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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM [ ] TO [ ].
COMMISSION FILE NUMBER 0-22341
AUGMENT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3089539
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2 ROBBINS ROAD, WESTFORD, MA 01886
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
978-392-8626
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.01 PAR VALUE
COMMON STOCK PURCHASE WARRANTS
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirement for the past
90 days. (1) Yes [X] NO [ ] (2) Yes [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form. [ ]
The issuer's revenues for the fiscal year ended December 31, 1997 were
approximately $990,000. As of March 15, 1998, there were 11,272,229 shares of
the Issuer's Common Stock, $.01 par value, issued and outstanding. The aggregate
market value of the Issuer's Common Stock held by non-affiliates was
approximately $11,184,453 based upon the average of the bid and ask prices of
such stock on that date.
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Augment Systems, Inc. designs, develops, and sells fibre channel-based
network file server systems designed to increase data transfer and file storage
on computer networks. The Company's products address the increasing demand for
the rapid transfer and efficient storage of very large image and text files
within computer networks. While maintaining full compatibility with legacy
hardware and software systems, the Company's proprietary application of hardware
and software technologies facilitates improvements in data transfer rates versus
conventional computer networks. The Company's technology is designed to support
multi-platform environments and enables end-to-end solutions by providing a high
capacity data channel and file management functions that work in parallel with
conventional networks. The Company's technology is optimized to support the
emerging industry requirements for client storage area networks ("client SANs").
A client SAN provides high-speed connectivity between multiple clients and
storage.
The Company's initial target market is the electronic printing and
publishing industry which is rapidly converting to digital technology, but
suffers from workflow bottlenecks due to the very large file sizes of color
images that cannot be efficiently transported over conventional networks. The
Company believes that its technology is applicable to a number of other areas
where rapid and efficient data transfer technology will enable improvements in
productivity and effectiveness, including geophysical information systems
("GIS"), medical imaging, and data servers for internet service providers
("ISPs").
The Company sells fibre channel-based network file server systems which
include (i) one or more end-to-end high speed fibre channel arbitrated loop
("FC-AL") interfaces; (ii) a file server, the AFX 410, that performs a central
file management function, high speed large capacity storage, and high speed
interconnects to the FC-AL interfaces; and (iii) PCI cards and software for each
client workstation to be connected to the file server. This unique approach
produces 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.
BACKGROUND
Information, and the ability to access and distribute it, is increasingly
becoming a key strategic asset in the competitive business environment. Advances
in computer hardware and software technology have resulted in dramatic increases
in the amount of electronically stored information available to computer users.
The need to effectively use and communicate information has driven the extensive
deployment of network based communication systems, which are now typically based
on the client/server architecture. The resulting explosion in connectivity has
in turn focused attention on the need to transfer information between computer
users quickly and effectively. In a number of industries, including electronic
publishing, GIS, and medical imaging, the quantity of digital information
routinely manipulated has now outgrown the capacity of the networks to transfer
files in a reasonably short period of time. Often involving the manipulation of
very large text and image files, these applications require massive amounts of
disk storage and very high network bandwidths.
THE AUGMENT SOLUTION
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 Augment file server systems permit increases in the speed
at which data files are moved from each end of the printing process, leading to
improved workflow throughput which significantly decreases the time currently
lost waiting for files to be transferred between workstations. Installation of
an Augment server system does not require the replacement of any hardware or
software or any alteration of the operating system environment. The Augment
technology is multi-platform and augments the existing network architecture to
provide considerable improvements in file management and file transfer speed.
Depending on the capacity of the existing network, the Company believes that an
Augment server system increases file transfer speeds by at least an order of
magnitude. The Company believes an Augment server system is up to 30 times
faster than conventional Ethernet 10 baseT networks, and
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can enable file retrieval from the Augment server at up to three times the speed
currently possible from the workstation's local hard drive.
The Company's initial product, the AFX 410, provides optimized data
transfer for Macintosh clients and WindowsNT clients via a fiber channel
arbitrated loop. The fiber channel interconnect delivers data to client
workstations at the rate of up to 10 megabytes per second ("MBytes/sec").
Standard Ethernet connections based on the 10 baseT standard provide data at up
to 0.3 Mbytes/sec, Ethernet 100 baseT connections provide data at up to 0.75
Mbytes/sec, and modified Ethernet 100 baseT networks can deliver data at up to 3
Mbytes/sec. In addition to the utilization of fiber channel connections, the
Company's products perform sophisticated file management and storage functions
that are crucial to achieving high levels of throughput. The server incorporates
an extensive scalable internal storage system (up to 216 gigabytes ("GBs") in a
RAID sub-system) supporting on-line data equivalent to more than 330 CDs, which
is in turn complemented by up to 96 GBs of automatic tape back-up and archiving
capabilities. The Company believes that the multi-platform design and scalable
storage capacity of its file management networks will allow users to upgrade
easily without having to purchase new operating systems and hardware.
PRODUCTS
The Company's initial file management network and server system product
performs 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 initial product is
targeted at the electronic printing and publishing industry, which Apple
currently dominates with its Macintosh workstations. The Company believes that
its file management networks provide solutions sought by the printing and
publishing industry by eliminating large file bottlenecks and by centralizing
the management of files and data. The Company's initial product release supports
Macintosh workstations and the Company has recently introduced a Windows NT
compatible product which enables the connection of Windows NT-based workstations
and servers to the Augment system.
The Company's technology incorporates (i) end-to-end high-speed fibre
channel connectivity; (ii) a server containing an embedded I/O control
processor, a hardware-assisted parallel disk array subsystem, and two NUBus-90
backplanes (each supporting up to six I/O control processors); and (iii) file
management software in the client and server. The overall system is optimized to
transfer large files over a network. Independent 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 high speed file system appears to
the desktop applications as a local hard drive, but can provide shared access of
up to 216 GBs of data complemented by 96 GBs of automatic tape back-up and
archiving capabilities, and speeds up to 30 times faster than a conventional 10
baseT network and even up to three times faster than a local hard drive. The
Company's server includes a RAID controller driven by customized ASIC 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 processor; it is handled transparently by the file system control
processor. Access to the server is provided by an operating system device driver
(software) and a fibre channel PCI interface card (hardware) in each
workstation. The existing local area network is augmented by the Company's one
gigabit per second fiber channel arbitrated loop to provide data transfers
between the server and the workstations at speeds that significantly exceed
local disk transfer rates.
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[GRAPHIC]
Diagram of an Augment SuperServer connected to multiple clients.
COMPETITION
The Company faces substantial competition from the manufacturers of several
different types of products used as file servers or as storage area networks.
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.
Servers in the publishing 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 traditional color prepress suppliers are most often
dedicated I/O device servers, rather than general purpose servers. The Company
believes that its servers compare well on a price and features basis, and
outperform proprietary operating software systems by a significant amount in
end-to-end throughput.
Specialized 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.
There is a wide variety of mid-range and high-end servers provided by SGI,
Sun, Hewlett Packard, Digital, and Apple which use Unix-based operating systems
and Windows NT. The Company believes that its servers compete directly on entry
price, price to performance, and scalability, while offering the preferred
Macintosh or Windows NT environments and ease of use.
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The following table provides a comparison of product features and
performance among the Company's initial product and other competing
technologies.
SUMMARY OF FILE SERVER TECHNOLOGIES AND PARTICIPANTS
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SCSI OR GIGABIT
AUGMENT FIBRE E-NET "ENHANCED" ETHERNET
FIBRE CHANNEL E-NET GENERAL SERVER GEN'L
CHANNEL SHARED NETWORK FILE PURPOSE SOL'N PURPOSE "POINT"
TECHNOLOGY FILE SERVER RAID SERVER SERVER INTEGRATOR SERVER SOLUTIONS
---------- ------------ ------------ -------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Description Dedicated RAID that is Dedicated file General Same as General Add-ons to
file serving shared with serving purpose previous with purpose improve
and more than solution for computer add'l computer Ethernet speed
management one small files used for components to used for or reduce file
solutions workstation and apps and enhance apps and transfers
for large via SCSI or transactions file performance file
files using Fibre using Ethernet serving via serving via
Fibre Channel Ethernet Giga
Channel Ethernet
- ----------------------------------------------------------------------------------------------------------------------------
Companies Augment Transoft, Novell, Sun, SGL, Hybinette, Sun Xinet,
AFX410 Megadrive, Network DEC, HP, Xiner, GSI, Luminous,
Mountain- Appliance, Apple, IBM, RARE, various Asante, Helios,
Gate Sonic Tricord Compaq, dealers Run, Archetype
Sol'ns, EMC, etc.
Clarion
- ----------------------------------------------------------------------------------------------------------------------------
Client Connection Fibre SCSI or 10/100 baseT 10/100 10/100 baseT Gigabit 10/100 baseT
Channel Fibre Ethernet; May baseT Ethernet; May E-Net based Ethernet; May
Channel be switched Ethernet; be switched on Fibre include h/w or
May be Channel s/w
switched physical enhancements
connection
- ----------------------------------------------------------------------------------------------------------------------------
Typical Transfer Up to 10 Up to 10 Up to 1 MB/Sec Up to 1 Up to 4 TBD Same as
Speeds to Apps MB/Sec MB/Sec MB/Sec MB/Sec "Enhanced"
- ----------------------------------------------------------------------------------------------------------------------------
Connection Length GREATER LESS THAN25m GREATER GREATER GREATER GREATER GREATER
THAN1,000m SCSI THAN1,000m THAN1,000m THAN1,000m THAN1,000m THAN1,000m
GREATER
THAN1,000m
Fibre
- ----------------------------------------------------------------------------------------------------------------------------
Heterogeneous File Yes No; Not a Yes Yes Yes Yes No
Management? Server
- ----------------------------------------------------------------------------------------------------------------------------
File system designed Yes No; Not a No No No No Varies
for large files? Server
- ----------------------------------------------------------------------------------------------------------------------------
File Management Yes No; Not a No No No No N/A
Accelerator? Server
- ----------------------------------------------------------------------------------------------------------------------------
Transparent Unix, Yes No; Not a Yes Yes Varies Yes No
Macintosh, NT File Server
System support?
- ----------------------------------------------------------------------------------------------------------------------------
Efficient with Yes No No No No No No
multiple users?
- ----------------------------------------------------------------------------------------------------------------------------
Efficient with single Yes Yes No No No No No
user?
- ----------------------------------------------------------------------------------------------------------------------------
Optimizes client file Yes No No No No No No
I/O?
- ----------------------------------------------------------------------------------------------------------------------------
Low Client CPU Yes Yes No No No No No
Overhead?
- ----------------------------------------------------------------------------------------------------------------------------
Integrates into Yes No Yes Yes No Yes No
existing workflow?
</TABLE>
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SALES AND MARKETING
The Company's sales and marketing strategy is to employ multiple
distribution channels, including direct sales, sales to original equipment
manufacturers ("OEMs"), and sales through value added resellers ("VARs"). The
Company believes that broad distribution will enable its products to be exposed
to the maximum number of end-users, whether as an add-on upgrade to
sophisticated early adopters or as part of a large solution when packaged with
electronic publishing applications and hardware.
The Company has established three regional sales offices in the United
States and utilizes VARs and third party distributors in Europe and the Far
East. In addition, the Company employs two systems engineers to work with
prospective customers on their network configurations and to provide a
sophisticated analysis of their existing hardware and software and an optimized
solution.
The Company believes that VARs represent an important distribution channel
as the electronic publishing industry undergoes further transformations as it
progresses towards digitization. By complementing their product portfolios with
the Company's products, VARs are able to maximize the productivity potential of
new products by augmenting the customer's network capacity. The Company has
entered into agreements with distributors in the United States, Europe, Canada,
Mexico, and Japan. In addition, the Company is currently developing
relationships with providers of electronic publishing solutions, to embed its
products and technology within their products with the goal of enhancement of
overall system performance.
The Company plans to continue 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 markets. The Company's
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 has recently entered into a co-marketing arrangement with Shira
Computers Ltd. ("Shira") of Israel. The agreement allows each company to market,
sell, and support integrated solutions for digital prepress workflows based on
complementary Augment and Shira products. Shira provides workflow management,
database management systems, and integration solutions for the graphic arts
industry.
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. For
the year ended December 31, 1997 and the six months ended December 31, 1996, the
Company expended approximately $3,812,000 and $1,526,000, respectively, for
research and development.
CUSTOMER SERVICE AND SUPPORT
The Company provides customer training, installation and integration
support, and maintains 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 has a commitment to excellence in customer
support and employs three customer service and support personnel.
Users that purchase the Company's products through indirect channels are
supported and serviced by the Company's direct support organization as well as
by distributors, VARs or OEMs. The Company provides direct access to the
Company's service and support organization through a toll-free telephone
hotline.
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The Company warrants 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 offers service and maintenance contracts to its customers. To
date all of its customers have entered into such agreements with the Company.
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.
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 Hitachi as its sole source supplier of customized ASICs. The Company has no
contract requiring Hitachi to supply the Company with ASICs. As a precaution,
the Company carries extra inventory of some of its single source components,
including the Hitachi 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.
LICENSES
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
Inc. ("Radius") and proprietary software technology licensed from Polybus
Systems Corporation ("Polybus").
