number of
systems sold to $50 per server and $25 per workstation until the first 100,000
systems are sold by the Company. No royalties are payable after the Company
sells 100,000 systems. The initial term of the Development and License Agreement
is 25 years and the agreement may be terminated sooner by Polybus only in the
event of a payment default by the Company. Upon termination of the Development
and License Agreement, Polybus may license the software to third parties in the
publishing market.
20
PRODUCTS
The Company's initial products, the AFX 410 and AFX 210, provide optimized
Macintosh client support via a fibre channel arbitrated loop. The fibre channel
interconnect is expected to deliver up to 10-20 MBytes/sec per client
workstation. This is two to three times the file transfer rate currently
available from a user's local hard drive and 20 times faster than local Ethernet
networks.
The server's file management system is designed to accelerate and
efficiently administer the movement of large image and text files over a
network. The server incorporates an extensive scalable internal storage system
(up to 100 GBs RAID sub-system) supporting on-line data equivalent to 150 CDs.
The base price of this Macintosh-based server is less than $80,000 and the
Company expects the average configuration to sell for approximately $130,000.
The server's architecture has multi-platform capabilities so as to not
become obsolete as new CPUs, operating systems and other emerging technologies
become popular. The initial focus on the Macintosh operating system and user
interface will provide familiarity and ease of use for color prepress shops,
while the server's independent plug in processor capability and parallel RAID
technology overcome the performance weaknesses in the Macintosh desktop systems.
In addition, the plug-in modular architecture of the system allows the user to
expand or upgrade easily, avoiding early platform obsolescence.
A third product, the AFX 410 NT, based on the architecture of the AFX 410
server, will be designed for the Internet/Intranet server market. The Company
plans to introduce the AFX 410 NT during 1997. This system will include Windows
NT running on multiple Pentium Pro processors. The Windows NT server is rapidly
becoming the platform of choice for WEB servers. The Company believes that there
will be two distinct advantages for using the Company's super server: it will
manage the sharing of files across the cluster of NT systems and its
architecture makes predictive WEB page caching possible.
PRODUCT FEATURES
The Company designs its server products to provide the following features:
<TABLE>
<CAPTION>
FEATURE BENEFIT
------- -------
<S> <C>
TrueWindows NT and Macintosh Super 100% compatibility with Apple and
Server-- The Company's server will use Microsoft, insuring compatibility with
Windows NT or Macintosh O/S as the the vast array of commercial third
user visible operating environment. party applications available for
Macintosh O/S and Windows NT.
Server to Workstation Solution--The Performance bottlenecks are addressed by
Company delivers end to end throughput a single vendor, and users are not
to the user desktop for maximum required to integrate their own
performance. systems.
HighSpeed--The Company's unique Reduces idle time waiting for downloads
architecture and high speed file and improves productivity. Even the
system allow its servers to deliver largest of files is available in
files to the desktop up to 20 times seconds. Large files can now be
faster than today's local networks and centralized without losing
two to three times faster than from performance.
local hard drive.
Scalability--Up to 100 GBs of storage Users may upgrade their systems as
capacity in a single box, and the required with minimal disruption to
ability to cascade boxes for operations.
additional capacity. Both processors
and disks may be added as required
without major system reconfigurations.
Integral Tape Backup System--The servers Easy and quick backup and archive
include an integral tape backup system capabilities of all or any portion of
(hardware and software) for file the central file system. No special
backup and archiving. setup or integration required on the
part of the user.
</TABLE>
SALES AND MARKETING
The Company plans to advertise its products in trade publications, to
participate in trade shows and conferences, to conduct direct mail campaigns and
to publish and disseminate product literature. The initial focus of these
activities will be the color prepress and Internet/Intranet markets. The
Company's
21
marketing department will be responsible for product planning, product
positioning, pricing, customer training and overall promotion of the Company's
products through industry press coverage, advertising exposure and participation
in industry trade shows.
The Company plans to employ a direct sales force that focuses on product
sales to end users in North America. The Company plans to establish four
regional sales offices in the United States. Because the success of the
Company's direct sales efforts will be dependent in part upon a sophisticated
analysis of a customer's networking requirements, the Company will complement
its direct sales force in North America with system engineers who have expertise
in hardware, software and networking solutions. In the future, as the Company
expands its marketing efforts in the publishing and Internet/Intranet markets,
the Company may utilize a multi-tiered distribution strategy including
distributors and VARs, system integrators and OEMs. The Company also plans to
sell its products to OEMs in both the medical imaging and GIS markets.
The Company plans to establish sales offices in Japan and in Europe and will
primarily focus its sales efforts in these areas on distributors, VARs and third
party integrators who can effectively evaluate and support a customer's
networking requirements.
The Company also plans to develop relationships with independent vendors who
will encourage their customers to purchase the Company's server systems in
conjunction with their products on the basis that overall systems performance
will be enhanced. This sales method will be especially beneficial to software
vendors promoting workflow management and database management who can leverage
the performance of the Company's server products as a complement to improving
overall workflow of information.
CUSTOMER SERVICE AND SUPPORT
The Company's corporate philosophy is based on a commitment to customer
satisfaction and product quality. The Company does not plan to recognize
revenues on system sales to end users until system performance has been accepted
by the customer based on measurement against pre-defined published
specifications.
The Company plans to provide customer training, installation and integration
support, and maintain systems sold directly to end users in North America
through an internal systems integration organization. Unlike other server
companies in the industry, the Company's customer support and systems
integration organization will support various equipment and software in the
customer sites and provide consulting and integration services on a wide
spectrum of equipment. The Company is currently building its direct support
organization and will complement its direct service and support organization
with nationwide and European third party service organizations as the business
expands.
Users that purchase the Company's products through indirect channels will be
serviced by the Company's direct support organization as well as by
distributors, VARs or OEMs. The Company plans to provide direct access to the
Company's service and support organization through a toll-free telephone
hotline. The Company plans to staff its technical support center 24 hours a day,
365 days a year, with highly trained and experienced technical support
engineers.
The Company plans to warrant all of its server products against defects in
material and workmanship for 90 days. During the warranty period, the Company
will repair or replace, within two days, any server component(s) which the
Company identifies as containing defects which do not prevent the continued use
of the server. For defects that do prevent the continued use of the server, the
Company will attempt to repair or replace the identified defective component
within 24 hours. The Company plans to offer service and maintenance contracts to
its customers.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations, located in Westford, Massachusetts,
consist of product assurance, quality control of materials, components and
subassemblies, final assembly and system test. The Company relies on numerous
high-quality ISO 9002 class vendors located in New England for the manufacture
of mechanical subsystems and printed circuit boards. This strategy minimizes
capital investment and overhead expenditures and provides the Company with the
ability to increase production to meet market demand. As volumes increase,
consideration will be given to outsourcing with low cost vendors in the midwest
and Pacific Rim countries.
22
Although the Company generally uses standard parts and components for its
products, a number of key components used in the Company's current products are
currently available or purchased from single source suppliers. These components
include disk drives, microprocessors and ASICs. The Company currently depends
upon Toshiba as its sole source supplier of customized ASICs. The Company has no
contract with Toshiba requiring Toshiba to supply the Company with ASICs. As a
precaution, the Company carries extra inventory of some of its single source
components, including the Toshiba ASICs, to provide additional time to develop
an alternate source or redesign the component, if necessary. The lack of
sufficient quantities of single source components, or the inability to develop
alternative sources for these items, could result in delays or reductions in
product shipments which would have a material adverse affect on the Company's
results of operations. The Company intends to design its future products to
minimize the need to rely on single source suppliers for key components.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by extensive research
and development and rapid technological advances in both hardware and software
development, resulting in frequent introductions of new products. The
introduction of products embodying new technology and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
Company believes that the speed of technological advancement in its industry
requires a significant investment in research and development in order to
maintain its competitive position. The Company will continue to invest
substantially in product development as it believes that its future success will
depend upon its ability to develop, manufacture and market new products and
enhancements to existing products on a cost-effective and timely basis. In the
fiscal year ended June 30, 1996 and the six months ended December 31, 1996, the
Company expended approximately $1,388,000 and $1,526,000, respectively for
research and development expenses.
COMPETITION
The Company faces substantial competition from the manufacturers of several
different types of products used as file servers. The Company expects
competition to intensify as more companies enter the market and compete for
market share. In addition, companies currently in the server market will
continue to change product offerings in order to capture further market share.
Many of these companies have substantially greater financial resources, research
and development staffs, manufacturing, marketing and distribution facilities
than the Company. The Company believes that an important competitive factor in
its market is network server performance measured in terms of overall system
throughput and expressed as a function of megabytes per second of data to client
desktop computers. However, equally important are other factors, including
product reliability, availability, scalability, upgradability, price, overall
cost of ownership and technical service and support. The Company's ability to
compete will depend, among other factors, upon its ability to anticipate
industry trends, invest in product research and development, and effectively
manage the introduction of new products into targeted markets.
The Company believes that there are no servers available today that provide
high-performance, high-capacity file service and a Macintosh-compatible
application environment. The Apple Workgroup Servers are aimed at a lower market
tier, with lower performance and limited expansion capability. Apple's "shiner"
series of servers provide higher performance than its workgroup servers,
however, the operating system used is UNIX based and requires specialized
training to operate.
Other servers in the prepress and video market fall into one of three
categories: (i) proprietary operating software systems, (ii) high-end personal
computer architecture systems or (iii) larger UNIX-based systems. "Server"
products offered by the traditional color prepress suppliers are most often
dedicated I/O device servers, rather than general purpose servers. For example,
the Scitex Whisper series of servers are an integral part of the proprietary
Scitex environment, with few and limited external client services. The Company
believes that its servers compare well on a price and features basis, and
outperform the proprietary operating software systems by a significant amount in
end to end throughput. More importantly, in the color prepress market, the
Company believes that its server is the only true Macintosh solution.
23
Specialized super servers provide some fault tolerance features and
"hot-swap" disk capability, along with some multiprocessor support. These
features lead to premium entry prices and high-priced expansion options. While
the systems are well suited to the typical NetWare environment (many users
needing occasional access to medium or small files), they are not optimized for
handling very large files and high-bandwidth networks. The Company's servers
have the distinct advantage of being able to handle very large files on high
bandwidth networks. The Company's current servers are also Macintosh-based,
provide superior input and output performance and allow a user to upgrade its
server without incurring significant expense for new operating systems or
hardware.
There is also a wide variety of mid-range and high-end servers provided by
SGI, Sun and Apple which use Unix-based operating systems. The Company believes
that its servers compete directly on entry price, price to performance and
scalability, while offering the preferred Macintosh or Windows NT (expected in
1997) environments and ease of use.
EMPLOYEES
As of April 30, 1997, the Company employed 46 full-time employees.
Approximately 20 of these employees are involved in research and development, 12
in sales and service, 2 in marketing, 8 in manufacturing and 4 in finance and
general administration. In addition, the Company has retained 12 independent
contractors on a consulting basis who support engineering and marketing
functions. To date, the Company believes it has been successful in attracting
and retaining skilled and motivated individuals. Competition for qualified
management and technical employees is intense in the computer industry. The
Company's success will depend in large part upon its ability to continue to
attract and retain qualified employees. The Company has never experienced a work
stoppage and its employees are not covered by a collectively bargaining
agreement. The Company believes that it has good relations with its employees.
FACILITIES
The Company has a three-year lease expiring in October 1998 for
approximately 19,400 square feet of space in Westford, Massachusetts, which
currently accommodates the Company's headquarters, development, production,
administrative, and financial functions. The monthly rent is $16,750. The
Company intends to lease an additional 9,000 square feet in the same facility.
The Company also has a lease expiring in August 2000 for a second facility
consisting of approximately 2,000 square feet of office space in San Diego,
California for a monthly base rent of approximately $2,300. The facility is
currently used for engineering support for development of Internet/Intranet
technology and products. The Company believes that its facilities are adequate
to meet its current business requirements and that suitable facilities for
expansion will be available, if necessary, to accommodate further physical
expansion of corporate operations and for additional sales and support offices,
at comparable rates.
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. In connection with the
lawsuit, one of the Company's bank accounts has been attached in the amount of
$50,000 pending the resolution of this matter.
24
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lorrin G. Gale 55 President, Chief Executive Officer
and Chairman of the Board
Duane A. Mayo 45 Chief Financial Officer, Treasurer,
Secretary and Director
Fred L. Chanowski 46 Director
Chappell Cory III 52 Director
Gregory M. Millar 40 Director
Stanley A. Young 69 Director
</TABLE>
LORRIN G. GALE co-founded the Company in May 1990. He has served as Chief
Executive Officer and Chairman of the Board since its inception and as President
since July 1994. In August 1981, he co-founded Massachusetts Computer Corp.,
serving as Vice President of Engineering from August 1981 through June 1986 and
as General Manager for end-user business from July 1986 through December 1987.
