AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1997
REGISTRATION NO. 333-21401
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
AUGMENT SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
----------------
DELAWARE 04-3089539
(STATE OR OTHER JURISDICTION (I.R.S.
OF INCORPORATION OR EMPLOYER
ORGANIZATION) IDENTIFICATION
7373 NO.)
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
----------------
2 ROBBINS ROAD
WESTFORD, MASSACHUSETTS 01886
(508) 392-8626
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
LORRIN G. GALE, PRESIDENT AND CHIEF EXECUTIVE OFFICER
AUGMENT SYSTEMS, INC.
2 ROBBINS ROAD
WESTFORD, MASSACHUSETTS 01886
(508) 392-8626
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------
COPIES TO:
MICHAEL A. HICKEY, ESQ. DAVID ALAN MILLER, ESQ.
WARNER & STACKPOLE LLP PETER M. ZIEMBA, ESQ.
75 STATE STREET GRAUBARD MOLLEN & MILLER
BOSTON, MASSACHUSETTS 02109 600 THIRD AVENUE
TEL: (617) 951-9000 FAX: (617) 951-9151 NEW YORK, NEW YORK 10016
TEL: (212) 818-8800 FAX:
(212) 818-8881
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE(1) FEE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, par
value $.01 per
share(2) 2,070,000 $ 5.50 $11,385,000 $ 3,450.00
- ------------------------------------------------------------------------------------------------------------------------
Warrants to purchase
one share of Common
Stock(3) 2,070,000 $ 0.15 $ 310,500 $ 94.09
- ------------------------------------------------------------------------------------------------------------------------
Common Stock issuable
upon exercise of
Warrants(3) 2,070,000 $ 6.60 $13,662,000 $ 4,140.00
- ------------------------------------------------------------------------------------------------------------------------
Underwriter's Purchase
Option(4) 1 $100.00 $ 100 --
- ------------------------------------------------------------------------------------------------------------------------
Common Stock issuable
upon exercise of
Underwriters' Purchase
Option 180,000 $ 9.075 $ 1,633,500 $ 495.00
- ------------------------------------------------------------------------------------------------------------------------
Warrants issuable upon
exercise of
Underwriter's Purchase
Option(4) 180,000 $0.2475 $ 44,550 --
- ------------------------------------------------------------------------------------------------------------------------
Common Stock
underlying Warrants
issuable upon exercise
of Underwriters'
Purchase Option 180,000 $ 6.60 $ 1,188,000 $ 360.00
- ------------------------------------------------------------------------------------------------------------------------
Total Registration
Fee(5) $ 8,539.09
========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Includes 270,000 shares of Common Stock which the Underwriters have the
option to purchase from the Registrant to cover over-allotments, if any.
(3) Includes 270,000 Warrants which the Underwriters have the option to
purchase from the Registrant to cover over-allotments, if any.
(4) Pursuant to Rule 457(g), no registration fee is payable.
(5) $8,600.01 has been paid previously.
-----------------
Pursuant to Rule 416, there are also being registered hereby such indeterminate
number of additional shares of Common Stock as may be issued as a result of the
antidilution provisions of the Warrants and the Underwriters' Purchase Option.
-----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 11, 1997
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.
<TABLE>
<CAPTION>
========================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $5.50 $.495 $5.005
- --------------------------------------------------------------------------------------------------------
Per Warrant $.15 $.0135 $.1365
- --------------------------------------------------------------------------------------------------------
Total(3) $10,170,000 $915,300 $9,254,700
========================================================================================================
</TABLE>
(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 ___________ , 1997.
GKN SECURITIES CORP. LAIDLAW EQUITIES, INC.
, 1997
[LOGO] AUGMENT
[ILLUSTRATION DEPICTING AUGMENT LOCAL AREA NETWORK]
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 8,
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 four
systems and anticipates recognizing revenue from its initial shipments 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
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
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.
<TABLE>
<CAPTION>
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
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1)(2) AS ADJUSTED(1)(2)(3)
------ --------------- --------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $ (1,303,035) $ (950,285) $ 6,929,713
Total assets 1,679,053 3,700,418 8,108,738
Total liabilities 2,532,417 4,142,917 1,085,419
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 1997 of a long-term promissory note in the
principal amount of $200,000.
(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 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
1,205,748 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, 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."
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 a "key person"
insurance policy 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 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. 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 after the Offering, the Company must satisfy certain maintenance
criteria. 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."
Penny Stock Regulations; Illiquid Securities. The regulations of the
Securities and Exchange Commission ("Commission") promulgated under the
Securities Exchange Act of 1934 ("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,
8
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 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 914,175 shares of Common Stock and the 914,175
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 21,965 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 3,275,748
shares of Common Stock. This amount includes 2,070,000 shares underlying the
Warrants and 1,205,748 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
9
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
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."
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."
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
10
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 accrued
interest on such promissory notes, 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 62,248 262,248 241,498
---------- ---------- ----------
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 $ 2,903,040 $ 7,311,360
============ =========== ===========
</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 1997 of a long-term promissory note in the
principal amount of $200,000.
(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 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 four systems and anticipates recognizing revenue
from its initial shipments 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 $7,700,000.
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 2,591,064 shares of its Common
Stock for approximately $3,355,000 in gross proceeds.
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 four
systems and anticipates recognizing revenue from its initial shipments 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 10, 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
The Company is not currently involved in any material litigation or legal
proceedings and is not aware of any material litigation or proceeding pending or
threatened against it.
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 $58,492 $3,237(1)
and Chief Chairman, President 1995 0 $1,914(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 11,840 shares of common stock
held by Mr. Gale. Also as part of this recapitalization, the Company issued
39,325 shares of Common Stock valued at $.0133 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, 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, of which Mr. Chanowski is a 20% member, a
promissory note in the principal amount of $200,000 in consideration for a
$200,000 loan. The promissory note bears interest at 18% per annum with interest
and principal payable at maturity on May 31, 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. 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 291,573 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 53 warrant
holders to purchase an aggregate of 914,175 shares of Common Stock, 457,087 of
which have an exercise price of $2.75 per share and 457,088 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 914,175 shares of Common Stock and the 914,175 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
31
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 21,965 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. For purposes of determining when
outstanding shares of Common Stock may first be sold, it is assumed that the
amendment of Rule 144 adopted by the Commission on February 20, 1997 and
effective April 29, 1997 is in effect.
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, 1,588,010 will be available for sale pursuant to Rule 144 commencing on or
about July 14, 1997, 1,272,655 will become available for sale pursuant to Rule
144 commencing July 31, 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 stockholders
owning 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"). Therefore, of the 1,588,010 shares available for sale
pursuant to Rule 144 commencing on or about July 14, 1997, 1,268,423 cannot be
sold without the consent of GKN for a period of 13 months from the date of this
Prospectus, of the 1,272,655 shares available for sale pursuant to Rule 144
commencing July 31, 1997 through December 1997, 661,147 shares cannot be sold
without the consent of GKN for a period of 13 months 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 stockholders owning 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 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
33
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 914,175 shares
of Common Stock and the 914,175 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
317,415 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 21,965 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. (together, 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. Each of the
Underwriters has agreed to purchase one half of such 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 $________ per share of Common Stock and $_______ per
Warrant. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $_________ per share of Common Stock and $________ 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
35
the date hereof. The Underwriters' Purchase Option may not be transferred, sold,
assigned or hypothecated 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 914,175 shares of Common Stock, 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-17
</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 April 10, 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
21,965 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 914,175 shares of Common Stock, 457,087 of which have an exercise
price of $2.75 per share and 457,088 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 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.
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, 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 a
$200,000 loan. The promissory note bears interest at 18% per annum with interest
and principal payable at maturity on May 31, 1998.
F-17
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 , 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.
, 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except as hereinafter set forth, there is no statute, charter provision,
by-law, contract or other arrangement under which any controlling person,
director or officer of Augment Systems, Inc. ("Registrant") is insured or
indemnified in any manner against liability which he may incur in his capacity
as such.
See the fifth and sixth paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission with respect to
the effect of any indemnification for liabilities arising under the Securities
Act of 1933, as amended ("Securities Act").
The Registrant's Certificate of Incorporation, as amended ("Certificate of
Incorporation"), provides that the Registrant shall indemnify, to the fullest
extent permitted by Section 145 of the General Corporation Law of Delaware, as
amended (the "GCL"), each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was, or has agreed to become, a director or officer of the
Registrant, or is or was serving, or has agreed to serve, at the request of the
Registrant, as a director, officer or trustee of, or in a similar capacity with,
another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom. Such paragraph provides further that the
indemnification may include payment by the Registrant of expenses in defending
an action or proceeding in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by the person indemnified to repay
such payment if it is ultimately determined that such person is not entitled to
indemnification hereunder, which undertaking may be accepted without reference
to the financial ability of such person to make such repayment. Such paragraph
provides further, however, that the Registrant shall not indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person unless the initiation thereof was approved by its Board
of Directors.
The Certificate of Incorporation provides that the indemnification rights
set forth above (i) shall not be deemed exclusive of any other rights to which
those indemnified may be entitled under any law, agreement or vote of
stockholders or disinterested directors or otherwise, and (ii) shall inure to
the benefit of the heirs, executors and administrators of such persons. Such
paragraph provides further that the Registrant may, to the extent authorized
from time to time by its Board of Directors, grant indemnification rights to
other employees or agents of the Registrant or other persons serving the
Registrant and such rights may be equivalent to, or greater or less than, those
set forth in herein.
Section 145 of the GCL provides as follows:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement,
II-1
conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was
unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court shall deem
proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in this section.
Such expenses incurred by other employees and agents may be so paid upon
such terms and conditions, if any, as the board of directors deems
appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
II-2
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect
to the resulting or surviving corporation as he would have with respect to
such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan;
and references to "serving at the request of the corporation" shall include
any service as a director, officer, employee or agent of the corporation
which imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to any employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to
in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Registrant also maintains liability insurance for its directors and
officers.
Pursuant to Section 5.1 of the Underwriting Agreement, the Underwriters have
agreed to indemnify each director of the Registrant, each officer of the
Registrant who has signed the Registration Statement and any person who controls
the Registrant within the meaning of the Securities Act against certain
liabilities, including liabilities under the Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses of the Registrant in connection with the issuance and distribution
of the securities being registered are estimated as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $ 8,600.01
NASD Filing Fee 3,341.31
Nasdaq Listing Fee 25,000.00
Blue Sky Fees and Expenses 50,000.00
Legal Fees and Expenses 165,000.00
Accounting Fees and Expenses 100,000.00
Printing and Engraving Expenses 105,000.00
Transfer Agent Fees 7,500.00
Miscellaneous Expenses 36,158.68
------------
Total $ 500,600.00
============
</TABLE>
The Registrant will bear all expenses shown above.
II-3
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to all securities sold by the Registrant
without registration under the Securities Act within the three years prior to
the filing of this Form SB-2. The number of shares and the price per share have
been restated to reflect a .637434-for-1 reverse stock split and a 3-for-4
reverse stock split of the Registrant's Common Stock on October 30, 1996 and
April 8, 1997, respectively.
(1) On June 30, 1995, the Registrant issued 239,038 shares of Common Stock
in connection with a recapitalization in lieu of payment of $1,280,596
in accrued salaries and $71,529 in debt, and in exchange for 426,257
shares of preferred stock and 226,713 shares of common stock.
(2) On July 15, 1995, the Registrant issued an aggregate of 705,161 shares
of Common Stock to 11 persons in lieu of cash payments for services
rendered, of which 525,883 shares were issued to management.
(3) In September 1995, the Registrant issued 3,346 shares of Common Stock
valued at $1.507 per share to one person in lieu of a $30,325 cash
payment for accrued rent. The Registrant subsequently repurchased these
shares for a $7,000 cash payment in the same month.
(4) On December 1, 1995, the Registrant issued 22,565 shares of Common
Stock to Radius for certain assets valued by the Company at $33,998 in
connection with a license agreement entered into between the Registrant
and Radius.
(5) On December 8, 1995, the Registrant issued an aggregate of 21,912
shares of Common Stock and convertible promissory notes in the
aggregate principal amount of $111,674.08 to Massachusetts Technology
Development Corporation and First Stage Capital Limited Partnership
upon the conversion of a portion of prior debt and accrued interest in
the aggregate amount of $144,675.
(6) From November 22, 1995 through May 31, 1996, the Registrant sold an
aggregate of 147,686 shares of Common Stock and issued secured
convertible promissory notes in the aggregate principal amount of
$752,602.50 to 22 accredited investors for an aggregate purchase price
of $975,000 in a private placement.
Rickel & Associates, Inc., a New York corporation, acted as the
placement agent for the private placement and was (i) paid by the
Registrant an aggregate of $126,750, consisting of a selling commission
and an expense allowance, and (ii) issued warrants to purchase in the
aggregate ten percent (10%) of the total number of shares of Common
Stock issued in the offering and shares issuable upon conversion of the
notes, or 21,965 shares of Common Stock, at an exercise price of $1.507
per share.
(7) On January 2, 1996, the Registrant issued an aggregate of 14,276 shares
of Common Stock to two persons in lieu of cash payments for consulting
services rendered.
(8) In January 1996, the Registrant issued three promissory notes in the
aggregate principal amount of $150,000 and warrants to purchase in the
aggregate 21,515 shares of Common Stock, at an exercise price of $1.507
per share, to five persons in connection with a private placement. In
the same month, the Registrant repaid the entire principal amount plus
accrued interest to the three note holders.
(9) In February 1996 and April 1996, the Registrant issued warrants to
purchase in the aggregate 73,145 shares of Common Stock, at an exercise
price of $1.507 per share, to four persons in lieu of cash payments for
services rendered, one of whom exercised a warrant in March 1997 to
purchase 47,807 shares of Common Stock.
(10) In May 1996, the Registrant issued warrants to purchase in the
aggregate 47,808 shares of Common Stock, at an exercise price of $1.507
per share, to three persons in lieu of cash payments for services
rendered.
(11) In May 1996, the Registrant issued convertible promissory notes in the
principal aggregate amount of $425,000 to nine people and warrants to
purchase in the aggregate 101,592 shares of Common Stock, at an
exercise price of $1.507 per share, to 12 persons in connection with a
private placement. In July and August 1996, the Registrant repaid an
aggregate of $200,000 in principal plus accrued interest to four of the
nine note holders.
II-4
(12) From August 1996 to October 1996, the five remaining note holders from
the nine people who were issued convertible promissory notes as
described in paragraph (11) converted their promissory notes, in the
aggregate principal amount of $225,000, into 107,567 shares of Common
Stock.
(13) From June 20, 1996 through October 16, 1996, the Registrant sold an
aggregate of 1,398,371 shares of Common Stock to 17 accredited
investors for an aggregate purchase price of $2,925,000 in a private
placement.
Rickel & Associates, Inc., a New York corporation, acted as the
placement agent for the private placement and was paid $387,750 by the
Registrant, consisting of $7,500 for expenses and a nonaccountable
expense allowance and a selling commission.
(14) In July 1996, the Registrant issued a warrant to purchase 23,904 shares
of Common Stock, at an exercise price of one-half of the price of the
shares of Common Stock, in an initial public offering of the
Registrant, to one person in lieu of cash payment for services
rendered.
(15) In September 1996, the Registrant issued an aggregate of 7,172 shares
of Common Stock to six persons, in lieu of cash payments for services
rendered.
(16) In October 1996, the Registrant issued an aggregate of 47,490 shares of
Common Stock to 11 persons in lieu of cash payments for services
rendered.
(17) In October 1996, the Registrant issued a warrant to purchase 11,952
shares of Common Stock, at an exercise price of $2.093 per share,
effective as of August 1996, to one person in lieu of cash payment for
services rendered.
(18) On November 30, 1996, the Registrant issued an aggregate of 218,374
shares of Common Stock upon the conversion of the convertible
promissory notes, in the aggregate principal amount of $802,018, held
by 22 of the 24 people who were issued such notes in paragraph (5) and
(6).
(19) In December 1996, the Registrant issued a warrant to purchase 37,500
shares of Common Stock, at an exercise price of $4.00 per share, to one
person in lieu of cash payment for services rendered.
(20) From December 1996 through February 1997, the Registrant issued
warrants to purchase in the aggregate 914,175 shares of Common Stock,
at an exercise price equal to either (i) $1.333 per share or, (ii) if
the Registrant 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, and issued promissory notes in
the aggregate principal amount of $3,585,000 to 53 accredited investors
for an aggregate purchase price of $3,585,000 in a private placement.
Laidlaw Equities, Inc. acted as the placement agent for the private
placement and was paid approximately $438,750 by the Registrant,
consisting of a nonaccountable expense allowance and a selling
commission.
(21) In December 1996, the Registrant issued an aggregate of 7,613 shares of
Common Stock to two persons upon the conversion of prior debt in the
aggregate amount of $30,450.
(22) From October 1995 to March 1997, the Registrant granted to certain of
its employees, pursuant to its Stock Option Plan, options to purchase
an aggregate of 429,650 of Common Stock at exercise prices of $1.507 to
$5.50 per share.
Except in the transactions described in Items (5), (6), (12), (13), (18) and
(20), the Registrant issued the above securities without registration in
reliance upon the exemption provided by Section 4(2) of the Securities Act as a
transaction to a limited number of investors which did not involve a public
offering, general solicitation or general advertisement. There were no
underwriters involved in any of these transactions other than those described in
Items (6), (13) and (20) as discussed below.
II-5
In Items (5), (12) and (18), the Registrant issued the above securities
without registration in reliance upon the exemption provided by Section 3(a)(9)
of the Securities Act as a transaction in which the Registrant exchanged
securities with its existing security holders and no commission or other
remuneration was paid or given directly or indirectly for soliciting such
exchange.
In Items (6), (13) and (20), the Registrant issued the above securities
without registration in reliance upon the exemption provided by Rule 506 of
Regulation D of the Securities Act as transactions in which there was no general
solicitation or general advertisement, and the securities were offered and sold
only to accredited investors who represented that they had the necessary
experience and knowledge in financial and business matters to evaluate the
merits and risks of the investment.
ITEM 27. EXHIBITS.
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of the Registrant, as amended.
*3.2 -- By-laws of the Registrant.
*4.1 -- Specimen Common Stock Certificate of the Registrant.
4.2 -- Form of Underwriters' Purchase Option.
4.3 -- Specimen Redeemable Common Stock Purchase Warrant.
4.4 -- Form of Warrant Agreement.
5 -- Opinion of Warner & Stackpole LLP on legality of securities being registered.
*10.1 -- Lease Agreement of Corporate Headquarters in Westford, Massachusetts between New
England Mutual Life Insurance Company and the Registrant dated October 23, 1995.
*10.1.1 -- First Amendment to Lease Agreement of Corporate Headquarters dated as of January
31, 1996.
*10.2 -- Lease Agreement of Sales Office in San Diego, California between The Parkwest
Partners and the Registrant dated July 1, 1996.
*10.3 -- Restated Technology License Agreement between Radius Inc. and the Registrant dated
as of September 27, 1995.
*10.3.1 -- First Amendment to Restated Technology Agreement between Radius Inc. and the Registrant
dated as of October 28, 1996.
*10.4 -- Software Development and License Agreement between
Polybus Systems Corporation and the Registrant dated as of
August 1, 1996.
*10.5 -- Form of Warrant as issued to Registrant's other Warrantholders.
*10.6 -- Form of Warrant as issued to placement agent in Registrant's private placement
completed in May 1996.
*10.7 -- Form of Promissory Note from Registrant's private placement completed in May 1996.
*10.8 -- Form of Registration Rights Agreement for shares of common stock and shares underlying
promissory notes issued in Registrant's private placement completed in May 1996.
*10.9 -- Form of Registration Rights Agreement for shares of common stock issued in Registrant's
private placement completed in October 1996.
*10.10 -- Form of Class A Warrant from Registrant's private
placement completed in February 1997.
*10.11 -- Form of Class B Warrant from Registrant's private
placement completed in February 1997.
*10.12 -- Form of Class A Promissory Note from Registrant's
private placement completed in February 1997.
*10.13 -- Form of Class B Promissory Note from Registrant's
private placement completed in February 1997.
*10.14 -- Consulting Agreement between Young Management Group, Inc. and the Registrant dated
July 1995.
*10.15 -- Registrant's 1995 Stock Option Plan.
II-6
*10.16 -- Employment Agreement, dated as of January 1, 1997, between the Registrant and
Lorrin G. Gale.
*10.17 -- Noncompetition, Nondisclosure Agreement, dated as of January 1, 1997, between
the Registrant and Duane A. Mayo.
10.18 -- Promissory Note issued to Venture Management Consultants, LLC by the Registrant
dated April 8, 1997.
11 -- Computation of net loss per share of Common Stock.
23.1 -- Consent of BDO Seidman, LLP.
23.2 -- Consent of Warner & Stackpole LLP (included in Exhibit 5).
*24 -- Power of Attorney.
27 -- Financial Data Schedule.
</TABLE>
- -------------------
* Previously Filed.
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the Offering of the securities of the securities
at that time to be the initial bona fide Offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
(4) Provide to the Underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(5) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective.
(6) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of the securities at that time as the
initial bona fide Offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-7
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS AMENDMENT NO. 2
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN
THE CITY OF WESTFORD, COMMONWEALTH OF MASSACHUSETTS, ON APRIL 11, 1997.
AUGMENT SYSTEMS, INC.
(Registrant)
By: /s/ LORRIN G. GALE
---------------------
LORRIN G. GALE,
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT ON FORM SB-2 HAS BEEN SIGNED BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES STATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LORRIN G. GALE Chief Executive Officer, April 11, 1997
--------------------------- President and Chairman
LORRIN G. GALE OF THE BOARD
* Chief Financial Officer, April 11, 1997
--------------------------- Treasurer, Secretary and
DUANE A. MAYO Director
* Director April 11, 1997
---------------------------
CHAPELL CORY III
* Director April 11, 1997
---------------------------
GREGORY M. MILLAR
* Director April 11, 1997
---------------------------
STANLEY A. YOUNG
* Director April 11, 1997
---------------------------
FRED L. CHANOWSKI
* /s/ LORRIN G. GALE
---------------------------
LORRIN G. GALE
ATTORNEY-IN-FACT
</TABLE>
II-8
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of the Registrant, as amended.