On September 27, 1995, the Company obtained a worldwide license from Radius
to use certain of Radius' technology in its products. The license was initially
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. 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. To maintain the
exclusivity of the license, the Company was required to meet certain minimum
sales requirements. These sales requirements were not fulfilled; accordingly,
the license converted into a non-exclusive agreement in the fourth quarter of
1997, and Radius is now permitted to license the technology to other parties.
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
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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.
EMPLOYEES
As of April 15, 1998, the Company employed 31 full-time employees.
Approximately nine of these employees are involved in research and development,
thirteen in sales and service, two in marketing, three in manufacturing, and
four in finance and general administration. In addition, the Company has
retained six 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
collective bargaining agreement. The Company believes that it has good relations
with its employees.
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company has a three-year lease expiring in October 1998 for
approximately 30,000 square feet of space in Westford, Massachusetts, which
currently accommodates the Company's headquarters, development, production,
administrative, and financial functions. The monthly rent is $25,900. 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 second facility
is currently used for engineering support for development of Windows NT
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.
ITEM 3. LEGAL PROCEEDINGS
In September 1997, a lawsuit was filed against the Company in Middlesex
Superior Court (Massachusetts) by a third-party alleging a breach of contract
and seeking damages in the amount of $40,000. This suit was voluntarily
terminated by the plaintiff, without payment by the Company, in November 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the NASDAQ SmallCap under
the symbol "AUGS" and the Company's Common Stock Purchase Warrants are traded on
the NASDAQ SmallCap under the symbol "AUGSW".
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The following table sets forth the range of high and low prices quoted on
NASDAQ for the Common Stock for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
----------------
HIGH LOW
BID BID
PRICE PRICE
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1997
First Quarter(1).......................................... $ -- $ --
Second Quarter............................................ $ 6.00 $ 4.00
Third Quarter............................................. $4.125 $2.625
Fourth Quarter............................................ $4.313 $ .734
</TABLE>
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(1) The Company was not publicly-held until the completion of its initial public
offering in May 1997.
DIVIDEND POLICY
The Company has never paid any cash dividends and does not anticipate
payment of cash dividends on the Company's Common Stock in the foreseeable
future. Under Delaware Corporation Law, dividends may be paid only out of
legally available funds as proscribed by statute, subject to the discretion of
the Company's Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to all securities sold by the Company
during the period covered by this reporting period that were not registered
under the Securities Act of 1933 or otherwise reported on the Company's Form
10-QSBs filed during this reporting period.
1. On August 1, 1997, for reduction of interest on debt, the Company
issued warrants for the purchase of up to 14,663 shares of Common Stock to
Leasing Technologies International, Inc. These warrants have an exercise price
of $3.41 per share.
2. On September 24, 1997, for services rendered, the Company issued
warrants for the purchase of an aggregate of 400,000 shares of Common Stock to
Venture Management Consultants LLC ("Venture Management"). These warrants have
an exercise price of $3.00 per share; rights to purchase shares granted by these
warrants will expire on September 23, 2002.
3. On September 24, 1997, for services rendered, the Company issued
warrants for the purchase of up to 15,000 shares of Common stock to Peter
Wokoun. These warrants have an exercise price of $3.00 per share; rights to
purchase shares granted by these warrants will expire on September 23, 2002.
4. On September 24, 1997, for services rendered, the Company issued
warrants for the purchase of up to 10,000 shares of Common Stock to Mark Lavi.
These warrants have an exercise price of $3.00 per share; rights to purchase
shares granted by these warrants will expire on September 23, 2002.
5. On September 24, 1997, for services rendered, the Company issued
warrants for the purchase of an aggregate of up to 80,000 shares of Common Stock
to Equity Group of New York. These warrants have an exercise price of $3.00 per
share; rights to purchase shares granted by these warrants will expire on
September 23, 2002.
6. On September 24, 1997, for services rendered, the Company issued
warrants for the purchase of up to 50,000 shares of Common Stock to Michael
Faber. These warrants have an exercise price of $3.00 per share; rights to
purchase shares granted by these warrants will expire on September 23, 2002.
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7. On October 1, 1997, for payment of interest, the Company issued
warrants for the purchase of up to 100,000 shares of Common Stock to Fleet
National Bank. These warrants have an exercise price of $1.00 per share; rights
to purchase shares granted by these warrants will expire on September 30, 2002.
8. On December 8, 1997, in connection with a $500,000 bridge financing,
the Company issued promissory notes with a stated principal of $500,000 and
warrants to purchase up to 500,000 shares at $1.00 per share to nine accredited
investors.
9. In January 1998, in connection with a $500,000 bridge financing, the
Company issued promissory notes with a stated principal of $500,000 and warrants
to purchase up to 250,000 shares at $1.00 per share to four accredited
investors.
10. On January 30, 1998, in connection with an initial closing on a
private placement and in consideration of $6,180,000, the Company issued
6,180,000 shares of Common Stock, $1.00 per share to 68 accredited investors.
The offerings described in Numbers 1 through 7, inclusive, were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. The
offerings described in Numbers 8 through 10, inclusive, were exempt from
registration pursuant to Securities and Exchange Commission Rule 506.
The Company completed its initial public offering in May 1997. After
deducting underwriting discounts, commissions, and expenses, the Company's net
proceeds were estimated to be approximately $8,220,000. These net proceeds have
been expended approximately as follows:
<TABLE>
<S> <C>
Repayment of debt........................................... $3,756,000
Product development......................................... 1,430,000
Sales and marketing......................................... 1,170,000
Capital expenditures........................................ 340,000
Working capital and general corporate purposes.............. 1,524,000
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. Except for historical
information contained herein, the matters discussed in the Liquidity and Capital
Resources section below contain potential risks and uncertainties, including,
without limitation, risks related to the Company's ability to successfully
develop, test, produce, and market its proposed products; identify and attract
partners to help commercialize the Company's products; attract and retain key
employees; raise capital for future operations and commercializations of its
products; and successfully respond to changes in the marketplace. The Company
will need to attract partners in order to exploit its products, and there can be
no assurance that the Company will be successful in attracting such partners.
Additional information on potential factors which could affect the Company's
financial results are included in the Company's public filings with the
Securities and Exchange Commission.
GENERAL
From October 1995 through March 1997, the Company operated as a development
stage company and engaged principally in research and development, recruitment
of personnel, and financing activities. During this time, the Company engaged in
limited marketing activities and had not commenced the selling of its initial
products. During the second quarter ended June 30, 1997, the Company commenced
commercial shipment of its server product and recognized initial revenue in
April 1997. The Company's initial target market is the electronic publishing
industry, which requires the rapid and efficient movement of large image and
data files over networks. In September 1997, the Company introduced a Windows
NT-based client for its file management networks systems. In December 1997, the
Company commenced a private placement offering to raise a minimum of $6.0
million and a maximum of $9.0 million. In January 1998, the Company closed on
the first $6,180,000 of the private placement. The Company anticipates
completing the financing during the first half of 1998.
9
<PAGE> 11
PLAN OF OPERATION
In October 1996, the Company changed its fiscal year-end from June 30 to
December 31. Revenues for the fiscal year ended December 31, 1997 were $989,609
as compared to $0 revenues for both the six month period ended December 31, 1996
and the fiscal year ended June 30, 1996. Increases in expenses in fiscal 1997 as
compared to the six months ended December 31, 1996 are attributed to the fiscal
1997 period including a full twelve months as compared to the December 31, 1996
period which included six months as well as increases in spending as further
explained. Prior to the second quarter ended June 30, 1997, the Company was a
development stage company and had not recognized revenues. Gross product margin
on product sales was approximately 40%. Gross product margins may vary slightly
with the distribution of products into OEM's, third party resellers, and end
users. During 1997, 86% of product revenues were generated through domestic
end-user sales.
Research and development costs for the fiscal year ended December 31, 1997
were $3,812,326 as compared to $1,526,384 for the six month period ended
December 31, 1996 and $1,388,149 for the fiscal year ended June 30, 1996. The
increase is primarily attributable to additional engineering personnel and
increased use of consultants associated with the development of the Company's
initial server product. The Company also increased spending for associated
engineering supplies and prototype materials used in the development of its
server product. The Company anticipates that research and development costs will
continue to increase through 1998 as compared to 1997. These costs are expected
to be incurred in connection with the enhancement of the AFX 410 and research
and development on the next generation of storage area networks based on Windows
NT.
General and administrative costs for the fiscal year ended December 31,
1997 were $1,565,274 as compared to $1,083,267 for the six month period ended
December 31, 1996 and $90,274 for the fiscal year ended June 30, 1996. The
$482,007 increase is primarily attributable to additional administrative
support, increased spending for outside legal and accounting support, and other
normal operating expenses.
Selling and marketing costs for the fiscal year ended December 31, 1997
were $3,141,843 as compared to $490,735 for the six month period ended December
31, 1996 and $0 for the fiscal year ended June 30, 1996. The increase is
attributable to an increase in marketing support and sales personnel,
participation in various trade shows, and increased spending on sales
promotional material. The Company anticipates that selling and marketing
expenses will continue to increase through 1998. This expected increase will
result from the Company's plans to add up to five sales and marketing employees
to meet anticipated demand for AFX 410 units in the United States. In countries
other than the United States, the Company plans to engage additional VARs and
third-party distributors to sell the Company's products. The Company does not
anticipate hiring additional service support personnel in 1998, as it plans to
engage third-party contractors to provide maintenance and support services to
the Company's customers.
The Company recognized a net loss for the fiscal year ended December 31,
1997 of $9,380,055 as compared to $3,216,285 for the six month period ended
December 31, 1996 and $1,511,664 for the fiscal year ended June 30, 1996. The
increase in net loss of $6,163,770 is primarily attributable to increased
research and development efforts, increased sales and marketing activity, and
higher administrative costs to support these activities and to comply with the
requirements of being a public company.
The Company currently has 31 full-time employees and six independent
contractors, and plans to hire an additional five sales and marketing and seven
software engineering employees. Additional personnel may be required depending
on the level of business activity. The Company expects, however, to continue its
current practice of utilizing independent consultants on an as-needed basis
rather than exclusively hiring additional full-time employees.
In 1998, the Company will continue to sell its product through its direct
sales force and expand its relationships with VARs and third-party resellers in
the United States, Europe, and the rest of the world. The Company plans to
develop a new generation of storage area network solutions, by developing a
Windows NT based server which the Company anticipates will be introduced during
the fourth quarter of 1998.
10
<PAGE> 12
YEAR 2000
Certain computer programs and microprocessors use two digits rather than
four to define the applicable year. Any computer program that has date-sensitive
software and microprocessors may recognize a date using "00" as the year 1900
rather than 2000. This phenomenon could cause a disruption of the Company's
operations, including, among other things, a temporary inability to send
invoices, or engage in similar normal business activities. Management believes
the Company is substantially year 2000 compliant with respect to its sales,
administration, and general operations. Prior to purchasing any new equipment or
software, it is Company policy to ensure that the specifications include year
2000 compliance. However, there can be no guarantee that the systems of other
companies on which the Company's system will rely will be converted on a timely
basis, or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material impact on the
Company. Based on its current assessment, management believes that year 2000
compliance will not have a material adverse impact on the future operations of
the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since October 1995 principally from a
combination of debt and equity financings totaling approximately $21,220,000.
From October 1995 through April 1996, the Company issued convertible promissory
notes in the aggregate principal amount of approximately $864,000. Approximately
$802,000 of the principal balance of these notes plus accrued interest was
converted into shares of Common Stock in November 1996 at a conversion price of
$4.00 per share. In December 1996 and February 1997, the Company raised gross
proceeds of $3,585,000 in a private placement of promissory notes and common
stock purchase warrants. The promissory notes, bearing interest at 12% per
annum, were repaid from the proceeds of its initial public offering. In
addition, from September 1995 through August 1996, the Company issued 1,653,623
shares of its Common Stock for approximately $3,372,000 in gross proceeds. In
each of April 1997 and May 1997, the Company issued to Venture Management, of
which Fred Chanowski, a director of the Company, is a 20% member, a promissory
note in the principal amount of $200,000 in consideration for $200,000. The
promissory notes, both bearing interest at 18% per annum, were repaid in August
1997.
On May 16, 1997, the Company completed its initial public offering of
1,800,000 shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four year period commencing May 12, 1998. The
net proceeds from the Company's initial public offering were approximately
$8,220,000 after deducting underwriting discounts, commissions, and estimated
expenses payable by the Company.
In July 1997, the Company obtained a $3,000,000 working line of credit from
Fleet National Bank. Borrowings on the facility will bear interest at prime plus
.50%. Borrowings are limited to 75% of eligible domestic accounts receivable and
are secured by all assets of the Company. In October 1997, the use of this
facility was temporarily suspended until the Company complies with certain
financial covenants.
In September 1997 the Company issued to Venture Management a promissory
note in the principal amount of $400,000 in consideration for $400,000. The
promissory note, bearing interest at 9% per annum, was repaid in October 1997.
In addition, the Company issued to Venture Management a five year warrant to
purchase 100,000 shares of the Company's Common Stock at $3.00 per share.