From January 1988 through May 1990, Mr. Gale was a private investor.
DUANE A. MAYO has served as Vice President of Finance and Administration
since March 1995 and as a director, Chief Financial Officer, Secretary and
Treasurer since May 1995. From April 1993 through February 1995, he served as
Chief Financial Officer for Xerographic Laser Images Corporation, a
publicly-held company involved in development of resolution enhancement
technology. From April 1988 to April 1993, Mr. Mayo was Corporate Controller for
Howtek, Inc., a publicly-held company and supplier of desktop scanners for the
color prepress marketplace.
FRED L. CHANOWSKI has served as a director of the Company since June 1996.
Mr. Chanowski is a Managing Member of Alpha Ventures LLC, a venture capital fund
he founded in 1996, and a partner in Venture Management Consultants, LLC, a
management consulting firm he founded in January 1997. From December 1988
through June 1996, Mr. Chanowski was a telecommunications and information
technology consultant. Mr. Chanowski was the President, Chief Executive Officer
and owner of Telecommunications Management Corp., a management consulting firm
specializing in the areas of telecommunications and information management
technology, from November 1975 until its sale to Computer Task Group in December
1988.
CHAPPELL CORY III co-founded the Company in May 1990 and has served as a
director since its inception and served as President until July 1994. Since July
1994, Mr. Cory has been the General Manager, CDA Division, of Analogic
Corporation, a publicly-held company and supplier of precision data acquisition,
conversion and signal processing equipment.
GREGORY M. MILLAR has served as a director of the Company since October
1995. Since January 1989, Mr. Millar has been Vice President of Engineering and
Chief Technology Officer of Radius, Inc., a publicly-held company that
manufactures Macintosh controller cards and accessories.
STANLEY A. YOUNG has served as a director of the Company since June 1995.
Mr. Young has been a consultant and venture capital investor for the past five
years and has been a principal of Young Management Group, Inc., a management
consulting firm, since its inception in March 1994. Mr. Young serves as a
director on the boards of the following publicly-held companies: Jetform
Corporation, Andyne Computer, Inc. and Cable-SAT Systems, Inc.
25
KEY EMPLOYEES
ROBERT S. ALFORD has served as Vice President of Engineering since July
1995. From January 1990 through June 1995, Mr. Alford was Vice President of AGE
Logic Inc., a supplier of X Server software for personal computers, X Terminals,
and embedded applications.
LAWRENCE D. BEAUPRE has served as Vice President of Manufacturing on a
part-time basis from March 1995 to July 1996 and on a full-time basis since
August 1996. He co-founded QuadTech, Inc., a manufacturer of precision
measurement and calibration instruments in March 1991, serving as its Vice
President of Operations and Chief Operating Officer from April 1991 through June
1995 and as a consultant from July 1995 to August 1996.
COMMITTEES
The Board of Directors has an audit committee comprised of Chappell Cory
III, Gregory Millar and Stanley Young and a compensation committee comprised of
Chappell Cory III, Gregory Millar, Stanley Young and Fred Chanowski. The Audit
Committee reviews the results and scope of the audit and other services provided
by the Company's independent accountants. The Compensation Committee makes all
compensation decisions regarding the compensation of executive officers and
administers the Stock Option Plan.
TERM OF OFFICE
All directors hold office until the next annual meeting of stockholders of
the Company and until their successors have been duly elected and qualified. The
executive officers are appointed annually by, and serve at the discretion of,
the Board of Directors.
DIRECTOR COMPENSATION
The Company's directors do not receive compensation for serving on the Board
of Directors, however, the Company reimburses directors for travel expenses
incurred to attend Board meetings.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year ended June 30, 1996, the
annual compensation, including salary, bonuses and certain other compensation,
paid by the Company to its Chief Executive Officer. None of the Company's
executive officers received cash compensation in excess of $100,000 in the
fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
- ------------------------------------------------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY RESTRICTED STOCK AWARD
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lorrin G. Gale 1996 $55,862 $3,173(1)
Chairman, President and Chief 1995 0 $1,877(2)
Executive Officer 1994 0 0
</TABLE>
- ----------
(1) In July 1995, the Company issued 151,735 shares of restricted Common Stock
valued at $.021 per share to Mr. Gale in consideration for services
rendered.
(2) In June 1995, as part of a recapitalization, the Company issued to Mr. Gale
89,747 shares of restricted Common Stock valued at $.021 per share in lieu
of payment of accrued compensation of $454,843 for the period commencing
June 1992 through March 1995 and in lieu of repayment of $55,000 of loans
payable to Mr. Gale, as well as in exchange for all shares of preferred
stock and common stock then held by Mr. Gale. See "Certain Transactions."
26
EMPLOYMENT CONTRACTS
Effective as of January 1, 1997, the Company entered into a two-year
employment agreement with Mr. Gale. Pursuant to such contract, Mr. Gale will be
paid a base salary of $125,000 and has been granted incentive stock options to
purchase up to 75,000 shares of Common Stock. Options to purchase 15,000 shares
of Common Stock vested upon the execution of the agreement and options to
purchase 30,000 shares of Common Stock vest on each of the first and second
anniversaries of the agreement. All options have an exercise price of $4.00 per
share. Pursuant to his employment agreement, Mr. Gale agrees not to compete with
the Company during the term of his employment and for one year thereafter.
STOCK OPTION PLAN
In July 1995, the Company adopted its 1995 Stock Option Plan (the "Stock
Option Plan") under which the Company may grant incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended
("Code"), and stock options not intended to qualify as incentive stock options.
Stock options may be granted under the Stock Option Plan to employees, officers,
directors, consultants and advisors of the Company. Options granted to
non-employee directors and consultants must be non-qualified stock options only.
The Stock Option Plan is administered by the Compensation Committee of the
Board of Directors or successor committee. Subject to the provisions of the
Stock Option Plan, the Compensation Committee (or the Board of Directors) has
the authority to determine (i) to whom options will be granted, (ii) the time
when options may be granted, (iii) the number of shares to be covered by each
option, (iv) when the option becomes exercisable, (v) the exercise price of the
option (which price, in the case of incentive stock options, shall not be less
than the fair market value of the Common Stock on the date of the grant, or in
the case of incentive stock options granted to employees who own, directly or
indirectly, more than 10% of the total combined voting power of all classes of
stock of the Company, 110% of the fair market value of the Common Stock on the
date of grant) and (vi) any restrictions on sale and repurchase rights which
shall be placed on shares purchased upon exercise of an option.
Incentive stock options may not be granted at a price less than the fair
market value of the shares at the grant date (or less than 110% of fair market
value in the case of employees or officers holding 10% or more of the voting
stock) while the nonqualified options may be granted at a price determined by
the Board of Directors except that, pursuant to the Company's agreement with the
Underwriters, no options will be granted at a price less than 85% of the fair
market value of the shares at the date of the grant. All grants as of June 30,
1996 were at fair market value or greater. The options generally vest 10% after
30 days from the date of grant and the balance ratably over a period of four
years. Incentive stock options granted under the plan expire not more than 10
years from the date of grant and not more than five years in the case of
incentive stock options granted to an employee or officer holding 10% or more of
the voting stock of the Company. All options not exercised at the end of the
vesting period automatically expire. The aggregate number of shares which may be
granted under this plan may not exceed 600,000 shares.
Payment of the option exercise price may be made in cash, shares of Common
Stock, a combination of cash and Common Stock or by any method approved by the
Board of Directors consistent with the purposes of the Stock Option Plan and
applicable rules and regulations, without limitation, Section 422 of the Code
and Rule 16b-3 under the Exchange Act. Options are not assignable or
transferable except by will or the laws of descent and distributions.
As of the date of this Prospectus, 42 employees held options to purchase
429,650 shares of Common Stock under the Stock Option Plan.
STOCK OPTION GRANTS
No stock options were granted to Lorrin G. Gale during the fiscal year ended
June 30, 1996, and at June 30, 1996, Mr. Gale did not own any stock options. As
of January 1, 1997, Mr. Gale was granted options to purchase 75,000 shares of
Common Stock. See "Management--Employment Contracts."
27
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the capital stock of the Company as of the date of this
Prospectus for (i) each person who is known by the Company to own beneficially
5% or more of the outstanding shares of its Common Stock; (ii) each of the
directors and executive officers of the Company; and (iii) all directors and
officers as a group. Unless otherwise indicated, the address for directors,
executive officers and 5% stockholders is 2 Robbins Road, Westford,
Massachusetts 01886.
<TABLE>
<CAPTION>
PERCENTAGE
----------
NUMBER OF SHARES BEFORE AFTER
DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS: BENEFICIALLY OWNED(1) OFFERING OFFERING
- -------------------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Lorrin G. Gale 261,206(2) 8.9% 5.5%
Duane A. Mayo 105,176 3.6% 2.2%
Fred L. Chanowski 162,398(3) 5.5% 3.4%
Chappell Cory III 39,100 1.3% *
Gregory M. Millar 11,952 * *
Stanley A. Young 180,362(4) 6.1% 3.8%
Hamburger Bank 657,354(5) 22.6% 13.9%
Alstertor 9
Hamburg 20095
Germany
M.M. Warburg & Co. 346,605(6) 11.9% 7.4%
Ferdinandstrasse 75
Hamburg 20095
Germany
All directors and executive officers as a group
(6 persons)(2)(3)(4) 760,194 25.3% 15.8%
</TABLE>
- ----------
* Less than 1%
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be beneficially owned and
outstanding for the purpose of computing the percentage ownership of any
other person shown in the table.
(2) Includes 15,000 shares of Common Stock issuable upon exercise of incentive
stock options.
(3) Includes 29,880 shares of Common Stock issuable upon exercise of warrants.
Also includes 77,540 shares of Common Stock and 11,952 shares of Common
Stock issuable upon exercise of warrants owned by Alpha Ventures LLC of
which Mr. Chanowski is a founder and Managing Member.
(4) Includes (i) 56,915 shares of Common Stock and 23,904 shares of Common
Stock issuable upon exercise of warrants held by the Stanley A. Young
Irrevocable Trust; (ii) 47,456 shares of Common Stock and 12,750 shares of
Common Stock issuable upon exercise of warrants held by the Stanley A.
Young Family Limited Partnership; and (iii) 9,107 shares of Common Stock
held by Mr. Young's wife, as to which Mr.
Young disclaims beneficial ownership.
(5) In June 1996 and July 1996, Hamburger Bank purchased 334,653 shares of
Common Stock and 322,701 shares of Common Stock, respectively, for $2.093
per share in a private placement. The Company has been advised that
Hamburger Bank has no affiliation with M.M. Warburg & Co. nor does it have
any relationship with any officers or directors of the Company.
(6) In June 1996 and July 1996, M.M. Warburg & Co. purchased 215,134 shares of
Common Stock and 131,471 shares of Common Stock, respectively, for $2.093
per share in a private placement. The Company has been advised that M.M.
Warburg & Co. has no affiliation with Hamburger Bank nor does it have any
relationship with any officers or directors of the Company.
28
CERTAIN TRANSACTIONS
In June 1995, as part of a recapitalization, the Company issued 89,747
shares of Common Stock valued at $.021 per share to Lorrin Gale in lieu of
payment of $454,843 of accrued compensation and $55,000 of loans payable, and in
exchange for 15,787 shares of preferred stock and 7,547 shares of common stock
held by Mr. Gale. Also as part of this recapitalization, the Company issued
39,100 shares of Common Stock valued at $.021 per share to Chappell Cory in lieu
of payment of $214,231 of accrued compensation and $7,255 of loans payable.
In July 1995, the Company issued 151,735 shares of Common Stock valued at
$.021 per share to Mr. Gale and 105,176 shares of Common Stock valued at $.021
per share to Duane Mayo for services rendered.
In July 1995, the Company entered into a consulting agreement with Young
Management Group, Inc. ("Young Management"), a company founded by Stanley A.
Young, who subsequently became a director of the Company in September 1995. In
consideration for consulting services, the Company agreed to pay consulting fees
of $7,000 per month, plus out-of-pocket expenses, of which $3,000 per month is
being deferred until completion of an initial public offering, and sold 179,279
shares of Common Stock at a price of $.021 per share to Young Management.