*3.2 -- By-laws of the Registrant.
*4.1 -- Specimen Common Stock Certificate of the Registrant.
4.2 -- Form of Underwriters' Purchase Option.
4.3 -- Specimen Redeemable Common Stock Purchase Warrant.
4.4 -- Form of Warrant Agreement.
5 -- Opinion of Warner & Stackpole LLP on legality of securities being registered.
*10.1 -- Lease Agreement of Corporate Headquarters in Westford, Massachusetts between New
England Mutual Life Insurance Company and the Registrant dated October 23, 1995.
*10.1.1 -- First Amendment to Lease Agreement of Corporate Headquarters dated as of January
31, 1996.
*10.2 -- Lease Agreement of Sales Office in San Diego, California between The Parkwest
Partners and the Registrant dated July 1, 1996.
*10.3 -- Restated Technology License Agreement between Radius Inc. and the Registrant dated
as of September 27, 1995.
*10.3.1 -- First Amendment to Restated Technology Agreement between Radius Inc. and the Registrant
dated as of October 28, 1996.
*10.4 -- Software Development and License Agreement between
Polybus Systems Corporation and the Registrant dated as of
August 1, 1996.
*10.5 -- Form of Warrant as issued to Registrant's other Warrantholders.
*10.6 -- Form of Warrant as issued to placement agent in Registrant's private placement
completed in May 1996.
*10.7 -- Form of Promissory Note from Registrant's private placement completed in May 1996.
*10.8 -- Form of Registration Rights Agreement for shares of common stock and shares underlying
promissory notes issued in Registrant's private placement completed in May 1996.
*10.9 -- Form of Registration Rights Agreement for shares of common stock issued in Registrant's
private placement completed in October 1996.
*10.10 -- Form of Class A Warrant from Registrant's private
placement completed in February 1997.
*10.11 -- Form of Class B Warrant from Registrant's private
placement completed in February 1997.
*10.12 -- Form of Class A Promissory Note from Registrant's
private placement completed in February 1997.
*10.13 -- Form of Class B Promissory Note from Registrant's
private placement completed in February 1997.
*10.14 -- Consulting Agreement between Young Management Group, Inc. and the Registrant dated
July 1995.
*10.15 -- Registrant's 1995 Stock Option Plan.
*10.16 -- Employment Agreement, dated as of January 1, 1997, between the Registrant and
Lorrin G. Gale.
*10.17 -- Noncompetition, Nondisclosure Agreement, dated as of January 1, 1997, between
the Registrant and Duane A. Mayo.
10.18 -- Promissory Note issued to Venture Management Consultants, LLC by the Registrant
dated April 8, 1997.
11 -- Computation of Net Loss per share of Common Stock.
23.1 -- Consent of BDO Seidman, LLP.
23.2 -- Consent of Warner & Stackpole LLP (included in Exhibit 5).
*24 -- Power of Attorney.
27 -- Financial Data Schedule.
</TABLE>
- -----------
* Previously Filed.
UNDERWRITING AGREEMENT
BETWEEN
AUGMENT SYSTEMS, INC.
AND
GKN SECURITIES CORP.
AND
LAIDLAW EQUITIES, INC.
DATED: ________ __, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INDEX OF DEFINITIONS..............................................................................................v
1. Purchase and Sale of Securities..........................................................................1
1.1 Firm Securities.................................................................................1
1.1.1 Purchase of Firm Securities............................................................1
1.1.2 Payment and Delivery...................................................................1
1.2 Over-Allotment Option...........................................................................2
1.2.1 Option Securities......................................................................2
1.2.2 Exercise of Option.....................................................................2
1.2.3 Payment and Delivery...................................................................2
1.3 Underwriters' Purchase Option...................................................................3
1.3.1 Purchase Option........................................................................3
1.3.2 Payment and Delivery...................................................................3
2. Representations and Warranties of the Company............................................................3
2.1 Filing of Registration Statement................................................................3
2.1.1 Pursuant to the Act....................................................................3
2.1.2 Pursuant to the Exchange Act...........................................................3
2.2 No Stop Orders, Etc.............................................................................4
2.3 Disclosures in Registration Statement...........................................................4
2.3.1 Securities Act and Exchange Act Representation.........................................4
2.3.2 Disclosure of Contracts................................................................4
2.3.3 Prior Securities Transactions..........................................................5
2.4 Changes After Dates in Registration Statement...................................................5
2.4.1 No Material Adverse Change.............................................................5
2.4.2 Recent Securities Transactions, Etc....................................................5
2.5 Independent Accountants.........................................................................5
2.6 Financial Statements............................................................................5
2.7 Authorized Capital; Options; Etc................................................................6
2.8 Valid Issuance of Securities; Etc...............................................................6
2.8.1 Outstanding Securities.................................................................6
2.8.2 Securities Sold Pursuant to this Agreement.............................................6
2.9 Registration Rights of Third Parties............................................................7
2.10 Validity and Binding Effect of Agreements.......................................................7
2.11 No Conflicts, Etc...............................................................................7
2.12 No Defaults; Violations.........................................................................7
2.13 Corporate Power; Licenses; Consents.............................................................8
2.13.1 Conduct of Business....................................................................8
2.13.2 Transactions Contemplated Herein.......................................................8
2.14 Title to Property; Insurance....................................................................8
2.15 Litigation; Governmental Proceedings............................................................8
2.16 Good Standing...................................................................................8
2.17 Taxes...........................................................................................9
i
Page
2.18 Employees' Options..............................................................................9
2.19 Transactions Affecting Disclosure to NASD.......................................................9
2.19.1 Finder's Fees..........................................................................9
2.19.2 Payments Within Twelve Months..........................................................9
2.19.3 Use of Proceeds........................................................................9
2.19.4 Insiders' NASD Affiliation.............................................................9
2.20 Foreign Corrupt Practices Act..................................................................10
2.21 Nasdaq Eligibility.............................................................................10
2.22 Intangibles....................................................................................10
2.23 Relations With Employees.......................................................................10
2.23.1 Employee Matters......................................................................10
2.23.2 Employee Benefit Plans................................................................11
2.24 Officers' Certificate..........................................................................11
2.25 Warrant Agreement..............................................................................11
2.26 Agreements With Insiders.......................................................................11
2.26.1 Lock-Up Agreements....................................................................11
2.26.2 Right of First Refusal and Rule 144 Sales.............................................11
2.27 Subsidiaries...................................................................................11
2.28 Unaudited Financials...........................................................................12
3. Covenants of the Company................................................................................12
3.1 Amendments to Registration Statement...........................................................12
3.2 Federal Securities Laws........................................................................12
3.2.1 Compliance............................................................................12
3.2.2 Filing of Final Prospectus............................................................12
3.2.3 Exchange Act Registration.............................................................12
3.3 Blue Sky Filing................................................................................12
3.4 Delivery to the Underwriters of Prospectuses...................................................13
3.5 Events Requiring Notice to the Underwriters....................................................13
3.6 Review of Financial Statements.................................................................13
3.7 Reserved.......................................................................................13
3.8 Secondary Market Trading and Standard & Poor's.................................................13
3.9 Nasdaq Maintenance.............................................................................14
3.10 Warrant Solicitation and Registration of Common Stock Underlying the
Warrants.......................................................................................14
3.10.1 Warrant Solicitation and Warrant Solicitation Fees....................................14
3.10.2 Registration of Common Stock..........................................................14
3.11 Reserved.......................................................................................14
3.12 Reports to the Underwriters....................................................................14
3.12.1 Periodic Reports, Etc.................................................................14
3.12.2 Transfer Sheets and Weekly Position Listings..........................................15
3.12.3 Secondary Market Trading Memorandum...................................................15
3.13 Underwriters' Purchase Option..................................................................15
3.14 Disqualification of Form SB-2..................................................................15
3.15 Payment of Expenses............................................................................15
3.15.1 General Expenses......................................................................15
3.15.2 Non-Accountable Expenses..............................................................16
ii
Page
3.16 Application of Net Proceeds....................................................................16
3.17 Delivery of Earnings Statements to Security Holders............................................16
3.18 Key Person Life Insurance......................................................................17
3.19 Stabilization..................................................................................17
3.20 Internal Controls..............................................................................17
3.21 Accountants and Lawyers........................................................................17
3.22 Transfer Agent.................................................................................17
3.23 Sale of Securities.............................................................................17
3.24 Exercise Price of Options......................................................................17
4. Conditions of the Underwriters' Obligations.............................................................17
4.1 Regulatory Matters.............................................................................17
4.1.1 Effectiveness of Registration Statement...............................................17
4.1.2 NASD Clearance........................................................................18
4.1.3 No Blue Sky Stop Orders...............................................................18
4.2 Company Counsel Matters........................................................................18
4.2.1 Effective Date Opinion of Counsel.....................................................18
4.2.2 Closing Date and Option Closing Date
Opinion of Counsel....................................................................22
4.2.3 Reliance..............................................................................22
4.2.4 Secondary Market Trading Memorandum...................................................23
4.3 Cold Comfort Letter............................................................................23
4.4 Officers' Certificates.........................................................................24
4.4.1 Officers' Certificate.................................................................24
4.4.2 Secretary's Certificate...............................................................24
4.5 No Material Changes............................................................................24
4.6 Delivery of Underwriters' Purchase Option......................................................25
4.7 Opinion of Counsel for the Underwriters........................................................25
5. Indemnification.........................................................................................25
5.1 Indemnification of the Underwriters............................................................25
5.1.1 General...............................................................................25
5.1.2 Procedure.............................................................................26
5.2 Indemnification of the Company.................................................................26
5.3 Contribution...................................................................................27
5.3.1 Contribution Rights...................................................................27
5.3.2 Contribution Procedure................................................................27
6. Default by an Underwriter...............................................................................28
7. Additional Covenants....................................................................................28
7.1 Attendance at Board Meetings...................................................................28
7.2 Right of First Refusal.........................................................................28
7.3 Rule 144 Sales.................................................................................28
7.4 Press Releases.................................................................................29
7.5 Form S-8 or any Similar Form...................................................................29
7.6 [Omitted]......................................................................................29
iii
Page
7.7 [Omitted]......................................................................................29
8. Representations and Agreements to Survive Delivery......................................................29
9. Effective Date of This Agreement and Termination Thereof................................................29
9.1 Effective Date.................................................................................29
9.2 Termination....................................................................................29
9.3 Notice.........................................................................................30
9.4 Expenses.......................................................................................30
9.5 Indemnification................................................................................30
10. Miscellaneous...........................................................................................30
10.1 Notices........................................................................................30
10.2 Headings.......................................................................................31
10.3 Amendment......................................................................................31
10.4 Entire Agreement...............................................................................31
10.5 Binding Effect.................................................................................31
10.6 Governing Law, Jurisdiction....................................................................31
10.7 Execution in Counterparts......................................................................32
10.8 Waiver, Etc....................................................................................32
iv
INDEX OF DEFINITIONS
Term Section
Act................................................................................................. 2.1.1
BSE.................................................................................................. 2.21
Closing Date.........................................................................................1.1.2
Code................................................................................................2.23.2
Commission...........................................................................................2.1.1
Common Stock.........................................................................................1.1.1
Company.......................................................................................Introductory
Paragraph
Effective Date.......................................................................................1.2.2
ERISA...............................................................................................2.23.2
ERISA Plans.........................................................................................2.23.2
Exchange Act.........................................................................................2.1.2
Filing Date.........................................................................................2.19.2
Firm Securities......................................................................................1.1.1
GKN...........................................................................................Introductory
Paragraph
Insiders............................................................................................2.26.1
Intangibles...........................................................................................2.22
Laidlaw.......................................................................................Introductory
Paragraph
NASD................................................................................................2.19.1
Nasdaq................................................................................................2.21
Option Closing Date..................................................................................1.2.2
Option Securities....................................................................................1.2.1
Over-allotment Option................................................................................1.2.1
Preliminary Prospectus...............................................................................2.1.1
Principal Stockholders.................................................................................7.2
Prospectus...........................................................................................2.1.1
Public Securities....................................................................................1.2.1
Registration Statement...............................................................................2.1.1
Regulations..........................................................................................2.1.1
SAS....................................................................................................4.3
Secondary Market Trading Memorandum.................................................................3.12.3
Securities...........................................................................................1.3.1
Transfer Agent........................................................................................3.22
Unaudited Financials..................................................................................2.28
Underwriters..................................................................................Introductory
Paragraph
Underwriters' Purchase Option........................................................................1.3.1
Underwriters' Sec rities.............................................................................1.3.1
Underwriters' Shares.................................................................................1.3.1
Underwriters' Warrants...............................................................................1.3.1
Warrant(s)...........................................................................................1.1.1
Warrant Agreement.....................................................................................2.25
v
</TABLE>
AUGMENT SYSTEMS, INC.
1,800,000 Shares of Common Stock
and
1,800,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
New York, New York
_________ __, 1997
GKN Securities Corp.
61 Broadway
12th Floor
New York, New York 10006
Laidlaw Equities, Inc.
100 Park Avenue
New York, New York 10017
Ladies and Gentlemen:
The undersigned, Augment Systems, Inc., a Delaware corporation
("Company"), hereby confirms its agreement with GKN Securities Corp. ("GKN") and
Laidlaw Equities, Inc. ("Laidlaw" and, together with GKN, being referred to
herein variously as "you" or the "Underwriters") as follows:
1. Purchase and Sale of Securities.
1.1 Firm Securities.
1.1.1 Purchase of Firm Securities. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to the
Underwriters and the Underwriters agree to purchase from the Company 1,800,000
shares of the Company's Common Stock ("Common Stock") at a purchase price (net
of discounts and commissions) of $5.005 per share and 1,800,000 Redeemable
Common Stock Purchase Warrants ("Warrant(s)") at a purchase price of $0.1365 per
Warrant, each Warrant to purchase one share of Common Stock at an initial
purchase price of $6.60 per share commencing one year after the Effective Date
(as hereinafter defined) until the fifth anniversary of the Effective Date
(these shares of Common Stock and Warrants being referred to herein as "Firm
Securities"), with 900,000 shares of Common Stock and 900,000 Warrants being
sold to and purchased by each of GKN and Laidlaw.
1.1.2 Payment and Delivery. Delivery and payment for the Firm
Securities shall be made at 10:00 A.M., New York time, on or before the third
business day following the date that the Firm Securities commence trading or at
such earlier time as the Underwriters shall determine, or at such other time as
shall be agreed upon by the Underwriters and the Company at the offices
1
of GKN or at such other place as shall be agreed upon by the Underwriters and
the Company. The hour and date of delivery and payment for the Firm Securities
are called the "Closing Date." Payment for the Firm Securities shall be made on
the Closing Date at the Underwriters' election by wire transfer or by certified
or bank cashier's check(s) in New York Clearing House funds, payable to the
order of the Company upon delivery to you of certificates (in form and substance
satisfactory to the Underwriters) representing the Firm Securities for the
account of the Underwriters. The Firm Securities shall be registered in such
name or names and in such authorized denominations as the Underwriters may
request in writing at least two full business days prior to the Closing Date.
The Company will permit the Underwriters to examine and package the Firm
Securities for delivery, at least one full business day prior to the Closing
Date. The Company shall not be obligated to sell or deliver the Firm Securities
except upon tender of payment by the Underwriters for all the Firm Securities.
1.2 Over-Allotment Option.
1.2.1 Option Securities. For the purposes of covering any
over-allotments in connection with the distribution and sale of the Firm
Securities, the Underwriters are hereby granted an option to purchase up to an
additional 270,000 shares of Common Stock and/or 270,000 Warrants from the
Company ("Over-allotment Option"). Such additional 270,000 shares of Common
Stock and 270,000 Warrants are hereinafter referred to as the "Option
Securities." The Firm Securities and the Option Securities are, together with
the shares of Common Stock issuable upon exercise of the Warrants, hereinafter
referred to collectively as the "Public Securities." The purchase price to be
paid for the Option Securities will be the same price per Option Security as the
price per Firm Security set forth in Section 1.1.1 hereof.
1.2.2 Exercise of Option. The Over-allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Underwriters as to all
or any part of the Option Securities at any time, from time to time, within
forty-five business days after the effective date ("Effective Date") of the
Registration Statement (as hereinafter defined). The Underwriters will not be
under any obligation to purchase any Option Securities prior to the exercise of
the Over-allotment Option. The Over-allotment Option granted hereby may be
exercised by the giving of oral notice to the Company from the Underwriters,
which must be confirmed by a letter or telecopy setting forth the number of
Option Securities to be purchased, the date and time for delivery of and payment
for the Option Securities and stating that the Option Securities referred to
therein are to be used for the purpose of covering over-allotments in connection
with the distribution and sale of the Firm Securities. If such notice is given
at least two full business days prior to the Closing Date, the date set forth
therein for such delivery and payment will be the Closing Date. If such notice
is given thereafter, the date set forth therein for such delivery and payment
will not be earlier than five full business days after the date of the notice,
unless we mutually agree to an earlier date. If such delivery and payment for
the Option Securities does not occur on the Closing Date, the date and time of
the closing for such Option Securities will be as set forth in the notice
(hereinafter "Option Closing Date"). Upon exercise of the Over-allotment Option,
the Company will become obligated to convey to the Underwriters, and, subject to
the terms and conditions set forth herein, the Underwriters will become
obligated to purchase, the number of Option Securities specified in such notice.
1.2.3 Payment and Delivery. Payment for the Option Securities
will be at the Underwriters' election by wire transfer or by certified or bank
cashier's check(s) in New York Clearing House funds, payable to the order of the
Company at the offices of GKN or at such other
2
place as shall be agreed upon by the Underwriters and the Company upon delivery
to you of certificates representing such securities for the Underwriters. The
certificates representing the Option Securities to be delivered will be in such
denominations and registered in such names as the Underwriters request not less
than two full business days prior to the Closing Date or the Option Closing
Date, as the case may be, and will be made available to the Underwriters for
inspection, checking and packaging at the aforesaid office of the Company's
transfer agent or correspondent not less than one full business day prior to
such Closing Date.
1.3 Underwriters' Purchase Option.
1.3.1 Purchase Option. The Company hereby agrees to issue and
sell to the Underwriters (and/or their designees) on the Closing Date, for an
aggregate purchase price of $100, an option ("Underwriters' Purchase Option")
exercisable for a period of four years commencing one year from the Effective
Date, for the purchase of an aggregate of 180,000 shares of Common Stock
("Underwriters' Shares") at an initial exercise price of 165% of the initial
offering price of a share of common stock (i.e., $9.075 per share of Common
Stock) and/or 180,000 Warrants ("Underwriters' Warrants") at an initial exercise
price of 165% of the initial offering price of a Warrant (i.e. $0.2475 per
Warrant). Each of the Underwriters' Shares and the Underwriters' Warrants is
identical to the Firm Securities. The Underwriters' Purchase Option, the
Underwriters' Shares, the Underwriters' Warrants and the shares of Common Stock
issuable upon exercise of the Underwriters' Warrants are hereinafter referred to
collectively as the "Underwriters' Securities." The Public Securities and the
Underwriters' Securities are hereinafter referred to collectively as the
"Securities."
1.3.2 Payment and Delivery. Delivery and payment for the
Underwriters' Purchase Option shall be made on the Closing Date. The Company
shall deliver to the Underwriters, upon payment therefor, certificates for the
Underwriters' Purchase Option in the name or names and in such authorized
denominations as the Underwriters may request.
2. Representations and Warranties of the Company. The Company represents
and warrants to the Underwriters as follows:
2.1 Filing of Registration Statement.
2.1.1 Pursuant to the Act. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement and
an amendment or amendments thereto, on Form SB-2 (No. 333-21401), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Securities under the Securities Act of 1933, as amended ("Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act and the rules and
regulations ("Regulations") of the Commission under the Act. Except as the
context may otherwise require, such registration statement, as amended, on file
with the Commission at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430A of the Regulations), is hereinafter called the "Registration
Statement," and the form of the final prospectus dated the Effective Date (or,
if applicable, the form of final prospectus filed with the Commission pursuant
to Rule 424 of the Regulations), is hereinafter called the "Prospectus." The
Registration Statement has been declared effective by the Commission on the date
hereof.
3
2.1.2 Pursuant to the Exchange Act. The Company has filed with
the Commission a registration statement on Form 8-A (No. 0-000-2234) providing
for the registration under the Securities Exchange Act of 1934, as amended
("Exchange Act"), of the Common Stock and Warrants. Such registration of the
Common Stock and Warrants has been declared effective by the Commission on the
date thereof.
2.2 No Stop Orders, Etc. Neither the Commission nor, to the best
of the Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.
2.3 Disclosures in Registration Statement.
2.3.1 Securities Act and Exchange Act Representation. At the
time the Registration Statement became effective and at all times subsequent
thereto up to and including the Closing Date and the Option Closing Date, if
any, the Registration Statement and the Prospectus and any amendment or
supplement thereto contained and will contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations,
and conformed and will conform in all material respects to the requirements of
the Act and the Regulations; neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, during such time period and
on such dates, contained or will contain any untrue statement of a material fact
or omitted or will omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, nor did they or will
they contain any untrue statement of a material fact nor did they or will they
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. When any Preliminary Prospectus was first filed with the
Commission (whether filed as part of the Registration Statement for the
registration of the Securities or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or supplement thereto
was first filed with the Commission, such Preliminary Prospectus and any
amendments thereof and supplements thereto complied or will comply in all
material respects with the applicable provisions of the Act and the Regulations
and did not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The representation and warranty made in this Section 2.3.1 does
not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriters expressly for use in the Registration Statement or Prospectus or
any amendment thereof or supplement thereto.