In October 1997, the Company obtained a $750,000 loan from Fleet National
Bank. The loan is secured by all of the Company's assets, bears interest at
Fleet National Bank's prime rate plus 2% (9% on December 31, 1997), and was
originally payable by December 31, 1997 or upon completion of a financing
resulting in net proceeds to the Company of at least $5,000,000. Pursuant to the
original terms of this loan, the Company issued detachable warrants to purchase
100,000 shares of Common Stock at an exercise price of $3.00 per share
exercisable over five years. This loan was extended through and until February
28, 1998, and the exercise price for warrants issued in conjunction with this
loan was lowered from $3.00 per share to $1.00 per share. The term of this loan
was further extended to April 1, 1998 pursuant to an allonge between the
11
<PAGE> 13
Company and Fleet National Bank. The Company is currently negotiating to extend
the due date again to coincide with the private placement offering.
The net proceeds of the Company's initial public offering plus cash
anticipated to be generated from operations and funds available under the
Company's line of credit, were expected to meet the Company's funding needs for
at least twelve months from the date of the offering. While initial shipments of
the Company's server systems met customers' expectations with a limited number
of clients attached to a network, larger installations with more clients caused
systems crashes, and loss of data. The Company subsequently corrected its
software and hardware as well as its vendors software and hardware to support
larger networked systems. This unanticipated extension in the development of the
Company's initial server system severely impacted development of the Company's
sales channels and anticipated revenues. The funds generated from the Company's
initial public offering were not sufficient to fund the Company's activities,
and the Company undertook additional financing.
In December 1997, the Company entered into an agreement with Sunrise
Securities Corp. ("Sunrise Securities"), a New York based investment bank, to
raise a minimum of $6,000,000 and a maximum of $9,000,000 in a private placement
of the Company's Common Stock. During December 1997 and January 1998, Sunrise
Securities secured $1,000,000 in bridge financing from institutional and private
investors in anticipation of the private placement. The bridge financing
promissory notes accrued interest at 8% per annum with interest and principal
payable at maturity on the initial closing of the private placement. In
addition, the Company issued to the bridge investors five year warrants to
purchase up to 750,000 shares in the aggregate of the Company's Common Stock at
$1.00 per share. In February 1998, the Company repaid $200,000 of these
promissory notes plus accrued interest and the holders of $800,000 of these
promissory notes converted their notes into shares of the Company's Common Stock
at $1.00 per share.
In January 1998, the Company closed on an initial amount of $6,180,000. The
Company anticipates that the funding process started in December 1997 will be
completed in the first half of 1998. The Company believes that the proceeds from
the initial closing of the private placement plus cash from anticipated revenues
will be sufficient to support its operations for the next twelve months. There
can be no assurance, however, that the Company will be able complete the funding
started in December 1997, nor can there be assurance that the Company will able
to obtain additional funding on terms favorable to the Company, if at all. Funds
received pursuant to the January 1998 financing and funds anticipated to be
received as a result of sales in the ordinary course of the Company's business
should permit the Company to operate without further need for financing for the
next twelve months. If cash flow from operations is not sufficient, there will
be a material adverse affect on the Company's ability to continue to fund new
product development and expand its sales distribution channels which will
negatively effect anticipated revenues and results of operations in 1998.
Success of future operations is subject to a number of risks, including: 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; the highly competitive nature of the
server industry; and future unanticipated shortfalls in the Company's revenues.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company is dependent on its ability to obtain
additional financing to fund new product development and expand its sales
distribution channels, generate sufficient funds from the sale of products in
the normal course of business, and ultimately to generate profitable operations.
The accompanying financial statements do not include any adjustments relating to
the recovery and classification of recorded asset amounts or the amount or
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company does not have any material commitments for capital expenditures
at this time.
ITEM 7. FINANCIAL STATEMENTS
See Pages F-3 through F-21.
12
<PAGE> 14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not had any disagreements with its accountants on
accounting and financial disclosures.
ITEM 9. DIRECTOR'S EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The current directors, executive officers and key employees of the Company,
their ages, and their positions held in the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lorrin G. Gale............................ 56 Chairman of the Board
Lawrence D. Beaupre....................... 62 President and Chief Executive Officer
Duane A. Mayo............................. 46 Vice President of Finance and
Administration, Chief Financial Officer,
Treasurer, Secretary, and Director
Colin T. Murphy........................... 47 Vice President of Sales and Marketing
Fred L. Chanowski......................... 47 Director
Jeffrey Leventhal......................... 33 Director
</TABLE>
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. In January 1998, Chappell Cory and Greg Millar resigned
from the Board of Directors to pursue other interests. Jeffrey Leventhal was
elected to the Board of Directors in January 1998.
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. In March
1998, Mr. Gale left the Company as President and Chief Executive Officer; he
continues to serve as Chairman of the Board of Directors.
Lawrence D. Beaupre 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. In March 1998 and upon Mr. Gale's departure, Mr. Beaupre accepted
the position of interim President and Chief Executive Officer. 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. He was Vice President and member of the founding group
of other successful companies including Xyvision and Roll Systems, Inc. He
received B.A. and M.A. degrees from the University of Massachusetts.
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 the 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 L.L.C. ("Alpha Ventures"),
a venture capital fund he founded in 1996, and a member in Venture Management, 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.
13
<PAGE> 15
Jeffrey Leventhal has served as a director of the Company since January
1998. Mr. Leventhal is president of Remote Lojix, a computer services company,
and a member of Leventhal Paget LLC ("Leventhal Paget"), a private investment
entity.
KEY EMPLOYEE
Colin T. Murphy has served as Vice President of Sales and Marketing since
July 1997, and prior as Vice President of Marketing and European Sales. From
1990 to 1996, Mr. Murphy was Director of Sales for Optronics, an Intergraph
division, a leading manufacturer of high end color scanners, imagesetters and
direct to plate systems. From 1988 to 1990, he served as Vice President of
Marketing and International Operations for Imagitex, a manufacturer of image
manipulation workstations. He received a BS degree from Boston State College and
an M.B.A. from Suffolk University.
COMMITTEES
The Board of Directors has an audit and a compensation committee comprised
of Jeffrey Leventhal 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.
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.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth actual compensation, for the fiscal years
ended June 30, 1995 and 1996, and the fiscal year ended December 31, 1997,
including salary, bonuses, and certain other compensation, paid by the Company
to its Chief Executive Officer. None of the Company's other executive officers
received cash compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------------
AWARDS
ANNUAL COMPENSATION ----------------------- PAYOUTS
NAME AND --------------------------------------------- RESTRICTED ---------------------
COMPENSATION OTHER ANNUAL STOCK LTIP ALL
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS(#) PAYOUTS($) OTHER($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
------------ ---- --------- -------- --------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lorrin G. Gale,............ 1997 125,000 75,000(1)
Chairman, President, and 1996** 55,862 3,186(2)
Chief Executive Officer* 1995** 1,885(3)
</TABLE>
- ---------------
(1) In January 1997, pursuant to an employment contract, the Company issued
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. Options to purchase 30,000 shares of Common Stock vested
on the first anniversary of the agreement.
(2) 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.
(3) 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.
14
<PAGE> 16
* In March 1998, Mr. Gale left the Company as President and Chief Executive
Officer.
** Prior to 1997, the Company's fiscal year ended on June 30.
EMPLOYMENT CONTRACTS
Effective as of January 1, 1997, the Company entered into a two-year
employment agreement with Mr. Gale. Pursuant to that contract, Mr. Gale was paid
a base salary of $125,000 per annum and was 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. Options to purchase
30,000 shares of Common Stock vested on the first anniversary of the agreement.
All such options have an exercise price of $4.00 per share. Pursuant to his
employment agreement, Mr. Gale agreed not to compete with the Company during the
term of his employment and for one year thereafter. Mr. Gale left the Company as
President and Chief Executive Officer in March 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets, as of March 30, 1998, certain information with
respect to the beneficial ownership of the capital stock of the Company 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. Except
as otherwise indicated, the stockholders listed in the table have sole voting
and investment powers with respect to the shares indicated. As of March 30,
1998, the Company had 165 stockholders of record. Unless otherwise indicated,
the address for directors, executive officers and 5% stockholders is 2 Robbins
Road, Westford, Massachusetts 01886.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE CLASS
- ------------------------------------ --------------------- ----------------
<S> <C> <C>
Lorrin G. Gale............................................. 291,206(2) 2.6%
Duane A. Mayo.............................................. 105,176 *
Fred L. Chanowski.......................................... 662,398(3) 5.6%
Jeffrey Leventhal.......................................... 200,000(4) 1.8%
Lawrence D. Beaupre........................................ 71,713 *
Trussel & Co............................................... 1,000,000 8.9%
c/o Westfield Capital Management
One Financial Center
Boston, MA 02110
All directors and executive officers as a group (5 1,330,493 11.2%
persons)(2)(3)(4)........................................
</TABLE>
- ---------------
(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 45,000 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 of which
Mr. Chanowski is a founder and managing member and 500,000 shares of Common
Stock issuable upon exercise of warrants held by Venture Management of which
Mr. Chanowski is a founder and managing member.
(4) Includes 200,000 shares owned by Leventhal Paget, of which Mr. Leventhal is
a member and founder.
* Less than 1%.
15
<PAGE> 17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1995, the Company entered into a consulting agreement with Young
Management Group, Inc. ("Young Management"), a company founded by Stanley A.
Young, who subsequently became a director of the Company in September 1995. In
consideration for consulting services, the Company agreed to pay consulting fees
of $7,000 per month, plus out-of-pocket expenses, of which $3,000 per month was
deferred until completion of the Company's 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. 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 6,375 shares of Common Stock at an exercise price of $2.75 per share
and warrants to purchase 6,375 shares of Common Stock at an exercise price of
$4.125 per share. In November 1995, the 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, the 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, a director of the
Company, 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
private placement. Mr. Chanowski paid the $50,000 purchase price by converting a
$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, 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,
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. In May 1997, the Company issued to Venture Management, 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 June 30, 1998. In October 1997, the Company
issued to Venture Management, in consideration of a $400,000 loan, a promissory
note in the principal amount of $400,000 plus a warrant to purchase up to
100,000 shares of Common Stock at $3.00 per share. The promissory note bears
interest at 9% per annum with interest and principal payable at maturity on the
earlier of (i) December 11, 1997; or (ii) the completion of a financing by the
Company. The Company subsequently repaid all three of the promissory notes
issued to Venture Management. In October 1997, the Company entered into a
Consulting Agreement with Venture Management. In consideration for consulting
services, the Company issued Venture Management a warrant to purchase up to
400,000 shares of Common Stock at $3.00 per share and agreed to pay consulting
fees of $4,000 per month, plus out-of-pocket expenses up to $1,000 per month.
16
<PAGE> 18
In January 1998, Leventhal Paget, of which Jeffrey Leventhal is a member,
purchased 200,000 shares of Common Stock for $200,000 in a private placement of
the Company's Common Stock. Mr. Leventhal has been a director of the Company
since February 1998.
The Company has adopted a policy, by resolution of the Board of Directors,
whereby all transactions between the Company and its officers, directors,
principal stockholders or affiliates are to 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<S> <C> <C>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of the Company, as amended.
3.1.1 -- Restated Certificate of Incorporation of the Company.
*3.2 -- By-laws of the Company.
*4.1 -- Specimen Common Stock Certificate of the Company.
*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 Company 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 Company dated July 1,
1996.
*10.3 -- Restated Technology License Agreement between Radius and the
Company dated as of September 27, 1995.
*10.3.1 -- First Amendment to Restated Technology Agreement between
Radius and the Company dated as of October 28, 1996.
*10.4 -- Software Development and License Agreement between Polybus
and the Company dated as of August 1, 1996.
*10.5 -- Form of Warrant as issued to the Company's other
Warrantholders.
*10.6 -- Form of Warrant as issued to placement agent in the
Company's private placement completed in May 1996.
*10.7 -- Form of Promissory Note from the Company'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 the
Company's private placement completed in May 1996.
*10.9 -- Form of Registration Rights Agreement for shares of common
stock issued in the Company's private placement completed in
October 1996.
*10.10 -- Form of Class A Warrant from the Company's private placement
completed in February 1997.
*10.11 -- Form of Class B Warrant from the Company's private placement
completed in February 1997.
*10.12 -- Form of Class A Promissory Note from the Company's private
placement completed in February 1997.
*10.13 -- Form of Class B Promissory Note from the Company's private
placement completed in February 1997.
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C> <C>
*10.14 -- Consulting Agreement between Young Management and the
Company dated July 1995.
*10.15 -- The Company's 1995 Stock Option Plan.
*10.16 -- Employment Agreement, dated as of January 1, 1997, between
the Company and Lorrin G. Gale.
*10.17 -- Noncompetition and Nondisclosure Agreement, dated as of
January 1, 1997, between the Company and Duane A. Mayo.
*10.18 -- Promissory Note issued to Venture Management by the Company
dated April 8, 1997.
*10.19 -- Promissory Note issued to Venture Management by the Company
dated May 6, 1997.
*10.20 -- Loan Letter Agreement with Fleet National Bank.
*10.21 -- $3,000,000 Promissory Note issued to Fleet National Bank.
*10.22 -- Placement Agent Agreement with Oscar Gruss & Son.
10.23 -- Consulting Agreement between the Company and Venture
Management, executed as of October 1, 1997.