Consulting fees expensed in connection with this agreement during the fiscal
year ended June 30, 1996 were approximately $85,000, of which $56,000 was
accrued and unpaid at June 30, 1996. Consulting fees expensed in connection with
this agreement during the six months ended December 31, 1996 were $42,000 and an
aggregate of $67,250 was accrued and unpaid at December 31, 1996. In August
1996, Young Management transferred all of its shares of Common Stock to certain
affiliates of Young Management, including the Stanley A. Young Irrevocable Trust
and the Stanley A. Young Family Limited Partnership.
In May 1996, the Stanley A. Young Irrevocable Trust was issued a promissory
note in the principal amount of $100,000 (which was subsequently repaid) and
warrants to purchase 23,904 shares of Common Stock with an exercise price of
$1.507 per share in connection with a private placement, and in February 1997,
the Stanley A. Young Family Limited Partnership was issued in a private
placement, promissory notes in the aggregate principal amount of $50,000 and
warrants to purchase 12,750 shares of Common Stock at an exercise price equal to
either (i) $1.333 per share or, (ii) if the Company consummates an initial
public offering by a certain date, either one-half or three-fourths of the
offering price of a share of the Common Stock in the initial public offering. In
November 1995, Stanley A. Young Irrevocable Trust and Mr. Young's wife each
purchased 3,787 shares of Common Stock at a price of $1.507 per share and were
each issued a convertible promissory note in the amount of $19,297.50 in a
private placement. In November 1996, Stanley A. Young Irrevocable Trust
converted the principal balance and accrued interest on its note into 5,320
shares of Common Stock and Mr. Young's wife converted the principal balance and
accrued interest on her note into 5,320 shares of Common Stock.
In May 1996, the Company issued to Fred L. Chanowski, in consideration for
consulting services rendered, a warrant to purchase up to 23,904 shares of
Common Stock at an exercise price of $1.507 per share. Also in May 1996, the
Company issued to Mr. Chanowski, in consideration for a $25,000 loan, a
promissory note in the principal amount of $25,000 plus a warrant to purchase up
to 5,976 shares of Common Stock at $1.507 per share.
In October 1996, the Company issued to Mr. Chanowski 19,123 shares of Common
Stock in consideration for consulting services rendered. Mr. Chanowski also
purchased 23,904 shares of Common Stock for $50,000 in October 1996 in a private
placement. Mr. Chanowski paid the $50,000 purchase price by converting the
$25,000 promissory note issued to him in May 1996 and by investing an additional
$25,000 in cash. Mr. Chanowski is a 6.675% member in Alpha Ventures LLC which
holds 77,540 shares of the Company's Common Stock and warrants to purchase
11,952 shares of Common Stock. In April 1997, the Company issued to Venture
Management Consultants, LLC ("Venture Management"), of which Mr. Chanowski is a
20% member, a promissory note in the principal amount of $200,000 in
consideration for $200,000. The promissory note bears interest at 18% per annum
with interest and principal payable at maturity on May 31, 1998. In May 1997,
the Company also issued to Venture Management a promissory note in the principal
amount of $200,000 in consideration for $200,000. The promissory note bears
interest at 18% per annum with interest and principal payable at maturity on
June 30, 1998.
The Company has adopted a policy by resolution of the Board of Directors
whereby all future transactions between the Company and its officers, directors,
principal stockholders or affiliates will be approved by a committee of the
Board of Directors, a majority of the members of which shall be independent
directors, or, if required by law, a majority of disinterested directors, and
will be on terms no less favorable to the Company than could be obtained in
arm's length transactions from unaffiliated third parties.
29
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company is 32,000,000 shares, consisting
of 30,000,000 shares of Common Stock, $.01 par value per share, and 2,000,000
shares of Preferred Stock, $.01 par value per share. As of the date of this
Prospectus, there were 2,913,319 shares of Common Stock outstanding held by 96
shareholders. Upon the completion of this Offering there will be 4,713,319
shares of Common Stock outstanding. No shares of Preferred Stock are currently
outstanding.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted can elect all of the
directors then being elected. The holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining available for distribution to them after payment
of liabilities and after provision has been made for each class of stock, if
any, having preference over the Common Stock. Holders of shares of Common Stock,
as such, have no redemption, preemptive or other subscription rights, and there
are no conversion provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby, when issued and paid for as set forth in this Prospectus, will be, fully
paid and nonassessable.
PREFERRED STOCK
Preferred Stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by the Board of Directors, without further
action by stockholders, and may include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion and redemption rights and sinking fund provisions. No
Preferred Stock is currently outstanding and the Company has no present plans
for the issuance thereof. The issuance of any Preferred Stock could affect the
rights of the holders of Common Stock, and therefore, reduce the value of the
Common Stock and make it less likely that holders of Common Stock would receive
a premium for the sale of their shares of Common Stock. In particular, specific
rights granted to future holders of Preferred Stock could restrict the Company's
ability to merge with or sell its assets to a third party.
WARRANTS
Each Warrant entitles the registered holder thereof to purchase one share of
Common Stock at a price of $6.60 per share, at any time during the period
commencing one year from the date hereof and expiring on the fifth anniversary
of the date of this Prospectus.
Unless extended by the Company at its discretion, the Warrants will expire
at 5:00 p.m., New York time, on the fifth anniversary of the date of this
Prospectus. In the event a holder of Warrants fails to exercise the Warrants
prior to their expiration, the Warrants will expire and the holder thereof will
have no further rights with respect to the Warrants.
The Company may, with the prior written consent of the Underwriters, redeem
the outstanding Warrants, once they become exercisable, at a price of $.01 per
Warrant on not less than 30 days' prior written notice if the last sale price of
the Common Stock has been at least 150% of the then current exercise price of
the Warrants (initially $9.90) for the 20 consecutive trading days ending on the
third day prior to the date on which such notice is given. The Warrants will be
exercisable until the close of business on the date fixed for redemption. The
Warrants will be issued in registered form under a warrant agreement by and
among the Company and Continental Stock Transfer & Trust Company, as warrant
agent. Reference is made to said warrant agreement (which has been filed as an
exhibit to the registration statement of which this Prospectus is a part) for a
complete description of the terms and conditions of the Warrants contained
therein (the description herein contained being qualified in its entirety by
reference thereto).
30
The exercise price and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are subject to adjustment to protect
against dilution in the event of a stock dividend, stock split,
recapitalization, reorganization, merger or consolidation of the Company or
other similar event. No assurance can be given that the market price of the
Common Stock will exceed the exercise price of the Warrants at any time during
the exercise period.
No Warrant will be exercisable unless at the time of the exercise the
Company has filed with the Commission a current prospectus covering the shares
of Common Stock issuable upon exercise of such Warrant and such shares have been
registered or qualified to be exempt under the securities laws of the state of
residence of the holder of such Warrant. Although the Company has undertaken and
intends to have all shares so qualified for sale in those states where the
Securities are being offered and to maintain a current prospectus relating
thereto until the expiration of the Warrants, subject to the terms of the
Warrant Agreement, there can be no assurance that the Company will be able to do
so.
A holder of Warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to the exercise of the Warrants. The Company
is required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.
OTHER SECURITIES
The Company has two outstanding long term convertible promissory notes in
the aggregate principal amount of $62,248 held by two persons which bear
interest at 10% per annum and which are secured by all of the assets of the
Company. These long term convertible promissory notes plus accrued interest are
to be repaid: (i) one third upon the completion of this Offering; (ii) one third
on the first anniversary of the closing of this Offering; and (iii) one third on
the second anniversary of the closing of this Offering, unless converted prior
to such date. Simultaneously with the closing of this Offering, the holders of
the notes have the right to convert outstanding principal and accrued interest
into shares of Common Stock at a price equal to the price of the Common Stock in
this Offering. At any time following the closing of this Offering, any portion
of the principal and interest may be converted at a price equal to the price of
the Common Stock in this Offering plus $1.33 per share. However, if the price of
the Common Stock is at least $4.00 above the price of the Common Stock in this
Offering for a period of 10 consecutive trading days, the Company may convert
any remaining principal and accrued interest into shares of Common Stock at a
price equal to the price of the Common Stock in this Offering plus $1.33 per
share.
The Company has outstanding warrants held by 24 warrant holders to purchase
in the aggregate 291,574 shares of Common Stock at exercise prices ranging from
$1.507 per share to $4.00 per share, which expire between November 1999 and
December 2001. The Company also has outstanding warrants held by 43 warrant
holders to purchase an aggregate of 678,310 shares of Common Stock, 339,155 of
which have an exercise price of $2.75 per share and 339,155 of which have an
exercise price of $4.125 per share, and all of which expire in December 2000.
The exercise price and number of shares of Common Stock or other securities
issuable upon exercise of the warrants described herein are subject to
adjustments in the event of a stock dividend, stock split, recapitalization,
reorganization, merger or consolidation of the Company or other similar event.
In connection with certain private placement offerings of the Company's
securities, the Company has agreed to register, no later than 13 months after
the effective date of this Offering, 1,871,998 shares of issued and outstanding
Common Stock and approximately 13,600 shares of Common Stock issuable upon the
conversion of outstanding principal of and accrued interest on certain long term
convertible promissory notes. The Company has agreed to use its best efforts to
register 179,279 shares of Common Stock issued in connection with a consulting
agreement with Young Management and 47,807 shares issued in connection with the
exercise of a warrant as part of any registration of securities by the Company,
subject to the discretion of the managing underwriter, if any, to exclude such
shares from registration. In addition, the Company has agreed to register
warrants to purchase 678,310 shares of Common Stock and the 678,310 shares of
Common Stock underlying these warrants no later than 12 months and one day after
the date of this Prospectus. If the shares and warrants are not registered
within 12 months and one day after the date of this Prospectus, then the Company
shall use its best efforts to register these shares and warrants as part
31
of any other registration of securities by the Company until November 30, 2002.
The Company has also agreed to use its best efforts to register the shares
underlying warrants to purchase in the aggregate 269,608 shares of Common Stock
as part of any registration of securities by the Company, subject to the
discretion of the managing underwriter, if any, to exclude such shares from
registration. Finally, the Company has also agreed to register the shares
underlying warrants to purchase up to 21,966 shares of Common Stock issued to a
placement agent in connection with a private placement completed in May 1996 no
later than 13 months after the effective date of this Offering.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law ("DGCL"), the Company's
Certificate of Incorporation, as amended, limits the personal liability of a
director or officer to the Company for monetary damages for breach of fiduciary
duty of care as a director. Liability is not eliminated for (i) any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or stock purchases or
redemptions pursuant to Section 174 of the DGCL, or (iv) any transaction from
which the director derived an improper personal benefit.
The Company's Certificate of Incorporation provides that the Company will
indemnify directors and officers, and may indemnify its employees and other
agents, to the fullest extent permitted by law. Indemnified parties are covered
in all cases except where such indemnification is prohibited by law, or where
the conduct of the indemnified party (i) constitutes willful misconduct or
recklessness, or (ii) is based upon receipt by the indemnified representative
from the Company of a personal benefit to which the indemnified party is not
legally entitled. The Company may pay the expenses incurred in good faith by an
indemnified party, against an undertaking by the indemnified party to repay such
expenses if it is ultimately determined that the indemnified party is not
entitled to indemnification. The Company also maintains liability insurance for
its directors and officers. At present, there is no pending litigation or
proceeding involving any director, officer, employee or agent of the Company
where the Company anticipates indemnification will be required. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
DELAWARE LAW
The Company is subject to Section 203 of the DGCL which prevents an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a publicly held Delaware corporation for three years
following the date such person became an interested stockholder, unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (subject to certain exceptions); or (iii) following the transaction in
which such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of 66% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. A "business combination" includes mergers, stock or asset sales and
other transactions resulting in a financial benefit to the interested
stockholder.
The provisions of Section 203 of the DGCL could have the effect of delaying,
deferring or preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock and Warrants
is Continental Stock Transfer & Trust Company, New York, New York.
32
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 4,713,319 shares of
Common Stock outstanding, not including shares of Common Stock issuable upon
exercise of stock options, the Warrants, the Underwriters' Purchase Option and
other warrants and assuming no exercise of the over-allotment option granted to
the Underwriters or options outstanding under the Stock Option Plan. Of these
outstanding shares, the 1,800,000 shares sold to the public in this Offering may
be freely traded without restriction or further registration under the
Securities Act of 1933 ("Securities Act"), except that any shares that may be
held by an "affiliate" of the Company (as that term is defined in the rules and
regulations under the Securities Act) may be sold only pursuant to a
registration under the Securities Act or pursuant to an exemption from
registration under the Securities Act including the exemption provided by Rule
144 adopted under the Securities Act.