2.3.2 Disclosure of Contracts. The description in the
Registration Statement and the Prospectus of contracts and other documents is
accurate and presents fairly the information required to be disclosed and there
are no contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company is a party or by which its property or business is or may be bound or
affected and (i) which is referred to in the Pro spectus, or (ii) is material to
the Company's business, has been duly and validly executed, is in full force and
effect in all material respects and is enforceable against the parties thereto
in accordance with its
4
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, as
enforceability of any indemnification provision may be limited under the federal
and state securities laws, and that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought. None of such contracts or instruments has been assigned by the
Company, and neither the Company nor, to the best of the Company's knowledge,
any other party is in default thereunder and, to the best of the Company's
knowledge, no event has occurred which, with the lapse of time or the giving of
notice, or both, would constitute a default thereunder. None of the material
provisions of such contracts or instruments violates or will result in a
violation of any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court having jurisdiction over the Company
or any of its assets or businesses, including, without limitation, those
relating to environmental laws and regulations.
2.3.3 Prior Securities Transactions. No securities of the
Company have been sold by the Company or by or on behalf of, or for the benefit
of, any person or persons controlling, controlled by, or under common control
with the Company within the three years prior to the date hereof, except as
disclosed in the Registration Statement.
2.4 Changes After Dates in Registration Statement.
2.4.1 No Material Adverse Change. Since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, except as otherwise specifically stated therein, (i) there has been
no material adverse change in the condition, financial or otherwise, or in the
results of operations, business or business prospects of the Company, including,
but not limited to, a material loss or interference with its business from fire,
storm, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree,
whether or not arising in the ordinary course of business, and (ii) there have
been no transactions entered into by the Company, other than those in the
ordinary course of business, which are material with respect to the condition,
financial or otherwise, or to the results of operations, business or business
prospects of the Company.
2.4.2 Recent Securities Transactions, Etc. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or (ii)
declared or paid any dividend or made any other distribution on or in respect to
its capital stock.
2.5 Independent Accountants. BDO Seidman, LLP, whose report is
filed with the Commission as part of the Registration Statement, are independent
accountants as required by the Act and the Regulations.
2.6 Financial Statements. The financial statements, including the
notes thereto and supporting schedules included in the Registration Statement
and Prospectus, fairly present the financial position and the results of
operations of the Company at the dates and for the periods to which they apply;
and such financial statements have been prepared in conformity with generally
accepted accounting principles, consistently applied throughout the periods
involved; and the supporting schedules included in the Registration Statement
present fairly the information required to be stated therein. The pro forma
financial information set forth in the Registration Statement
5
reflects all significant assumptions and adjustments relating to the business
and operations of the Company.
2.7 Authorized Capital; Options; Etc. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions and adjustments stated in the Registration Statement
and the Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any obligations to issue any shares pursuant to anti-dilution
provisions, or any security convertible into shares of Common Stock of the
Company, or any contracts or commitments to issue or sell shares of Common Stock
or any such options, warrants, rights or convertible securities.
2.8 Valid Issuance of Securities; Etc.
2.8.1 Outstanding Securities. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and warrants
to purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification provision may be limited under the federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought. The authorized Common Stock and outstanding options and warrants
to purchase shares of Common Stock conform to all statements relating thereto
contained in the Registration Statement and the Prospectus. The offers and sales
of the outstanding Common Stock, options and warrants to purchase shares of
Common Stock and promissory notes convertible into Common Stock were at all
relevant times either registered or qualified under the Act and the applicable
state securities or Blue Sky Laws or exempt from such registration requirements.
2.8.2 Securities Sold Pursuant to this Agreement. The
Securities have been duly authorized and, when issued and paid for, will be
validly issued, fully paid and non-assessable; the holders thereof are not and
will not be subject to personal liability by reason of being such holders; the
Securities are not and will not be subject to the preemptive rights of any
holders of any security of the Company or similar contractual rights granted by
the Company; and all corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken. When issued, the Underwriters' Purchase Option, the Underwriters'
Warrants and the Warrants will constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and payment therefor, the
number and type of securities of the Company called for thereby and the
Underwriters' Purchase Option, the Underwriters' Warrants and the Warrants will
be enforceable against the Company in accordance with their respective terms,
except (i) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws
6
affecting creditors' rights generally, (ii) as enforceability of any
indemnification provision may be limited under the federal and state securities
laws, and (iii) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
2.9 Registration Rights of Third Parties. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company, and none of such holders
have the right to include any of such securities in the Registration Statement.
2.10 Validity and Binding Effect of Agreements. This Agreement, the
Underwriters' Purchase Option, and the Warrant Agreement (as hereinafter
defined) have been duly and validly authorized by the Company, and constitute,
or when executed and delivered, will constitute, the valid and binding
agreements of the Company, enforceable against the Company in accordance with
their respective terms, except (i) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (ii) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
2.11 No Conflicts, Etc. The execution, delivery, and performance by the
Company of this Agreement, the Underwriters' Purchase Option, and the Warrant
Agreement, the consum mation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms hereof and
thereof do not and will not, with or without the giving of notice or the lapse
of time or both, (i) result in a breach of, or conflict with any of the terms
and provisions of, or constitute a default under, or result in the creation,
modification, termination or imposition of any lien, charge or encumbrance upon
any property or assets of the Company pursuant to the terms of any indenture,
mortgage, deed of trust, note, loan or credit agreement or any other agreement
or instrument evidencing an obligation for borrowed money, or any other
agreement or instrument to which the Company is a party or by which the Company
may be bound or to which any of the property or assets of the Company is
subject; (ii) result in any violation of the provisions of the Certificate of
Incorporation or the By-Laws of the Company; (iii) violate any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its properties or business; or (iv) have a material adverse effect on any
permit, license, certificate, registration, approval, consent, license or
franchise concerning the Company.
2.12 No Defaults; Violations. Except as described in the Prospectus, no
default exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of trust,
note, loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or instrument
to which the Company is a party or by which the Company may be bound or to which
any of the properties or assets of the Company is subject. The Company is not in
violation of any term or provision of its Certificate of Incorporation or
By-Laws or in violation of any franchise, license, permit, applicable law, rule,
regulation, judgment or decree of any governmental
7
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its properties or business, except as described in the Prospectus.
2.13 Corporate Power; Licenses; Consents.
2.13.1 Conduct of Business. The Company has all requisite
corporate power and authority, and has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies to own or lease its properties and conduct its
business as described in the Prospectus, and the Company is and has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates and permits and all federal, state and local rules and
regulations. The disclosures in the Registration Statement concerning the
effects of federal, state and local regulation on the Company's business as
currently contemplated are correct in all material respects and do not omit to
state a material fact.
2.13.2 Transactions Contemplated Herein. The Company has all
corporate power and authority to enter into this Agreement and to carry out the
provisions and conditions hereof, and all consents, authorizations, approvals
and orders required in connection therewith have been obtained. No consent,
authorization or order of, and no filing with, any court, government agency or
other body is required for the valid issuance, sale and delivery, of the
Securities pursuant to this Agreement, the Warrant Agreement and the
Underwriters' Purchase Option, and as contemplated by the Prospectus, except
with respect to applicable federal and state securities laws.
2.14 Title to Property; Insurance. The Company has good and defensible
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable or arising by law.
The Company has adequately insured its properties against loss or damage by fire
or other casualty and maintains, in adequate amounts, such other insurance as is
usually maintained by companies engaged in the same or similar business.
2.15 Litigation; Governmental Proceedings. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or, to the best of
the Company's knowledge, threatened against, or involving the properties or
business of, the Company which might materially and adversely affect the
financial position, prospects, value or the operation or the properties or the
business of the Company, or which questions the validity of the capital stock of
the Company or this Agreement or of any action taken or to be taken by the
Company pursuant to, or in connection with, this Agreement. There are no
outstanding orders, judgments or decrees of any court, governmental agency or
other tribunal, domestic or foreign, naming the Company and enjoining the
Company from taking, or requiring the Company to take, any action, or to which
the Company, its properties or business is bound or subject.
2.16 Good Standing. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of the state of
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
8
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on its properties or business.
2.17 Taxes. The Company has filed all returns (as hereinafter defined)
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has paid
all taxes (as hereinafter defined) shown as due on such returns that were filed
and has paid all taxes imposed on or assessed against the Company. The
provisions for taxes payable, if any, shown on the financial statements filed
with or as part of the Registration Statement are sufficient for all accrued and
unpaid taxes, whether or not disputed, and for all periods to and including the
dates of such consolidated financial statements. Except as disclosed in writing
to the Underwriters, (i) no issues have been raised (and are currently pending)
by any taxing authority in connection with any of the returns or taxes asserted
as due from the Company, and (ii) no waivers of statutes of limitation with
respect to the returns or collection of taxes have been given by or requested
from the Company. The term "taxes" mean all federal, state, local, foreign, and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other taxes, fees, assessments, or charges
of any kind whatever, together with any interest and any penalties, additions to
tax, or additional amounts with respect thereto. The term "returns" means all
returns, declarations, reports, statements, and other documents required to be
filed in respect to taxes.
2.18 Employees' Options. Except as set forth on Schedule 2.18, no
shares of Common Stock are eligible for sale pursuant to Rule 701 promulgated
under the Act.
2.19 Transactions Affecting Disclosure to NASD.
2.19.1 Finder's Fees. Except as set forth on Schedule 2.19.1,
there are no claims, payments, issuances, arrangements or understandings for
services in the nature of a finder's, consulting or origination fee with respect
to the introduction of the Company to the Underwriters or the sale of the
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuances with respect to the Company that may affect the
Underwriters' compensation, as determined by the National Association of
Securities Dealers, Inc. ("NASD").
2.19.2 Payments Within Twelve Months. Except as set forth on
Schedule 2.19.2, and other than payments to the Underwriters, the Company has
not made any direct or indirect payments (in cash, securities or otherwise) to
(i) any person, as a finder's fee, investing fee or otherwise, in consideration
of such person raising capital for the Company or introducing to the Company
persons who provided capital to the Company, (ii) to any NASD member, or (iii)
to any person or entity that has any direct or indirect affiliation or
association with any NASD member within the twelve month period prior to the
date on which the Registration Statement was filed with the Commission ("Filing
Date") or thereafter.
2.19.3 Use of Proceeds. None of the net proceeds of the
offering will be paid by the Company to any participating NASD member or any
affiliate or associate of any NASD member, except as specifically authorized
herein.
2.19.4 Insiders' NASD Affiliation. Except as set forth on
Schedule 2.19.4, no officer or director of the Company or owner of any of the
Company's unregistered securities has any direct
9
or indirect affiliation or association with any NASD member. The Company will
advise the Underwriters and the NASD if any stockholder of the Company becomes,
directly or indirectly, an affiliate or associated person of an NASD member
participating in the offering.
2.20 Foreign Corrupt Practices Act. Neither the Company nor any of its
officers, directors, employees or agents or any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or other person who was, is, or
may be in a position to help or hinder the business of the Company (or assist it
in connection with any actual or proposed transaction) which (i) might subject
the Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Prospectus or
(iii) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The internal accounting
controls and procedures of the Company are sufficient to cause the Company to
comply with the Foreign Corrupt Practices Act of 1977, as amended.
2.21 Nasdaq Eligibility. As of the Effective Date, the Public
Securities have been approved for designation upon notice of issuance on the
Nasdaq SmallCap Market ("Nasdaq").
2.22 Intangibles. The Company owns or possesses the requisite
licenses or rights to use all trademarks, service marks, service names, trade
names, patents and patent applications, copyrights and other rights
(collectively, "Intangibles") described as being licensed to or owned by it in
the Registration Statement. The Company's Intangibles which have been registered
in the United States Patent and Trademark Office have been fully maintained and
are in full force and effect. There is no claim or action by any person
pertaining to, or proceeding pending or, to the best of the Company's knowledge,
threatened and the Company has not received any notice of conflict with the
asserted rights of others which challenges the exclusive right of the Company
with respect to any Intangibles used in the conduct of the Company's business
except as described in the Prospectus. The Intangibles and the Company's current
products, services and processes do not infringe on any Intangibles held by any
third party. To the best of the Company's knowledge, no others have infringed
upon the Intangibles of the Company.
2.23 Relations With Employees.
2.23.1 Employee Matters. The Company has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment practices,
terms and conditions of employment and wages and hours relating thereto. To the
best of the Company's knowledge, there are no pending investigations involving
the Company by the U.S. Department of Labor, or any other governmental agency
responsible for the enforcement of such federal, state and local laws and
regulations. There is no unfair labor practice charge or complaint against the
Company pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving the Company or any predecessor entity, and none has ever occurred.
No question concerning representation exists respecting the employees of the
Company and no
10
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company,
if any.
2.23.2 Employee Benefit Plans. Other than as set forth in the
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to contribute to, any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute
to, and has at no time maintained or contributed to, a defined benefit plan, as
defined in Section 3(35) of ERISA. If the Company does maintain or contribute to
a defined benefit plan, any termination of the plan on the date hereof would not
give rise to liability under Title IV of ERISA. No ERISA Plan (or any trust
created thereunder) has engaged in a "prohibited transaction" within the meaning
of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as
amended ("Code"), which could subject the Company to any tax penalty for
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
The Company has never completely or partially withdrawn from a "multi-employer
plan."
2.24 Officers' Certificate. Any certificate signed by any duly
authorized officer of the Company and delivered to you or to your counsel shall
be deemed a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
2.25 Warrant Agreement. The Company has entered into a warrant
agreement with respect to the Warrants and the Underwriters' Warrants
substantially in the form filed as an exhibit to the Registration Statement
("Warrant Agreement") with Continental Stock Transfer & Trust Company, in form
and substance satisfactory to the Underwriters, providing for, among other
things, (i) no redemption of the Warrants without the consent of the
Underwriters and (ii) the payment of a warrant solicitation fee as contemplated
by Section 3.10 hereof.
2.26 Agreements With Insiders.
2.26.1 Lock-Up Agreements. The Company has caused to be duly
executed legally binding and enforceable agreements pursuant to which all of the
officers and directors of the Company (including their family members and
affiliates) and all holders of at least two percent (2%) of the outstanding
Common Stock of the Company or warrants or options to purchase, or other
securities convertible into, two percent (2%) or more of the outstanding Common
Stock, calculated with reference to the number of outstanding shares immediately
prior to the Effective Date, ("Insiders") agree not to sell any shares of Common
Stock or warrants or options to purchase, or other securities convertible into
Common Stock, owned by them (either pursuant to Rule 144 of the Regulations or
otherwise) for a period of 13 months following the Effective Date except with
the prior consent of GKN.
2.26.2 Right of First Refusal and Rule 144 Sales. The Company
has caused to be executed legally binding and enforceable agreements pursuant to
which each of its officers, directors and stockholders holding five percent (5%)
or more of the Company's outstanding stock has granted to GKN the rights
described in Section 7.2 of this Agreement.
2.27 Subsidiaries. The representations and warranties made by the
Company in this Agreement shall, in the event that the Company has one or more
subsidiaries (a "subsidiary(ies)")
11
also apply and be true with respect to each subsidiary, individually and taken
as a whole with the Company and all other subsidiaries, as if each
representation and warranty contained herein made specific reference to the
subsidiary each time the term "Company" was used.
2.28 Unaudited Financials. The Company has furnished to the
Underwriters as early as practicable prior to the date hereof a copy of the
latest available unaudited interim financial statements ("Unaudited Financials")
of the Company (which in no event shall be as of a date more than thirty days
prior to the Effective Date) which have been read by the Company's independent
accountants, as stated in their letter to be furnished pursuant to Section 4.3
hereof.
3. Covenants of the Company. The Company covenants and agrees as follows:
3.1 Amendments to Registration Statement. The Company will deliver
to the Underwriters, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and not file any such amendment or supplement to which the Underwriters
shall reasonably object.
3.2 Federal Securities Laws.
3.2.1 Compliance. During the time when a Prospectus is
required to be delivered under the Act, the Company will use all reasonable
efforts to comply with all requirements imposed upon it by the Act, the
Regulations and the Exchange Act and by the regulations under the Exchange Act,
as from time to time in force, so far as necessary to permit the continuance of
sales of or dealings in the Securities in accordance with the provisions hereof
and the Prospectus. If at any time when a Prospectus relating to the Securities
is required to be delivered under the Act any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriters, the Prospectus, as then amended or supplemented, includes an
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Underwriters promptly and prepare and file with the
Commission, subject to Section 3.1 hereof, an appropriate amendment or
supplement in accordance with Section 10 of the Act.
3.2.2 Filing of Final Prospectus. The Company will file the
Prospectus (in form and substance satisfactory to the Underwriters) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 Exchange Act Registration. For a period of five years
from the Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock and Warrants under the provisions of Section 12
of the Exchange Act.
3.3 Blue Sky Filing. The Company will endeavor in good faith, in
cooperation with the Underwriters, at or prior to the time the Registration
Statement becomes effective, to qualify the
12
Securities for offering and sale under the securities laws of such jurisdictions
as the Underwriters may reasonably designate, provided that no such
qualification shall be required in any jurisdiction where, as a result thereof,
the Company would be subject to service of general process or to taxation as a
foreign corporation doing business in such jurisdiction. In each jurisdiction
where such qualification shall be effected, the Company will, unless the
Underwriters agree that such action is not at the time necessary or advisable,
use all reasonable efforts to file and make such statements or reports at such
times as are or may be required by the laws of such jurisdiction.
3.4 Delivery to the Underwriters of Prospectuses. The Company will
deliver to the Underwriters, without charge, from time to time during the period
when the Prospectus is required to be delivered under the Act or the Exchange
Act, such number of copies of each Preliminary Prospectus and the Prospectus as
the Underwriters may reasonably request and, as soon as the Registration
Statement or any amendment or supplement thereto becomes effective, deliver to
you two original executed Registration Statements, including exhibits, and all
post-effective amendments thereto and copies of all exhibits filed therewith or
incorporated therein by reference and all original executed consents of
certified experts.
3.5 Events Requiring Notice to the Underwriters. The Company will
notify the Underwriters immediately and confirm the notice in writing (i) of the
effectiveness of the Registration Statement and any amendment thereto, (ii) of
the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding for that purpose, (iii) of the issuance by any
state securities commission of any proceedings for the suspension of the
qualification of the Securities for offering or sale in any jurisdiction or of
the initiation, or the threatening, of any proceeding for that purpose, (iv) of
the mailing and delivery to the Commission for filing of any amendment or
supplement to the Registration Statement or Prospectus, (v) of the receipt of
any comments or request for any additional information from the Commission, and
(vi) of the happening of any event during the period described in Section 3.4
hereof which, in the judgment of the Company, makes any statement of a material
fact made in the Registration Statement or the Prospectus untrue or which
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
3.6 Review of Financial Statements. For a period of five years from the
Effective Date, the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit) the Company's
financial statements for each of the first three fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
Form 10-Q quarterly reports and the mailing of quarterly financial information
to stockholders.
3.7 Reserved.
3.8 Secondary Market Trading and Standard & Poor's. The Company will
take all necessary and appropriate actions to achieve accelerated publication in
Standard and Poor's Corporation Records Corporate Descriptions (within thirty
(30) days after the Effective Date) and to maintain such publication with
updated quarterly information for a period of five years from the Effective
Date, including the payment of any necessary fees and expenses. The Company
shall take such action as may be reasonably requested by the Underwriters to
obtain a secondary
13
market trading exemption in such states as may be requested by the Underwriters,
including the payment of any necessary fees and expenses and the filing of a
Form (e.g. 25101(b)) for secondary market trading in the State of California on
the Effective Date or as soon thereafter as is permissible.
3.9 Nasdaq Maintenance. For a period of five years from the date
hereof, the Company will use its best efforts to maintain the quotation on
Nasdaq of the Common Stock and Warrants and, if the Company satisfies the
inclusion standards of the Nasdaq National Market System, apply for and maintain
quotations on the Nasdaq National Market System of such securities during such
period.
3.10 Warrant Solicitation and Registration of Common Stock
Underlying the Warrants.
3.10.1 Warrant Solicitation and Warrant Solicitation Fees. The
Company hereby engages the Underwriters, on a non-exclusive basis, as its agents
for the solicitation of the exercise of the Warrants. The Company, at its cost,
will (i) assist the Underwriters with respect to such solicitation, if requested
by the Underwriters and will (ii) provide to the Underwriters, and direct the
Company's transfer and warrant agent to provide to the Underwriters, lists of
the record and, to the extent known, beneficial owners of the Company's
Warrants. Commencing one year from the Effective Date, the Company will pay to
the Underwriters a commission of five percent of the Warrant exercise price for
each Warrant exercised, payable on the date of such exercise, on the terms
provided for in the Warrant Agreement, if allowed under the rules and
regulations of the NASD and only if the Underwriters have provided bona fide
services to the Company in connection with the exercise of Warrants and have
received written confirmation from the holder that Laidlaw or GKN has solicited
such exercise. In addition to soliciting, either orally or in writing, the
exercise of 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 the assisting in the processing of the
exercise of Warrants. The Underwriters may engage sub-agents who are members of
the NASD in its solicitation efforts, provided, however, nothing herein shall
obligate the Company to make any payment to any such sub-agent. The Company will
disclose the arrangement to pay such solicitation fees to the Underwriters in
any prospectus used by the Company in connection with the registration of the
shares of Common Stock underlying the Warrants. The Company shall not be
obligated to reimburse the Underwriters for any of their expenses incurred in
connection with such solicitation.
3.10.2 Registration of Common Stock. The Company agrees that
prior to the date that the Warrants become exercisable, it shall file with the
Commission a post-effective amendment to the Registration Statement, if
possible, or a new registration statement, to register, under the Act, and it
shall take such action as is necessary to qualify for sale, in those states in
which the Warrants were initially offered by the Company, the Common Stock
issuable upon exercise of the Warrants. In either case, the Company shall cause
the same to become effective at or prior to the date that the Warrants become
exercisable, and maintain the effectiveness of such registration statement and
keep current a prospectus thereunder and maintain such qualification until the
expiration of the Warrants in accordance with the provisions of the Warrant
Agreement.