10.24 -- Form of Promissory Note evidencing the Company's
indebtedness to Fleet National Bank.
10.25 -- Warrant Purchase Agreement between the Company and Fleet
National Bank, executed October 9, 1997.
10.26 -- Loan Modification Agreement between the Company and Fleet
National Bank, executed October 9, 1997.
10.27 -- Sales Agency Agreement between the Company and Sunrise
Securities, dated December 8, 1997.
10.28 -- Allonge to Promissory Note between the Company and Fleet
National Bank.
*24 -- Power of Attorney.
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed with the Commission.
(b) Reports of Form 8-K.
The Company did not file any Form 8-Ks during the quarter ended
December 31, 1997.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUGMENT SYSTEMS, INC.
By:
------------------------------------
Lawrence D. Beaupre
President and Chief Executive
Officer
April 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President and Chief Executive April 15, 1998
- --------------------------------------------------- Officer (Principal Executive
Lawrence D. Beaupre Officer)
Vice President of Finance and April 15, 1998
- --------------------------------------------------- Administration, Chief Financial
Duane A. Mayo Officer, Treasurer, Secretary,
and Director (Principal
Financial Officer and Principal
Accounting Officer)
Chairman of the Board of April 15, 1998
- --------------------------------------------------- Directors
Lorrin G. Gale
Director April 15, 1998
- ---------------------------------------------------
Fred L. Chanowski
Director April 15, 1998
- ---------------------------------------------------
Jeffrey Leventhal
</TABLE>
19
<PAGE> 21
AUGMENT SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----------
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
FINANCIAL STATEMENTS:
Balance sheets as of December 31, 1997 and 1996........... F-3
Statements of operations for the year ended December 31,
1997, the six months ended December 31, 1996 and the
year ended June 30, 1996............................... F-4
Statements of stockholders' deficit for the year ended
December 31, 1997, the six months ended December 31,
1996 and the year ended June 30, 1996.................. F-5
Statements of cash flows for the year ended December 31,
1997, the six months ended December 31, 1996 and the
year ended June 30, 1996............................... F-6
Notes to financial statements............................. F-7 to F-21
</TABLE>
F-1
<PAGE> 22
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. as
of December 31, 1997 and 1996 and the related statements of operations,
stockholders' deficit, and cash flows for the year ended December 31, 1997, the
six months ended December 31, 1996 and the year ended June 30, 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. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the year ended December 31, 1997, the six months ended December 31, 1996 and
the year ended June 30, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and at December 31, 1997 has a working capital deficiency and a stockholders'
deficit that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also discussed in
Note 1 to the financial statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Boston, Massachusetts
April 10, 1998
F-2
<PAGE> 23
AUGMENT SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash (Note 2)............................................. $ 47,224 $ 452,753
Accounts receivable, net of allowance for doubtful
accounts of $126,673 in 1997 (Note 2).................. 224,969 --
Inventories (Note 2)...................................... 1,162,920 589,351
Prepaid expenses (Note 6)................................. 115,100 97,500
----------- -----------
Total current assets................................... 1,550,213 1,139,604
Property and equipment, net (Notes 2, 3).................... 409,848 348,889
Other assets, net (Note 2).................................. 278,745 190,560
----------- -----------
Total assets...................................... $ 2,238,806 $ 1,679,053
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable (Note 5)..................................... $ 717,569 $ --
Bridge financing (Note 5)................................. 474,074 --
Accounts payable.......................................... 1,371,632 601,274
Accrued expenses (Note 4)................................. 611,633 196,104
Short-term promissory notes (Note 5)...................... -- 1,051,248
Short-term advance (Note 5)............................... -- 575,000
Current portion of obligations under capital leases (Notes
3 and 6)............................................... 46,177 19,013
----------- -----------
Total current liabilities.............................. 3,221,085 2,442,639
Convertible promissory notes (Note 5)....................... 41,495 62,248
Obligations under capital leases, less current portion
(Notes 3 and 6)........................................... 81,951 27,530
----------- -----------
Total liabilities...................................... 3,344,531 2,532,417
----------- -----------
Commitments (Note 6)
Stockholders' deficit (Notes 5, 7, 9, 10, 11, 12, 13 and
14):
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 4,713,319 and 2,865,512 shares issued and
outstanding............................................ 47,133 28,655
Additional paid-in capital................................ 15,286,410 6,177,194
Deficit................................................... (16,439,268) (7,059,213)
----------- -----------
Total stockholders' deficit............................ (1,105,725) (853,364)
----------- -----------
Total liabilities and stockholders' deficit....... $ 2,238,806 $ 1,679,053
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 24
AUGMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1996
------------ ------------ -----------
<S> <C> <C> <C>
NET SALES.......................................... $ 989,609 $ -- $ --
COST OF SALES...................................... 597,924 -- --
----------- ----------- -----------
GROSS MARGIN....................................... 391,685 -- --
----------- ----------- -----------
OPERATING EXPENSES:
Research and development (Notes 2 and 6)......... 3,812,326 1,526,384 1,388,149
General and administrative....................... 1,565,274 1,083,267 90,274
Selling and marketing............................ 3,141,843 490,735 --
----------- ----------- -----------
Total operating expenses...................... 8,519,443 3,100,386 1,478,423
----------- ----------- -----------
Operating loss................................ (8,127,758) (3,100,386) (1,478,423)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Other income, net................................ 13,323 -- 25,284
Interest expense (Note 5)........................ (835,815) (115,899) (51,343)
Other expense.................................... (429,805) -- --
----------- ----------- -----------
Total other expense, net...................... (1,252,297) (115,899) (26,059)
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS.................... (9,380,055) (3,216,285) (1,504,482)
----------- ----------- -----------
DISCONTINUED OPERATIONS (NOTE 1):
Loss from operations............................. -- -- (7,182)
----------- ----------- -----------
Loss from discontinued operations................ -- -- (7,182)
----------- ----------- -----------
NET LOSS (NOTES 2 AND 11).......................... $(9,380,055) $(3,216,285) $(1,511,664)
=========== =========== ===========
NET LOSS PER SHARE OF COMMON STOCK (NOTE 11):
Basic............................................ $ (2.31) $ (1.09) $ (0.52)
=========== =========== ===========
Diluted.......................................... $ (1.67) $ (0.71) $ (0.34)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 25
AUGMENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(NOTES 5, 7, 9, 10, 11 AND 14)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
----------------- ------------------- PAID-IN -----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
------- ------- --------- ------- ----------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995.......... -- $ -- 239,038 $2,390 $ 2,135,251 $ (2,331,264) -- $ --
Issuance of common stock to
new management.............. -- -- 525,883 5,259 5,741 -- -- --
Issuance of common stock in
exchange of consulting
services.................... -- -- 193,554 1,936 6,314 -- -- --
Issuance of common stock in
exchange of inventories..... -- -- 22,565 226 33,772 -- -- --
Issuance of common stock in
exchange of back rent....... -- -- 3,346 33 5,008 -- -- --
Purchase of treasury stock.... -- -- -- -- -- -- (3,346) (7,000)
Conversion of demand
promissory notes and accrued
interest into common
stock....................... -- -- 21,912 219 32,781 -- -- --
Issuance of common stock in
connection with private
placements.................. -- -- 697,473 6,975 1,147,119 -- -- --
Retirement of treasury
stock....................... -- -- (3,346) (34) (6,966) -- 3,346 7,000
Net loss...................... -- -- -- -- -- (1,511,664) -- --
------- ------- --------- ------- ----------- ------------ ------- -------
BALANCE, JUNE 30, 1996.......... -- -- 1,700,425 17,004 3,359,020 (3,842,928) -- --
Issuance of common stock in
connection with private
placements.................. -- -- 609,546 6,095 1,103,155 -- -- --
Conversion of convertible
promissory notes into common
stock....................... -- -- 107,567 1,076 223,924 -- -- --
Issuance of common stock to
employees................... -- -- 7,172 72 14,940 -- -- --
Issuance of common stock in
exchange of consulting
services.................... -- -- 47,490 475 98,937 -- -- --
Issuance of common stock in
connection with private
placements.................. -- -- 239,037 2,390 432,610 -- -- --
Conversion of convertible
promissory notes and accrued
interest into common
stock....................... -- -- 218,374 2,184 737,353 -- -- --
Conversion of debt to existing
stockholder into common
stock....................... -- -- 4,725 47 18,853 -- -- --
Issuance of common stock in
exchange of consulting
services.................... -- -- 2,888 29 11,521 -- -- --
Purchase of treasury stock.... -- -- -- -- -- -- (71,712) (956)
Retirement of treasury
stock....................... -- -- (71,712) (717) (239) -- 71,712 956
Issuance of warrants
associated with short term
promissory notes............ -- -- -- -- 177,120 -- -- --
Net loss...................... -- -- -- -- -- (3,216,285) -- --
------- ------- --------- ------- ----------- ------------ ------- -------
BALANCE, DECEMBER 31, 1996...... -- -- 2,865,512 28,655 6,177,194 (7,059,213) -- --
Issuance of common stock for
exercise of warrants........ -- -- 47,807 478 71,567 -- -- --
Issuance of warrants
associated with short term
promissory notes............ -- -- -- -- 389,500 -- -- --
Initial public offering of
1,800,000 shares of common
stock at $5.50 per share and
2,070,000 common stock
warrants at $0.15, net of
$1,990,369 in offering
costs....................... -- -- 1,800,000 18,000 8,202,131 -- -- --
Issuance of warrants in
consideration for
consulting.................. -- -- -- -- 271,950 -- -- --
Issuance of warrants in
connection with bridge
financing................... -- -- -- -- 174,068 -- -- --
Net loss...................... -- -- -- -- -- (9,380,055) -- --
------- ------- --------- ------- ----------- ------------ ------- -------
BALANCE, DECEMBER 31, 1997.... -- $ -- 4,713,319 $47,133 $15,286,410 $(16,439,268) -- $ --
======= ======= ========= ======= =========== ============ ======= =======
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
<S> <C>
BALANCE, JUNE 30, 1995.......... $ (193,623)
Issuance of common stock to
new management.............. 11,000
Issuance of common stock in
exchange of consulting
services.................... 8,250
Issuance of common stock in
exchange of inventories..... 33,998
Issuance of common stock in
exchange of back rent....... 5,041
Purchase of treasury stock.... (7,000)
Conversion of demand
promissory notes and accrued
interest into common
stock....................... 33,000
Issuance of common stock in
connection with private
placements.................. 1,154,094
Retirement of treasury
stock....................... --
Net loss...................... (1,511,664)
-----------
BALANCE, JUNE 30, 1996.......... (466,904)
Issuance of common stock in
connection with private
placements.................. 1,109,250
Conversion of convertible
promissory notes into common
stock....................... 225,000
Issuance of common stock to
employees................... 15,012
Issuance of common stock in
exchange of consulting
services.................... 99,412
Issuance of common stock in
connection with private
placements.................. 435,000
Conversion of convertible
promissory notes and accrued
interest into common
stock....................... 739,537
Conversion of debt to existing
stockholder into common
stock....................... 18,900
Issuance of common stock in
exchange of consulting
services.................... 11,550
Purchase of treasury stock.... (956)
Retirement of treasury
stock....................... --
Issuance of warrants
associated with short term
promissory notes............ 177,120
Net loss...................... (3,216,285)
-----------
BALANCE, DECEMBER 31, 1996...... (853,364)
Issuance of common stock for
exercise of warrants........ 72,045
Issuance of warrants
associated with short term
promissory notes............ 389,500
Initial public offering of
1,800,000 shares of common
stock at $5.50 per share and
2,070,000 common stock
warrants at $0.15, net of
$1,990,369 in offering
costs....................... 8,220,131
Issuance of warrants in
consideration for
consulting.................. 271,950
Issuance of warrants in
connection with bridge
financing................... 174,068
Net loss...................... (9,380,055)
-----------
BALANCE, DECEMBER 31, 1997.... $(1,105,725)
===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 26
AUGMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (NOTE 13)
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1996
----------------- ----------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $(9,380,055) $(3,216,285) $(1,511,664)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization........... 212,364 119,798 56,539
Compensation paid in common stock....... -- 125,974 19,250
Consulting expense paid in warrants..... 271,950 -- --
Provision for doubtful accounts......... 126,673 -- --
Loss on disposal of fixed assets........ 12,375 -- --
Interest on warrants associated with
debt.................................. 505,211 -- --
Changes in operating assets and
liabilities:
Accounts receivable................... (351,642) -- --
Inventories........................... (573,569) (541,709) (13,644)
Prepaid expenses...................... (17,600) 9,800 (107,300)
Other assets.......................... 176,815 150 (11,079)
Accounts payable...................... 770,358 414,840 152,829
Accrued expenses...................... 415,529 (70,460) 312,768
----------- ----------- -----------
Net cash used for operating
activities....................... (7,831,591) (3,157,892) (1,102,301)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......... (179,985) (179,359) (182,463)
Capitalized software....................... (265,000) -- --
----------- ----------- -----------
Net cash used for investing
activities....................... (444,985) (179,359) (182,463)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock..... 72,045 1,544,250 1,154,094
Proceeds from bridge financing............. 500,000 -- --
Proceeds from issuance of note payable..... 750,000 -- --
Proceeds from issuance of convertible
promissory notes........................ -- -- 1,177,602
Proceeds from noninterest bearing loans
from stockholder........................ -- -- 13,500
Proceeds (payments) from issuance of
short-term promissory notes............. (1,051,248) 1,011,560 100,000
Proceeds (payments) from short-term
advance................................. (575,000) 575,000 --
Proceeds from issuance of warrants
associated with short-term promissory
notes................................... -- 177,120 --
Payments on capital lease obligations...... (24,128) (8,317) (739)
Payments on convertible promissory notes... (20,753) (200,000) --
Payments on promissory notes............... -- -- (100,000)
Purchase of treasury stock................. -- (956) (7,000)
Net proceeds from initial public
offering................................ 8,220,131 -- --
Deferred financing costs................... -- (108,680) (165,143)
Deferred registration costs................ -- (89,871) --
----------- ----------- -----------
Net cash provided by financing
activities....................... 7,871,047 2,900,106 2,172,314
----------- ----------- -----------
Net increase (decrease) in cash.............. (405,529) (437,145) 887,550
Cash, beginning of period.................... 452,753 889,898 2,348
----------- ----------- -----------
Cash, end of period.......................... $ 47,224 $ 452,753 $ 889,898
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 27
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION:
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.