The 2,913,319 shares of Common Stock outstanding prior to the date of this
Prospectus are "restricted securities" as that term is defined in Rule 144 under
the Securities Act ("Restricted Shares"), and may not be sold unless such sale
is registered under the Securities Act, or is made pursuant to an exemption from
registration under the Securities Act, including the exemption provided by Rule
144. Of such shares, 4,847 are currently available for sale pursuant to Rule
144, 234,191 will be available for sale pursuant to Rule 144 on June 30, 1997,
597,594 will be available for sale pursuant to Rule 144 on July 15, 1997,
1,019,167 will be available for sale pursuant to Rule 144 commencing on or about
August 15, 1997, 1,009,713 will become available for sale pursuant to Rule 144
commencing August 21, 1997 through December 1997 and 47,807 will be available
for sale pursuant to Rule 144 commencing on March 7, 1998.
All of the officers and directors of the Company and all other holders of 2%
or more of the Company's Common Stock or warrants or options to purchase, or
other securities convertible into, 2% or more of the Company's Common Stock
immediately prior to this Offering have agreed that for a period of 13 months
from the date of this Prospectus they will not sell any of their shares without
the consent of GKN Securities Corp. ("GKN"). In addition, all purchasers of
shares of the Company's Common Stock in a private placement from June 1996 to
October 1996 and certain shareholders who coverted promissory notes into shares
of Common Stock from August 1996 to October 1996 have agreed that for a period
of 12 months from the date of this Prospectus they will not sell any of these
shares without the consent of GKN. Therefore, of the 234,191 shares available
for sale pursuant to Rule 144 on June 30, 1997, 128,847 shares cannot be sold
without the consent of GKN for a period of 13 months from the date of this
Prospectus. Of the 597,594 shares available for sale pursuant to Rule 144 on
July 15, 1997, 400,333 shares cannot be sold without the consent of GKN for a
period of 13 months from the date of this Prospectus. Of the 1,019,167 shares
available for sale pursuant to Rule 144 commencing on or about August 15, 1997,
850,597 shares and 131,471 shares cannot be sold without the consent of GKN for
a period of 13 months and 12 months, respectively from the date of this
Prospectus, of the 1,009,713 shares available for sale pursuant to Rule 144
commencing August 21, 1997 through December 1997, 649,735 shares and 155,376
shares cannot be sold without the consent of GKN for a period of 13 months and
12 months, respectively, from the date of this Prospectus and of the 47,807
shares available for sale pursuant to Rule 144 commencing March 7, 1998, all
47,807 shares cannot be sold without the consent of GKN for a period of 13
months from the date of this Prospectus. None of the 4,847 shares currently
available for sale pursuant to Rule 144 will require the consent of GKN to be
sold since none of these shares are held by the Company's officers or directors
or other holders of 2% or more of the Company's Common Stock or warrants or
options to purchase, or other securities convertible into, 2% or more of the
Company's Common Stock immediately prior to this Offering.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned any
Restricted Shares for at least one year (including a stockholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of such sale is given to the Commission, provided certain
public information, manner of sale and notice requirements are satisfied. A
stockholder who is deemed to be an affiliate of the Company, including members
of the Board of Directors and senior management of the Company, will still need
to comply with the restrictions and requirements of Rule 144, other than the one
year
33
holding period requirement, in order to sell shares of Common Stock that are not
Restricted Securities, unless such sale is registered under the Securities Act.
A stockholder (or stockholders whose shares are aggregated) who is deemed not to
have been an affiliate of the Company at any time during the three month period
preceding a sale by such stockholder, and who has beneficially owned Restricted
Shares for at least two years, will be entitled to sell such shares under Rule
144 without regard to the volume limitations described above.
In addition, any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory
benefit plan or contract may be entitled to rely on the resale provisions of
Rule 701 under the Securities Act ("Rule 701"). Rule 701 permits affiliates to
sell their shares which are subject to Rule 701 under Rule 144 without complying
with the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell Rule 701 shares in reliance on Rule 144 without having
to comply with the public information, volume limitation or notice provisions of
Rule 144. In both cases, a holder of Rule 701 shares is required to wait until
90 days after the date of this Prospectus. There are currently outstanding
options to purchase 429,650 shares of the Company's Common Stock under the
Company's Stock Option Plan. The shares issued upon exercise of these options
may be sold pursuant to the provisions of Rule 701.
No predictions can be made of the effect, if any, that future sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market could adversely affect the then- prevailing
market price.
In connection with certain private placement offerings of the Company's
securities, the Company has agreed to register, no later than 13 months after
the effective date of this Offering, 1,871,998 shares of issued and outstanding
Common Stock and approximately 13,600 shares of Common Stock issuable upon the
conversion of outstanding principal of and accrued interest on certain long term
convertible promissory notes. In connection with a consulting agreement with
Young Management, the Company has agreed to use its best efforts to register
179,279 shares of issued and outstanding Common Stock as part of any
registration of securities by the Company, subject to the discretion of the
managing underwriter, if any, to exclude such shares from registration. In
addition, the Company has agreed to register warrants to purchase 678,310 shares
of Common Stock and the 678,310 shares of Common Stock underlying these warrants
no later than 12 months and one day after the date of this Prospectus. If the
shares and warrants are not registered within 12 months and one day after the
date of this Prospectus, then the Company shall use its best efforts to register
these shares and warrants as part of any other registration of securities by the
Company until November 30, 2002. The Company has also agreed to use its best
efforts to register the shares underlying warrants to purchase in the aggregate
269,608 shares of Common Stock as part of any registration of securities by the
Company, subject to the discretion of the managing underwriter, if any, to
exclude such shares from registration. Finally, the Company has also agreed to
register the shares underlying warrants to purchase up to 21,966 shares of
Common Stock issued to a placement agent in connection with a private placement
completed in May 1996 no later than 13 months after the effective date of this
Offering.
34
UNDERWRITING
GKN Securities Corp. and Laidlaw Equities, Inc. ("Laidlaw" and, together
with GKN, the "Underwriters") have agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase on a firm commitment basis from the
Company a total of 1,800,000 shares of Common Stock and 1,800,000 Warrants. GKN
has agreed to purchase 1,170,000 shares of Common Stock and Warrants and Laidlaw
has agreed to purchase 630,000 shares of Common Stock and Warrants.
The obligations of the Underwriters under the Underwriting Agreement are
subject to approval of certain legal matters by counsel and various other
conditions precedent, and the Underwriters are obligated to purchase all of the
shares of Common Stock and Warrants offered by this Prospectus (other than the
shares of Common Stock and Warrants covered by the over-allotment option
described below), if any are purchased.
The Underwriters have advised the Company that they propose to offer the
Securities to the public at the initial public offering prices set forth on the
cover page of this Prospectus and to certain dealers at that price less a
concession not in excess of $0.25 per share of Common Stock and $0.00675 per
Warrant. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $0.10 per share of Common Stock and $0.002725 per Warrant to
certain other dealers. After this Offering, the offering price and other selling
terms may be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriters an expense allowance on a nonaccountable
basis equal to 3% of the gross proceeds derived from the sale of the Securities
offered by this Prospectus (including the sale of any Securities subject to the
Underwriters' over-allotment option), $60,000 of which has been paid to date.
The Company also has agreed to pay all expenses in connection with qualifying
the Securities offered hereby for sale under the laws of such states as the
Underwriters may designate and registering this Offering with the National
Association of Securities Dealers, Inc., including fees and expenses of counsel
retained for such purposes by the Underwriters.
The Company has granted to the Underwriters an option, exercisable within 45
business days from the date of this Prospectus, to purchase at the offering
price, less underwriting discounts and the nonaccountable expense allowance, up
to an aggregate of 270,000 additional shares of Common Stock and/or 270,000
additional Warrants for the sole purpose of covering over-allotments, if any.
The Company has engaged the Underwriters on a non-exclusive basis as its
agents for the solicitation of the exercise of the Warrants. To the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Commission, the Company has agreed to pay the Underwriters for bona fide
services rendered a commission equal to 5% of the exercise price for each
Warrant exercised after one year from the date of this Prospectus if the
exercise was solicited by the Underwriters. In addition to soliciting, either
orally or in writing, the exercise of the Warrants, such services may also
include disseminating information, either orally or in writing, to
warrantholders about the Company or the market for the Company's securities, and
assisting in the processing of the exercise of Warrants. No compensation will be
paid to the Underwriters in connection with the exercise of the Warrants if the
market price of the underlying shares of Common Stock is lower than the exercise
price, the Warrants are held in a discretionary account, the Warrants are
exercised in an unsolicited transaction, the warrantholder has not confirmed in
writing that the Underwriters solicited such exercise or the arrangement to pay
the commission is not disclosed in the prospectus provided to warrantholders at
the time of exercise. In addition, unless granted an exemption by the Commission
from Regulation M under the Exchange Act, while soliciting exercise of the
Warrants, the Underwriters will be prohibited from engaging in any market-making
activities or solicited brokerage activities with regard to the Company's
securities unless the Underwriters have waived their right to receive a fee for
the exercise of the Warrants.
In connection with this Offering, the Company has agreed to sell to the
Underwriters for an aggregate of $100, the Underwriters' Purchase Option,
consisting of the right to purchase up to an aggregate of 180,000 shares of
Common Stock and/or 180,000 Warrants. The Underwriters' Purchase Option is
exercisable initially at a price of $9.075 per share and $0.2475 per Warrant for
a period of four years commencing one year from the date hereof. The
Underwriters' Purchase Option may not be transferred, sold, assigned or
hypothecated
35
during the one year period following the date of this Prospectus except to
officers of the Underwriters and the selected dealers and their officers or
partners. The Underwriters' Purchase Option grants to the holders thereof
certain "piggyback" and demand rights for periods of seven and five years,
respectively, from the date of this Prospectus with respect to the registration
under the Securities Act of the securities directly and indirectly issuable upon
exercise of the Underwriters' Purchase Option.
Pursuant to the Underwriting Agreement, all of the officers, directors and
all other stockholders owning 2% or more of the Company's Common Stock
immediately prior to this Offering (who hold in the aggregate 1,977,377
outstanding shares of Common Stock) have agreed not to sell any of their shares
of Common Stock until 13 months from the date of this Prospectus without the
consent of GKN. In addition, the Underwriting Agreement provides that, for a
period of three years from the date of this Prospectus, GKN will have the right
to send a representative to observe each meeting of the Board of Directors. GKN
has not yet selected such representative. GKN has also been granted a
preferential right for a period of 18 months from the date of this Prospectus to
purchase or to sell for the account of any of the Company's officers, directors
or stockholders owning 5% or more of the Company's outstanding Common Stock any
securities to be sold pursuant to Rule 144 adopted under the Securities Act.
These sellers must consult with GKN regarding any such offering and offer GKN
the opportunity to purchase or sell any such securities.
Prior to this Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering prices of the Securities and the
terms of the Warrants have been determined by negotiation between the Company
and the Underwriters and do not bear any relation to established valuation
criteria. Factors considered in determining such prices and terms, in addition
to prevailing market conditions, included an assessment of the prospect for the
industry in which the Company will compete, the Company's management and the
Company's capital structure.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate short covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act. Over-allotment involves sales by the
underwriting syndicate in excess of the offering size, which creates a syndicate
short position. Stabilizing transactions permit bids to purchase the Securities
so long as the stabilizing bids do not exceed a specified maximum. Syndicate
short covering transactions involve purchases of the Securities in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a selling group member when the Securities originally sold by
such selling group member are repurchased in the open market by the
Underwriters. Such stabilizing transactions, syndicate short covering
transactions and penalty bids may cause the prices of the Securities to be
higher than they would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq SmallCap Market or otherwise and, if
commenced, may be discontinued at any time.
From December 1996 to February 1997, the Underwriters acted as placement
agents in connection with the private placement of units consisting of
promissory notes with an aggregate face value of $3,375,000 and warrants to
purchase an aggregate of 914,188 shares of Common Stock (of which warrants to
purchase 235,878 shares of Common Stock were subsequently cancelled), and were
paid commissions of approximately $337,500 (10%) and a nonaccountable expense
allowance of $101,250 (3%).
LEGAL MATTERS
The validity of the securities hereby offered will be passed upon for the
Company by Warner & Stackpole LLP, Boston, Massachusetts. Graubard Mollen &
Miller, New York, New York, has served as counsel to the Underwriters in
connection with this Offering.
EXPERTS
The financial statements of the Company in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report (which contains an explanatory paragraph regarding the Company's
ability to continue as a going concern) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of said firm as experts in auditing and accounting.