3.11 Reserved.
14
3.12 Reports to the Underwriters.
3.12.1 Periodic Reports, Etc. For a period of five years from
the Effective Date, the Company will promptly furnish to the Underwriters copies
of such financial statements and other periodic and special reports as the
Company from time to time files with any governmental authority or furnishes
generally to holders of any class of its securities, and promptly furnish to the
Underwriters (i) a copy of each periodic report the Company shall be required to
file with the Commission, (ii) a copy of every press release and every news item
and article with respect to the Company or its affairs which was released by the
Company, (iii) copies of each Form SR, (iv) a copy of each Form 8-K or Schedules
13D, 13G, 14D-1 or 13E-4 received or prepared by the Company, (v) a copy of
monthly statements setting forth such information regarding the Company's
results of operations and financial position (including balance sheet, profit
and loss statements and data regarding outstanding purchase orders) as is
regularly prepared by management of the Company, and (vi) such additional
documents and information with respect to the Company and the affairs of any
future subsidiaries of the Company as the Underwriters may from time to time
reasonably request.
3.12.2 Transfer Sheets and Weekly Position Listings. For a
period of five years from the Closing Date, the Company will furnish to the
Underwriters at the Company's sole expense such transfer sheets and position
listings of the Company's securities as the Underwriters may request, including
the daily, weekly and monthly consolidated transfer sheets of the transfer agent
of the Company and the weekly position listings of the Depository Trust Company.
3.12.3 Secondary Market Trading Memorandum. Until such time as
the Securities are listed or quoted, as the case may be, on one of the
following: the New York Stock Exchange, the American Stock Exchange or Nasdaq
National Market, the Company shall cause the Underwriters' legal counsel to
deliver to the Underwriters on the Effective Date a written opinion detailing
those states in which Securities may be traded in non-issuer transactions under
the Blue Sky laws of the fifty states ("Secondary Market Trading Memorandum")
and to update such memorandum as reasonably requested by the Underwriters. The
Company shall pay to the Underwriters' legal counsel a one-time fee of $5,000
for such services at the Closing.
3.13 Underwriters' Purchase Option. On the Closing Date, the Company
will execute and deliver the Underwriters' Purchase Option to the Underwriters
substantially in the form filed as an exhibit to the Registration Statement.
3.14 Disqualification of Form SB-2. For a period equal to five years
from the date hereof, the Company will not take any action or actions which may
prevent or disqualify the Company's use of Form SB-2 (or other appropriate form)
for the registration of the Warrants and the Underwriters' Purchase Option and
the securities issuable upon exercise of those securities under the Act.
3.15 Payment of Expenses.
3.15.1 General Expenses. The Company hereby agrees to pay on
each of the Closing Date and the Option Closing Date, if any, to the extent not
paid at Closing Date, all expenses incident to the performance of the
obligations of the Company under this Agreement, including but not limited to
(i) the preparation, printing, filing, delivery and mailing (including the
payment of postage with respect to such mailing) of the Registration Statement,
the Prospectus and the Preliminary Prospectuses and the printing and mailing of
this Agreement and related
15
documents, including the cost of all copies thereof and any amendments thereof
or supplements thereto supplied to the Underwriters in quantities as may be
required by the Underwriters, (ii) the printing, engraving, issuance and
delivery of the shares of Common Stock, the Warrants and the Underwriters'
Purchase Option, including any transfer or other taxes payable thereon, (iii)
the qualification of the Securities under state or foreign securities or Blue
Sky laws, including the filing fees under such Blue Sky laws, the costs of
printing and mailing the "Preliminary Blue Sky Memorandum," and all amendments
and supplements thereto, fees (not to exceed $35,000) and disbursements of the
Underwriters' counsel, and fees and disbursements of local counsel, if any,
retained for such purpose, and a one-time fee of $5,000 payable to the
Underwriters' counsel for the preparation of the Secondary Market Trading
Memorandum, (iv) costs associated with applications for assignments of a rating
of the Securities by qualified rating agencies, (v) filing fees, costs and
expenses (including fees (not to exceed $5,000) and disbursements for the
Underwriters' counsel) incurred in registering the offering with the NASD, (vi)
costs of placing "tombstone" advertisements in The Wall Street Journal, The New
York Times and a third publication to be selected by the Underwriters, (vii)
fees and disbursements of the transfer and warrant agent, (viii) the Company's
expenses associated with "due diligence" meetings arranged by the Underwriters;
(ix) the preparation, binding and delivery of transaction "bibles," in number,
form and style reasonably satisfactory to the Underwriters and transaction
lucite cubes or similar commemorative items in a style and quantity as
reasonably requested by the Underwriters, (x) any listing of the Securities on
Nasdaq, and any securities exchange or any listing in Standard & Poor's, (xi)
fees and disbursements of any counsel engaged to review the Company's
intellectual property rights, and (xii) all other costs and expenses incident to
the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section 3.15.1. The Underwriters may deduct
from the net proceeds of the offering payable to the Company on the Closing
Date, or the Option Closing Date, if any, the expenses set forth herein to be
paid by the Company to the Underwriters and/or to third parties.
3.15.2 Non-Accountable Expenses. The Company further agrees
that, in addition to the expenses payable pursuant to Section 3.15.1, it will
pay to the Underwriters a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Securities, of which $60,000 has been paid to date, and the Company will pay the
balance on the Closing Date and any additional monies owed attributable to the
Option Securities or otherwise on the Option Closing Date by certified or bank
cashier's check or, at the election of the Underwriters, by deduction from the
proceeds of the offering contemplated herein. If the offering contemplated by
this Agreement is not consummated for any reason whatsoever then the following
provisions shall apply: The Company's liability for payment to the Underwriters
of the non-accountable expense allowance shall be equal to the sum of the
Underwriters' actual out-of-pocket expenses (including, but not limited to,
counsel fees, "road- show" and due diligence expenses). The Underwriters shall
retain such part of the non-accountable expense allowance previously paid as
shall equal such actual out-of-pocket expenses. If the amount previously paid is
insufficient to cover such actual out-of-pocket expenses, the Company shall
remain liable for and promptly pay any other actual out-of-pocket expenses. If
the amount previously paid exceeds the amount of actual out-of-pocket expenses,
the Underwriters shall promptly remit to the Company any such excess.
3.16 Application of Net Proceeds. The Company will apply the net
proceeds from the offering received by it in a manner consistent with the
application described under the caption "Use of Proceeds" in the Prospectus. The
Company hereby agrees that, except as so described, the
16
Company will not apply any net proceeds from the offering to pay (i) any debt
for borrowed funds, or (ii) any debt or obligation owed to any Insider.
3.17 Delivery of Earnings Statements to Security Holders. The Company
will make generally available to its security holders as soon as practicable,
but not later than the first day of the fifteenth full calendar month following
the Effective Date, an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under Section 11(a) of the Act) covering a period of at least twelve
consecutive months beginning after the Effective Date.
3.18 Key Person Life Insurance. The Company will maintain key person
life insurance in an amount no less than $1,000,000 on the life of Lorrin G.
Gale and pay the annual premiums therefor naming the Company as the sole
beneficiary thereof for at least three years following the Effective Date.
3.19 Stabilization. Neither the Company, nor, to its knowledge, any of
its employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
3.20 Internal Controls. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.21 Accountants and Lawyers. For a period of five years from the
Effective Date, the Company shall retain independent public accountants and
securities lawyers acceptable to the Underwriters. Accountants BDO Seidman, LLP
and lawyers Warner & Stackpole LLP are acceptable to the Underwriters.
3.22 Transfer Agent. For a period of five years from the Effective
Date, the Company shall retain a transfer agent for the Common Stock and
Warrants acceptable to the Underwriters. Continental Stock Transfer & Trust
Company ("Transfer Agent") is acceptable to the Underwriters.
3.23 Sale of Securities. The Company agrees not to permit or cause a
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the Insiders for a period of 13 months following the Effective
Date without obtaining the prior written approval of GKN.
3.24 Exercise Price of Options. The Company will not grant any option
pursuant to the Company's 1995 Stock Option Plan at an exercise price less than
85% of the fair market value of the Common Stock on the date of the grant.
17
4. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Securities, as provided herein, shall
be subject to the continuing accuracy of the representations and warranties of
the Company as of each of the Closing Date and the Option Closing Date, if any,
to the accuracy of the statements of officers of the Company made pursuant to
the provisions hereof and to the performance by the Company of its obligations
hereunder and to the following conditions:
4.1 Regulatory Matters.
4.1.1 Effectiveness of Registration Statement. The
Registration Statement has been declared effective on the date of this Agreement
and, at each of the Closing Date and the Option Closing Date, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for such purpose shall have been instituted or shall
be pending or contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Graubard Mollen & Miller, counsel to the
Underwriters.
4.1.2 NASD Clearance. By the Effective Date, the Underwriters
shall have received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriters as described in the Registration
Statement.
4.1.3 No Blue Sky Stop Orders. No order suspending the sale of
the Securities in any jurisdiction designated by the Underwriters pursuant to
Section 3.3 hereof shall have been issued on either on the Closing Date or the
Option Closing Date, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
4.2 Company Counsel Matters.
4.2.1 Effective Date Opinion of Counsel. On the Effective
Date, the Underwriters shall have received the favorable opinion of Warner &
Stackpole LLP, counsel to the Company, dated the Effective Date, addressed to
the Underwriters and in form and substance satisfactory to Graubard Mollen &
Miller, counsel to the Underwriters, to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation and is in good standing under the laws of its
state of incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which it owns or
leases any real property or the character of its operations requires such
qualification or licensing.
(ii) The Company has all requisite corporate power
and authority, and has all necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental or regulatory
officials and bodies to own or lease its properties and conduct its business as
described in the Prospectus, and the Company is and has been doing business in
compliance with all such authorizations, approvals, orders, licenses,
certificates and permits and all federal, state and local laws, rules and
regulations. The Company has all corporate power and authority to enter into
this Agreement, the Warrant Agreement, the Underwriters' Purchase Option and to
carry out the provisions and conditions hereof, and all consents,
authorizations, approvals and orders required in connection therewith have been
obtained. No consents, approvals, authorizations or orders of, and no filing
with any court or governmental agency or body (other than
18
such as may be required under the Act and applicable Blue Sky laws), is required
for the valid authorization, issuance, sale and delivery of the Securities, and
the consummation of the transactions and agreements contemplated by this
Agreement, the Warrant Agreement and the Underwriters' Purchase Option, and as
contemplated by the Prospectus or if so required, all such authorizations,
approvals, consents, orders, registrations, licenses and permits have been duly
obtained and are in full force and effect and have been disclosed to the
Underwriters.
(iii) All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with respect
thereto, and are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company or, to the best of such
counsel's knowledge after due inquiry, similar contractual rights granted by the
Company. The outstanding options and warrants to purchase shares of Common Stock
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. The offers and sales of the
outstanding Common Stock, options and warrants to purchase shares of Common
Stock and promissory notes convertible into Common Stock were at all relevant
times either registered under the Act and the applicable state securities or
Blue Sky Laws or exempt from such registration requirements. The authorized and
outstanding capital stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and,
when issued and paid for, will be validly issued, fully paid and non-assessable;
the holders thereof are not and will not be subject to personal liability by
reason of being such holders. The Securities are not and will not be subject to
the preemptive rights of any holders of any security of the Company or, to the
best of such counsel's knowledge after due inquiry, similar contractual rights
granted by the Company. All corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken. When issued, the Underwriters' Purchase Option, the Underwriters'
Warrants and the Warrants will constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and payment therefor, the
number and type of securities of the Company called for thereby and such
Warrants, the Underwriters' Purchase Option, and the Underwriters' Warrants,
when issued, in each case, will be enforceable against the Company in accordance
with their respective terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. The certificates representing the
Securities are in due and proper form.
(v) To the best of such counsel's knowledge after
due inquiry, except as set forth in the Prospectus, no holders of any securities
of the Company or of any options, warrants or securities of the Company
exercisable for or convertible or exchangeable into securities of the Company
have the right to require the Company to register any such securities of the
Company
19
under the Act or to include any such securities in a registration statement to
be filed by the Company, including the Registration Statement.
(vi) To the best of such counsel's knowledge,
after due inquiry, the shares of Common Stock and the Warrants are eligible for
quotation on Nasdaq.
(vii) This Agreement, the Underwriters' Purchase
Option and the Warrant Agreement have each been duly and validly authorized and,
when executed and delivered by the Company, will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provisions may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(viii) The execution, delivery and performance by
the Company of this Agreement, the Underwriters' Purchase Option and the Warrant
Agreement, the issuance and sale of the Securities, the consummation of the
transactions contemplated hereby and thereby and the compliance by the Company
with the terms and provisions hereof and thereof, do not and will not, with or
without the giving of notice or the lapse of time, or both, (a) conflict with,
or result in a breach of, any of the terms or provisions of, or constitute a
default under, or result in the creation or modification of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company pursuant to the terms of, any material mortgage, deed of trust, note,
indenture, loan, contract, commitment or other material agreement or instrument
of which such counsel has knowledge and to which the Company is a party or by
which the Company or any of its properties or assets may be bound, (b) result in
any violation of the provisions of the Certificate of Incorporation or the
By-Laws of the Company, (c) violate any judgment, order or decree of which such
counsel has knowledge, statute, rule or regulation applicable to the Company of
any court, domestic or foreign, or of any federal, state or other regulatory
authority or other governmental body having jurisdiction over the Company, its
properties or assets, or (d) have a material adverse effect on any permit,
certification, registration, approval, consent, license or franchise of the
Company.
(ix) The Registration Statement, each Preliminary
Prospectus and the Prospectus and any post-effective amendments or supplements
thereto (other than the financial statements included therein, as to which no
opinion need be rendered) comply as to form in all material respects with the
requirements of the Act and Regulations. The Securities and all other securities
issued or issuable by the Company conform in all respects to the description
thereof contained in the Registration Statement and the Prospectus. The
statements in the Prospectus under "Business," "Management," "Certain
Transactions," "Risk Factors," Principal Stockholders," "Description of
Securities" and "Shares Eligible for Future Sale" have been reviewed by such
counsel, and insofar as they contain descriptions of law, statutes, licenses,
rules or regulations or legal conclusions are correct in all material respects.
No statute or regulation or legal or governmental proceeding required to be
described in the Prospectus is not described as required, nor are any contracts
or documents of which such counsel has knowledge of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement not so described or filed as required.
20
(x) Counsel has participated in conferences with
officers and other representatives of the Company, representatives of the
independent public accountants for the Company and representatives of the
Underwriters at which the contents of the Registration Statement, the Prospectus
and related matters were discussed and although such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and
Prospectus (except as otherwise set forth in counsel's opinion), no facts have
come to the attention of such counsel which lead them to believe that either the
Registration Statement or the Prospectus or any amendment or supplement thereto,
as of the date of such opinion, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements and schedules and
other financial and statistical data included in the Registration Statement or
Prospectus).
(xi) The Registration Statement is effective under
the Act, and, to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or threatened
under the Act or applicable state securities laws.
(xii) The Company has good and defensible title to,
or valid and enforceable leasehold estates in, all items of real and personal
property (tangible and intangible) stated in the Prospectus to be owned or
leased by it, free and clear of all liens, encumbrances, claims, security
interests, defects and restrictions of any material nature whatsoever, other
than those referred to in the Prospectus and liens for taxes not yet due and
payable.
(xiii) Except as described in the Prospectus, to the
best of such counsel's knowledge, no default exists in the due performance and
observance of any term, covenant or condition of any license, contract,
indenture, mortgage, deed of trust, note, loan or credit agreement, or any other
agreement or instrument evidencing an obligation for borrowed money, or any
other agreement or instrument to which the Company is a party or by which the
Company may be bound or to which any of the properties or assets of the Company
is subject, except where such defaults, either singly or in the aggregate, would
not have a material adverse effect on the Company or its operations. The Company
is not in violation of any term or provision of its Certificate of Incorporation
or By-Laws. The Company is not in violation of any judgment, order or decree of
which such counsel has knowledge, franchise, license, permit, law, rule or
regulation applicable to the Company, of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any of its
properties or business, except where such violations, either singly or in the
aggregate, would not have a material adverse effect on the Company or its
operations.
(xiv) To the best of such counsel's knowledge after
due inquiry, the Company owns or possesses, free and clear of all liens or
encumbrances and rights thereto or therein by third parties, other than as
described in the Prospectus, the requisite licenses or other rights to use all
Intangibles and other rights necessary to conduct its business (including,
without limitation, any such licenses or rights described in the Prospectus as
being licensed to, owned or possessed by the Company), and there is no claim or
action by any person pertaining to, or proceeding, pending or, to the best of
such counsel's knowledge after due inquiry, threatened, which challenges the
exclusive rights of the Company with respect to any Intangibles used in the
21
conduct of its business (including without limitation any such licenses or
rights described in the Prospectus as being owned or possessed by the Company);
to the best of such counsel's knowledge after due inquiry, the Company's current
products, services and processes do not infringe on any Intangibles held by
third parties except as discussed in the Prospectus.
(xv) To the best of such counsel's knowledge after
due inquiry, except as described in the Prospectus, the Company does not own an
interest in any corporation, partnership, joint venture, trust or other business
entity.
(xvi) To the best of such counsel's knowledge after
due inquiry, except as set forth in the Prospectus, there is no action, suit or
proceeding before or by any court or governmental agency or body, domestic or
foreign, now pending or threatened against the Company, which might result in
any material and adverse change in the condition (financial or
otherwise), business or prospects of the Company, or which might materially and
adversely affect the properties or assets thereof.
(xvii) To the best of such counsel's knowledge after
due inquiry, neither the Company, nor its officers, employees, agents or other
persons acting on their behalf has, directly or indirectly, given or agreed to
give any money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer or supplier, any
employee or agent of a customer or supplier, any official or employee of any
governmental agency or body (domestic or foreign), any political party or
candidate for office (domestic or foreign) or any other person who was, is or
may be in a position to help or hinder the business of the Company (or assist it
in connection with any actual or proposed transaction) which (a) might subject
the Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (b) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in the financial statements contained in the Registration Statement
or (c) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls and procedures are sufficient to cause the Company to comply
with the Foreign Corrupt Practices Act of 1977, as amended.
(xviii) To the best of such counsel's knowledge after
due inquiry, except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in the nature
of a finder's or origination fee with respect to the sale of the Securities
hereunder or financial consulting arrangements or any other arrangements,
agreements, understandings, payments or issuances that may affect the
Underwriters' compensation, as determined by the NASD.
Unless the context clearly indicates otherwise, the term
"Company" as used in this Section 4.2.1 shall include each subsidiary of the
Company. The opinion of counsel for the Company and any opinion relied upon by
such counsel for the Company shall include a statement to the effect that it may
be relied upon by counsel for the Underwriters in its opinion delivered to the
Underwriters.
4.2.2 Closing Date and Option Closing Date Opinion of Counsel.
On each of the Closing Date and the Option Closing Date, if any, the
Underwriters shall have received the favorable opinion of Warner & Stackpole
LLP, counsel to the Company, dated the Closing Date or the Option Closing Date,
as the case may be, addressed to the Underwriters and in form and
22
substance satisfactory to Graubard Mollen & Miller, counsel to the Underwriters,
confirming as of the Closing Date and, if applicable, the Option Closing Date,
the statements made by Warner & Stackpole LLP in its opinion delivered on the
Effective Date.
4.2.3 Reliance. In rendering such opinion, such counsel may
rely (i) as to matters involving the application of laws other than the laws of
the United States and jurisdictions in which they are admitted, to the extent
such counsel deems proper and to the extent specified in such opinion, if at
all, upon an opinion or opinions (in form and substance reasonably satisfactory
to Underwriters' counsel) of other counsel reasonably acceptable to
Underwriters' counsel, familiar with the applicable laws, and (ii) as to matters
of fact, to the extent they deem proper, on certificates or other written
statements of officers of departments of various jurisdiction having custody of
documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to Underwriters' counsel if requested. Any opinion relied upon by counsel for
the Company shall include a statement to the effect that it may be relied upon
by counsel for the Underwriters in its opinion delivered to the Underwriters.
4.2.4 Secondary Market Trading Memorandum. On the Effective
Date the Underwriters shall have received the written Secondary Market Trading
Memorandum.
4.3 Cold Comfort Letter. At the time this Agreement is executed, and at
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the Underwriters and in form and substance
satisfactory in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to you and to Graubard
Mollen & Miller, counsel for the Underwriters, from BDO Seidman, LLP, dated,
respectively, as of the date of this Agreement and as of the Closing Date and
the Option Closing Date, if any:
(i) confirming that they are independent
accountants with respect to the Company within the meaning of the Act and the
applicable Regulations;
(ii) stating that in their opinion the financial
statements of the Company included in the Registration Statement and Prospectus
comply as to form in all material respects with the applicable accounting
requirements of the Act and the published Regulations thereunder;
(iii) stating that, based on the performance of
procedures specified by the American Institute of Certified Public Accountants
for a review of the latest available unaudited interim financial statements of
the Company (as described in Statement on Auditing Standards ("SAS") No. 71 --
"Interim Financial Information"), with an indication of the date of the latest
available unaudited interim financial statements, a reading of the latest
available minutes of the stockholders and board of directors and the various
committees of the board of directors, consultations with officers and other
employees of the Company responsible for financial and accounting matters and
other specified procedures and inquiries, nothing has come to their attention
which would lead them to believe that (a) the unaudited financial statements of
the Company included in the Registration Statement do not comply as to form in
all material respects with the applicable accounting requirements of the Act and
the Regulations or any material modification should be made to the unaudited
interim financial statements included in the Registration Statement for them to
be in conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial statements of
the Company included in the Registration Statement, (b) at a date not later than
five days prior to the
23
Effective Date, Closing Date or Option Closing Date, as the case may be, there
was any change in the capital stock or long-term debt of the Company, or any
decrease in the stockholders' equity of the Company as compared with amounts
shown in the December 31, 1996 balance sheet included in the Registration
Statement, other than as set forth in or contemplated by the Registration
Statement, or, if there was any decrease, setting forth the amount of such
decrease, and (c) during the period from December 31, 1996 to a specified date
not later than five days prior to the Effective Date, Closing Date or Option
Closing Date, as the case may be, there was any decrease in revenues, net
earnings or net earnings per share of Common Stock, in each case as compared
with the corresponding period in the preceding year and as compared with the
corresponding period in the preceding quarter, other than as set forth in or
contemplated by the Registration Statement, or, if there was any such decrease,
setting forth the amount of such decrease;
(iv) setting forth, at a date not later than five
days prior to the Effective Date, the amount of liabilities of the Company
(including a break-down of commercial papers and notes payable to banks);
(v) stating that they have compared specific
dollar amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Company set forth
in the Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, and work sheets, of the Company with the results obtained
from the application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and found them to
be in agreement;
(vi) stating that they have not during the
immediately preceding five year period brought to the attention of the Company's
management any reportable condition related to internal structure, design or
operation as defined in SAS No. 60 -- "Communication of Internal Control
Structure Related Matters Noted in an Audit," in the Company's internal
controls; and
(vii) statements as to such other matters incident
to the transaction contemplated hereby as you may reasonably request.