The loss from discontinued operations for the year ended June 30, 1996 resulted
in a loss per Basic and Diluted Share of less than $(0.01).
Since October 1995 and through March 1997, the Company had been operating
as a development stage company and had been engaged principally in research and
development, recruitment of personnel and financing activities. During this
time, the Company had engaged in limited marketing activities and had not
commenced the selling of its initial products, which are high-end file
management network systems. During the second quarter ended June 30, 1997, the
Company commenced commercial shipment of its server product and recognized
initial revenue in April 1997.
The Company's initial target market is the electronic publishing industry,
which requires the rapid and efficient movement of large image and data files
over networks. In September 1997, the Company introduced a Windows NT-based
client for its file management network systems.
The Company has incurred substantial losses since inception and has been
engaged primarily in product development having only recently begun shipment of
its initial products. The Company has funded its losses primarily from a
combination of debt and equity financings. In December 1997, the Company entered
into an agreement with an investment bank to raise a minimum of $6,000,000 and a
maximum of $9,000,000 in gross proceeds in a private placement of the Company's
common stock. In January 1998, the Company completed an initial private
placement of the Company's common stock which generated gross proceeds of
$6,180,000 (see Note 14). The Company anticipates that the funding process
started in December 1997 will be completed in the first half of 1998. The
Company believes that the proceeds from the initial closing of the private
placement in January 1998 plus cash from anticipated revenues will be sufficient
to support its operations for the next 12 months. There can be no assurance,
however, that the Company will be able to complete the funding started in
December 1997, nor can there be assurance that the Company will be able to
obtain additional funding on terms favorable to the Company, if at all.
Although the Company commenced shipment of its products in fiscal 1997, the
revenues recognized were less than originally anticipated by Company management.
The shortfall in 1997 revenues was attributed to product development delays and
problems with the Company's initial products sold. Success of future operations
is subject to a number of risks which include 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;
violation of certain debt covenants the highly competitive nature of the server
industry and future unanticipated shortfalls in the Company's revenues.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company is dependent on its ability to obtain
additional financing to fund new product development and expand its sales
distribution channels, generate sufficient funds from the sale of products in
the normal course of business and ultimately to generate profitable operations.
The accompanying financial statements do not include any adjustments relating to
the recovery and classification of recorded asset amounts or the amounts or
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
F-7
<PAGE> 28
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 December 31, 1997 and 1996.
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 leases are being
amortized over the lesser of the lease term or their estimated useful lives.
Other Assets
As of December 31, 1997, other assets included $265,000 of capitalized
software development costs. There was no amortization in the current year.
As of December 31, 1996, the Company had incurred registration costs of
$89,871 in connection with the May 1997 public offering. These costs were
deferred, and upon subsequent consummation of the proposed public offering, were
charged against the equity raised. Other assets also included deferred financing
costs of $108,680, net of accumulated amortization of $21,736 at December 31,
1996, respectively. These costs were amortized over 5 months, which represented
the estimated time between the debt issuance and the initial public offering.
Long-Lived Assets
The Company evaluates long-lived assets under the provisions of 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 ".
SFAS 121 establishes accounting standards for the impairment of long-lived
assets and certain identifiable intangibles to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable.
F-8
<PAGE> 29
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenue is recognized on system sales to end users when the system
performance has been accepted by the customer based on measurement against
pre-defined published specifications.
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 capitalizes 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. Amortization of these costs will be based on the greater of the charge
resulting from the application of either the straight-line method over the
economic life or the proportion of current sales to estimated future revenues of
each product.
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 receivable, accounts payable, related party accounts, debt
instruments, and convertible promissory notes, approximate their carrying value.
Concentrations of Credit Risk and Major Customers
A significant portion of the Company's sales are to customers in the
electronic publishing industry. The Company extends credit terms on a
customer-by-customer basis based on its evaluation of its collectibility
exposure. In management's opinion, the Company's allowance for doubtful accounts
is sufficient to cover any potential risk of loss from extending credit to
customers. In fiscal 1997, the Company derived sales from 5 customers which
represented 80% of net sales.
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 their intrinsic value with disclosure of the
effects of fair value accounting on net earnings (loss) and earnings (loss) per
share on a pro forma basis.
Net Loss Per Share of Common Stock
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 requires
the presentation of both basic and diluted earnings per share and replaces
previously required standards for computing and presenting earnings per share.
Earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the new requirements of SFAS No. 128.
Effect of Accounting Pronouncements Not Adopted
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
F-9
<PAGE> 30
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, ("SFAS No. 130") establishes standards for reporting and
display of comprehensive income, its components, and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 stipulates that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of an Enterprise and Related Information, ("SFAS No. 131"), which
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas, and major customers. SFAS No.
131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Management has been unable to fully evaluate
the impact, if any, these pronouncements may have on future financial statement
disclosures.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Equipment.............................................. $770,253 $490,665
Furniture and fixtures................................. 30,153 39,395
Leasehold improvements................................. 3,054 3,054
-------- --------
803,460 533,114
Less accumulated depreciation and amortization......... 393,612 184,225
-------- --------
Property and equipment, net............................ $409,848 $348,889
======== ========
</TABLE>
Property held under capital leases is included in property and equipment as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Equipment............................................... $161,312 $55,599
Less accumulated amortization........................... 39,292 6,122
-------- -------
Net property held under capital leases.................. $122,020 $49,477
======== =======
</TABLE>
F-10
<PAGE> 31
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Consulting............................................. $195,500 $ 94,669
Professional fees...................................... 177,432 --
Payroll and related taxes.............................. 50,000 65,464
Interest............................................... 12,178 20,875
Other.................................................. 176,523 15,096
-------- --------
Total accrued expenses....................... $611,633 $196,104
======== ========
</TABLE>
5. FINANCING ARRANGEMENTS
Line of Credit
In July 1997, the Company obtained a $3,000,000 working line of credit from
a bank. Borrowings on the facility bear interest at prime plus .50%. Borrowings
are limited to 75% of eligible domestic accounts receivable and are secured by
all assets of the Company. In October 1997, the use of this facility was
temporarily suspended until the Company can comply with certain financial
covenants.
There were no borrowings under this line of credit.
Bridge Financing
In October 1997, the Company entered into a note agreement with a bank in
the principal amount of $750,000 with interest at the banks prime rate plus 2%
(9% at December 31, 1997). This loan was originally payable upon completion of
financing resulting in net proceeds of at least $5,000,000. In accordance with
the original terms of the bridge loan, the Company issued detachable warrants to
purchase 100,000 shares of the Company's common stock at an exercise price of
$3.00 per share exercisable over 5 years. Gross proceeds were $750,000. The
Company allocated proceeds of $81,077 to the detachable warrants and $668,923 to
the note. The discount on the debt is being amortized over 5 months, the term of
the extended loan. As of December 31, 1997, $48,646 was charged to interest
expense. In December 1997, the loan agreement was amended to extend the due date
on the loan to February 28, 1998. In consideration of the extension, the
exercise price of the detachable warrants was reduced from $3.00 per share to
$1.00 per share. The Company is currently negotiating to extend the due date
again to coincide with the private placement offering. (See Note 14).
In December 1997, the Company entered into bridge financing which consisted
of the sale of 10 units. Each unit consisted of (i) a promissory note in the
principal amount of $50,000 bearing interest at the rate of 8% and payable on
the earlier of (a) the date of consummation of financing by the Company
resulting in net proceeds of at least $3,000,000 or (b) January 30, 1998; and
(ii) a warrant to purchase 50,000 shares of common stock at an exercise price of
$1.00 per share and having an exercise period of 5 years. Proceeds were
$500,000. The Company allocated gross proceeds of $51,852 to the detachable
warrants and $448,148 to the promissory notes. The discount on the debt is being
amortized over 2 months, the term of the loan. As of December 31, 1997, $25,926
was charged to interest expense. Subsequent to year end, the Company
extinguished this debt by paying $200,000 in cash and converting the remaining
balance into 300,000 shares the Company's common stock in conjunction with a
January 1998 private placement of 6,180,000 shares of the Company's common stock
at $1.00 per share. (See Note 14).
F-11
<PAGE> 32
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Convertible Promissory Notes
In May 1996, the Company issued $425,000 of convertible promissory notes
that bore interest at the rate of 10% 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. 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. The notes provided that following the
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. Outstanding balances on these notes amounted to $41,495 and
$62,248 at December 31, 1997 and 1996, respectively.
Short Term Promissory Notes
The Company completed a private placement of 71.7 units in February 1997
and December 1996 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
connection with the sale of 24.2 units in December 1996. 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 was amortized over 5
months, the estimated time between the debt issuance and the 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 initial public offering, the Company recorded interest expense
in 1997 of $158,752 on the unamortized debt discount and recorded amortization
in 1997 of $86,944 related to unamortized deferred financing costs at December
31, 1996.
Proceeds, net of financing costs of $308,750, were $2,066,250 in connection
with the sale of the remaining 47.5 units completed in February 1997. 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 was
amortized over 3 months resulting in a charge of $389,500 to 1997 interest
expense on the debt discount and amortization in 1997 of $258,115 related to
unamortized deferred financing costs. In May 1997, certain warrant holders
agreed to the
F-12
<PAGE> 33
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
cancellation of warrants to purchase 235,878 shares of common stock issued in
connection with the short-term promissory notes. No consideration was given in
connection with the cancellation of these warrants.
Short Term Advance
In December 1996, the Company received a short-term non-interest bearing
advance of $575,000 from an unaffiliated third party which was repaid in fiscal
1997.
6. COMMITMENTS
Leases
The Company leases equipment and its facilities under operating leases that
expire through August 2000. Rent expense under these agreements for the year
ended December 31, 1997, the six months ended December 31, 1996 and the year
ended June 30, 1996 were $431,000, $116,524 and $97,049, 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 operating leases with initial or remaining
terms of one year or more consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ----------------------- -------------- ----------------
<S> <C> <C>
1998............................................ $ 60,190 $426,000
1999............................................ 52,652 39,000
2000............................................ 39,864 38,200
2001............................................ -- 10,600
2002............................................ -- 10,600
Thereafter...................................... -- 10,600
-------- --------
Total minimum lease payments.................... 152,706 $535,000
========
Less amount representing interest............... 24,578
--------
Present value of minimum lease payments......... 128,128
Less current portion............................ 46,177
--------
Long-term portion............................... $ 81,951
========
</TABLE>
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.
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. During 1997, the Company failed to meet the unit sales
requirement. As a result, the Company no longer has the exclusive right to the
Radius technology and it may be licensed to other parties. Royalty expense under
this license amounted to approximately $16,500 in 1997.
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
F-13
<PAGE> 34
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company made
advances of $109,100 and $97,500 pursuant to the agreement, as of December 31,
1997 and 1996, respectively. Royalty expense under this agreement amounted to
approximately $7,800 for the year ended December 31, 1997.
Employment Contracts
Effective January 1, 1997, the Company entered into a two-year employment
agreement with Mr. Lorrin Gale, the Company's former President and Chief
Executive Officer. Pursuant to such contract, Mr. Gale was paid a base salary of
$125,000 and was 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 may not compete with the Company during the term of his
employment and for one year thereafter. Mr. Gale left the Company as President
and Chief Executive Officer in March 1998.
Effective January 1, 1997, the Company entered into an employment agreement
with Mr. Duane Mayo, the Company's Chief Financial Officer, for a term equal to
the duration of his employment. In consideration of the agreement, Mr. Mayo's
annual salary increased from $85,000 to $100,000. Mr. Mayo may not compete with
the Company throughout the term of his employment and for one year thereafter.
7. RELATED PARTY TRANSACTIONS
In July 1995, the Company entered into a consulting agreement with Young
Management Group, Inc. ("Young Management"), a company founded by Stanley A.
Young, who subsequently became a director of the Company in September 1995. 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 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. 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 6,375 shares of common stock at an exercise price of $2.75 per share
and warrants to purchase 6,375 shares of common stock at an exercise price of
$4.125 per share. 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
F-14
<PAGE> 35
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, a director of the
Company, 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 at an exercise price of $1.507 per share.