36
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form SB-2, including
amendments thereto, relating to the Securities offered hereby with the
Commission. This Prospectus, which constitutes part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the
securities offered hereby, reference is made to such Registration Statement and
the exhibits thereto. Following the effectiveness of the Registration Statement,
the Company will be subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith the Company will
file periodic reports, proxy statements and other information with the
Commission. The Registration Statement, reports, proxy statements and other
information filed in accordance with the requirements of the Exchange Act may be
inspected without charge at the public reference facilities of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, New York,
New York, 10048; and Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511. Copies of such material may be obtained from the Public
Reference Section of the Commission upon the payment of certain fees prescribed
by the Commission. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
auditors after the end of each year, commencing with the fiscal year ending
December 31, 1997, and will make available such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
37
AUGMENT SYSTEMS, INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants F-2
Financial Statements:
Balance sheets as of June 30, 1995 and 1996 and December 31, 1996 F-3
Statements of operations for the years ended June 30, 1995 and 1996, the
cumulative period from October 1, 1995 to December 31, 1996 and the six
months ended December 31, 1995 and 1996 F-4
Statements of stockholders' deficit for the years ended June 30, 1995 and
1996 and the six months ended December 31, 1996 F-5
Statements of cash flows for the years ended June 30, 1995 and 1996, the
cumulative period from October 1, 1995 to December 31, 1996 and the six
months ended December 31, 1995 and 1996 F-6
Notes to financial statements F-7 to F-18
</TABLE>
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors
Augment Systems, Inc.
Westford, Massachusetts
We have audited the accompanying balance sheets of Augment Systems, Inc. (a
Development Stage Enterprise) as of June 30, 1995 and 1996 and December 31, 1996
and the related statements of operations, stockholders' deficit, and cash flows
for the years ended June 30, 1995 and 1996 and the six months ended December 31,
1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide 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 Augment Systems, Inc. (a
Development Stage Enterprise) at June 30, 1995 and 1996 and December 31, 1996,
and the results of its operations and its cash flows for the years ended June
30, 1995 and 1996 and the six months ended December 31, 1996 in conformity with
generally accepted accounting principles.
The Company is in the development stage, and as such, success of future
operations is subject to a number of risks. The Company has incurred substantial
losses since inception and there is a substantial doubt about the Company's
ability to continue as a going concern. The Company's ability to continue as a
going concern is dependent upon the anticipated net proceeds from a proposed
initial public offering or obtaining financing by alternative means. These
matters are further discussed in Note 1. The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
BDO SEIDMAN, LLP
Boston, Massachusetts
February 20, 1997, except for
Note 15 which is as
of May 8, 1997
F-2
AUGMENT SYSTEMS, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------- DECEMBER 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash (Note 2) $ 2,348 $ 889,898 $ 452,753
Inventories (Note 2) -- 47,642 589,351
Prepaid expenses (Note 9) -- 107,300 97,500
----------- ----------- -----------
Total current assets 2,348 1,044,840 1,139,604
Property and equipment, net (Notes 2, 3 and 9) 18,033 205,688 348,889
Other assets, net (Note 2) -- 147,874 190,560
----------- ----------- -----------
Total assets $ 20,381 $ 1,398,402 $ 1,679,053
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Demand notes payable (Note 4) $ 105,218 $ -- $ --
Accounts payable 63,930 186,434 601,274
Accrued expenses (Note 5) 39,456 338,052 196,104
Due to stockholder (Note 10) 5,400 18,900 --
Short term promissory notes (Note 6) -- -- 1,051,248
Short term advance (Note 7) -- -- 575,000
Convertible promissory notes (Note 8) -- 425,000 --
Current portion of obligations under capital leases (Notes 3 and 9) -- 13,400 19,013
----------- ----------- -----------
Total current liabilities 214,004 981,786 2,442,639
Convertible promissory notes (Note 8) -- 864,276 62,248
Obligations under capital leases, less current portion (Notes 3 and 9) -- 19,244 27,530
----------- ----------- -----------
Total liabilities 214,004 1,865,306 2,532,417
----------- ----------- -----------
Commitments (Note 9)
Stockholders' deficit (Notes 4, 6, 8, 10, 12, 13 and 15):
Preferred stock, $.01 par value; 2,000,000 shares authorized; none
issued -- -- --
Common stock, $.01 par value; 30,000,000 shares authorized; 239,038,
1,700,425 and 2,865,512 shares issued and outstanding 2,390 17,004 28,655
Additional paid-in capital 2,135,251 3,359,020 6,177,194
Deficit (2,331,264) (3,842,928) (7,059,213)
----------- ----------- -----------
Total stockholders deficit (193,623) (466,904) (853,364)
----------- ----------- -----------
Total liabilities and stockholders' deficit $ 20,381 $ 1,398,402 $ 1,679,053
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------- -------------------- CUMULATIVE
PERIOD FROM
OCTOBER 1, 1995 TO
1995 1996 1995 1996 DECEMBER 31, 1996
---- ---- ---- ---- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development expenses (Note 2) $ -- $ 1,388,149 $ 155,575 $ 1,526,384 $ 2,914,533
General and administrative expenses 39,273 90,274 387,150 1,083,267 1,132,878
Selling and marketing expenses -- -- 9,500 490,735 490,735
---------- ------------ ---------- ------------ -----------
Total operating expenses 39,273 1,478,423 552,225 3,100,386 4,538,146
Operating loss (39,273) (1,478,423) (552,225) (3,100,386) (4,538,146)
---------- ------------ ---------- ------------ -----------
Other income (expense):
Other income, net -- 25,284 25,284 -- 25,284
Interest expense (Note 6) -- (51,343) -- (115,899) (167,242)
---------- ------------ ---------- ------------ -----------
Total other income (expense), net -- (26,059) 25,284 (115,899) (141,958)
---------- ------------ ---------- ------------ -----------
Loss from continuing operations (39,273) (1,504,482) (526,941) (3,216,285) (4,680,104)
Discontinued operations (Note 1): ---------- ------------ ---------- ------------ -----------
Loss from operations (361,582) (7,182) (7,182) -- --
---------- ------------ ---------- ------------ -----------
Loss from discontinued operations (361,582) (7,182) (7,182) -- --
---------- ------------ ---------- ------------ -----------
Net loss (Notes 2 and 11) $ (400,855) $(1,511,664) $ (534,123) $ (3,216,285) $(4,680,104)
========== =========== ========== ============ ===========
Loss per share of common stock (Note 2):
Loss from continuing operations $ (.02) $ (.51) $ (.19) $ (.93) $ (1.47)
Loss from discontinued operations (.17) -- -- -- --
---------- ----------- ---------- ------------ -----------
Net loss per share of common stock $ (.19) $ (.51) $ (.19) $ (.93) $ (1.47)
---------- ----------- ---------- ------------ -----------
Weighted average number of shares of common
stock and common stock equivalents
outstanding 2,170,878 2,950,492 2,862,246 3,452,740 3,190,648
========== =========== ========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-4
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
(NOTES 4, 6, 8, 12 AND 13)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
---------------- --------------- ADDITIONAL ----------------- TOTAL
PAID-IN STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT DEFICIT
------ ------ ------ ------ ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 426,257 $ 4,263 226,713 $ 2,267 $ 778,986 $(1,930,409) -- $ -- $(1,144,893)
Issuance of Common Stock in
exchange for certain
liabilities and all
outstanding preferred stock
and common stock (426,257) (4,263) 12,325 123 1,356,265 -- -- -- 1,352,125
Net loss -- -- -- -- -- (400,855) -- -- (400,855)
-------- ------- -------- ------ --------- ----------- -------- ------ -----------
Balance, June 30, 1995 -- -- 239,038 2,390 2,135,251 (2,331,264) -- -- (193,623)
Issuance of common stock to new
management -- -- 525,883 5,259 5,741 -- -- -- 11,000
Issuance of common stock in
exchange of consulting
services -- -- 193,554 1,936 6,314 -- -- -- 8,250
Issuance of common stock in
exchange of inventories -- -- 22,565 226 33,772 -- -- -- 33,998
Issuance of common stock in
exchange of back rent -- -- 3,346 33 5,008 -- -- -- 5,041
Purchase of treasury stock -- -- -- -- -- -- (3,346) (7,000) (7,000)
Conversion of demand
promissory notes and accrued
interest into common stock -- -- 21,912 219 32,781 -- -- -- 33,000
Issuance of common stock in
connection with private
placements -- -- 697,473 6,975 1,147,119 -- -- -- 1,154,094
Retirement of treasury stock -- -- (3,346) (34) (6,966) -- 3,346 7,000 --
Net loss -- -- -- -- -- (1,511,664) -- -- (1,511,664)
-------- ------- -------- ------ --------- ----------- -------- ------ -----------
Balance, June 30, 1996 -- -- 1,700,425 17,004 3,359,020 (3,842,928) -- -- (466,904)
Issuance of common stock in
connection with private
placements -- -- 609,546 6,095 1,103,155 -- -- -- 1,109,250
Conversion of convertible
promissory notes into common
stock -- -- 107,567 1,076 223,924 -- -- -- 225,000
Issuance of common stock to
employees -- -- 7,172 72 14,940 -- -- -- 15,012
Issuance of common stock in
exchange of consulting
services -- -- 47,490 475 98,937 -- -- -- 99,412
Issuance of common stock in
connection with private
placements -- -- 239,037 2,390 432,610 -- -- -- 435,000
Conversion of convertible
promissory notes and accrued
interest into common stock -- -- 218,374 2,184 737,353 -- -- -- 739,537
Conversion of debt to existing
stockholder into common stock -- -- 4,725 47 18,853 -- -- -- 18,900
Issuance of common stock in
exchange of consulting
services -- -- 2,888 29 11,521 -- -- -- 11,550
Purchase of treasury stock -- -- -- -- -- -- (71,712) (956) (956)
Retirement of treasury stock -- -- (71,712) (717) (239) -- 71,712 956 --
Issuance of warrants
associated with short term
promissory notes -- -- -- -- 177,120 -- -- -- 177,120
Net loss -- -- -- -- -- (3,216,285) -- -- (3,216,285)
-------- ------- -------- ------ --------- ----------- -------- ------ -----------
Balance, December 31, 1996 -- $ -- 2,865,512 $28,655 $6,177,194 $(7,059,213) -- $ -- $(853,364)
======== ======= ========== ======= ========= =========== ======== ====== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(NOTE 14)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
-------------------- ----------------------- CUMULATIVE
PERIOD FROM
OCTOBER 1, 1995 TO
1995 1996 1995 1996 DECEMBER 31, 1996
---- ---- ---- ---- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(400,855) $(1,511,664) $(534,123) $(3,216,285) $(4,680,104)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 25,473 56,539 1,456 119,798 173,203
Compensation paid in common stock -- 19,250 19,250 125,974 130,474
Changes in operating assets and liabilities:
Inventories -- (13,644) (6,822) (541,709) (555,353)
Prepaid expenses -- (107,300) -- 9,800 (97,500)
Other assets -- (11,079) (9,145) 150 (10,929)
Accounts payable (20,860) 152,829 78,036 414,840 568,340
Accrued expenses 390,359 312,768 96,626 (70,460) 227,264
------- ------- ------ ------- -------
Net cash used for operating activities (5,883) (1,102,301) (354,722) (3,157,892) (4,244,605)
------- ------- ------ ------- -------
Cash flows from investing activities:
Purchase of property and equipment (4,664) (182,463) -- (179,359) (361,822)
------- ------- ------ ------- -------
Net cash used for investing activities (4,664) (182,463) -- (179,359) (361,822)
------- ------- ------ ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 1,154,094 99,232 1,544,250 2,698,344
Proceeds from issuance of convertible promissory
notes -- 1,177,602 385,940 -- 1,177,602
Proceeds from noninterest bearing loans from
stockholder 5,400 13,500 10,108 -- 13,500
Proceeds from issuance of short-term promissory notes -- 100,000 150,000 1,011,560 1,011,560
Proceeds from short-term advance -- -- -- 575,000 575,000
Proceeds from issuance of warrants associated with
short-term promissory notes -- -- -- 177,120 177,120
Payments on capital lease obligations -- (739) (8,317) (9,056)
Payments on convertible promissory notes -- -- -- (200,000) (200,000)
Payments on promissory notes -- (100,000) -- -- (100,000)
Purchase of treasury stock -- (7,000) -- (956) (7,956)
Deferred financing costs -- (165,143) (50,172) (108,680) (273,823)
Deferred registration costs -- -- -- (89,871) (89,871)
------- ------- ------ ------- -------
Net cash provided by financing activities 5,400 2,172,314 595,108 2,900,106 4,972,420
------- ------- ------ ------- -------
Net increase (decrease) in cash (5,147) 887,550 240,386 (437,145) 365,993
Cash, beginning of period 7,495 2,348 2,348 889,898 86,760
------- ------- ------ ------- -------
Cash, end of period $ 2,348 $ 889,898 $ 242,734 $ 452,753 $ 452,753
========= =========== ========= =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
1. ORGANIZATION, BUSINESS AND PROPOSED INITIAL PUBLIC OFFERING
Augment Systems, Inc., formerly Augment Systems Incorporated (the
"Company"), a development stage company, designs, develops and sells high-end
super server products designed to move large image and text files rapidly and
efficiently over computer networks. The Company's initial target markets are the
electronic publishing industry and the Internet/Intranet market. The Company
expects to commence sales of its initial products, high-end Macintosh-based
super servers in April 1997. The Company plans to introduce in 1997 a Windows
NT-based super server targeted to meet the growing demand for Windows NT-based
high performance Internet/Intranet World Wide Web servers and a super server
system designed to support multi-platform networks comprised of Macintosh,
Windows NT and UNIX-based workstations.