4.4 Officers' Certificates.
4.4.1 Officers' Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Underwriters shall have received a
certificate of the Company signed by the President and the Chief Financial
Officer of the Company, dated the Closing Date or the Option Closing Date, as
the case may be, respectively, to the effect that the Company has performed all
covenants and complied with all conditions required by this Agreement to be
performed or complied with by the Company prior to and as of the Closing Date,
or the Option Closing Date, as the case may be, and that the conditions set
forth in Section 4.5 hereof have been satisfied as of such date and that, as of
Closing Date and the Option Closing Date, as the case may be, the
representations and warranties of the Company set forth in Section 2 hereof are
true and correct. In addition, the Underwriters will have received such other
and further certificates of officers of the Company as the Underwriters may
reasonably request.
24
4.4.2 Secretary's Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Underwriters shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation, as amended, of the
Company are true and complete, have not been modified and are in full force and
effect, (ii) that the resolutions relating to the public offering contemplated
by this Agreement are in full force and effect and have not been modified, (iii)
all correspondence between the Company or its counsel and the Commission, (iv)
all correspondence between the Company or its counsel and the NASD concerning
inclusion of the Securities on Nasdaq, and (v) as to the incumbency of the
officers of the Company. The documents referred to in such certificate shall be
attached to such certificate.
4.5 No Material Changes. Prior to and on each of the Closing Date
and the Option Closing Date, if any, (i) there shall have been no material
adverse change or development involving a prospective material change in the
condition or prospects or the business activities,
financial or otherwise, of the Company from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus, (ii) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
materially adverse to the Company, taken as a whole, (iii) the Company shall not
be in default under any provision of any instrument relating to any outstanding
indebtedness which default would have a material adverse effect on the Company,
(iv) no material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus, (v)
no action suit or proceeding, at law or in equity, shall have been pending or
threatened against the Company or affecting any of its property or business
before or by any court or federal or state commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus, (vi) no stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated or threatened by the
Commission, and (vii) the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations and
conform in all material respects to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
4.6 Delivery of Underwriters' Purchase Option. The Company has
delivered to the Underwriters an executed copy of the Underwriters' Purchase
Option.
4.7 Opinion of Counsel for the Underwriters. All proceedings taken
in connection with the authorization, issuance or sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and substance to
you and to Graubard Mollen & Miller, counsel to the Underwriters, and you shall
have received from such counsel a favorable opinion, dated the Closing Date and
the Option Closing Date, if any, with respect to such of these proceedings as
you may reasonably require. On or prior to the Effective Date, the Closing Date
and the Option Closing Date, as the case may be, counsel to the Underwriters
shall have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review or pass upon the
matters referred to in this Section 4.7, or in order to evidence the accuracy,
25
completeness or satisfaction of any of the representations, warranties or
conditions herein contained.
5. Indemnification.
5.1 Indemnification of the Underwriters.
5.1.1 General. Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless each of the Underwriters, their
respective directors, officers, agents and employees and each person, if any,
who controls an Underwriter ("controlling person") within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any and all loss,
liability, claim, damage and expense whatsoever (including but not limited to
any and all legal or other expenses reasonably incurred in investigating,
preparing or defending against any litigation, commenced or threatened, whether
arising out of any action between the Underwriters and the Company or between
the Underwriters and any third-party or otherwise) to which they or any of them
may become subject under the Act, the Exchange Act or any other statute or at
common law or otherwise or under the laws of foreign countries, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in (i) any Preliminary Prospectus, the Registration Statement or
the Prospectus (as from time to time each may be amended and supplemented); (ii)
in any post-effective amendment or amendments or any new registration statement
and prospectus in which is included securities of the Company issued or issuable
upon exercise of the Underwriters' Purchase Option; or (iii) any application or
other document or written communication (in this Section 5 collectively called
"application") executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the Securities
under the securities laws thereof or filed with the Commission, any state
securities commission or agency, Nasdaq or any securities exchange; or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, unless such statement
or omission was made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment or supplement thereof, or
in any application, as the case may be. The Company agrees promptly to notify
the Underwriters of the commencement of any litigation or proceedings against
the Company or any of its officers, directors or controlling persons in
connection with the issue and sale of the Securities or in connection with the
Registration Statement or Prospectus.
5.1.2 Procedure. If any action is brought against an
Underwriter or controlling person in respect of which indemnity may be sought
against the Company pursuant to Section 5.1.1, such Underwriter shall promptly
notify the Company in writing of the institution of such action and the Company
shall assume the defense of such action, including the employment and fees of
counsel (subject to the approval of the Underwriters) and payment of actual
expenses. Such Underwriter or controlling person shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or controlling person unless
(i) the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or (ii) the Company shall
not have employed counsel to have charge of the defense of such action, or (iii)
such indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to the Company (in which case the Company shall
26
not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events the fees and expenses of
not more than one additional firm of attorneys selected by the Underwriter or
Underwriters and/or controlling person shall be borne by the Company.
Notwithstanding anything to the contrary contained herein, if an Underwriter or
controlling person shall assume the defense of such action as provided above,
the Company shall have the right to approve the terms of any settlement of such
action which approval shall not be unreasonably withheld.
5.2 Indemnification of the Company. The Underwriters, severally and
not jointly, agree to indemnify and hold harmless the Company against any and
all loss, liability, claim, damage and expense described in the foregoing
indemnity from the Company to the several Underwriters, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions directly relating to the transactions effected by the Underwriters in
connection with this offering made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto or
in any application in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to an Underwriter by or on
behalf of such Underwriter expressly for use in such Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto or
in any such application. In case any action shall be brought against the Company
or any other person so indemnified based on any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto or
any application, and in respect of which indemnity may be sought against any
Underwriter, such Underwriter shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the several Underwriters by the provisions of Section
5.1.2.
5.3 Contribution.
5.3.1 Contribution Rights. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for indemnification
pursuant hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 5 provides for indemnification in such case, or (ii) contribution
under the Act, the Exchange Act or otherwise may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 5, then, and in each such case, the Company and the Underwriters shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by said indemnity agreement incurred by the Company and
the Underwriters, as incurred, in such proportions that the Underwriters are
responsible for that portion represented by the percentage that the underwriting
discount appearing on the cover page of the Prospectus bears to the initial
offering price appearing thereon and the Company is responsible for the balance;
provided, that, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 5.3, neither Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay in respect of such losses, liabilities, claims,
damages and expenses. For purposes of this Section, each director, officer and
employee of an
27
Underwriter, and each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act shall have the same rights to contribution as
such Underwriter.
5.3.2 Contribution Procedure. Within fifteen days after
receipt by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid fifteen days,
the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution on account of any settlement of any claim, action or
proceeding which was effected by the party seeking contribution without the
written consent of the contributing party. The contribution provisions contained
in this Section are intended to supersede, to the extent permitted by law, any
right to contribution under the Act, the Exchange Act or otherwise available.
6. Default by an Underwriter. If either Underwriter shall default in its
obligations to purchase Securities hereunder, the non-defaulting Underwriter
may, in its discretion, arrange for itself or another party or parties to
purchase such Securities on the terms contained herein. In the event that within
one business day after such default the non-defaulting Underwriter does not
arrange for the purchase of the shares of Common Stock and Warrants as to which
such default relates, this Agreement will thereupon terminate automatically (but
only with respect to the obligations relating to the Option Securities if such
default occurs after the Closing Date) without liability on the part of the
Company (except as provided in Sections 3.15 and 5.1 hereof) or the
non-defaulting Underwriter, but nothing herein shall relieve the defaulting
Underwriter of its liability, if any, to the non-defaulting Underwriter and to
the Company for damages occasioned by its default.
7. Additional Covenants.
7.1 Attendance at Board Meetings. For a period of three years from the
Effective Date, GKN shall be permitted to select a designee to attend all
meetings of the Board of Directors, but who will not be entitled to vote at such
meetings. The Company agrees to give GKN written notice of each such meeting and
to provide GKN with an agenda and minutes of the meeting no later than it gives
such notice and provides such items to the directors. The Company shall
reimburse the designee of GKN for its out-of-pocket expenses incurred in
connection with its attendance at the Company's Board meetings, including, but
not limited to, food, lodging and transportation.
28
7.2 Rule 144 Sales. During the 18 month period following the Effective
Date, GKN shall have the right to purchase for its account or to sell for the
account of the Company's officers, directors and stockholders owning five
percent (5%) or more of the Company's outstanding stock any securities sold
pursuant to Rule 144 under the Act. Each of the officers, directors and
Principal Stockholders ("144 Sellers") will agree to consult with GKN with
regard to any such sales and will offer GKN the exclusive opportunity to
purchase or sell such securities on terms at least as favorable to the 144
Sellers as they can secure elsewhere. If GKN fails to accept in writing any such
proposal for sale by the 144 Sellers within two business days after receipt of a
notice containing such proposal, then GKN shall have no claim or right with
respect to any such sales contained in any such notice. If, thereafter, such
proposal is modified in any material respect, the 144 Sellers shall adopt the
same procedures as with respect to the original proposal.
7.3 Press Releases. The Company will not issue a press release or
engage in any other publicity until 25 days after the Effective Date without the
Underwriters' prior written consent.
7.4 Form S-8 or any Similar Form. The Company shall not file a
Registration Statement on Form S-8 (or any similar or successor form) for the
registration of shares of Common Stock underlying stock options for a period of
one year from the Effective Date without the Underwriters' prior written
consent.
7.5 [Omitted].
7.6 [Omitted].
8. Representations and Agreements to Survive Delivery. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Dates and such representations, warranties and
agreements of the Underwriters and Company, including the indemnity agreements
contained in Section 5 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Underwriters,
the Company or any controlling person, and shall survive termination of this
Agreement or the issuance and delivery of the Securities to the Underwriters
until the earlier of the expiration of any applicable statute of limitations and
the seventh anniversary of the later of the Closing Date or the Option Closing
Date, if any, at which time the representations, warranties and agreements shall
terminate and be of no further force and effect.
9. Effective Date of This Agreement and Termination Thereof.
9.1 Effective Date. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective.
9.2 Termination. You shall have the right to terminate this Agreement
at any time prior to any Closing Date, (i) if any domestic or international
event or act or occurrence has materially disrupted, or in your opinion will in
the immediate future materially disrupt, general securities
29
markets in the United States; or (ii) if trading on the New York Stock Exchange,
the American Stock Exchange, The Boston Stock Exchange or in the
over-the-counter market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been fixed, or maximum ranges for prices for securities shall have
been required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority having jurisdiction, or (iii) if
the United States shall have become involved in a war or major hostilities, or
(iv) if a banking moratorium has been declared by a New York State or federal
authority, or (v) if a moratorium on foreign exchange trading has been declared
which materially adversely impacts the United States securities market, or (vi)
if the Company shall have sustained a material loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act which,
whether or not such loss shall have been insured, will, in your opinion, make it
inadvisable to proceed with the delivery of the Securities, or (vii) if Lorrin
G. Gale shall no longer serve the Company in his present capacity, or (viii) if
the Company has breached any of its representations, warranties or obligations
hereunder, or (ix) if the Underwriters shall have become aware after the date
hereof of such a material adverse change in the condition (financial or
otherwise), business, or prospects of the Company, or such adverse material
change in general market conditions, as in the Underwriters' judgment would make
it impracticable to proceed with the offering, sale and/or delivery of the
Securities or to enforce contracts made by the Underwriters for the sale of the
Securities.
9.3 Notice. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 Expenses. In the event that this Agreement shall not be carried out
for any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.15 hereof.
9.5 Indemnification. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this Agreement,
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. Miscellaneous.
10.1 Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
If to the Underwriters:
GKN Securities Corp.
61 Broadway
12th Floor
New York, New York 10006
Attention: Andrew G. Lazarus, Assistant Vice President
and
30
Laidlaw Equities, Inc.
100 Park Avenue
New York, New York 10017
Attention: James Cahill, Managing Director
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016-2097
Attention: David Alan Miller, Esq.
If to the Company:
Augment Systems, Inc.
2 Robbins Road
Westford, Massachusetts 01886-4113
Attention: Lorrin G. Gale, President and Chief Executive Officer
Copy to:
Warner & Stackpole LLP
75 State Street
Boston, Massachusetts 02109
Attention: Michael A. Hickey, Esq.
10.2 Headings. The headings contained herein are for the sole purpose
of convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this Agreement.
10.3 Amendment. This Agreement may be amended only by a written
instrument executed by each of the parties hereto.
10.4 Entire Agreement. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with this
Agreement) constitutes the entire agreement of the parties hereto with respect
to the subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
10.5 Binding Effect. This Agreement shall inure solely to the benefit
of and shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 5 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained.
10.6 Governing Law, Jurisdiction. This Agreement shall be governed by
and construed and enforced in accordance with the law of the State of New York,
without giving effect to conflicts of law. The Company hereby agrees that any
action, proceeding or claim against it arising out of,
31
relating in any way to this Agreement shall be brought and enforced in the
courts of the State of New York or the United States District Court for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any such process or summons to be served upon the Company may be served
by transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
10.1 hereof. Such mailing shall be deemed personal service and shall be legal
and binding upon the Company in any action, proceeding or claim. The Company
agrees that the prevailing party(ies) in any such action shall be entitled to
recover from the other party(ies) all of its reasonable attorneys' fees and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefor.
10.7 Execution in Counterparts. This Agreement may be executed in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.
10.8 Waiver, Etc. The failure of any of the parties hereto to at any
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way effect the
validity of this Agreement or any provision hereof or the right of any of the
parties hereto to thereafter enforce each and every provision of this Agreement.
No waiver of any breach, non-compliance or non-fulfillment of any of the
provisions of this Agreement shall be effective unless set forth in a written
instrument executed by the party or parties against whom or which enforcement of
such waiver is sought; and no waiver of any such breach, non-compliance or
non-fulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, non-compliance or non-fulfillment.
If the foregoing correctly sets forth the understanding
between the Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement between us.
Very truly yours,
AUGMENT SYSTEMS, INC.
By:
-------------------------------
Name: Lorrin G. Gale
Title: President and Chief Executive
Officer
32
Accepted as of the date first
above written.
New York, New York
GKN SECURITIES CORP.
By:
--------------------------------
Name:
Title:
LAIDLAW EQUITIES, INC.
By:
--------------------------------
Name:
Title:
33
THE REGISTERED HOLDER OF THIS PURCHASE OPTION BY ITS ACCEPTANCE HEREOF, AGREES
THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION EXCEPT AS HEREIN
PROVIDED.
NOT EXERCISABLE PRIOR TO ________ __, 1998. VOID AFTER 5:00 P.M. EASTERN TIME,
________ ___, 2002.
PURCHASE OPTION
FOR THE PURCHASE OF
180,000 SHARES OF COMMON STOCK
AND/OR
180,000 COMMON STOCK PURCHASE WARRANTS
OF
AUGMENT SYSTEMS, INC.
(A DELAWARE CORPORATION)
1. Purchase Option.
THIS CERTIFIES THAT, in consideration of $_______ duly paid by or on
behalf of ________________________________ ("Holder"), as registered owner of
this Purchase Option, to Augment Systems, Inc. ("Company"), Holder is entitled,
at any time or from time to time at or after ________________ ,1998
("Commencement Date"), and at or before 5:00 p.m., Eastern Time,
________________ , 2002 ("Expiration Date"), but not thereafter, to subscribe
for, purchase and receive, in whole or in part, up to 180,000 shares of Common
Stock of the Company, $.01 par value ("Common Stock") and/or 180,000 Redeemable
Common Stock Purchase Warrants, each to purchase one share of Common Stock
("Warrants") during the period commencing on ________ ___, 1998 and expiring
________ ___, 2002, (five years from the effective date of the registration
statement on Form SB-2 No. 333-21401 ("Registration Statement") pursuant to
which the Company has registered shares of Common Stock and warrants to purchase
Common Stock
("Effective Date")). Each Warrant is the same as the warrants that have been
registered for sale to the public pursuant to the Registration Statement
("Public Warrants"). The shares of Common Stock and Warrants are sometimes
collectively referred to herein as the "Securities." The Holder can purchase,
upon exercise of the Purchase Option, either shares of Common Stock or Warrants
or both. If the Expiration Date is a day on which banking institutions are
authorized by law to close, then this Purchase Option may be exercised on the
next succeeding day which is not such a day in accordance with the terms herein.
During the period ending on the Expiration Date, the Company agrees not to take
any action that would terminate the Purchase Option. This Purchase Option is
initially exercisable at $9.075 per share of Common Stock and $0.2475 per
Warrant purchased; provided, however, that upon the occurrence of any of the
events specified in Section 6 hereof, the rights granted by this Purchase
Option, including the exercise price and the number of shares of Common Stock
and Warrants to be received upon such exercise, shall be adjusted as therein
specified. The term "Exercise Price" shall mean the initial exercise price or
the adjusted exercise price of a share of Common Stock or a Warrant, depending
on the context.
2. Exercise.
2.1 Exercise Form. In order to exercise this Purchase Option, the
exercise form attached hereto must be duly executed and completed and delivered
to the Company, together with this Purchase Option and payment of the Exercise
Price in cash or by certified check or official bank check for the Securities
being purchased. If the subscription rights represented hereby shall not be
exercised at or before 5:00 p.m., Eastern time, on the Expiration Date this
Purchase Option shall become and be void without further force or effect, and
all rights represented hereby shall cease and expire.
2.2 Legend. Each certificate for Securities purchased under this
Purchase Option shall bear a legend as follows unless such Securities have been
registered under the Securities Act of 1933, as amended ("Act"):
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act"), or applicable state law. The securities may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement under the Act
or pursuant to an exemption from registration under the Act
and applicable state law."
2.3 Cashless Exercise.
2.3.1 Determination of Amount. In lieu of the payment of the
Exercise Price in the manner required by Section 2.1, the Holder shall have the
right (but not the obligation) to pay the Exercise Price for the Securities
being purchased with this Purchase Option by the surrender to the Company of any
exercisable but unexercised portion of this Purchase Option having a "Stock
Value" or "Warrant Value" (as defined below), as the case may be, at the close
of trading on the last trading day immediately preceding the exercise of this
Purchase Option, equal to the Exercise Price multiplied by the number of
Securities being purchased upon exercise ("Cashless Exercise Right").
2
(a) Common Stock. Upon exercise of the Cashless Exercise
Right, the Company shall deliver to the Holder (without payment by the Holder of
any of the Exercise Price in cash) that number of shares of Common Stock equal
to the quotient obtained by dividing (x) the "Stock Value" (as defined below) of
the portion of the Purchase Option relating to the purchase of Common Stock
being surrendered at the time the Cashless Exercise Right is exercised by (y)
the Market Price. The "Stock Value" of the portion of the Purchase Option being
surrendered shall equal the remainder derived from subtracting (a) the Exercise
Price multiplied by the number of shares of Common Stock being surrendered from
(b) the Market Price of the Common Stock multiplied by the number of shares of
Common Stock being surrendered. As used in this paragraph, the term "Market
Price" at any date shall be deemed to be the average last reported sale price of
the Common Stock for the five days immediately preceding such date, as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange or if any such exchange
on which the Common Stock is listed is not its principal trading market, the
last reported sale price as furnished by the NASD through the Nasdaq National
Market or SmallCap Market, or, if applicable, the OTC Bulletin Board, or if the
Common Stock is not listed or admitted to trading on any of the foregoing
markets, or similar organization, as determined in good faith by resolution of
the Board of Directors of the Company, based on the best information available
to it.
(b) Warrants. Upon exercise of the Cashless Exercise Right,
the Company shall deliver to the Holder (without payment by the Holder of any of
the Exercise Price in cash) that number of Warrants equal to the quotient
obtained by dividing (x) the "Warrant Value" (as defined below) of the portion
of the Purchase Option relating to the purchase of Warrants being surrendered at
the time the Cashless Exercise Right is exercised by (y) the Market Price. The
"Warrant Value" of the portion of the Purchase Option being surrendered shall
equal the remainder derived from subtracting (a) the Exercise Price multiplied
by the number of Warrants being surrendered from (b) the Market Price of the
Warrants multiplied by the number of Warrants being surrendered. As used in this
paragraph, the term "Market Price" at any date shall be deemed to be the average
last reported sale price of the Warrants for the five days immediately preceding
such date, as officially reported by the principal securities exchange on which
the Warrants are listed or admitted to trading, or, if the Warrants are not
listed or admitted to trading on any national securities exchange or if any such
exchange on which the Warrants are listed is not its principal trading market,
the last reported sale price as furnished by the NASD through the Nasdaq
National Market or SmallCap Market, or, if applicable, the OTC Bulletin Board,
or if the Warrants are not listed or admitted to trading on any of the foregoing
markets, or similar organization, as determined in good faith by resolution of
the Board of Directors of the Company, based on the best information available
to it.
(c) Mechanics of Cashless Exercise. The Cashless Exercise
Right may be exercised by the Holder on any business day on or after the
Commencement Date and not later than the Expiration Date by delivering the
Purchase Option with a duly executed exercise form attached hereto with the
cashless exercise section completed to the Company, exercising the Cashless
Exercise Right and specifying the total number of shares of Common Stock and/or
Warrants the Holder will purchase pursuant to such Cashless Exercise Right.