In April 1997, the Company issued to Venture Management Consultants, LLC
("Venture Management"), of which Mr. Chanowski is a 20% member, a promissory
note in the principal amount of $200,000 in consideration for a $200,000 loan.
The promissory note bears interest at 18% per annum with interest and principal
payable at maturity on May 31, 1998. In May 1997, the Company issued to Venture
Management a promissory note in the principal amount of $200,000 in
consideration for a $200,000 loan. The promissory note bears interest at 18% per
annum with interest and principal payable at maturity on June 30, 1998. In
October 1997, the Company issued to Venture Management, in consideration of a
$400,000 loan, a promissory note in the principal amount of $400,000 plus a
warrant to purchase up to 100,000 shares of Common Stock at $3.00 per share
valued at $41,139. The promissory note bears interest at 9% per annum with
interest and principal payable at maturity on the earlier of (i) December 11,
1997; or (ii) the completion of a financing by the Company. The Company
subsequently repaid all three of the promissory notes issued to Venture
Management. In October 1997, the Company entered into a Consulting Agreement
with Venture Management. In consideration for consulting services, the Company
issued Venture Management a warrant to purchase up to 400,000 shares of common
stock at $3.00 per share and agreed to pay consulting fees of $4,000 per month,
plus out-of-pocket expenses up to $1,000 per month.
In January 1998, Leventhal Paget LLC, of which Jeffrey Leventhal, a
director of the Company is a member, purchased 200,000 shares of Common Stock
for $200,000 in a private placement of the Company's Common Stock.
8. 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 December 31, 1997 and 1996, the Company had a gross deferred tax asset
of $5,500,000 and $1,700,000, respectively, related to a net operating loss
carryforward, for which a valuation allowance of $5,500,000 and $1,700,000,
respectively, was recorded. The Company had no deferred tax liability at
December 31, 1997 and 1996. The increase in the deferred tax asset valuation
allowance of $3,800,000 was attributable to the increase in the deferred asset
related to the net operating loss carryforward.
Due to operating losses generated, there is no provision for federal and
state income taxes for the years ended December 31, 1997 and June 30, 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 December 31, 1997 and June 30, 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.
F-15
<PAGE> 36
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $13,500,000 which begin to expire
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
May 1997, the annual utilization of the Company's net operating losses are
expected to be limited.
9. CAPITAL STOCK
Preferred 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
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. 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.
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. 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 expense at $2.093 per
share, or $114,424, during the six months ended December 31, 1996.
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.
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.
F-16
<PAGE> 37
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 May 1997, the Company issued 1,800,000 shares of common stock in
connection with an initial public offering.
In October 1996, the Board of Directors declared a .637434-for-one 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.
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 disclosed in the financial statements and notes thereto
have been adjusted to give effect for these stock splits.
At December 31, 1997, 600,000 shares of common stock were reserved for
issuance under outstanding stock options and 4,683,117 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,
of which 21,514 have an expiration date four years from the date of issuance and
222,545 have an expiration date five years from the date of issuance; and (ii)
warrants (to a placement agent) to purchase an aggregate of 21,966 shares of
common stock at a price of $1.507 per share and expiring between November 22,
2000 and May 31, 2001. In July 1996, the Company issued a warrant to purchase
23,904 shares of common stock at an exercise price equal to one half of the
price of the shares of common stock in the Company's initial public offering and
with an expiration date five years from the date of issuance. In October 1996,
the Company issued a warrant to purchase 11,952 shares of common stock at an
exercise price of $2.093 per share and with an expiration date five years from
the date of issuance. In December 1996, the Company issued a warrant to purchase
37,500 shares of the Company's common stock at an exercise price of $4.00 per
share and with an expiration date five years from the date of issuance. From
December 1996 through February 1997, the Company issued warrants to purchase in
the aggregate 914,188 shares of common stock, 457,094 of which have an exercise
price of $2.75 per share and 457,094 of which have an exercise price equal of
$4.125 per share. These warrants are exercisable for a period of three years
commencing on December 30, 1997.
In connection with an initial public offering declared effective on May 12,
1997, 2,070,000 redeemable common stock purchase warrants were issued by the
Company. 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 the
offering.
10. 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, 1997 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
F-17
<PAGE> 38
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Changes in options outstanding under the 1995 Stock Option Plan are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
-------- ---------
<S> <C> <C>
Granted................................................ 207,965 $ 1.63
Exercised.............................................. -- --
Cancelled or expired................................... -- --
-------- -------
Balance, June 30, 1996................................. 207,965 1.63
Granted................................................ 125,788 2.61
Exercised.............................................. -- --
Cancelled or expired................................... (29,164) 3.14
-------- -------
Balance, December 31, 1996............................. 304,589 2.14
Granted................................................ 223,813 3.82
Exercised.............................................. -- --
Cancelled or expired................................... (153,918) 3.09
-------- -------
Balance, December 31, 1997............................. 374,484 2.58
======== =======
</TABLE>
At December 31, 1997 options for 131,322 shares are exercisable at prices
ranging from $1.51 to $5.50. At December 31, 1996 options for 63,404 shares were
exercisable at prices ranging from $1.51 to $4.00.
F-18
<PAGE> 39
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE
PRICES 1997 LIFE (YEARS) PRICE
---------- -------------- ------------ ---------
<S> <C> <C> <C>
$ 1.51 122,150 3.2 $1.51
2.09 87,484 3.5 2.09
3.00 78,750 4.5 3.00
4.00-5.50 86,100 4.0 4.07
------------------------------------------------------
$1.51-5.50 374,484 3.7 $2.55
------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
---------------------------
NUMBER WEIGHTED-
RANGE OF EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, EXERCISE
PRICES 1997 PRICE
---------- -------------- ---------
<S> <C> <C>
$ 1.51 60,739 $1.51
2.09 36,958 2.09
3.00 15,161 3.00
4.00-5.50 18,464 4.08
-----------------------------------------
$1.51-5.50 131,322 $2.21
-----------------------------------------
</TABLE>
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 (loss) and earnings (loss) per share on a
pro forma basis. Had compensation costs for the stock option plans been
determined using the fair value method, the Company's pro forma net loss and
loss per share would have been as follows:
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1996
------------ ------------ -----------
<S> <C> <C> <C> <C>
Net loss As reported............ $(9,380,055) $(3,216,285) $(1,511,664)
Pro forma.............. $(9,480,378) $(3,229,974) $(1,515,730)
Basic loss per share As reported............ $ (2.31) $ (1.09) $ (0.52)
Pro forma.............. $ (2.33) $ (1.09) $ (0.52)
Diluted loss per share As reported............ $ (1.67) $ (0.71) $ (0.34)
Pro forma.............. $ (1.69) $ (0.72) $ (0.34)
</TABLE>
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 December 31, 1997 are as
follows: risk free interest rates ranging from 5.97% to 6.33%, expected dividend
yield of 0% and expected option life of 60 months; and expected volatility of
46.50%. 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 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 fair value of all
options granted
F-19
<PAGE> 40
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
during the year ended December 31, 1997, the six months ended December 31, 1996
and the year ended June 30, 1996 were $1.07, $.51 and $.35, respectively.
11. NET LOSS PER SHARE OF COMMON STOCK
The Company follows Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share, issued by the Financial Accounting Standards Board.
Under SFAS No. 128, the basic and diluted net loss per share of common stock for
the year ended December 31, 1997, the six months ended December 31, 1996 and the
year ended June 30, 1996 is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period, including stock
options issued at nominal amounts within 12 months of the Company's Initial
Public Offering.
The weighted average number of common shares outstanding is summarized as
follows:
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Denominator for basic loss per share:
Weighted average common stock shares
outstanding.............................. 4,062,360 2,960,865 2,902,760
Potential dilutive common shares:
Common stock shares issuable under stock
options at nominal amounts within 12
months of IPO............................ 1,543,509 1,543,509 1,543,509
--------- --------- ---------
Denominator for diluted loss per share........ 5,605,869 4,504,374 4,446,269
========= ========= =========
</TABLE>
Stock options issued at nominal amounts within 12 months prior to the
Company's Initial Public Offering (IPO) are considered outstanding for all
periods presented for the diluted calculation in accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin No. 98. The Company's
options, warrants and convertible debt instruments other than those issued for
nominal amounts within 12 months of the Company's Initial Public Offering are
not considered outstanding for the diluted calculation since their effect is
antidilutive.
12. INITIAL PUBLIC OFFERING
During fiscal 1997, the Company consummated an initial public offering of
its common stock and common stock purchase warrants under the Securities Act of
1933 with the Securities and Exchange Commission. Pursuant to the offering,
1,800,000 shares of common stock and 2,070,000 redeemable common stock purchase
warrants were issued and sold by the Company. 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 the offering. The Registration Statement
was declared effective on May 12, 1997. The Company received net proceeds after
expenses of approximately $8,220,000.
F-20
<PAGE> 41
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Supplemental schedule of cash payments:
Cash paid for interest.............................. $ 180,549 $ 30,956 $ 4,235
Cash paid for income taxes.......................... -- -- --
Supplemental schedule of noncash financing and
investing activities:
Inventories paid with common stock.................. -- -- 33,998
Property and equipment acquired by capital lease
obligations...................................... 105,713 22,216 33,383
Accrued rent paid with common stock................. -- -- 5,041
Conversion of demand notes payable and accrued
interest into convertible promissory notes....... -- -- 111,674
Conversion of amount due to stockholder into common
stock............................................ -- 18,900 --
Conversion of convertible promissory notes and
accrued interest into common stock............... -- 964,537 --
Conversion of demand notes payable and accrued
interest into common stock....................... -- -- 33,000
Conversion of convertible promissory notes into
common stock..................................... -- -- 225,000
Consulting expense paid with warrants............... 271,950 -- --
</TABLE>
14. SUBSEQUENT EVENTS
In January 1998, the Company completed a private placement of 10 units each
consisting of (i) a convertible promissory note in the principal amount of
$50,000 bearing interest payable at maturity, at the rate of 8% per annum, which
shall be converted into shares of the Company's common stock at the rate of one
share of common stock per dollar loaned plus accrued interest as of the date and
upon the earlier of (a) the consummation of a financing by the Company which
results in net proceeds to the Company of at least $3,000,000 or (b) June 30,
1998; and (ii) a warrant to purchase 25,000 shares of common stock at an
exercise price of $1.00 per share. Upon the completion of a separate private
equity placement in January 1998, the above 10 units were converted into 500,000
shares of the Company's common stock.
In January 1998, the Company completed an initial private placement of
6,180,000 shares of the Company's common stock at a price of $1.00 per share.
The Company anticipates that the funding process started in December 1997 will
be completed in the first half of 1998.
F-21
<PAGE> 1
EXHIBIT 3.2
RESTATED CERTIFICATE OF INCORPORATION
OF
AUGMENT SYSTEMS, INC.
Under Section 245 of the
DELAWARE GENERAL CORPORATION LAW
The undersigned, Augment Systems, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies that:
FIRST: The name of the Corporation is Augment Systems, Inc.
SECOND: The Certificate of Incorporation of the Corporation
under its original name "Lextel, Inc." was filed with the Secretary of
the State of Delaware on May 2, 1990.
THIRD: Certificates of Amendment, changing the Corporation's
name to Augment Systems Incorporated and to Augment Systems, Inc., were
filed with the Secretary of the State of Delaware on June 21, 1990 and
on October 30, 1996, respectively.
FOURTH: This Restated Certificate of Incorporation was duly
adopted by the Corporation's Board of Directors in accordance with
Section 245 of the General Corporation Law of the State of Delaware.
FIFTH: The text of the Certificate of Incorporation, as
amended and corrected, of the Corporation is hereby restated to
integrate all amendments, corrections and supplements heretofore
adopted and shall read as set forth in full in Exhibit A annexed
hereto.
IN WITNESS WHEREOF, said Augment Systems, Inc. has caused its corporate
seal to be hereunto affixed and to be signed by its President who does hereby
acknowledge that the
<PAGE> 2
foregoing is the free act and deed of the Corporation and that the facts stated
therein are true, as of this _____ day of __________, 1997.
AUGMENT SYSTEMS, INC.
By:________________________________
[SEAL] Lorrin G. Gale, President
- ------------------------------------
Duane A. Mayo, Secretary
<PAGE> 3
EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
OF
Augment Systems, Inc.
FIRST: The name of the Corporation is Augment Systems, Inc.
SECOND: The address of its registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or
promoted by the Corporation is as follows:
To engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
FOURTH: The total number of all classes of shares of stock which the
corporation shall have authority to issue is thirty-two million (32,000,000)
shares, consisting of thirty million (30,000,000) shares of Common Stock with a
par value of One Cent ($.01) per share, and two million (2,000,000) shares of
Preferred Stock with a par value of One Cent ($.01) per share, amounting in the
aggregate to Three Hundred Twenty Thousand Dollars ($320,000.00).
The Board of Directors of the Corporation is hereby expressly
vested with the power to issue one or more series of the Preferred Stock of the
Corporation from time to time and by resolution to designate the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions of any class of
stock or any series of such class of stock of the Corporation.
FIFTH: In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
(a) Election of directors need not be by written ballot.