The Company was incorporated in 1990 to develop and distribute fiber optic
printed circuit boards in the publishing and printing markets. The fiber optic
products had limited success and in fiscal 1994 the Company began phasing out
the fiber optic operations and began the transition into a systems integration
and engineering consulting business. In 1995 the Company made a strategic shift
in its business operation into the server market. Accordingly, operations have
been accounted for as discontinued for the periods through September 30, 1995.
Since October 1995, the Company has been engaged principally in research and
development, recruitment of personnel and financing activities. The Company has
engaged in limited marketing activities and has not generated any revenues and
does not expect to generate revenues until April 1997. The Company is considered
to be in the development stage, and as such, success of future operations is
subject to a number of risks similar to those of other companies in the same
stage of development. Principal among these risks are the risk that the
Company's products will not be accepted in the marketplace; the risk that the
Company will not be successful in developing future products; the risk of rapid
technological changes in the server industry; the Company's limited operating
history, history of losses and accumulated deficit; the Company's need for
additional capital; and the highly competitive nature of the server industry.
The Company has incurred substantial losses since inception and has been
engaged primarily in product development. The Company has funded these losses
through the private placement of convertible promissory notes and common stock
aggregating approximately $5,300,000 during the year ended December 31, 1996.
There is substantial doubt about the Company's ability to continue as a going
concern. The Company is dependent upon the anticipated net proceeds from a
proposed initial public offering or obtaining financing by alternative means.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
In October 1996 the Company changed its fiscal year-end from June 30 to
December 31.
Estimates and Assumptions
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 of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. There were no cash
equivalents at June 30, 1995 and 1996, and December 31, 1996.
F-7
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from three to five years. Property held under capital lease are being
amortized over the lesser of the lease term or their estimated useful lives.
Other Assets
Other assets included deferred financing costs of $108,680 net of
accumulated amortization of $21,736 at December 31, 1996, related to the Short
Term Promissory Notes discussed in Note 6. These costs are being amortized over
5 months, which is the estimated time between the debt issuance and the proposed
initial public offering.
As of December 31, 1996, the Company has incurred registration costs of
$89,871 in connection with the proposed public offering. These costs have been
deferred and upon consummation of the proposed public offering, will be charged
against the equity raised or expensed if the public offering is not successful.
Research and Development
Research and development costs are expensed as incurred.
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise
Marketed," the Company will capitalize software development costs incurred after
technological feasibility of the software development projects is established
and the realizability of such capitalized costs through future operations is
expected if such costs become material. To date, all of the Company's costs for
research and development of software have been charged to operations as
incurred, as the amount of software development costs incurred subsequent to the
establishment of technological feasibility has been immaterial.
Income Taxes
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
Financial Instruments
The estimated fair value of the Company's financial instruments, which
include accounts payable, related party accounts, and convertible promissory
notes, approximate their carrying value.
Stock Options
Effective July 1, 1996, the Company adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company has elected to continue
to account for stock options at intrinsic value with disclosure of the effects
of fair value accounting on net income and earnings per share on a pro forma
basis. See Note 13 for required disclosures.
F-8
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Net Loss Per Share of Common Stock
Net loss per share of common stock is computed by dividing net loss
applicable to common stockholders by the weighted average number of shares
outstanding during each period presented, as adjusted for the effects of the
application of Securities and Exchange Commission Staff Accounting Bulletin No.
83 ("SAB No. 83"). Pursuant to SAB No. 83, common stock, common stock options
and warrants issued within one year of the initial public offering at a price
(or exercise or conversion price) less than the initial public offering price
(estimated at $5.50 per share) are treated as outstanding for all periods
presented. Net loss per share is computed using the treasury stock method, under
which the number of shares outstanding reflects an assumed use of the proceeds
from the issuance of such shares and from the assumed exercise of such options,
to repurchase shares of the Company's common shares at the initial public
offering price. Common stock equivalents issued prior to this period have not
been included since their effect would be anti-dilutive.
Effect of Accounting Pronouncements Not Adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
issued by the Financial Accounting Standards Board is effective for financial
statements for fiscal years beginning after December 15, 1995. The new standard
establishes new guidelines regarding when impairment losses on long-lived
assets, which include plant and equipment and certain identifiable intangible
assets, should be recognized and how impairment losses should be measured. The
Company does not expect the adoption of this standard to have a material effect
on its financial position or results of operations.
Interim Financial Statements
The financial statements for the six months ended December 31, 1995 are
unaudited but, in the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation. The
interim financial statements are not necessarily indicative of the results of
operations for the full fiscal year.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------- DECEMBER 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Equipment $115,693 $309,231 $490,665
Furniture and fixtures -- 22,308 39,395
Leasehold improvements -- -- 3,054
------ ------- -------
115,693 331,539 533,114
Less accumulated depreciation and amortization 97,660 125,851 184,225
------ ------- -------
Property and equipment, net $ 18,033 $205,688 $348,889
========= ======== ========
</TABLE>
Property held under capital leases is included in property and equipment as
follows:
<TABLE>
<CAPTION>
JUNE 30,
-------- DECEMBER 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Equipment $ -- $33,383 $55,599
Less accumulated amortization -- 564 6,122
------ ------- -------
Net property held under capital leases $ -- $32,819 $49,477
====== ======= =======
</TABLE>
F-9
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
4. DEMAND PROMISSORY NOTES
Demand promissory notes at June 30, 1995 represented notes issued during
1991 to two venture funds: Massachusetts Technology Development Corporation
("MTDC") and First Stage Capital Limited Partnership ("First Stage"). The notes
bore interest of 10 percent per annum. In January 1996, MTDC and First Stage
converted the outstanding $105,218 demand promissory notes and $39,456 of
accrued interest into $111,674 of convertible promissory notes (see Note 8) and
21,912 shares of the Company's common stock at $1.507 per share.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------- DECEMBER 31,
1995 1996 1996
---- ---- ----------
<S> <C> <C> <C>
Payroll and related taxes $ -- $135,869 $ --
Consulting -- 89,186 94,669
Interest 39,456 47,108 20,875
Other -- 65,889 80,560
------- -------- --------
Total accrued expenses $39,456 $338,052 $196,104
======= ======== ========
</TABLE>
6. SHORT TERM PROMISSORY NOTES
In December 1996, the Company completed a private placement of 24.2 units
consisting of (i) a Class A promissory note in the principal amount of $25,000
bearing interest, payable at maturity, at the rate of 12 percent per annum due
and payable on the earlier of: (a) the closing of an initial public offering
("IPO") of the Company's Common Stock; (b) November 30, 1997; or (c) the sale by
the Company of substantially all of its assets, or upon the sale or merger of
the Company; (ii) a Class A warrant to purchase 6,375 shares of Common Stock at
an exercise price of one-half the offering price of the Common Stock in an IPO,
provided that the IPO is completed by May 31, 1997; otherwise $1.33 per share;
(iii) a Class B promissory note in the principal amount of $25,000 bearing
interest, payable at maturity, at the rate of 12 percent per annum, due and
payable on the earlier of: (a) the closing of an IPO, if such IPO is completed
by May 31, 1997; (b) May 31, 1998; or (c) the sale by the Company of
substantially all of its assets, or upon the sale or merger of the Company; and
(iv) a Class B warrant to purchase 6,375 shares of Common Stock at an exercise
price of three-fourths of the offering price of the Common Stock in an IPO,
provided that the IPO is completed by May 31, 1997; otherwise $1.33 per share.
Proceeds, net of financing costs of $130,000, were $1,080,000. In accordance
with the provisions of Accounting Principles Board Opinion No. 14, "Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants," ("APB No.
14") the Company allocated gross proceeds of $198,440, net of financing costs of
$21,320, to the detachable warrants and gross proceeds of $1,011,560 to the
Class A and Class B promissory notes ($1,210,000 face value). The discount on
the debt is being amortized over 5 months, which is the estimated time between
the debt issuance and the proposed initial public offering. During the six
months ended December 31, 1996, the Company charged interest expense for $39,688
of amortization on the debt discount. Upon completion of the proposed initial
public offering, the Company would record interest expense of $158,752 on the
unamortized debt discount and record $86,944 on the unamortized deferred
financing costs at December 31, 1996.
7. SHORT TERM ADVANCE
In December 1996, the Company received a short-term non-interest bearing
advance of $575,000 from an unaffiliated third party.
F-10
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
8. CONVERTIBLE PROMISSORY NOTES
In May, 1996, the Company issued $425,000 of convertible promissory notes
that bore interest at the rate of 10 percent per annum. In July, 1996, $200,000
of these notes were repaid and in September 1996, $225,000 of these notes were
converted into 107,567 shares of the Company's common stock in accordance with
the notes.
In addition, at June 30, 1996, the Company had outstanding $752,602 of
convertible promissory notes issued to various stockholders of the Company
during September 1995 and May 1996 in connection with a private placement, as
well as $111,674 of convertible promissory notes issued (collectively referred
to as the "Notes") to MTDC and First Stage in connection with the conversion of
demand promissory notes issued in 1991 (See Note 4). The Notes mature three
years from date of issue and bear interest of 10 percent per annum payable at
maturity or upon the earlier of redemption or conversion. Simultaneous with the
closing of the proposed public offering any portion of the principal and accrued
interest of the Notes may be converted to common stock at the election of the
holder at a price equal to the offering price of the proposed public offering.
Following the proposed public offering, any portion of the principal and
interest of the Notes not so converted may be converted at the option of the
holder at the offering price plus $1.33 per share. However, if the price of the
common stock is at least $4.00 above the initial public offering price for a
period of 10 consecutive trading days, the Company may convert any of the
remaining principal and accrued interest at a price equal to $1.33 per share
above the initial public offering price. On November 30, 1996, $802,018 of the
outstanding convertible promissory notes and $71,488 of accrued interest, net of
financing costs of $133,969, were converted into 218,374 shares of the Company's
Common Stock at a conversion rate of $4.00 per share.
9. COMMITMENTS
Leases
The Company leases equipment and its facility under operating leases that
expire through August 2000. Rent expense under these agreements for the years
ending June 30, 1995 and 1996 and the six months ended December 31, 1995 and
1996 were $14,095, $97,049, $24,569 and $116,524, respectively. In addition, the
Company leases certain equipment under capital leases that continue through July
2000. Future minimum payments, by year and in the aggregate, under capital
leases and noncancelable operating leases with initial or remaining terms of one
year or more consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31, LEASES LEASES
- ----------------------- ------ ------
<S> <C> <C>
1997 $24,176 $232,164
1998 17,390 196,530
1999 9,820 30,662
2000 4,171 19,904
----- ------
Total minimum lease payments 55,557 $479,260
Less amount representing interest 9,014 ========
-----
Present value of minimum lease payments 46,543
Less current portion 19,013
------
Long-term portion $27,530
=======
</TABLE>
F-11
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
9. COMMITMENTS -- (CONTINUED)
License Agreements
On September 27, 1995, the Company obtained a worldwide license from Radius,
Inc. ("Radius") to use certain of Radius' technology in its products. The
license is exclusive except as to Radius, which has retained rights to its
technology. Under the agreement with Radius, the royalties payable by the
Company initially are the greater of $1,500 per unit or two percent of the
purchase price per unit for the first 200 units, declining in increments based
on the number of units sold to the greater of $750 per unit or one percent of
the purchase price per unit after 1001 units are sold. Royalties will be paid
until the cumulative total of royalties paid equals $10,000,000 at which time
the Company will have a royalty-free license. If the Company fails to sell the
minimum number of units required to be sold pursuant to the agreement for two
consecutive calendar quarters, the technology may be licensed to other parties.