3
3. Transfer.
3.1 General Restrictions. The registered Holder of this Purchase
Option, by its acceptance hereof, agrees that it will not sell, transfer or
assign or hypothecate this Purchase Option prior to the Commencement Date to
anyone other than (i) an officer of GKN Securities Corp. or Laidlaw Equities,
Inc. (together, the "Underwriters") or an officer or partner of any Selected
Dealer in connection with the Company's public offering with respect to which
this Purchase Option has been issued, or (ii) any Selected Dealer. On and after
the Commencement Date, transfers to others may be made subject to compliance
with or exemptions from applicable securities laws. In order to make any
permitted assignment, the Holder must deliver to the Company the assignment form
attached hereto duly executed and completed, together with the Purchase Option
and payment of all transfer taxes, if any, payable in connection therewith. The
Company shall immediately transfer this Purchase Option on the books of the
Company and shall execute and deliver a new Purchase Option or Purchase Options
of like tenor to the appropriate assignee(s) expressly evidencing the right to
purchase the aggregate number of shares of Common Stock and Warrants purchasable
hereunder or such portion of such number as shall be contemplated by any such
assignment.
3.2 Restrictions Imposed by the Act. This Purchase Option and the
Securities underlying this Purchase Option shall not be transferred unless and
until (i) the Company has received the opinion of counsel for the Holder that
this Purchase Option or the Securities, as the case may be, may be transferred
pursuant to an exemption from registration under the Act and applicable state
law, the availability of which is established to the reasonable satisfaction of
the Company (the Company hereby agreeing that the written opinion of Graubard
Mollen & Miller shall be deemed satisfactory evidence of the availability of an
exemption), or (ii) a registration statement relating to such Purchase Option or
Securities, as the case may be, has been filed by the Company and declared
effective by the Securities and Exchange Commission and compliance with
applicable state law.
4. New Purchase Options to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions in
Section 3 hereof, this Purchase Option may be exercised or assigned in whole or
in part. In the event of the exercise or assignment hereof in part only, upon
surrender of this Purchase Option for cancellation, together with the duly
executed exercise or assignment form and funds sufficient to pay any Exercise
Price and/or transfer tax, the Company shall cause to be delivered to the Holder
without charge a new Purchase Option of like tenor to this Purchase Option in
the name of the Holder evidencing the right of the Holder to purchase the
aggregate number of shares of Common Stock and Warrants purchasable hereunder as
to which this Purchase Option has not been exercised or assigned.
4.2 Lost Certificate. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory indemnification, the Company
shall execute and deliver a new Purchase Option of like tenor and date. Any such
new Purchase Option executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute a substitute contractual obligation
on the part of the Company.
4
5. Registration Rights.
5.1 Demand Registration.
5.1.1 Grant of Right. The Company, upon written demand
("Initial Demand Notice") of the Holder(s) of at least 51% of the Purchase
Options and/or the underlying shares of Common Stock and Warrants considered
together ("Majority Holders"), agrees to register on one occasion, all or any
portion of the Purchase Options requested by the Majority Holders in the Initial
Demand Notice and all of the Securities underlying such Purchase Options,
including the Common Stock, the Warrants and the Common Stock underlying the
Warrants (collectively the "Registrable Securities"). On such occasion, the
Company will file a Registration Statement covering the Registrable Securities
within sixty days after receipt of the Initial Demand Notice and use its best
efforts to have such registration statement declared effective promptly
thereafter. If the Company fails to comply with the provisions of this Section
5.1.1, the Company shall, in addition to any other equitable or other relief
available to the Holder(s), be liable for any and all incidental, special and
consequential damages sustained by the Holder(s). The demand for registration
may be made at any time during a period of four years beginning one year from
the Effective Date. The Company covenants and agrees to give written notice of
its receipt of any Initial Demand Notice by any Holder(s) to all other
registered Holders of the Purchase Options and/or the Registrable Securities
within ten days from the date of the receipt of any such Initial Demand Notice.
5.1.2 Terms. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. The Company agrees to use its best efforts to cause the
filing required herein to become effective promptly and to qualify or register
the Registrable Securities in such States as are reasonably requested by the
Holder(s); provided, however, that in no event shall the Company be required to
register the Registrable Securities in a State in which such registration would
cause (i) the Company to be obligated to register or license to do business in
such State, or (ii) the principal stockholders of the Company to be obligated to
escrow their shares of capital stock of the Company. The Company shall cause any
registration statement filed pursuant to the demand rights granted under Section
5.1.1 to remain effective for a period of at least twelve consecutive months
from the date that the Holders of the Registrable Securities covered by such
registration statement are first given the opportunity to sell all of such
securities.
5.1.3 Repurchase of Registrable Securities; Deferral or
Suspension of Registration Statement. Anything in this Section 5.1 to the
contrary notwithstanding, (a) the Company shall have no obligation to prepare
and file a registration statement as provided for in this Section 5.1 if, within
twenty (20) days after it receives a demand therefor, it agrees to purchase the
Common Stock and Warrants underlying the Purchase Options and/or the Common
Stock underlying the Warrants from the Holder(s) thereof at a price, in the case
of the Warrants, equal to the difference between the Exercise Price and the then
current market price of the Common Stock and, in the case of the Common Stock
underlying the Purchase Options or the Common Stock underlying the Warrants, at
the current market price of the Common Stock, and (b) the Company may defer or
suspend the filing of a registration statement for a period of up to 120 days in
the event that (i) such registration statement would have to include disclosure
of a material fact that the Company believes would have a material adverse
effect on any proposal or plan by the Company to engage in any acquisition,
merger or other significant transaction, or (ii) the Company has filed, or has
5
taken steps towards filing, a registration statement relating to any of the
Company's securities and the Company believes that the filing of the
registration statement relating to the Registrable Securities would materially
adversely affect the offering by the Company or the market for its securities
after such offering. The current market price of the Common Stock shall be the
average of the closing bid and asked prices for the Common Stock during the five
(5) trading day period preceding such demand for registration.
5.2 "Piggy-Back" Registration.
5.2.1 Grant of Right. In addition to the demand right of
registration, the Holders of the Purchase Options shall have the right for a
period of six years commencing one year from the Effective Date to include the
Registrable Securities as part of any other registration of securities filed by
the Company (other than in connection with a transaction contemplated by Rule
145(a) promulgated under the Act or pursuant to Form S-8 or any equivalent form)
provided, however, that if, in the written opinion of the Company's managing
underwriter or underwriters, if any, for such offering, the inclusion of the
Registrable Securities, when added to the securities being registered by the
Company or the selling stockholder(s), will exceed the maximum amount of the
Company's securities which can be marketed (i) at a price reasonably related to
their then current market value, or (ii) without materially and adversely
affecting the entire offering, the Company shall nevertheless register all or
any portion of the Registrable Securities required to be so registered but such
Registrable Securities shall not be sold by the Holders until 180 days after the
registration statement for such offering has become effective and provided
further that, if any securities are registered for sale on behalf of other
stockholders in such offering and such stockholders have not agreed to defer
such sale until the expiration of such 180 day period, the number of securities
to be sold by all stockholders in such public offering during such 180 day
period shall be apportioned pro rata among all such selling stockholders,
including all holders of the Registrable Securities, according to the total
amount of securities of the Company owned by said selling stockholders,
including all holders of the Registrable Securities.
5.2.2 Terms. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. In the event of such a proposed regis tration, the
Company shall furnish the then Holders of outstanding Registrable Securities
with not less than thirty days written notice prior to the proposed date of
filing of such registration state ment. Such notice to the Holders shall
continue to be given for each registration statement filed by the Company until
such time as all of the Registrable Securities have been sold by the Holder. The
holders of the Registrable Securities shall exercise the "piggy-back" rights
provided for herein by giving written notice, within twenty days of the receipt
of the Company's notice of its intention to file a registration statement. The
Company shall cause any registration statement filed pursuant to the above
"piggyback" rights to remain effective for at least twelve months from the date
that the Holders of the Registrable Securities are first given the opportunity
to sell all of such securities.
5.3 General Terms.
5.3.1 Indemnification. The Company shall indemnify the
Holder(s) of the Registrable Securities to be sold pursuant to any registration
statement hereunder and each person, if any, who controls such Holders within
the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), against all loss, claim,
6
damage, expense or liability (including all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Underwriters contained in Section 5 of the
Underwriting Agreement between the Underwriters and the Company, dated the
Effective Date. The Holder(s) of the Registrable Securities to be sold pursuant
to such registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, against all loss, claim,
damage, expense or liability (including all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which they may become subject under the Act, the
Exchange Act or otherwise, arising from information furnished by or on behalf of
such Holders, or their successors or assigns, in writing, for specific inclusion
in such registration statement to the same extent and with the same effect as
the provisions contained in Section 5 of the Underwriting Agreement pursuant to
which the Underwriters have agreed to indemnify the Company.
5.3.2 Exercise of Warrants. Nothing contained in this Purchase
Option shall be construed as requiring the Holder(s) to exercise their Purchase
Options or Warrants prior to or after the initial filing of any registration
statement or the effectiveness thereof.
5.3.3 Exclusivity. The Company shall not permit the inclusion
of any securities other than the Registrable Securities to be included in any
registration statement filed pursuant to Section 5.1 hereof without the prior
written consent of the Majority Holders of the Registrable Securities.
5.3.4 Documents Delivered to Holders. The Company shall
furnish to each Holder participating in any of the foregoing offerings and to
each Underwriters of any such offering, if any, a signed counterpart, addressed
to such Holder or Underwriters, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the date
of the closing under any underwriting agreement related thereto), and (ii) a
"cold comfort" letter dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, a letter
dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities. The Company shall also deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing Underwriters copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and Underwriters to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and inde-
7
pendent auditors, all to such reasonable extent and at such reasonable times and
as often as any such Holder shall reasonably request.
5.3.5 Underwriting Agreement. The Company shall enter into an
underwriting agreement with the managing Underwriters(s) selected by any Holders
whose Registrable Securities are being registered pursuant to this Section 5.
Such agreement shall be reasonably satisfactory in form and substance to the
Company, each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
Underwriters. The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Registrable Securities and may, at
their option, require that any or all the representations, warranties and
covenants of the Company to or for the benefit of such underwriters shall also
be made to and for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such Holders, their
shares and their intended methods of distribution.
5.3.6 Documents to be Delivered by Holder(s). Each of the
Holder(s) participating in any of the foregoing offerings shall furnish to the
Company a completed and executed questionnaire provided by the Company
requesting information customarily sought of selling security holders.
6. Adjustments.
6.1 Adjustments to Exercise Price and Number of Securities. The
Exercise Price and the number of shares of Common Stock underlying the Purchase
Option and underlying the Warrants underlying the Purchase Option shall be
subject to adjustment from time to time as hereinafter set forth:
6.1.1 Stock Dividends, Recapitalization, Reclassification,
Split-Ups. If after the date hereof, and subject to the provisions of Section
6.3 below, the number of outstanding shares of Common Stock is increased by a
stock dividend payable in shares of Common Stock or by a split-up,
recapitalization or reclassification of shares of Common Stock or other similar
event, then, on the effective date thereof, the number of shares of Common Stock
and Warrants issuable on exercise of the Purchase Option shall be increased in
proportion to such increase in outstanding shares; provided, however, that
nothing in this section is intended to provide for adjustment with respect to
the Warrants beyond that provided for in the Warrant Agreement between the
Company and Continental Stock Transfer & Trust Company. For example, if the
Company declares a two-for-one stock dividend and at the time of such dividend
this Purchase Option is for the purchase of 1,000 shares at $9.075 per share and
1,000 Warrants at $0.2475 per Warrant (each Warrant exercisable for $6.60 per
share), upon effectiveness of the dividend, the Purchase Option will be adjusted
(disregarding for purposes of this example that adjustments shall be rounded to
the nearest cent, as provided in section 6.1.3) to allow for the purchase of
2,000 shares at $4.5375 per share and 2,000 Warrants at $.12375 (each Warrant
exercisable for $3.30 per share).
6.1.2 Aggregation of Shares. If after the date hereof, and
subject to the provisions of Section 6.3, the number of outstanding shares of
Common Stock is decreased by a consolidation, combination or reclassification of
shares of Common Stock or other similar event, then, upon the effective date
thereof, the number of shares of Common Stock issuable on exercise of the
Purchase Option and the Warrants underlying the Purchase Option shall be
decreased in proportion to such decrease in outstanding shares.
8
6.1.3 Adjustments in Exercise Price. Whenever the number of
shares of Common Stock or Warrants purchasable upon the exercise of this
Purchase Option is adjusted, as provided in this Section 6.1, the Exercise Price
shall be adjusted (to the nearest cent) by multiplying such Exercise Price
immediately prior to such adjustment by a fraction (x) the numerator of which
shall be the number of shares of Common Stock or Warrants, as the case may be,
purchasable upon the exercise of this Purchase Option immediately prior to such
adjustment, and (y) the denominator of which shall be the number of shares of
Common Stock or warrants as the case may be, so purchasable immediately
thereafter.
6.1.4 Replacement of Securities Upon Reorganization, Etc. In
case of any reclassification or reorganization of the outstanding shares of
Common Stock other than a change covered by Section 6.1.1 hereof or which solely
affects the par value of such shares of Common Stock, or in the case of any
merger or consolidation of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or reorganization
of the outstanding shares of Common Stock), or in the case of any sale or
conveyance to another corporation or entity of the property of the Company as an
entirety or substantially as an entirety in connection with which the Company is
dissolved, the Holder of this Purchase Option shall have the right thereafter
(until the expiration of the right of exercise of this Purchase Option) to
receive upon the exercise hereof, for the same aggregate Exercise Price payable
hereunder immediately prior to such event, the kind and amount of shares of
stock or other securities or property (including cash) receivable upon such
reclassification, reorganization, merger or consolidation, or upon a dissolution
following any such sale or other transfer, by a Holder of the number of shares
of Common Stock of the Company obtainable upon exercise of this Purchase Option
immediately prior to such event; and if any reclassification also results in a
change in shares of Common Stock covered by Section 6.1.1, then such adjustment
shall be made pursuant to Sections 6.1.1, 6.1.3 and this Section 6.1.4. The
provisions of this Section 6.1.4 shall similarly apply to successive
reclassifications, reorganizations, mergers or consolidations, sales or other
transfers.
6.1.5 Changes in Form of Purchase Option. This form of
Purchase Option need not be changed because of any change pursuant to this
Section, and Purchase Options issued after such change may state the same
Exercise Price and the same number of shares of Common Stock and Warrants as are
stated in the Purchase Options initially issued pursuant to this Agreement. The
acceptance by any Holder of the issuance of new Purchase Options reflecting a
required or permissive change shall not be deemed to waive any rights to a prior
adjustment or the computation thereof.
6.2 [Intentionally Omitted]
6.3 Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
or Warrants upon the exercise or transfer of the Purchase Option, nor shall it
be required to issue scrip or pay cash in lieu of any fractional interests, it
being the intent of the parties that all fractional interests shall be
eliminated
9
by rounding any fraction up or down to the nearest whole number of Warrants,
shares of Common Stock or other securities, properties or rights.
7. Reservation and Listing. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Purchase Options or the Warrants, such number
of shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Purchase Options and payment of the Exercise Price therefor, all
shares of Common Stock and other securities issuable upon such exercise shall be
duly and validly issued, fully paid and non-assessable and not subject to
preemptive rights of any stockholder. The Company further covenants and agrees
that upon exercise of the Warrants underlying the Purchase Options and payment
of the respective Warrant exercise price therefor, all shares of Common Stock
and other securities issuable upon such exercises shall be duly and validly
issued, fully paid and non-assessable and not subject to preemptive rights of
any stockholder. As long as the Purchase Options shall be outstanding, the
Company shall use its best efforts to cause all (i) shares of Common Stock
issuable upon exercise of the Purchase Options and the Warrants, and (ii) the
Warrants underlying the Purchase Options to be listed (subject to official
notice of issuance) on all securities exchanges (or, if applicable on Nasdaq) on
which the Common Stock or the Public Warrants issued to the public in connection
herewith are then listed and/or quoted.
8. Certain Notice Requirements.
8.1 Holder's Right to Receive Notice. Nothing herein shall be construed
as conferring upon the Holders the right to vote or consent or to receive notice
as a stockholder for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Purchase Options and their exercise, any of the
events described in Section 8.2 shall occur, then, in one or more of said
events, the Company shall give written notice of such event at least fifteen
days prior to the date fixed as a record date or the date of closing the
transfer books for the determination of the stockholders entitled to such
dividend, distribution, conversion or exchange of securities or subscription
rights, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of the
closing of the transfer books, as the case may be.
8.2 Events Requiring Notice. The Company shall be required to give the
notice described in this Section 8 upon one or more of the following events: (i)
if the Company shall take a record of the holders of its shares of Common Stock
for the purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution pay able otherwise
than out of retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company, or (ii) the Company shall
offer to all the holders of its Common Stock any additional shares of capital
stock of the Company or securities convertible into or exchangeable for shares
of capital stock of the Company, or any option, right or warrant to subscribe
therefor, or (iii) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price. The Company shall, promptly
after an event requiring a change in the Exercise Price pursuant to Section 6
hereof, send notice to the Holders
10
of such event and change ("Price Notice"). The Price Notice shall describe the
event causing the change and the method of calculating same and shall be
certified as being true and accurate by the Company's President and Chief
Financial Officer.
8.4 Transmittal of Notices. All notices, requests, consents and other
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally or
sent by overnight courier, with acknowledgment of receipt to the party to which
notice is given, or on the fifth day after mailing if mailed to the party to
whom notice is to be given, by registered or certified mail, return receipt
requested, postage prepaid and properly addressed as follows: (i) if to the
registered Holder of the Purchase Option, to the address of such Holder as shown
on the books of the Company, or (ii) if to the Company, to its principal
executive office.
9. Miscellaneous.
9.1 Amendments. The Company and the Underwriters may from time to time
supplement or amend this Purchase Option without the approval of any of the
Holders in order to cure any ambiguity, to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriters may deem
necessary or desirable and which the Company and the Underwriters deem shall not
adversely affect the interest of the Holders. All other modifications or
amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
9.2 Headings. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Purchase Option.
9.3 Entire Agreement. This Purchase Option (together with the other
agreements and documents being delivered pursuant to or in connection with this
Purchase Option) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
9.4 Binding Effect. This Purchase Option shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Purchase Option or any provisions
herein contained.
9.5 Governing Law; Submission to Jurisdiction. This Purchase Option
shall be governed by and construed and enforced in accordance with the laws of
the State of New York, without giving effect to conflict of laws. The Company
hereby agrees that any action, proceeding or claim against it arising out of, or
relating in any way to this Purchase Option shall be brought and enforced in the
courts of the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any process or summons to be served upon the Company may be served by
transmitting a copy thereof by registered or certified mail, return receipt
requested, postage
11
prepaid, addressed to it at the address set forth in Section 8 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The Company agrees that the
prevailing party(ies) in any such action shall be entitled to recover from the
other party(ies) all of its reasonable attorneys' fees and expenses relating to
such action or proceeding and/or incurred in connection with the preparation
therefor.
9.6 Waiver, Etc. The failure of the Company or the Holder to at any
time enforce any of the provisions of this Purchase Option shall not be deemed
or construed to be a waiver of any such provision, nor to in any way affect the
validity of this Purchase Option or any provision hereof or the right of the
Company or any Holder to thereafter enforce each and every provision of this
Purchase Option. No waiver of any breach, non-compliance or non-fulfillment of
any of the provisions of this Purchase Option shall be effective unless set
forth in a written instrument executed by the party or parties against whom or
which enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver of
any other or subsequent breach, non-compliance or non-fulfillment.
9.7 Execution in Counterparts. This Purchase Option may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.
IN WITNESS WHEREOF, the Company has caused this Purchase
Option to be signed by its duly authorized officer as of the ____ day of
____________, 1997.
AUGMENT SYSTEMS, INC.
By:__________________________
Name: Lorrin G. Gale
Title: Chief Executive Officer and
President
12
Form to be used to exercise Purchase Option:
AUGMENT SYSTEMS, INC.
2 Robbins Road
Westford, Massachusetts 01886-4113
Date:_________________, 19__
The undersigned hereby elects irrevocably to exercise the
within Purchase Option and to purchase ____ shares of Common Stock and Warrants
to purchase shares of Common Stock of Augment Systems, Inc. and hereby makes
payment of $____________ (at the rate of $ per share of Common Stock and $ per
Warrant) in payment of the Exercise Price pursuant thereto. Please issue the
Common Stock and Warrants as to which this Purchase Option is exercised in
accordance with the instructions given below.
or
The undersigned hereby elects irrevocably to exercise the
within Purchase Option and to purchase _______ shares of Common Stock and
Warrants to purchase ______ shares of Common Stock of Augment Systems, Inc. by
surrender of the unexercised portion of the within Purchase Option (with a
"Value" of $_______ based on a "Market Price" of $______). Please issue the
Common Stock and Warrants in accordance with the instructions given below.
--------------------------------
Signature
- --------------------------
Signature Guaranteed
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A BANK, OTHER THAN A SAVINGS BANK, OR BY A TRUST COMPANY OR BY A
FIRM HAVING MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
---------------------------------
(Print in Block Letters)
Address
---------------------------------
13
Form to be used to assign Purchase Option:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Purchase Option):
FOR VALUE RECEIVED,____________________________________ does
hereby sell, assign and transfer unto_______________________ the right to
purchase _______________________ shares of Common Stock and/or Warrants to
purchase shares of Common Stock of Augment Systems, Inc. ("Company") evidenced
by the within Purchase Option and does hereby authorize the Company to transfer
such right on the books of the Company.
Dated:___________________, 19__
----------------------------------
Signature
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
14
WARRANT CERTIFICATE FOR
PURCHASE OF COMMON STOCK
VOID AFTER 5:00 P.M. ON DECEMBER 19, 2002
AUGMENT SYSTEMS, INC.