(b) The Board of Directors is expressly authorized to adopt,
amend or repeal the By-Laws of the Corporation.
<PAGE> 4
SIXTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on , the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
SEVENTH: Except to the extent that the General Corporation Law of the
State of Delaware prohibits the elimination or limitation of liability of
directors for breaches of fiduciary duty, no director of the Corporation shall
be personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty as a director, notwithstanding any provision of
law imposing such liability. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment.
EIGHTH: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware, as amended from time to
time, indemnify 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
Corporation, or is or was serving, or has agreed to serve, at the request of the
Corporation, 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.
Indemnification may include payment by the Corporation 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 under this Article, which
undertaking may be accepted without reference to the financial ability of such
person to make such repayment.
<PAGE> 5
The Corporation 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 the Board of Directors
of the Corporation.
The indemnification rights provided in this Article (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. The Corporation may, to the extent
authorized from time to time by its Board of Directors, grant indemnification
rights to other employees or agents of the Corporation or other persons serving
the Corporation and such rights may be equivalent to, or greater or less than,
those set forth in this Article.
NINTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and the Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
<PAGE> 1
EXHIBIT 10.23
CONSULTING AGREEMENT
AGREEMENT is made as of this 1st day of October 1997, by and between
AUGMENT SYSTEMS INC., a Delaware corporation with its principal place of
business located at 2 Robbins Road, Westford, Massachusetts 01886 (the
"Company"), and VENTURE MANAGEMENT CONSULTANTS, LLC, a Massachusetts limited
liability company with its principal place of business located at 60 Wells
Avenue, Newton, Massachusetts 02159 ("Consultant").
RECITALS
WHEREAS, the Company has agreed to engage Consultant as a Consultant to
render advice and services from time to time regarding strategic planning and
financial matters; and general business advice requested from time to time by
the Company;
WHEREAS, Consultant and the Company agree that certain information
regarding the trade secrets, marketing plans and strategies, business and
operations of the Company that Consultant may obtain, prepare, review or develop
during the course of its relationship with the Company should be used
exclusively for the benefit of the Company and are deemed to be "works for hire"
for the Company.
NOW, THEREFORE, in consideration of the promises and the mutual
covenants and conditions herein contained, the parties hereto agree as follows:
1. Consultant's Services
(a) The Company hereby retains Consultant, and its members, to perform
the following consulting and advisory services (the "Services") upon the terms
and conditions set forth in this Agreement.
(b) Consultant's Services to be rendered to the Company shall include
the following: assistance in the evaluation by the Company of various financing
options, including the assessment of various forms of financing, whether through
bank lines of credit, private placements, public offering, merger or
acquisition; the review of strategic financial plans; the review and evaluation
of private placement memorandums; the review of offering literature and business
plans for private placements of the Company's debt or equity securities;
evaluation and critique of the Company's operations and such other general
business advice and assistance relating to the Company's capital structure,
operations, finance and working capital requirements as may be requested from
time to time by the Board of Directors and senior executive officers of the
Company.
<PAGE> 2
2. Independent Contractor. It is expressly understood that the
relationship of Consultant to the Company is that of an independent contractor
and consultant. Nothing contained herein shall be construed to create an
employer and employee or principal and agent relationship between the Company
and Consultant. Consultant shall have sole and exclusive responsibility for the
withholding and payment of all federal, state and local taxes and for all
employment and disability insurance, Social Security obligations and other
benefits for Consultant's officers, employees and agents. Consultant shall
assume and accept all responsibilities which are imposed upon an independent
contractor by any statute, regulation, rule of law or otherwise. Consultant is
not authorized to bind the Company, to incur any obligation or liability on
behalf of the Company, or to use the Company's name except as expressly
authorized in writing by the Company or as contemplated by this Agreement.
3. Compensation for Services. For the performance of the Services to be
rendered to the Company during the term of this Agreement, the Company shall pay
and provide Consultant, as full and complete compensation for the Services,
compensation as follows:
(a) Equity Issuance. The Company shall issue to Consultant, warrants
(singularly the "Warrant" and collectively the "Warrants") to purchase an
aggregate of 400,000 shares of the Company's common stock, $.01 par value per
share, ("Common Stock") at a purchase price of $3.00 per share (subject to
adjustment for stock splits or any other subdivision of the number of
outstanding shares of Common Stock). The Warrants shall be exercisable
immediately and each Warrant will expire and be of no further force or effect at
5 p.m. on the date five (5) years from the date hereof.
(b) Cash Compensation. For each month during the term of this
Agreement, Consultant shall be paid cash compensation in the amount of four
thousand dollars ($4,000). For any period during the term of this Agreement that
is less than a full month, the payment shall be prorated.
4. Expenses. The Company shall reimburse Consultant for all reasonable
and necessary out-of-pocket expenses incurred by Consultant in connection with
the Services rendered hereunder, provided that such expenses are deductible to
the Company and are properly documented in reasonable, itemized detail.
Consultant's expenses shall in no event exceed $1,000 per month unless such
expenses are authorized in advance by the Company.
5. Nondisclosure of Proprietary Information.
(a) Proprietary Information. For purposes of this Agreement, the term
"Proprietary Information" shall mean all knowledge and information which
Consultant has acquired or may acquire as a result of, or related to, or arising
from its relationship with the Company concerning the Company's business,
finances, operations, marketing plans and marketing strategies, research and
development activities, software designs and specifications, products, services,
trade secrets,
2
<PAGE> 3
and cost and pricing policies. Notwithstanding the foregoing sentence, such
Proprietary Information does not include (i) information which is or becomes
publicly available or is a matter for the public domain (except as may be
disclosed by Consultant in violation of this Agreement); (ii) information
acquired by Consultant from a source other than the Company or any of its
employees, which source legally acquired such information directly from the
Company without any obligation of nondisclosure; or (iii) information known to
Consultant prior to the date hereof.
(b) Nondisclosure Obligation. Consultant agrees that it will not at any
time, either during or after the term or any termination of this Agreement,
without the prior written consent of the Company, divulge or disclose to anyone
outside the Company, or appropriate for its own use or the use of any third
party, any such Proprietary Information, and will not during its engagement by
the Company hereunder, or at any time thereafter, disclose or use, or attempt to
use, any such Proprietary Information for its own benefit, or the benefit of any
third party, or in any manner which may injure or cause loss, or may be
calculated to injure or cause loss, to the Company. Consultant shall obtain from
all employees, Consultants, agents, or other representatives employed or engaged
by it to do any work for the benefit of the Company a written agreement
obligating them to the same restrictions on the disclosure of Proprietary
Information as set forth in this Section.
(c) Works for Hire. Consultant and the Company agree that any and all
reports, business plans, memoranda, notes, drawings, private placement memoranda
or other written materials conceived, devised, developed or otherwise obtained
by Consultant for the benefit of the Company during the course of rendering
Services to the Company hereunder are "works for hire" and are hereby assigned
to the Company. Such materials shall be the sole and exclusive property of the
Company as consideration for any and all compensation paid to Consultant under
this Agreement.
6. Term. The term of this Agreement shall be for one year commencing on
the date hereof unless terminated earlier upon (i) the dissolution, liquidation
or cessation of business in the ordinary course of Consultant or the Company, or
(ii) as provided in Section 7 below. The term of the Agreement may be extended
and renewed by mutual, written agreement of the parties.
7. Termination. Either party may terminate this Agreement upon five (5)
days prior written notice in the event of a material breach of the terms of this
Agreement. The Company may terminate this Agreement for "just cause" upon five
(5) days prior written notice to Consultant. "Just cause" shall mean any one or
more of the following: (a) the substantial and continuing failure of Consultant
to render Services to the Company in accordance with its obligations under this
Agreement for a continuous period of thirty (30) days; (b) willful misconduct,
malfeasance, misfeasance or gross negligence of Consultant (or any of
Consultant's employees, consultants or agents) in connection with the
performance of such Services; (c) the conviction of Consultant (or any of
Consultant's employees, Consultants or agents) of a felony,
3
<PAGE> 4
either in connection with the performance of its obligations to the Company or
which shall adversely affect Consultant's ability to perform such obligations;
(d) disloyalty, dishonesty or breach of fiduciary duty to the Company; or (e)
the commission of an act of embezzlement, fraud or deliberate disregard of the
rules or policies of the Company which results in loss, damage or injury to the
Company. If the Company terminates this Agreement for "just cause", Consultant
shall forfeit one-half of the Warrants and one-half of the shares of Common
Stock issued upon exercise of the Warrants. Except as provided for herein, after
any termination becomes effective, both the Company and Consultant shall
thereafter be relieved of any further obligations pursuant to this Agreement.
8. Indemnification and Contribution. Each party (the "Indemnifying
Party") agrees to indemnify and hold harmless the other party (the "Indemnified
Party") and each of the Indemnified Party's directors, officers, agents,
employees and controlling persons (as such persons are defined in the Securities
Act) against any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) related to or arising out of any actions or
omissions committed by the Indemnifying Party hereunder (including any violation
of applicable federal and state securities laws), and will reimburse the
Indemnified Party and each other person indemnified hereunder for all legal and
other expenses incurred in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding in connection with pending
or threatened litigation or other actions or investigations in which the
Indemnified Party or any of its directors, officers, agents, employees and
controlling persons is a party; provided however, that the Indemnifying Party
will not be liable in any such case for losses, claims, damages, liabilities or
expense that a court of competent jurisdiction shall have found to have arisen
primarily from the recklessness, negligence or willful misconduct, malfeasance,
misfeasance of the Indemnified Party or any party claiming a right to
indemnification.
In case any proceeding shall be instituted involving any person in
respect of whom indemnity may be sought, the Indemnified Party shall promptly
notify the Indemnifying Party, and the Indemnifying Party, upon the request of
the Indemnified Party, shall retain counsel reasonably satisfactory to the
Indemnified Party to represent the Indemnified Party and any others the
Indemnified Party may designate in such proceeding and shall pay as incurred the
fees and expenses of such counsel related to such proceeding. In any such
proceeding, the Indemnified Party shall have the right to retain its own counsel
at its own expense. In no event shall the Indemnifying Party be liable for the
fees and expenses of more than one counsel for all Indemnified Parties in
connection with any one action or separate but similar or related actions in the
same or other jurisdictions arising out of the same general allegations or
circumstances. The Indemnifying Party shall not be liable for any settlement of
any proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the Indemnifying
Party agrees to indemnify the Indemnified Party to the extent set forth in this
Section.
4
<PAGE> 5
In the event a claim for indemnification under this Section is
determined to be unenforceable by a final judgment of a court of competent
jurisdiction, then the Indemnifying Party shall contribute to the aggregate
losses, claims, damages or liabilities to which the Indemnified Party or its
officers, directors, agents, employees or controlling persons may be subject in
such amount as is appropriate to reflect the relative benefits received by each
of the Indemnifying Party and the party seeking contribution on the one hand and
the relative faults of the Indemnified Party and the party seeking contribution
on the other, as well as any other relevant equitable contributions; provided,
however, that no person adjudged guilty of fraudulent judicial determination
shall be entitled to contribution from the Indemnifying Party. The provisions of
this Section shall survive any termination of this Agreement and shall be
binding upon any successors or assigns of the Company and Consultant.
9. Absence of Conflicting Agreements. Consultant represents and
warrants that it is not a party to any agreement or arrangement, whether oral or
written, which conflicts with this Agreement or would prevent it from satisfying
completely its obligations to the Company under this Agreement.
10. General. This Agreement constitutes the entire Agreement between
the parties relative to the subject matter hereof, and supersedes all proposals,
letters of intent or agreements, written or oral, and all other communications
between the parties relating to the subject matter of this Agreement.
No provision of this Agreement shall be waived, amended, modified,
superseded, canceled, renewed or extended except in a written instrument signed
by the party against whom any of the foregoing actions is asserted. Any waiver
shall be limited to the particular instance and for the particular purpose when
and for which it is given.
The invalidity, illegality or unenforceability of any provision of this
Agreement shall in no way effect the validity, legality or enforceability or any
other provision of this Agreement. This Agreement is entered into subject to
compliance by Consultant with all applicable federal and state securities laws,
including the Securities Act of 1933, the Securities Exchange Act of 1934, the
Investment Company Act of 1940, and the Investment Advisors of 1940. The
Services rendered by Consultant shall be limited to the services described
herein and shall not extend to the placement of securities or otherwise offering
or soliciting the purchase of any of the Company's securities. Consultant shall
not act as a "broker", "dealer" or "finder" and the compensation payable to
Consultant thereunder shall be paid regardless of the consummation of any
financing of the Company.
This Agreement, Consultant's Services to be performed thereunder, and
all rights thereunder are personal to Consultant and may not be transferred or
assigned by Consultant at any time without the prior written consent of the
Company.
5
<PAGE> 6
This Agreement shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the internal laws of The
Commonwealth of Massachusetts.
All notices provided for in this Agreement shall be given in writing
and shall be effective when either served by personal delivery, electronic
facsimile transmission, express overnight courier service or by registered or
certified mail, return receipt requested, addressed to the parties at their
respective addresses herein set forth, or to such other address or addresses as
either party may later specify by written notice to the other.
This Agreement may be executed in duplicate counterparts, which, when
taken together, shall constitute one instrument and each of which shall be
deemed to be an original instrument.