In addition, the Company has granted to Radius an irrevocable, perpetual,
non-exclusive, worldwide, royalty-free license to any modifications to the
Radius technology made by the Company.
The Company entered into a Development and License Agreement dated August 1,
1996 with Polybus Systems Corporation ("Polybus") pursuant to which the Company
obtained an irrevocable, perpetual, worldwide, nonexclusive (except as to
publishing for which the license is exclusive) license to a high speed file
manager software package in consideration for royalty payments. The royalties
payable by the Company pursuant to the Development and License Agreement are
initially $800 per server and $400 per workstation, declining in increments
based upon the number of systems sold to $50 per server and $25 per workstation
until the first 100,000 systems are sold by the Company. No royalties are
payable after the Company sells 100,000 systems. The initial term of the
Development and License Agreement is 25 years and the agreement may be
terminated sooner by Polybus only in the event of a payment default by the
Company. Upon termination of the Development and License Agreement, Polybus may
license the software to third parties in the publishing market. As of December
31, 1996, the Company made advances of $97,500 pursuant to the agreement.
Employment Contract
Effective as of January 1, 1997, the Company entered into a two- year
employment agreement with Mr. Gale, the Company's President and Chief Executive
Officer. Pursuant to such contract, Mr. Gale will be paid a base salary of
$125,000 and has been granted incentive stock options to purchase up to 75,000
shares of Common Stock. Options to purchase 15,000 shares of Common Stock vested
upon the execution of the agreement and options to purchase 30,000 shares of
Common Stock vest on each of the first and second anniversaries of the
agreement. All options have an exercise price of $4.00 per share. Pursuant to
his employment agreement, Mr. Gale agrees not to compete with the Company during
the terms of his employment and for one year thereafter.
10. RELATED PARTY TRANSACTIONS
The amounts due to stockholder consist of noninterest-bearing loans to the
Company. In December 1996 the loans were converted into 4,725 shares of Commons
Stock.
In July 1995, the Company entered into a consulting agreement with Young
Management Group, Inc. ("Young Management"), a company founded by Stanley Young,
who subsequently became a director of the Company in September 1995. Upon the
signing of the agreement, the Company sold 179,279 shares of common stock at
$.021 per share to Young Management. In addition, the Company agreed to a
consulting fee of $7,000 per month, plus out-of-pocket expenses, of which $3,000
per month would be deferred until
F-12
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
10. RELATED PARTY TRANSACTIONS -- (CONTINUED)
completion of an initial public offering. Consulting fees expensed in connection
with this agreement during the six months ended December 31, 1996 were
approximately $42,000 and an aggregate of $67,250 was accrued at December 31,
1996. In August 1996, Young Management transferred all of its shares of Common
Stock to certain affiliates of Young Management, including the Stanley A. Young
Irrevocable Trust and the Stanley A. Young Family Limited Partnership.
In May 1996, the Stanley A. Young Irrevocable Trust was issued a promissory
note in the principal amount of $100,000 (which was subsequently repaid) and
warrants to purchase 23,904 shares of Common Stock with an exercise price of
$1.507 per share in connection with a private placement, and in January 1997,
the Stanley A. Young Family Limited Partnership was issued in a private
placement, promissory notes in the aggregate principal amount of $50,000 and
warrants to purchase 12,750 shares of Common Stock at an exercise price equal to
either (i) $1.33 per share or, (ii) if the Company consummates an initial public
offering ("IPO") by a certain date, either one-half or three-fourths of the
offering price of a share of the Common Stock in the IPO. In November 1995,
Stanley A. Young Irrevocable Trust and Mr. Young's wife each purchased 3,787
shares of Common Stock at a price of $1.507 per share and were each issued a
convertible promissory note in the amount of $19,297 in a private placement. In
November 1996, Stanley A. Young Irrevocable Trust converted the principal
balance and accrued interest on its note into 5,320 shares of Common Stock and
Mr. Young's wife converted the principal balance and accrued interest on her
note into 5,320 shares of Common Stock.
In May 1996, the Company issued to Fred L. Chanowski, in consideration for
consulting services rendered, a warrant to purchase up to 23,904 shares of
Common Stock at an exercise price of $1.507 per share. Also in May 1996, the
Company issued to Mr. Chanowski, in consideration for a $25,000 loan, a
promissory note in the principal amount of $25,000 plus a warrant to purchase up
to 5,976 shares of Common Stock at $1.507 per share.
In October 1996, the Company issued to Mr. Chanowski 19,123 shares of Common
Stock in consideration for consulting services rendered. Mr. Chanowski also
purchased 23,904 shares of Common Stock for $50,000 in October 1996 in a private
placement. Mr. Chanowski paid the $50,000 purchase price by converting the
$25,000 promissory note issued to him in May 1996 and by investing an additional
$25,000 in cash. Mr. Chanowski is a 6.125% member in Alpha Ventures LLC which
holds 77,540 shares of the Company's Common Stock and warrants to purchase
11,952 shares of Common Stock at an exercise price of $1.507 per share. (See
Note 15.)
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
At June 30, 1995, the Company had no deferred tax assets or liabilities. At
June 30, 1996, the Company had a gross deferred tax asset of $440,000, related
to a net operating loss carryforward, for which a valuation allowance of
$440,000 was recorded. The Company had no deferred tax liability at June 30,
1996. The increase in the deferred tax asset valuation allowance of $440,000 was
attributable to the increase in the deferred asset related to the net operating
loss carryforward. At December 31, 1996, the Company had a gross deferred tax
asset of $1,700,000, related to a net operating loss carryforward, for which a
valuation allowance of $1,700,000 was recorded. The Company had no deferred tax
liability at December 31, 1996. The increase in the deferred tax asset valuation
allowance of $1,260,000 was attributable to the increase in the deferred asset
related to the net operating loss carryforward.
F-13
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
11. INCOME TAXES -- (CONTINUED)
Due to operating losses generated, there is no provision for federal and
state income taxes for the years ended June 30, 1995 and 1996 and the six months
ended December 31, 1996.
The difference between the effective tax rate and the United States federal
rate of 34 percent for the years ended June 30, 1995 and 1996 and the six months
ended December 31, 1996 relates to the limitations applicable to the recognition
of tax benefits from the net operating losses.
At December 31, 1996, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $4,300,000 which expires in 2011.
Net operating loss carryforwards are subject to review and possible adjustment
by the Internal Revenue Service and may be limited in the event of certain
cumulative changes in the ownership interests of significant stockholders over a
three year period in excess of 50 percent. As a result of the change in
ownership of the Company in June 1995, the ultimate utilization of the Company's
net operating losses were substantially eliminated as of June 30, 1995. As a
result of the changes in ownership of the Company in June 1996 and December 31,
1996, the annual utilization of the Company's net operating losses are expected
to be limited. The Company may experience an additional change in ownership in
excess of 50 percent upon completion of the proposed public offering which would
place further limitations on the utilization of net operating losses.
12. CAPITAL STOCK
Preferred Stock
During 1990, the Company issued 426,257 shares of preferred stock to several
venture funds and the initial founders of the Company. In May 1995 as part of a
restructuring of the capital structure of the Company, the preferred stock was
converted into common stock. In July 1995, the Board of Directors' approved an
increase in the number of authorized shares of preferred stock from 593,602
shares to 2,000,000 shares.
The preferred stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by the Board of Directors, without
further action by stockholders, and may include voting rights, preferences to
dividends and liquidation, conversion and redemption rights and sinking fund
provisions.
Common Stock
In order to attract new funding to support the proposed development of a
server product, in May 1995, the Board of Directors recommended and the
stockholders approved a reorganization pursuant to which the Company issued
4,903 shares of Common Stock in exchange for 426,257 shares of outstanding
preferred stock and 226,713 shares of outstanding common stock and the issuance
of 234,135 shares of its Common Stock in exchange for $1,280,596 in accrued
salaries and $71,529 of expenses payable to current and former officers and
employees. These obligations had accrued starting in fiscal year ended June 1992
through March 1995. Since the Company had negative net worth, no anticipated
revenues, total assets of approximately $12,000 and total liabilities of
approximately $1,500,000 all current and former employees accepted shares of the
Company's Common Stock valued at $.013 per share in lieu of payment.
From September 1995 through April 1996, the Company issued 147,686 shares of
its Common Stock at a price of $1.507 per share in a private placement of Common
Stock and convertible promissory notes (see Note 8). Proceeds net of financing
costs of $48,824 were $173,594. From May 1996 through June 1996, the Company
issued 549,787 shares of its Common Stock at a price of $2.093 per share in a
private placement. Proceeds net of financing costs of $169,500 were $980,500.
F-14
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
12. CAPITAL STOCK -- (CONTINUED)
In January 1996, demand promissory notes and accrued interest were converted
into 21,912 shares of the Company's Common Stock and convertible promissory
notes (see Note 4). In addition, during the year ended June 30, 1996, the
Company issued 219,465 shares of its Common Stock as payment for consulting
services, inventories and back rent.
In July 1996, the Board of Directors approved an increase in the number of
authorized shares of Common Stock from 2,000,000 shares to 15,000,000 shares.
Between July 1996 and September 1996, the Company completed a private
placement of 609,546 shares of its Common Stock at a price of $2.093 per share.
Proceeds net of financing costs of $165,750, were $1,109,250.
In September 1996, the Company issued 7,172 shares of Common Stock to
employees in lieu of cash payments for services rendered. In addition, in
October 1996, the Company issued 47,490 shares of Common Stock in lieu of cash
payments for consulting services rendered. In connection with the issuance of
this Common Stock, the Company recorded compensation of $114,424, during the six
months ended December 31, 1996, at a price of $2.093 per share.
In October 1996, the Company completed a private placement of 239,037 shares
of its Common Stock at a price of $2.093 per share. Proceeds net of financing
costs of $65,000, were $435,000. In addition the Company reclassified 71,712
shares from treasury stock to authorized but unissued Common Stock.
In October 1996, the Board of Directors declared a .637434-for-one reverse
stock split of the Company's Common Stock and approved an increase in the number
of authorized shares of common stock from 15,000,000 shares to 30,000,000
shares. All common stock, common stock options and per share information
disclosed in the financial statements and notes have been adjusted to give
effect for this stock split.
On November 30, 1996, the Company converted $802,018 of the outstanding
convertible promissory notes and $71,488 in accrued interest into 218,374 shares
of the Company's Common Stock at a conversion rate of $4.00 per share (see Note
8).
At December 31, 1996, 9,338 shares of Common Stock were reserved for the
conversion of convertible promissory notes, 304,588 shares were reserved for
issuance under outstanding stock options and 647,930 shares were reserved for
issuance under warrants.
Warrants
From November 1995 to May 1996, the Company issued (i) warrants to purchase
in the aggregate 244,059 shares of Common Stock at an exercise price of $1.507
per share, of which 21,514 have an expiration date four years from the date of
issuance and 222,545 have an expiration date five years from the date of
issuance; and (ii) warrants (to a placement agent) to purchase an aggregate of
21,966 shares of Common Stock at a price of $1.507 per share and expiring
between November 22, 2000 and May 31, 2001. In July 1996, the Company issued a
warrant to purchase 23,904 shares of Common Stock at an exercise price equal to
one half of the price of the shares of Common Stock in the Company's initial
public offering and with an expiration date five years from the date of
issuance. In October 1996, the Company issued a warrant to purchase 11,952
shares of Common Stock at an exercise price of $2.093 per share and with an
expiration date five years from the date of issuance. In December 1996, the
Company issued a warrant to purchase 37,500 shares of the Company's Common Stock
at an exercise price of $4.00 per share and with an expiration date five years
from the date of issuance. From December 1996 through February 1997, the Company
issued warrants to purchase in the
F-15
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS
UNAUDITED)
12. CAPITAL STOCK -- (CONTINUED)
aggregate 914,188 shares of Common Stock, 457,094 of which have an exercise
price of $2.75 per share and 457,094 of which have an exercise price equal of
$4.125 per share. These warrants are exercisable for a period of three years
commencing on December 30, 1997.
13. STOCK OPTION PLAN
In July 1995, the Company adopted its 1995 Stock Option Plan. Under this
plan, the Board of Directors, at their discretion, can issue either incentive
stock options or nonqualified options to employees and nonqualified options to
consultants, directors or other nonemployees.