ASW-
Number of Warrants
CUSIP
THIS CERTIFIES THAT, for value received
, or registered assigns, ("Registered Holder") is the owner of the number of
warrants ("Warrants") specified above. Each Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Certificate and in the Warrant Agreement (as hereinafter defined), one
fully paid and nonassessable share (subject to adjustment as hereinafter
provided) of the Common Stock, par value $.01 per share ("Common Stock"), of
Augment Systems, Inc., a Delaware corporation ("Company"), at any time
commencing , 1998, and before the Expiration Date (as hereinafter
defined) upon the presentation and surrender of this Warrant Certificate with
the Subscription Form on the reverse hereof duly executed, at the office of
Continental Stock Transfer & Trust Company, as warrant agent, or its successor
("Warrant Agent") accompanied by payment of the $6.60 ("Purchase Price")
per Warrant, subject to adjustment as hereinafter provided, in lawful money of
the United States in cash, or by good certified or official bank check payable
to the order of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms set forth in the
Warrant Agreement ("Warrant Agreement") dated as of , 1997, by and
between the Company and the Warrant Agent, to all the terms and provisions of
which the Registered Holder, by acceptance of this Warrant Certificate, hereby
assents. In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment. Reference is made to the Warrant Agreement for a
more complete statement of the rights and limitations of the rights of the
Registered Holder hereof, the rights and duties of the Warrant Agent and the
rights and obligations of the Company thereunder. Copies of the Warrant
Agreement are on file at the corporate trust office of the Warrant Agent.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
,2002, or such earlier date as the Warrant shall be redeemed. If such date
shall in the State of New York be a holiday or a day on which the banks are
authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) the next following day which in the State of New York is not a holiday or
a day on which banks are authorized to close.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder. The Company shall not be required upon the exercise of the
Warrants represented hereby to issue any fractions of shares, but shall make an
adjustment therefor in cash on the basis of the market value of any such
fractional interest (computed as provided in the Warrant Agreement). In case
this Warrant is exercised with respect to less than all of such shares, a new
Warrant certificate or certificates will be issued on such surrender for the
number of Warrants represented hereby which were not so exercised. Prior to the
exercise of any Warrant represented hereby, the holder shall not be entitled to
any rights of a stockholder of the Company, including without limitation the
right to vote or to receive dividends or other distributions, and shall not be
entitled to receive any notice of any proceedings of the Company except as
provided in said Warrant Agreement. Prior to the due presentment for
registration of transfer of this Warrant Certificate, the Company and the
Warrant Agent may deem and treat the Registered Holder as the absolute owner
hereof and of each Warrant represented hereby (notwithstanding any notation of
ownership or other writing hereon made by anyone other than a duly authorized
officer of the Company or the Warrant Agent), for all purposes, and neither the
Company nor the Warrant Agent shall be affected by any notice to the contrary.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender.
Upon due presentment together with any tax or other governmental charge
imposed in connection therewith, for registration of transfer of this Warrant
Certificate at such office, a new Warrant Certificate or Warrant Certificates
representing an equal aggregate number of Warrants will be issued to the
transferee in exchange therefor, subject to the limitations provided in the
Warrant Agreement.
The Company shall not be obligated to deliver any securities pursuant to the
exercise of any Warrants unless a registration statement under the Securities
Act of 1933 with respect to such securities is effective. The Company has
covenanted and agreed that it will file a registration statement or a
post-effective amendment to its existing registration statement and will use
its best efforts to cause the same to become effective and to keep it current
while any of the Warrants are outstanding and exercisable. The Warrants
represented hereby shall not be exercisable by a Registered Holder in any state
where such exercise would be unlawful.
The Warrants may be redeemed at the option of the Company, in whole at any
time or in part from time to time, after the Warrants become exercisable and
prior to their expiration, by paying in cash, or certified or bank check,
therefor $.01 per Warrant, upon at least thirty (30) days' written notice
mailed to the Registered Holders at any time, if the last sales price on the
Common Stock has been at least 150% of the then current exercise price of the
Warrants on each of the twenty (20) consecutive trading days during a period
ending on the third day prior to the date on which the notice of redemption is
given. Each Warrant not exercised on or before the date called for in such
notice shall become void, and all rights thereunder shall terminate.
If this Warrant shall be surrendered for exercise within any period during
which the transfer books for Common Stock or other securities purchasable upon
the exercise of this Warrant are closed for any purpose, the Company shall not
be required to make delivery of certificates for the securities purchasable
upon such exercise until the date of the reopening of said transfer books.
The Company has agreed to pay a fee of 5% of the Purchase Price to GKN
Securities Corp. and/or Laidlaw Equities, Inc. upon certain conditions as
specified in the Warrant Agreement upon the exercise of any Warrants
represented hereby.
This Warrant Certificate and each Warrant represented hereby shall be
construed in accordance with and governed by the laws of the State of New York.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted herein.
Dated:
AUGMENT SYSTEMS, INC.
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, NJ)
WARRANT AGENT
BY:
AUTHORIZED OFFICER
ATTEST:
By:
By:
SECRETARY
PRESIDENT
PURCHASE FORM
TO BE EXECUTED
UPON EXERCISE OF WARRANT CERTIFICATE
TO: Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
The undersigned hereby exercises, according to the terms and conditions
thereof, the right to purchase Shares of Common Stock, evidenced by the
within Warrant Certificate, and herewith makes payment of the purchase price in
full.
NAME:
ADDRESS:
PAYMENT ENCLOSED
SOCIAL SECURITY NO. of Warrant Holder
The undersigned represents that the exercise of the within Warrant was
solicited by GKN Securities Corp. and/or Laidlaw Equities, Inc. (the
"Underwriters"). If not solicited by the Underwriters, please write
"unsolicited" in the space below. Unless otherwise
indicated, it will be assumed that the exercise was solicited by the
Underwriters.
(Write "Unsolicited" on above line if not solicited by the Underwriters.)
DATED:
SIGNATURE:
TRANSFER FORM
For value received hereby sells, assigns and transfers unto
( ) Warrants to purchase Shares of Common Stock
represented by the within Warrant Certificate and does hereby irrevocably
constitute and appoint
Attorney
to transfer such Warrants on the books of the within named Company with full
power of substitution in the premises.
DATED:
Notice:
The signature to this assignment must correspond with the name as written upon
the face of this Certificate in every particular.
Social Security Number of Assignee
or other identifying number
Signature(s) Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE17Ad-15.
WARRANT AGREEMENT
Agreement made as of ___________ __, 1997, between Augment Systems,
Inc., a Delaware corporation with offices at 2 Robbins Road, Westford,
Massachusetts 01886 ("Company"), and Continental Stock Transfer & Trust Company,
a New York corporation with offices at 2 Broadway, New York, New York 10002, a
New York corporation, (herein called "Warrant Agent").
WHEREAS, the Company is engaged in a public offering of Common Stock
and Warrants ("Public Offering") and in connection therewith, has determined to
issue and deliver up to (i) 2,070,000 (including up to 270,000 that may be
issued pursuant to the Underwriters' over-allotment option) Redeemable Common
Stock Purchase Warrants ("Public Warrants") to the public investors and (ii) an
aggregate of 180,000 Warrants to GKN Securities Corp. ("GKN") and/or Laidlaw
Equities, Inc. ("Laidlaw," and together with GKN, the "Underwriters") or their
respective designees ("Underwriters' Warrants" and together with the Public
Warrants, the "Warrant(s)"), each of such Warrants evidencing the right of the
holder thereof to purchase one share of the Company's common stock, $.01 par
value per share ("Common Stock"), for $6.60; and
WHEREAS, the Company has filed with the Securities and Exchange
Commission a Registration Statement, No. 333-21401 on Form SB-2 ("Registration
Statement"), for the registration under the Securities Act of 1933, as amended,
of, among others, the Warrants and the Common Stock issuable upon exercise of
the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange, redemption and exercise of the
Warrants; and
WHEREAS, the Company desires to provide for the form and provisions of
the Warrants, the terms upon which they shall be issued and exercised, and the
respective rights, limitation of rights, and immunities of the Company, the
Warrant Agent, and the holders of the Warrants; and
WHEREAS, all acts and things have been done and performed which are
necessary to make the Warrants, when executed on behalf of the Company and
countersigned by or on behalf of the Warrant Agent, as provided herein, the
valid, binding and legal obligations of the Company, and to authorize the
execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent
to act as agent for the Company for the Warrants, and the Warrant Agent hereby
accepts such appointment and agrees to perform the same in accordance with the
terms and conditions set forth in this Agreement.
2. Warrants.
2.1 Form of Warrant. Each Warrant certificate shall be issued in
registered form only, shall be in substantially the form of Exhibit A hereto,
the provisions of which are incorporated herein and shall be signed by, or bear
the facsimile signature of, the Chairman of the Board or President and Secretary
or Assistant Secretary of the Company and shall bear a facsimile of the
Company's
seal. In the event the person whose facsimile signature has been placed upon any
Warrant certificate shall have ceased to be Chairman of the Board or President
and Secretary or Assistant Secretary of the Company before such Warrant
certificate is issued, it may be issued with the same effect as if he had not
ceased to be such at the date of issuance. The Warrants represented by a Warrant
certificate may not be exercised until such certificate has been countersigned
by the Warrant Agent as provided in Section 2.3 hereof.
2.2 Effect of Countersignature. Unless and until countersigned by the
Warrant Agent pursuant to this Agreement, a Warrant certificate shall be invalid
and of no effect.
2.3 Events for Countersignature. The Warrant Agent shall countersign a
Warrant certificate only upon the occurrence of either of the following events:
(a) if the Warrant certificate is to be issued in exchange or
substitution for one or more previously countersigned Warrant certificates, as
hereinafter provided, or
(b) if the Company instructs the Warrant Agent to do so.
2.4 Registration.
2.4.1 Warrant Register. The Warrant Agent shall maintain books
("Warrant Register"), for the registration of original issuance and the
registration of transfer of the Warrants. Upon the initial issuance of the
Warrants, the Warrant Agent shall issue and register the Warrants in the names
of the respective holders thereof in such denominations and otherwise in
accordance with instructions delivered to the Warrant Agent by the Company.
2.4.2 Registered Holder. Prior to due presentment for
registration of transfer of any Warrant certificate, the Company and the Warrant
Agent may deem and treat the person in whose name such Warrant certificate shall
be registered upon the Warrant Register ("registered holder"), as the absolute
owner of such Warrant and of each Warrant represented thereby (notwithstanding
any notation of ownership or other writing on the Warrant certificate made by
anyone other than the Company or the Warrant Agent), for the purpose of any
exercise thereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
3. Terms and Exercise of Warrants
3.1 Warrant Price. Each Warrant certificate shall, when countersigned
by the Warrant Agent, entitle the registered holder thereof, subject to the
provisions of such Warrant certificate and of this Warrant Agreement, to
purchase from the Company the number of shares of Common Stock stated therein,
at the price of $6.00 per whole share, subject to the adjustments provided in
Section 4 hereof. The term "Warrant Price" as used in this Warrant Agreement
refers to the price per share at which Common Stock may be purchased at the time
a Warrant is exercised.
3.2 Duration of Warrants. Subject to Section 3.3.6 hereof, a Warrant
may be exercised only during the period ("Exercise Period") commencing on
________ ___, 1998, and terminating on the earlier of December ___, 2002, or the
date fixed for redemption of the Warrant as provided in Section 6 of this
Agreement ("Expiration Date"). Each Warrant not exercised on or before its
expiration date shall become void, and all rights thereunder and all rights in
respect thereof under
2
this Agreement shall cease at the close of business on its Expiration Date. The
Company in its sole discretion may extend the duration of the Warrants by
delaying the Expiration Date.
3.3 Exercise of Warrants.
3.3.1 Payment. A Warrant, when countersigned by the Warrant
Agent, may be exercised by the registered holder thereof by surrendering the
certificate representing such Warrant, at the office of the Warrant Agent, or at
the office of its successor as Warrant Agent, in the Borough of Manhattan, City
and State of New York, with the subscription form, as set forth on the Warrant
certificate and in substantially the form of Exhibit A hereto, duly executed,
and by paying in full, in lawful money of the United States, in cash, good
certified check or bank draft payable to the order of the Company, the Warrant
Price for each full share of Common Stock as to which the Warrant is exercised
and any and all applicable taxes due in connection with the exercise of the
Warrant, the exchange of the Warrant for the Common Stock, and the issuance of
the Common Stock.
3.3.2 Issuance of Certificates. As soon as practicable after
the exercise of any Warrant and the clearance of the funds in payment of the
Warrant Price, the Company shall issue to the registered holder of such Warrant
a certificate or certificates for the number of full shares of Common Stock to
which he is entitled, registered in such name or names as may be directed by
him, and if such Warrant shall not have been exercised in full, a new
countersigned Warrant certificate for the number of shares as to which such
Warrant shall not have been exercised. Notwithstanding the foregoing, the
Company shall not be obligated to deliver any securities pursuant to the
exercise of a Warrant unless a registration statement under the Securities Act
of 1933 with respect to the securities is effective. Warrants may not be
exercised by, or securities issued to, any registered holder in any state in
which such exercise would be unlawful.
3.3.3 Valid Issuance. All shares of Common Stock issued upon
the proper exercise of a Warrant in conformity with this Agreement shall be
validly issued.
3.3.4 Date of Issuance. Each person in whose name any such
certificate for shares of Common Stock is issued shall for all purposes be
deemed to have become the holder of record of such shares on the date on which
the Warrant certificate was surrendered and payment of the Warrant Price was
made, irrespective of the date of delivery of such certificate, except that, if
the date of such surrender and payment is a date when the stock transfer books
of the Company are closed, such person shall be deemed to have become the holder
of such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
3.3.5 Warrant Solicitation and Warrant Solicitation Fee.
(a) The Company has engaged the Underwriters, on a
non-exclusive basis, as its agents for the solicitation of the exercise of the
Warrants. The Company, at its cost, will (i) assist the Underwriters with
respect to such solicitation, if requested by the Underwriters and (ii) provide
to the Underwriters, and direct the Company's transfer and warrant agent to
deliver to the Underwriters, lists of the record, and to the extent known,
beneficial owners of the Company's Warrants. Accordingly, the Company hereby
instructs the Warrant Agent to cooperate with the Underwriters in every respect
in connection with the Underwriters' solicitation activities, including, but not
limited to, providing to the Underwriters, at the Company's cost, a list of
record and beneficial holders of the Warrants and circulating a prospectus or
offering circular disclosing the
3
compensation arrangements referenced in Section 3.3.5(b) hereinbelow to holders
of the Warrants at the time of exercise of the Warrants. In addition to the
conditions set forth in Section 3.3.5(b) hereinbelow, the Underwriters shall
accept payment of the warrant solicitation fee provided in Section 3.3.5(b) only
if they have provided bona fide services in connection with the exercise of the
Warrants. In addition to soliciting, either orally or in writing, the exercise
of Warrants by a Warrant holder, such services may also include disseminating
information, either orally or in writing, to Warrant holders about the Company
or the market for the Company's securities, or assisting in the processing of
the exercise of Warrants.
(b) In each instance in which a Warrant is exercised, the
Warrant Agent shall promptly give written notice of such exercise to the Company
and the Underwriters ("Warrant Agent's Exercise Notice"). If, upon the exercise
of any Warrant more than one year from the Effective Date, (i) the market price
of the Company's Common Stock is greater than the Warrant Price, (ii) disclosure
of compensation arrangements was made both at the time of the original offering
and at the time of exercise (by delivery of the Prospectus or as otherwise
required by applicable law, rule or regulation), (iii) the exercise of the
Warrant was solicited by one of the Underwriters, (iv) the Warrant was not held
in a discretionary account, and (v) the solicitation of the exercise of the
Warrant was not in violation of Regulation M (as such rule or any successor rule
may be in effect as of such time of exercise) promulgated under the Securities
Exchange Act of 1934, then the Warrant Agent, simultaneously with the
distribution of proceeds to the Company received upon exercise of the Warrant(s)
so exercised, shall, on behalf of the Company, pay from the proceeds received
upon exercise of the Warrant(s), a fee of 5% of the Warrant Price to the
respective Underwriters in accordance with their actual solicitation of a
Warrant holder, provided that either of the Underwriters deliver to the Warrant
Agent within ten (10) business days from the date on which the Underwriters
received the Warrant Agent's Exercise Notice, a certificate that the conditions
set forth in the preceding clauses (iii), (iv) and (v) have been satisfied. The
Underwriters and the Company may, at any time during business hours, examine the
records of the Warrant Agent, including its ledger of original Warrant
certificates returned to the Warrant Agent upon exercise of Warrants.
(c) The provisions of this Section 3.3.5. may not be modified,
amended or deleted without the prior written consent of the Underwriters.
4. Adjustments.
4.1 Stock Dividends - Split-Ups. If after the date hereof, and subject
to the provisions of Section 4.5 below, the number of outstanding shares of
Common Stock is increased by a stock dividend payable in shares of Common Stock
or by a split-up of shares of Common Stock or other similar event, then, on the
effective date thereof, the number of shares issuable on exercise of each
Warrant shall be increased in proportion to such increase in outstanding shares
and the then applicable Warrant Price shall be correspondingly decreased.
4.2 Aggregation of Shares. If after the date hereof, and subject to the
provisions of Section 4.5, the number of outstanding shares of Common Stock is
decreased by a consolidation, combination or reclassification of shares of
Common Stock or other similar event, then, upon the effective date of such
consolidation, combination or reclassification, the number of shares issuable on
exercise of each Warrant shall be decreased in proportion to such decrease in
outstanding shares and the then applicable Warrant Price shall be
correspondingly increased.
4
4.3 Replacement of Securities Upon Reorganization, etc. If after the
date hereof any capital reorganization or reclassification of the Common Stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation or other similar event shall be effected, then, as a condition of
such reorganization, reclassification, consolidation, merger, or sale, lawful
and fair provision shall be made whereby the Warrant holders shall thereafter
have the right to purchase and receive, upon the basis and upon the terms and
conditions specified in the Warrants and in lieu of the shares of Common Stock
of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented thereby, such shares of stock, securities, or
assets as may be issued or payable with respect to or in exchange for the number
of outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented by the Warrants, had such reorganization,
reclassification, consolidation, merger, or sale not taken place and in such
event appropriate provision shall be made with respect to the rights and
interests of the Warrant holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Warrant Price
and of the number of shares purchasable upon the exercise of the Warrants) shall
thereafter be applicable, as nearly as may be in relation to any share of stock,
securities, or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger, or sale unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger, or the corporation purchasing such
assets, shall assume by written instrument executed and delivered to the Warrant
Agent the obligation to deliver to the Warrant holders such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, such
holders may be entitled to purchase.
4.4 Notices of Changes in Warrant. Upon every adjustment of the Warrant
Price or the number of shares issuable on exercise of a Warrant, the Company
shall give written notice thereof to the Warrant Agent, which notice shall state
the Warrant Price resulting from such adjustment and the increase or decrease,
if any, in the number of shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Upon the occurrence of any event
specified in Sections 4.1., 4.2., or 4.3., then, in any such event, the Company
shall give written notice in the manner set forth above of the record date for
such dividend, distribution, or subscription rights, or the effective date of
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Such notice shall also specify the date as
of which the holders of Common Stock of record shall participate in such
dividend, distribution, or subscription rights, or shall be entitled to exchange
their Common Stock for stock, securities, or other assets deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of such event.
4.5 No Fractional Shares. Notwithstanding any provision contained in
this Warrant Agreement to the contrary, the Company shall not issue fractional
shares upon exercise of Warrants. If, by reason of any adjustment made pursuant
to this Section 4, the holder of any Warrant would be entitled, upon the
exercise of such Warrant, to receive a fractional interest in a share, the
number of shares of Common Stock to be received shall be rounded off to the
nearest whole number.
4.6 Form of Warrant. The form of Warrant need not be changed because of
any adjustment pursuant to this Section 4, and Warrants issued after such
adjustment may state the
5
same Warrant Price and the same number of shares as is stated in the Warrants
initially issued pursuant to this Agreement. However, the Company may at any
time in its sole discretion make any change in the form of Warrant that the
Company may deem appropriate and that does not affect the substance thereof, and
any Warrant thereafter issued or countersigned, whether in exchange or
substitution for an outstanding Warrant or otherwise, may be in the form as so
changed.
5. Transfer and Exchange of Warrants.
5.1 Registration of Transfer. The Warrant Agent shall register the
transfer, from time to time, of any outstanding Warrant upon the Warrant
Register, upon surrender of a Warrant certificate for transfer, properly
endorsed with signatures properly guaranteed and accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant certificate
representing an equal aggregate number of Warrants shall be issued and the old
Warrant certificate shall be canceled by the Warrant Agent. The Warrant
certificate so canceled shall be delivered by the Warrant Agent to the Company
from time to time upon request.
5.2 Procedure for Surrender of Warrants. Warrant certificates may be
surrendered to the Warrant Agent, together with a written request for exchange,
and thereupon the Warrant Agent shall issue in exchange therefor one or more new
Warrant certificates as requested by the registered holder of the Warrant
certificates so surrendered, representing an equal aggregate number of Warrants;
provided, however, that in the event that a Warrant certificate surrendered for
transfer bears a restrictive legend, the Warrant Agent shall not cancel such
Warrant certificate and issue new Warrant certificates in exchange therefor
until the Warrant Agent has received an opinion of counsel for the Company
stating that such transfer may be made and indicating whether the new Warrant
certificates must also bear a restrictive legend.
5.3 Fractional Warrants. The Warrant Agent shall not be required to
effect any registration of transfer or exchange which will result in the
issuance of a warrant certificate for a fraction of a warrant. The number of
Warrants to be delivered shall be rounded off to the nearest whole number.
5.4 Service Charges. No service charge shall be made for any exchange
or registration of transfer of Warrants.
5.5 Warrant Execution and Countersignature. The Warrant Agent is hereby
authorized to countersign and to deliver, in accordance with the terms of this
Agreement, the Warrants required to be issued pursuant to the provisions hereof,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrant certificates duly executed on behalf of the Company for such
purpose.