Incentive stock options may not be granted at a price less than the fair
market value of the shares at the grant date (or less than 110% of fair market
value in the case of employees or officers holding 10% or more of the voting
stock) while the nonqualified options may be granted at a price determined by
the Board of Directors except that the Company has agreed with the Underwriters
not to grant any nonqualified options at a price lower than 85% of the fair
market value of the shares at the date of the grant. All grants as of December
31, 1996 were at fair market value or greater. The options generally vest 10%
after 30 days from the date of grant and the balance ratably over a period of
four years. Incentive stock options granted under the plan expire not more than
10 years from the date of grant and not more than five years in the case of
incentive stock options granted to an employee or officer holding 10% or more of
the voting stock of the Company. All options not exercised at the end of the
vesting period automatically expire. The aggregate number of shares which may be
granted under this plan may not exceed 600,000 shares.
During the year ended June 30, 1996, the Company granted 207,965 options, at
exercise prices ranging from $1.507 to $2.093 per share. During the six months
ended December 31, 1996, the Company granted 125,788 options at exercise prices
ranging from $2.093 to $4.00 per share and 29,165 options were cancelled at
prices ranging from $1.507 to $4.00 per share. As of December 31, 1996, 304,588
options were outstanding at exercise prices ranging from $1.507 to $4.00 per
share, 63,404 options were exercisable at exercise prices ranging from $1.507 to
$4.00 per share and 295,412 options were available for future grant. On January
1, 1997, the Company granted, to the President and Chief Executive Officer of
the Company, options to purchase up to 75,000 shares of Common Stock in
connection with a key employment agreement (see Note 9).
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation". The Company has elected to
continue to account for stock options at intrinsic value with disclosure of the
effects of fair value accounting on net income and earnings per share on a pro
forma basis. Had compensation costs for the stock option plan been determined
using the fair value method, the Company's pro forma net loss and loss per share
would have been $1,515,730 and $.51, respectively for the year ended June 30,
1996 and $3,229,974 and $.93, respectively, for the six months ended December
31, 1996. Pro forma compensation cost may not be representative of that to be
expected in future years.
The Company has computed the pro forma disclosures required under SFAS No.
123 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The
weighted average assumptions used for the year ended June 30, 1996 are as
follows: risk free interest rate ranging from 5.7% to 6.52%, expected dividend
yield of 0% and expected option life of 28 to 34 months; and expected volatility
of 30%. The weighted average assumptions used for the six months ended December
31, 1996 are as follows: risk free interest rate ranging from 5.98% to 6.4%,
expected dividend yield of 0% and expected option life of 28 to 29 months; and
expected volatility of 30%. The weighted average fair value of all options
granted during the year ended June 30, 1996 and the six months ended December
31, 1996 were $.35 and $.51, respectively.
F-16
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
14. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED CUMULATIVE
JUNE 30, DECEMBER 31, PERIOD FROM
-------- ------------ OCTOBER 1, 1995 TO
1995 1996 1995 1996 DECEMBER 31, 1996
---- ---- ---- ---- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental schedule of cash payments:
Cash paid for interest $ -- $ 4,235 $ -- $ 30,956 $ 35,191
Cash paid for income taxes -- -- -- -- --
Supplemental schedule of noncash financing and
investing activities:
Inventories paid with common stock -- 33,998 33,998 -- 33,998
Property and equipment acquired by capital lease
obligations -- 33,383 -- 22,216 55,599
Accrued rent paid with common stock -- 5,041 5,041 -- 5,041
Conversion of demand notes payable and accrued
interest into convertible promissory notes -- 111,674 111,674 -- 111,674
Conversion of amount due to stockholder into
common stock -- -- -- 18,900 18,900
Conversion of convertible promissory notes and
accrued interest into common stock -- -- -- 964,537 964,537
Conversion of demand notes payable and accrued
interest into common stock -- 33,000 33,000 -- 33,000
Conversion of convertible promissory notes into
common stock -- 225,000 -- -- 225,000
Accrued payroll paid with common stock 1,280,596 -- -- -- --
Debt paid with common stock 71,529 -- -- -- --
</TABLE>
15. SUBSEQUENT EVENTS
In February 1997, the Company completed a private placement of 47.5 units of
Short Term Promissory Notes (see Note 6). Proceeds, net of financing costs of
$308,750, were $2,066,250. In accordance with APB No. 14, the Company allocated
gross proceeds of $389,500, net of financing costs of $50,635, to the detachable
warrants and gross proceeds of $1,985,500 to the Class A and Class B promissory
notes ($2,375,000 face value). The discount on the debt is being amortized over
3 months, which is the estimated time between the debt issuance and the proposed
initial public offering. Upon completion of the proposed initial public
offering, the Company would record interest expense of $389,500 on the
unamortized debt discount and record amortization on the unamortized deferred
financing costs of $258,115. In May 1997, certain warrant holders agreed to the
cancellation of warrants to purchase 235,878 shares of Common Stock issued in
connection with the above Short Term Promissory Notes. No consideration was
given in connection with the cancellation of these warrants.
In January 1997, the Company granted 11,812 options at an exercise price of
$4.00 per share.
In March 1997, the Company granted 38,250 options at an exercise price of
$5.50 per share.
In March 1997, the Company issued 47,807 shares of Common Stock in
connection with the exercise of a warrant to purchase common stock for $1.507
per share.
F-17
AUGMENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)
15. SUBSEQUENT EVENTS -- (CONTINUED)
In April 1997, the Board of Directors declared a three-for-four reverse
stock split of the Company's Common Stock. All Common Stock, Common Stock
Options and per share information discussed in the financial statements and
notes have been adjusted to give effect for this stock split.
In April 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 $200,000 in
consideration for $200,000. The promissory note bears interest at 18% per annum
with interest and principal payable at maturity on May 31, 1998.
In May 1997, the Company issued to Venture Management a promissory note in
the principal amount of $200,000 in consideration for $200,000. The promissory
note bears interest at 18% per annum with interest and principal payable at
maturity on June 30, 1998.
F-18
GLOSSARY
<TABLE>
<CAPTION>
TERMS DEFINITIONS
----- -----------
<S> <C>
ASIC Application Specific Integrated Circuit. A custom
designed circuit that performs a specific function
within a computer system. The use of ASICs simplifies
the design and construction of computer modules.
BIT A single binary digit having a value of either 0 or
1. A bit is the smallest unit of data a computer can
process.
BUS An electronic pathway by which processors in the
system communicate and exchange information.
BYTE An ordered set of 8 bits.
CEPS Color electronic publishing systems--computer based
systems for data input, manipulation, assembly, and
output, both color and black and white, in various
forms of media.
CPU Central Processing Unit. The component in a computer
that is responsible for processing instructions and
controlling the activities of the other components in
the system.
CACHING Storing recently or frequently accessed data in
memory which allows for faster access in subsequent
requests.
DISTRIBUTED FILES Files that are stored and accessed on networked
computing systems throughout an organization.
Distributed files allow users to share information
without having to transfer the files to each user who
needs access.
ETHERNET A method used to connect a local area network for
networking and communications.
10BASE-T An Ethernet standard that uses twisted wire pairs
(telephone wire). All stations connect in a star
configuration to a central hub, also known as a
multiport repeater. 10Base-T is widely used due to
the lower cost and flexibility of installing twisted
pair.
100BASE-T A faster Ethernet networking standard that supports
data transfer rates up to 100Mbps (100 megabits per
second). Officially, the 100Base-T standard is IEEE
802.3u. 100Base-T cabling schemes can include pairs
of twisted-pair wires or fiber optic cables.
FIBER CONNECTIVITY Using fiber optic cable (pulses of light sent through
strands of glass) to connect computing and
communications devices.
FIBRE CHANNEL An industry-standard method of connecting computing
ARBITRATED LOOP systems that allows information, including large
files, to be transferred at a high rate of speed.
GEOPHYSICAL IMAGING Computer systems which provide graphical
SYSTEMS representations of mapping, geological, or other
types of data. These systems might be used to develop
profiles of census, ecological, or climatological
data.
GIGA A prefix that means a billion or a thousand million
units, as in gigabaud and gigabyte.
INPUT/OUTPUT (I/O) Data that is exchanged between two points, for
example between a user's computer and a server. In
Augment's server systems, high-speed data transfers
between the users computer and the server occur via a
copper or fiber optic cable.
ISO 9000 ISO 9000 is the standard set by the International
Organization for Standardization in 1987 for quality
management systems and quality assurance. The 9002
standard covers quality standards for engineering
practices, documentation, testing and measurement,
training, purchasing and materials.
ISO 9000 has three levels of registration:
* ISO 9001 is used by companies that design, produce,
inspect, test, install and service products.
* ISO 9002 is used by companies that produce,
inspect, test, install and service products but
which do not design components.
* ISO 9003 is used by companies that must inspect and
test items (for example, an importer or
distributor).
MBYTE One million bits (see definition of bit).
G-1
GLOSSARY -- (CONTINUED)
TERMS DEFINITIONS
----- -----------
MULTI-PLATFORM Supporting different operating systems and/or
computer hardware in a network or operating
environment.
NETWORK A configuration of data processing devices and
software connected for information exchange.
NUBUS CARDS Printed Circuit Boards (PCBs) that support the NuBus
system bus. A NuBus card or board contains the
components and circuitry needed to provide specific
functions. Sometimes NuBus cards work together as
co-processors. The Company's AFX 410's CPU Controller
is a co-processor that works with other cards to
transfer data very quickly.
NUBUS-90 BACKPLANES Two high performance Printed Circuit Boards (PCBs)
that hold the system bus. The AFX 410's memory and
processing boards install into the NuBus-90
backplanes. The NuBus-90 backplanes support the NuBus
system bus and up to 12 boards.
O/S Abbreviation for Operating System, which is software
that provides instructions to a computer (for
example, Windows, DOS, MacIntosh, OS2, and UNIX).
PARALLELL DISK ARRAY RAID 0. (See definition of RAID.) The simplest RAID
configuration, with data distributed across the
array, but with no additional error checking or
redundancy.
RAID Redundant Array of Independent Disks. An array of
disks that is used to store information. Provides for
concurrent use of multiple devices, which provides
either higher peak data rate, higher request handling
rate, reduced average queuing delay, or a combination
of these, based on the RAID "level" used. Redundancy
or parity mechanisms compensate for the lower overall
reliability of a multiple-device array versus a
single device.
RAID 3 (See definition of RAID.) An additional parity disk
is used to store error correction information.
SCALABLE (INTERNAL The ability to increase internal data storage
STORAGE) capacity to meet the needs of an organization. The
AFX 410's data storage can be increased in increments
of 10 MBytes or 20 MBytes, depending on whether the
disk array consists of 2 GByte or 4 GByte disks.
SCSI Small Computer System Interface. A computer interface
that provides a high-speed pathway over which
information is transferred. SCSI connections are
typically used to connect disk and tape drives to a
computer system.
SERIAL PORTS Connection points on a computer or communications
device supporting serial data transfers. Serial data
transfers send and receive data one bit at a time,
albeit at rates up to 100,000 bytes per second.
SUPER SERVER A category of servers that generally have high
capacity, performance, functionality and price.
TERA A trillion units. Many data centers now require
terabytes of storage capacity.
THROUGHPUT The rate at which data moves from one point to
another, for example, from a user's computer to a
server.
UNIX An operating system developed at AT&T Labs in the
early 1970's and widely used throughout the computer
industry. UNIX has been available on a wide variety
of computer hardware systems.
Windows NT Windows NT (New Technology) is a Microsoft operating
system developed in the early 1990's to provide a
secure and stable computing environment for multiple
users.
World Wide Web (WEB) The WorldWide Web (also referred to as WWW or the
"Web") describes the way in which people use the
Internet to access text, graphics, multimedia and
other data from computer systems around the world.
The Web is based on Internet standards for locating
and displaying information.
</TABLE>
G-2
INSIDE BACK COVER
[Illustration depicting an exploded view of an Augment Server]
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
----------
TABLE OF CONTENTS
<TABLE>
PAGE
----
<S> <C>
Prospectus Summary 3
Risk Factors 6
Dilution 12
Use of Proceeds 13
Capitalization 15
Dividend Policy 15
Management's Discussion and Analysis of
Financial Condition and Plan of Operation 16
Business 18
Management 25
Principal Stockholders 28
Certain Transactions 29
Description of Securities 30
Shares Eligible for Future Sale 33
Underwriting 35
Legal Matters 36
Experts 36
Available Information 37
Index to Financial Statements F-1
Glossary G-1
</TABLE>
----------
UNTIL JUNE 6, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK AND THE WARRANTS, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
AUGMENT SYSTEMS, INC.
[Logo]
1,800,000 SHARES OF COMMON STOCK
AND
1,800,000 REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
----------
PROSPECTUS
----------
GKN SECURITIES CORP.
LAIDLAW EQUITIES, INC.
MAY 12, 1997
================================================================================