6. Redemption.
6.1 Redemption. Not less than all of the outstanding Warrants may be
redeemed, at the option of the Company, after they become exercisable and prior
to the Expiration Date, at the office of the Warrant Agent, upon the notice
referred to in Section 6.2., at the price of $.01 per Warrant ("Redemption
Price"), provided that (a) the last sale price of the Common Stock has been at
least one hundred and fifty percent (150%) of the then effective exercise price
of the Public Warrants on each of the twenty (20) consecutive trading days
ending on the third business day
6
prior to the date on which notice of redemption is given, the satisfaction of
which condition shall be certified by the Company and (b) the Company has
obtained the prior written consent of the Underwriters. The provisions of this
Section 6.1 may not be modified, amended or deleted without the prior written
consent of the Underwriters.
6.2 Date Fixed for, and Notice of, Redemption. In the event the Company
shall elect to redeem all or any part of the outstanding Warrants, the Company
shall fix a date for the redemption. Notice of redemption shall be mailed by
first class mail, postage prepaid, by the Company or the Company's agent at its
direction not less than 30 days from the date fixed for redemption to the
registered holders of the outstanding Warrants to be redeemed at their last
address as they shall appear on the registration books. Any notice mailed in the
manner herein provided shall be conclusively presumed to have been duly given
whether or not the registered holder received such notice.
6.3 Exercise After Notice of Redemption. The outstanding Warrants may
be exercised in accordance with Section 3 of this Agreement at any time after
notice of redemption shall have been given by the Company pursuant to Section
6.2. hereof and prior to the date fixed for redemption. On and after the
redemption date, the record holder of the outstanding Warrants shall have no
further rights except to receive, upon surrender of the outstanding Warrants,
the redemption price.
6.4 Outstanding Warrants Only. The Company understands that the
redemption rights provided for by this Section 6 apply only to outstanding
Warrants. To the extent a person holds rights to purchase Warrants, such
purchase rights shall not be extinguished by redemption. However, once such
purchase rights are exercised, the Company may redeem the Warrants issued upon
such exercise provided that the criteria for redemption is met. The provisions
of this Section 6.4 may not be modified, amended or deleted without the prior
written consent of the Underwriters.
7. Other Provisions Relating to Rights of Holders of Warrants.
7.1 No Rights as Stockholder. A Warrant does not entitle the registered
holder thereof to any of the rights of a stockholder of the Company, including,
without limitation, the right to receive dividends, or other distributions,
exercise any preemptive rights to vote or to consent or to receive notice as
stockholders in respect of the meetings of stockholders or the election of
directors of the Company or any other matter.
7.2 Lost, Stolen, Mutilated, or Destroyed Warrants. If any Warrant
certificate is lost, stolen, mutilated, or destroyed, the Company and the
Warrant Agent may, on such terms as to indemnity or otherwise as they may in
their discretion impose (which shall, in the case of a mutilated Warrant
certificate, include the surrender thereof), issue a new Warrant certificate of
like denomination, tenor, and date as the Warrant certificate so lost, stolen,
mutilated, or destroyed. Any such new Warrant certificate shall constitute a
substitute contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated, or destroyed Warrant certificate shall be at any time
enforceable by anyone.
7.3 Reservation of Common Stock. The Company shall at all times reserve
and keep available a number of its authorized but unissued shares of Common
Stock that will be sufficient to permit the exercise in full of all outstanding
Warrants issued pursuant to this Agreement.
7
7.4 Registration of Common Stock. The Company agrees that prior to the
date that the Warrants become exercisable it shall file with the Securities and
Exchange Commission a post-effective amendment to the Registration Statement, if
possible, or a new registration statement, to register, under the Securities Act
of 1933, and it shall take such action as is necessary to qualify for sale in
those states in which the Warrants were initially offered by the Company, the
Common Stock issuable upon exercise of the Warrants. In either case, the Company
shall cause the same to become effective at or prior to the date the Warrants
become exercisable, and maintain the effectiveness of such registration
statement and keep current a prospectus thereunder and maintain such
qualification until the expiration of the Public Warrants and the Underwriters'
Warrants in accordance with the provisions of this Agreement. The provisions of
this Section 7.4 may not be modified, amended or deleted without the prior
written consent of the Underwriters.
8. Concerning the Warrant Agent and Other Matters.
8.1 Payment of Taxes. The Company will from time to time promptly pay
all taxes and charges that may be imposed upon the Company or the Warrant Agent
in respect of the issuance or delivery of shares of Common Stock upon the
exercise of Warrants, but the Company shall not be obligated to pay any transfer
taxes in respect of the Warrants or such shares.
8.2 Resignation, Consolidation, or Merger of Warrant Agent.
8.2.1 Appointment of Successor Warrant Agent. The Warrant
Agent, or any successor to it hereafter appointed, may resign its duties and be
discharged from all further duties and liabilities (other than those incurred
prior to such resignation or discharge) hereunder after giving sixty (60) days'
notice in writing to the Company. If the office of the Warrant Agent becomes
vacant by resignation or incapacity to act or otherwise, the Company shall
appoint in writing a successor Warrant Agent in place of the Warrant Agent. If
the Company shall fail to make such appointment within a period of 30 days after
it has been notified in writing of such resignation or incapacity by the Warrant
Agent or by a holder of Warrants (who shall, with such notice, submit his
Warrant for inspection by the Company), then the holder of any Warrant may apply
to the Supreme Court of the State of New York for the County of New York for the
appoint ment of a successor Warrant Agent. Any successor Warrant Agent, whether
appointed by the Company or by such court, shall be a corporation organized,
existing and in good standing and authorized under the laws of the state in
which it was incorporated to exercise corporate trust powers, shall maintain an
office in the Borough of Manhattan, City and State of New York for the transfer
of the Warrants and, if not incorporated in the State of New York, shall be
authorized to do business in the State of New York as a foreign corporation, and
subject to supervision or examination by federal or state authority and shall be
authorized to serve as Warrant Agent for the Warrants under the Securities
Exchange Act of 1934, as amended. After appointment, any successor Warrant Agent
shall be vested with all the authority, powers, rights, immunities, duties, and
obligations of its predecessor Warrant Agent with like effect as if originally
named as Warrant Agent hereunder, without any further act or deed; but if for
any reason it becomes necessary or appropriate, the predecessor Warrant Agent
shall execute and deliver, at the expense of the Company, an instrument
transferring to such successor Warrant Agent all the authority, powers, and
rights of such predecessor Warrant Agent hereunder; and upon request of any
successor Warrant Agent the Company shall make, execute, acknowledge, and
deliver any and all instruments in writing for more fully and effectually
vesting in and confirming to such successor Warrant Agent all such authority,
powers, rights, immunities, duties, and obligations.
8.2.2 Notice of Successor Warrant Agent. In the event a
successor Warrant Agent shall be appointed, the Company shall give notice
thereof to the predecessor Warrant Agent and the transfer agent for the Common
Stock not later than the effective date of any such appointment.
8
8.2.3 Merger or Consolidation of Warrant Agent. Any
corporation into which the Warrant Agent may be merged or with which it may be
consolidated or any corporation resulting from any merger or consolidation to
which the Warrant Agent shall be a party, if it shall be eligible to serve as
Warrant Agent under Section 8.2.1, shall be the successor Warrant Agent under
this Agreement without any further act.
8.3 Fees and Expenses of Warrant Agent.
8.3.1 Remuneration. The Company agrees to pay the Warrant
Agent reasonable remuneration for its services as such Warrant Agent hereunder
and will reimburse the Warrant Agent upon demand for all expenditures that the
Warrant Agent may reasonably incur in the execution of its duties hereunder.
8.3.2 Further Assurances. The Company agrees to perform,
execute, acknowledge, and deliver or cause to be performed, executed,
acknowledged, and delivered all such further and other acts, instruments, and
assurances as may reasonably be required by the Warrant Agent for the carrying
out or performing of the provisions of this Agreement.
8.4 Liability of Warrant Agent.
8.4.1 Reliance on Company Statement. Whenever in the
performance of its duties under this Warrant Agreement, the Warrant Agent shall
deem it necessary or desirable that any fact or matter be proved or established
by the Company prior to taking or suffering any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
statement signed by the President of the Company and delivered to the Warrant
Agent. The Warrant Agent may rely upon such statement for any action taken or
suffered in good faith by it pursuant to the provisions of this Agreement.
8.4.2 Indemnity. The Warrant Agent shall be liable hereunder
only for its own negligence or willful misconduct. The Company agrees to
indemnify the Warrant Agent and save it harmless against any and all
liabilities, including judgments, costs and reasonable counsel fees, for
anything done or omitted by the Warrant Agent in the execution of this Agreement
except as a result of the Warrant Agent's negligence, willful misconduct, or bad
faith.
8.4.3 Exclusions. The Warrant Agent shall have no
responsibility with respect to the validity of this Agreement or with respect to
the validity or execution of any Warrant (except its countersignature thereof);
nor shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Warrant; nor shall it be
responsible to make any adjustments required under the provisions of Section 4.
hereof or responsible for the manner, method, or amount of any such adjustment
or the ascertaining of the existence of facts that would require any such
adjustment; nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any shares
of Common Stock to be issued pursuant to this Agreement or any Warrant or as to
whether any shares of Common Stock will when issued be valid and fully paid and
nonassessable.
8.5 Acceptance of Agency. The Warrant Agent hereby accepts the agency
established by this Agreement and agrees to perform the same upon the terms and
conditions herein set forth
9
and among other things, shall account promptly to the Company with respect to
Warrants exercised and concurrently account for, and pay to the Company, all
moneys received by the Warrant Agent for the purchase of shares of the Company's
Common Stock through the exercise of Warrants.
9. Miscellaneous Provisions.
9.1 Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company or the Warrant Agent shall bind and inure to
the benefit of their respective successors and assigns.
9.2 Notices. Any notice, statement or demand authorized by this Warrant
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant to or by the Company shall be sufficiently given or made if sent by
certified mail, or private courier service, postage prepaid, addressed (until
another address is filed in writing by the Company with the Warrant Agent), as
follows:
AUGMENT SYSTEMS, INC.
2 Robbins Road
Westford, Massachusetts 01886
Attn: Lorrin G. Gale, President and Chief
Executive Officer
with a copy to:
WARNER & STACKPOLE, LLP
75 State Street
Boston, Massachusetts 02109
Attn: Michael A. Hickey, Esq.
Any notice, statement or demand authorized by this Agreement to be given or made
by the holder of any Warrant or by the Company to or on the Warrant Agent shall
be sufficiently given or made if sent by certified mail or private courier
service, postage prepaid, addressed (until another address is filed in writing
by the Warrant Agent with the Company), as follows:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
2 Broadway New
York, New York 10002
9.3 Applicable law; Jurisdiction. The validity, interpretation, and
performance of this Agreement and of the Warrants shall be governed in all
respects by the law of the State of New York, without giving effect to
principles of conflicts of law. The Company hereby agrees that any action,
proceeding or claim against it arising out of or relating in any way to this
Agreement shall be brought and enforced in the courts of the State of New York
or the United States District Court for the Southern District of New York, and
irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive.
The Company hereby waives any objection to such exclusive jurisdiction and that
such courts represent an inconvenience forum. Any such process or summons to be
served upon the Company may be served by transmitting a copy thereof by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 9.2
10
hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the Company in any action, proceeding or claim.
9.4 Persons Having Rights Under This Agreement. Nothing in this
Agreement expressed and nothing that may be implied from any of the provisions
hereof is intended, or shall be construed, to confer upon, or give to, any
person or corporation other than the parties hereto and the registered holders
of the Warrants and, for the purposes of Sections 3.3.5, 6.1 through 6.4 and 7.4
hereof, the Underwriters, any right, remedy, or claim under or by reason of this
Warrant Agreement or of any covenant, condition, stipulation, promise, or
agreement hereof. The Underwriters shall each be deemed to be a third-party
beneficiary of this Agreement with respect to such Sections. All covenants,
conditions, stipulations, promises, and agreements contained in this Warrant
Agreement shall be for the sole and exclusive benefit of the parties hereto (and
the Underwriters to the extent set forth above) and their successors and assigns
and of the registered holders of the Warrants.
9.5 Examination of the Warrant Agreement. A copy of this Agreement
shall be available at all reasonable times at the office of the Warrant Agent in
the Borough of Manhattan, City and State of New York, for inspection by the
registered holder of any Warrant. The Warrant Agent may require any such holder
to submit his or her Warrant for inspection by it.
9.6 Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
9.7 Effect of Headings. The Section headings herein are for convenience
only and are not part of this Warrant Agreement and shall not affect the
interpretation thereof.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto
under their respective corporate seals as of the day and year first above
written.
Attest: AUGMENT SYSTEMS, INC.
By:
--------------------------
- --------------------------- Name: Lorrin G. Gale
Name: Title: President and Chief
Title: Executive Officer
Attest:
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
- --------------------------- By:
Name: --------------------------
Title: Name:
Title:
11
WARNER & STACKPOLE LLP
COUNSELLORS AT LAW
75 State Street Telephone: (617) 951-9000
Boston, Massachusetts 02109 Fax: (617) 951-9151
April 11, 1997
Augment Systems, Inc.
2 Robbins Road
Westford, Massachusetts 01886
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation and
filing with the Securities and Exchange Commission of a Registration Statement
on Form SB-2 (as amended to date, the "Registration Statement") with respect to
the public offering of (i) up to 1,800,000 shares of the common stock, $.01 par
value per share, ("Common Stock") and 1,800,000 Redeemable Common Stock Purchase
Warrants ("Warrants") of Augment Systems, Inc., a Delaware corporation (the
"Company"), by GKN Securities Corp. and Laidlaw Equities, Inc. ("Underwriters"),
(ii) 270,000 shares of Common Stock and 270,000 Warrants which may be sold by
the Underwriters to cover over-allotments, and (iii) an Underwriters' Purchase
Option ("Underwriters' Purchase Option") to purchase 180,000 shares of Common
Stock and 180,000 Warrants.
We have examined (i) the Registration Statement, (ii) the form of
Underwriting Agreement between the Company and the Underwriters (the
"Underwriting Agreement"), (iii) the form of Warrant Agreement by and between
the Company and Continental Stock Transfer & Trust Company (the "Warrant
Agreement"), (iv) the Certificate of Incorporation of the Company, as amended,
and (iv) such other documents and records of the Company as we have deemed
necessary for the purpose of this opinion.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies, and the authenticity of the
originals of such latter documents.
We assume that appropriate action will be taken, prior to the offer and
sale of the Common Stock and Warrants, to register and qualify the Common Stock
and Warrants for sale under the applicable state securities or "blue sky" laws.
We are members of the bar of the Commonwealth of Massachusetts and we
express no opinion as to any matters insofar as any laws other than Federal
laws, the laws of the Commonwealth of Massachusetts and the General Corporation
Law of the State of Delaware may be applicable.
Augment Systems, Inc.
April 11, 1997
Page 2
Based upon the foregoing, we are of the opinion that:
1. The Corporation is duly organized and validly existing under the
laws of the State of Delaware.
2. The Common Stock and the Warrants to be sold by the Corporation
through the Underwriters, including the 270,000 shares of Common Stock and the
270,000 Warrants that may be sold by the Underwriters to cover over-allotments,
have been duly authorized, and upon the execution and delivery of the
Underwriting Agreement by the parties thereto, payment for the Common Stock and
Warrants in accordance with the terms of the Underwriting Agreement and the
issuance of the certificates therefor by the Company, such Common Stock will be
validly issued, fully paid and non-assessable and such Warrants will be duly and
validly issued.
3. The shares of Common Stock issuable upon the exercise of the
Warrants to be sold by the Corporation through the Underwriters, including the
shares of Common Stock underlying the 270,000 Warrants that may be sold to cover
over-allotments, have been duly authorized and reserved for issuance upon
exercise of such Warrants, and such shares, when issued upon exercise in
accordance with the Warrant Agreement by and between the Corporation and
Continental Stock Transfer & Trust Company, as Warrant Agent, will be legally
issued, fully paid and non-assessable.
4. The Underwriters' Purchase Option to purchase up to 180,000 shares
of Common Stock and/or 180,000 Warrants to be sold to the Underwriters upon
completion of this offering has been duly authorized. The shares of Common Stock
and the Warrants included in the Underwriters' Purchase Option issuable upon the
exercise thereof have been duly authorized and reserved for issuance. The shares
of Common Stock issuable upon the exercise of the Underwriters' Purchase Option
when issued upon exercise in accordance with the terms of the Purchase Option
will be validly issued, fully paid and non-assessable. The shares issuable upon
the exercise of the Warrants included in the Underwriters' Purchase Option, when
issued upon exercise of such Warrants in accordance with the Warrant Agreement,
will be validly issued, fully paid and non-assessable.
We hereby consent to the reference to this firm under the heading
"Legal Matters" in the prospectus which is part of the Registration Statement
and to the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
WARNER & STACKPOLE LLP
W&S LLP: MAH/ml
EXHIBIT 10.18
PROMISSORY NOTE
$200,000 April 8, 1997
FOR VALUE RECEIVED, the undersigned Augment Systems, Inc., a Delaware
corporation (the "Company"), hereby promises to pay to the order of Venture
Management Consultants, LLC, a Massachusetts limited liability company located
at 60 Wells Avenue, Newton, MA 02159 (the "Holder"), on May 31, 1998 (the
"Maturity Date"), in lawful money of the United States and in immediately
available funds, the principal amount of Two Hundred Thousand Dollars ($200,000)
together with interest on the unpaid balance of said principal amount from time
to time outstanding at the rate of eighteen percent (18%) per annum; provided,
however, that the Company shall have the right to prepay all or any part of the
principal of this Note at any time and from time to time without premium or
penalty.
If the Maturity Date is on a Saturday, Sunday or legal holiday in
Massachusetts on which banks are authorized or required by law to close, the
maturity date of this Note shall be extended to the next succeeding business
day.
This Note shall be paid in full, without premium but with all interest
accrued thereon, in the event, and on the date, that the Company (i)
consolidates or merges with another corporation in which the Company is not the
surviving corporation or in which more than 50% of the equity ownership of the
Company has been transferred or (ii) effectuates a closing of the sale of all or
substantially all of the assets or substantially all of the outstanding common
stock of the Company.
In the event of a default as defined in the succeeding sentence, the
Company shall reimburse the Holder for all reasonable out-of-pocket expenses,
including attorneys' fees, incurred in enforcing or attempting to enforce this
Note. For the purpose of this Note, a default shall, at the option of the
Holder, be deemed to exist upon the occurence of one or more of the following
events:
i. if the Company shall fail to pay the principal and interest after the
same has become due and payable;
ii.if the Company shall take any voluntary action or be subject of any
involuntary action seeking bankruptcy, insolvency administration,
receivership, dissolution or other similar action or shall suffer any
such similar action without obtaining dismissal of such action within
obtaining dismissal of such action within forty-five (45) days of the
taking thereof.
This Note shall inure to the benefit of the Holder and its successors and
assigns, provided that this Note shall not be transferred or assigned without
the prior written consent of the Company. This Note shall be binding upon the
Company and any successor to its business, whether by merger of otherwise.
Subject to applicable law, this Note may be amended, modified and supplemented
only by written agreement of both the Company and Holder.
No delay or omission on the part of the Holder in exercising any right
hereunder shall operate as a waiver of such right or of any other right of such
Holder, nor shall any delay, omission, or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right of any future occasion. The
Company waives presentment, demand, protest and notice of every kind in
connection with the enforcement and collection of this Note.
The execution, delivery and performance of this Note shall be governed by
and construed in accordance with the laws of the Commonwealth of Massachusetts.
Executed as a sealed instrument as of the date set forth above.
AUGMENT SYSTEMS, INC.
By: /s/ Duane A. Mayo
-----------------------
Duane A. Mayo
Treasurer and Secretary
EXHIBIT 11
AUGMENT SYSTEMS, INC.
COMPUTATION OF NET LOSS PER SHARE
OF COMMON STOCK
Cummulative
Year Ended Six Months Ended Period From
June 30, December 31, 10/1/95
--------------- ------------------- to 12/31/96
1995 1996 1995 1996
- --------------------------------------------------------------------------------
Weighted average
number of shares
of common stock
outstanding 228,638 1,040,104 920,006 2,393,107 1,630,041
Application of SAB
No. 83(1) 1,942,240 1,910,388 1,942,240 1,059,633 1,560,607
- --------------------------------------------------------------------------------
Shares used in
computing net
loss per share
of common stock 2,170,878 2,950,492 2,862,246 3,452,740 3,190,648
- --------------------------------------------------------------------------------
Net loss applicable
to common stock $ (400,855)$(1,511,664) $(534,123)$(3,216,285)$(4,680,104)
- --------------------------------------------------------------------------------
Loss per share of
Common Stock:
Loss from continuing
operations $ (0.02) $ (0.51) $ (0.19) $ (0.93) $ (1.47)
Loss from discontinuing
operations $ (0.17) - - - -
- --------------------------------------------------------------------------------
Net loss per share
of common stock $ (0.19) $ (0.51) $ (0.19) $ (0.93) $ (1.47)
- --------------------------------------------------------------------------------
- ------------------
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, ("SAB No. 83") common stock issued within one year of the initial public
offering price less than the initial public offering price (estimated at $5.50
per share) is treated as outstanding for all periods presented.
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
Augment Systems, Inc.
Westford, Massachusetts
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated February 20, 1997, except for Note 15
which is as of April 10, 1997, relating to the financial statements of Augment
Systems, Inc., which is contained in that Prospectus. Our report contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Boston, Massachusetts
April 11, 1997
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<ARTICLE> 5
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUN-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 452,753
<SECURITIES> 0
<RECEIVABLES> 0
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<PP&E> 348,889
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0
0
<COMMON> 28,655
<OTHER-SE> 6,177,194
<TOTAL-LIABILITY-AND-EQUITY> 1,679,053
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<EXTRAORDINARY> 0
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<NET-INCOME> (3,216,285)
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