The provisions of Sections 5 and 8 shall survive the termination or
expiration of this Agreement as a continuing covenant and obligation of the
Company and Consultant.
Any dispute, controversy or claim arising out of, in connection with,
or in relation to this Agreement or the breach of any of the provisions hereof
shall be settled by binding arbitration by a panel of three arbitrators in
Boston, Massachusetts, pursuant to the rules then obtaining of the American
Arbitration Association. Any award shall be final, binding and conclusive upon
the parties and a judgment rendered thereon may be entered in any court having
competent jurisdiction thereof. The prevailing party shall be entitled to
recover all reasonable fees and expenses of the costs of such arbitration
(including reasonable attorneys' fees), and if no party shall be determined by
the arbitrator(s) to have successfully prevailed, or to be less at fault than
the other party, then each party shall bear its own costs and expenses
(including attorneys' fees). The parties agree to use their best efforts to
settle any and all disputes without resort to arbitration and litigation.
IN WITNESS WHEREOF, Parties have executed this Agreement as of the day
and year first above written.
AUGMENT SYSTEMS, INC.
By:_________________________________
VENTURE MANAGEMENT CONSULTANTS, LLC
By:_________________________________
6
<PAGE> 1
EXHIBIT 10.24
PROMISSORY NOTE
$750,000.00 Boston, Massachusetts
October 9, 1997
FOR VALUE RECEIVED, the undersigned Augment Systems, Inc., a Delaware
corporation (the "Borrower") hereby promises to pay to the order of FLEET
NATIONAL BANK (the "Bank") the principal amount of Seven Hundred Fifty Thousand
and 00/100 ($750,000.00) Dollars ("Principal"), with interest, at the rate
hereinafter set forth, on the daily balance of all unpaid Principal, from the
date hereof until payment in full of all Principal and interest hereunder. As
used herein, "Letter Agreement" means that certain letter agreement dated August
4, 1997 between the Borrower and the Bank, as amended.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the date hereof and continuing on the first day of each month thereafter and on
the date of payment of this note in full, at a fluctuating rate per annum
(computed on the basis of a year of three hundred sixty (360) days for the
actual number of days elapsed) which shall at all times be equal to the sum of
(i) two (2%) percent per annum plus (ii) the Prime Rate, as in effect from time
to time (but in no event in excess of the maximum rate permitted by then
applicable law), with a change in the aforesaid rate of interest to become
effective on the same day on which any change in the Prime Rate is effective.
Overdue Principal and, to the extent permitted by law, overdue interest shall
bear interest at a fluctuating rate per annum which at all times shall be equal
to the sum of (i) four (4%) percent per annum plus (ii) the per annum rate
otherwise payable under this note (but in no event in excess of the maximum rate
permitted by then applicable law), compounded monthly and payable on demand. As
used herein, "Prime Rate" means the variable rate of interest per annum
designated by the Bank from time to time as its prime rate, it being understood
that such rate is merely a reference rate and does not necessarily represent the
lowest or best rate being charged to any customer. If the entire amount of any
required Principal and/or interest is not paid within ten (10) days after the
same is due, the Borrower shall pay to the Bank a late fee equal to five percent
(5%) of the required payment, provided that such late fee shall be reduced to
three percent (3%) of any required Principal and interest that is not paid
within fifteen (15) days of the date it is due if this note is secured by a
mortgage on an owner-occupied residence of 1-4 units.
All outstanding Principal shall be repaid by the Borrower to the Bank on
February 28, 1998, together with all interest then accrued but unpaid thereon.
The Borrower may at any time and from time to time, without premium or
penalty, prepay all or any portion of the Principal. Each Principal prepayment
shall be accompanied by payment of all interest on the prepaid amount accrued
but unpaid to the date of payment.
Payments of both Principal and interest shall be made, in lawful money of
the United States in immediately available funds, at the office of the Bank
located at 75 State Street, Boston, Massachusetts 02109, or at such other
address as the Bank may from time to time designate.
<PAGE> 2
The undersigned Borrower irrevocably authorizes the Bank to make or cause
to be made, on a schedule attached to this note or on the books of the Bank, at
or following the time of receiving any payment of Principal, an appropriate
notation reflecting such transaction and the then unpaid balance of Principal.
Failure of the Bank to make any such notation shall not, however, affect any
obligation of the Borrower hereunder or under the Letter Agreement. The unpaid
Principal amount of this note, as recorded by the Bank from time to time on such
schedule or on such books, shall constitute presumptive evidence of the unpaid
principal amount of the Bridge Loan (as defined in the Letter Agreement).
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally in connection with the delivery, acceptance,
performance, default or enforcement of or under this note, and (c) agrees to
pay, to the extent permitted by law, all reasonable costs and expenses,
including, without limitation, reasonable attorneys' fees, incurred or paid by
the Bank in enforcing this note and any collateral or security therefor, all
whether or not litigation is commenced.
This note is the Bridge Note referred to in the Letter Agreement and is
secured by and entitled to the benefits of the Security Agreement (as defined in
the Letter Agreement). This note is subject to prepayment as set forth in the
Letter Agreement. The maturity of this note may be accelerated upon the
occurrence of an Event of Default, as provided in the Letter Agreement.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ARISING
OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY RELATED DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PERSON. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ACCEPT THIS NOTE AND TO MAKE THE BRIDGE LOAN AS CONTEMPLATED IN THE
LETTER AGREEMENT.
Executed, as an instrument under seal, as of the day and year first above
written.
CORPORATE SEAL AUGMENT SYSTEMS, INC.
ATTEST:
____________________________ By:__________________________
Secretary Name:
Title:
- 2 -
<PAGE> 1
EXHIBIT 10.25
WARRANT PURCHASE AGREEMENT
between
AUGMENT SYSTEMS, INC.
and
FLEET NATIONAL BANK
dated as of
October 9, 1997
<PAGE> 2
WARRANT PURCHASE AGREEMENT
This Agreement dated as of October 9, 1997 is entered into by and between
AUGMENT SYSTEMS, INC., a Delaware corporation (the "Company"), and FLEET
NATIONAL BANK (the "Purchaser").
As a material inducement to the Purchaser to enter into a Loan
Modification Agreement of even date herewith between the Company and the
Purchaser, and in consideration for the Purchaser's agreements therein,
including, without limitation, the extension of a bridge loan to the Company,
the Company is hereby agreeing to issue to the Purchaser a warrant to purchase
shares of the Company's Common Stock (as defined below), in the form attached
hereto as Exhibit A (the "Warrant", which term shall include any further warrant
or warrants issued upon transfer thereof, in exchange or replacement therefor or
upon partial exercise thereof) upon the terms and conditions set forth herein
and therein.
Now, therefore, in consideration of the mutual promises and covenants
contained herein, the parties hereby agree as follows:
1. Purchase and Sale.
1.1 The Closing. The closing of the sale and purchase of the Warrant under
this Agreement (the "Closing") shall take place at the offices Edwards & Angell,
101 Federal Street, Boston, Massachusetts, on the date hereof, or at such place
or on such other date as the Company and the Purchaser shall mutually agree (the
"Closing Date"). At the Closing, in consideration of the Purchaser entering into
the aforesaid Loan Modification Agreement, the Company shall issue to the
Purchaser the Warrant registered in the name of the Purchaser on the Company's
records.
1.2 Definitions. For all purposes of this Agreement, the following terms
shall have the following meanings:
Common Stock: The Common Stock, $0.01 par value, of the Company, as
constituted on the date hereof, any shares into which such Common Stock
shall be changed, or any shares resulting from any reclassification of
such Common Stock.
Material Adverse Effect: A material adverse effect on the business,
operations, prospects, financial condition or properties of the
Company, the ability of the Company to perform its obligations under
this Agreement, the Loan Agreement (as defined below) and the Warrant,
or the validity or enforceability of this Agreement, the Loan Agreement
or the Warrant.
Warrant Shares: (i) The Common Stock issued or issuable pursuant to the
exercise of the Warrant; (ii) any Common Stock or other securities
issued or issuable with respect to the Common Stock held by the
Purchaser pursuant to
<PAGE> 3
the preceding clause (i) upon any stock split, stock dividend,
recapitalization, or similar event; and (iii) securities issued in
replacement or exchange of any of the securities issued in clauses (i)
or (ii) above.
2. Representations of the Company. The Company hereby represents and
warrants to the Purchaser as follows:
2.1 Incorporation of Representations and Warranties. Except to the extent
affected by transactions occurring after the date thereof and permitted
thereunder and except as reflected in the attached updated item 2.1(b) and
2.1(e) of the Disclosure Schedule, the Company hereby confirms the
representations and warranties set forth in that certain letter agreement
between the Company and the Purchaser dated August 4, 1997, as amended (said
letter agreement, as so as amended, being referred to as the "Loan Agreement")
(which representations and warranties are incorporated herein by reference).
2.2 Capitalization.
(a) The capital structure of the Company, showing the authorized capital
stock of the Company as of the date hereof, is set forth in Exhibit B. All of
the issued and outstanding Common Stock of the Company has been duly authorized
and is validly issued, fully paid and nonassessable. There are no other
authorized or issued equity securities of the Company.
(b) Except as set forth in Exhibit C hereto or as provided in this
Agreement, (i) no subscription, warrant, option, convertible security or other
right (contingent or otherwise) to purchase or acquire any Common Stock or other
equity security of the Company is authorized or outstanding, (ii) there is no
commitment of the Company to issue any subscription, warrant, option,
convertible security or other such right to purchase any equity security of the
Company or to issue or distribute to holders of any of its Common Stock or other
equity securities any evidences of indebtedness or assets of the Company, and
(iii) the Company has no obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any of its Common Stock or other equity securities
or any interest therein or to pay any dividend or make any other distribution in
respect thereof. Except as set forth in Exhibit C or as provided in this
Agreement, no person or entity is entitled to (i) any preemptive right, catch-up
right, right of first refusal or similar right with respect to the issuance of
any Common Stock or other equity securities of the Company or (ii) any rights
with respect to the registration of any Common Stock or other equity securities
of the Company under the Securities Act (defined below). All of the issued and
outstanding Common Stock has been offered, issued and sold by the Company in
compliance with applicable federal and state securities laws and the rules and
regulations thereunder.
2.3 Certain Agreements. Except as set forth on Exhibit C, there are no
agreements, written or oral, between the Company and any holder of its Common
Stock or other equity securities, or, to the knowledge of the Company, among any
holders of its Common Stock or other equity securities, relating to the
acquisition, disposition or voting of the Common Stock of the Company.
- 2 -
<PAGE> 4
2.4 Issuance of Warrant and Warrant Shares. The issuance, sale and
delivery of the Warrant in accordance with this Agreement, and the issuance and
delivery of the Warrant Shares when sold and paid for in accordance with the
terms of this Agreement and the Warrant, have been and, in the case of the
Warrant Shares, will be, duly authorized by all necessary corporate action on
the part of the Company. The Warrant Shares have been duly and validly reserved
and, when sold and paid for in accordance with the terms of this Agreement and
the Warrant, will be duly and validly issued, fully paid and nonassessable. When
issued, the Warrant Shares will be free from any claims, liens or encumbrances
created or imposed by any act or omission on the part of the Company.
2.5 Authority. The execution, delivery and performance by the Company of
this Agreement and the Warrant and the consummation of the transactions
contemplated hereby and thereby is within the power and authority of the
Company, and have been duly authorized by all necessary corporate action on the
part of the Company. This Agreement and the Warrant constitute legal, valid and
binding obligations of the Company enforceable against the Company in accordance
with their respective terms. The execution and delivery of, and performance of
the transactions contemplated by, this Agreement and the Warrant, and compliance
with their provisions by the Company, (a) will not violate any provision of law
or regulation other than any law or regulation the violation of which would not
(singly or in the aggregate) have a Material Adverse Effect, (b) will not
conflict with or result in any breach of any of the terms, conditions or
provisions of, or constitute a default under, the Company's charter and by-laws,
each as amended to date and presently in effect, (c) will not conflict with or
result in any breach of any indenture, lease, mortgage, agreement or other
instrument to which the Company is a party or by which it or any of its
properties is bound, or any decree, judgment, order, statute, rule or regulation
applicable to the Company or its properties, which conflict or breach could have
a Material Adverse Effect, or (d) result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the assets or
properties of the Company.
2.6 Governmental Consents. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
governmental authority is required on the part of the Company in connection with
the execution, delivery and performance of this Agreement and the Warrant and
the consummation of the transactions contemplated hereby and thereby or the
offer, issuance, sale and delivery of the Warrant and the Warrant Shares, except
(a) such filings as shall have been made prior to and shall be effective on and
as of the Closing Date, (b) any notices of sale required to be filed with the
Securities and Exchange Commission under Regulation D of the Securities Act or
with state securities administrators under applicable state securities laws,
which will be filed within the required time period therefor, or (c) such
filings, registrations and orders as may be required to effect any registration
of securities pursuant to Section 5 of this Agreement. Based upon the
representations made by the Purchaser in Section 3 of this Agreement, the offer
and sale of the Warrant to the Purchaser will be exempt from the registration
requirements of the Securities Act and the qualification requirements of any
applicable state securities laws.
2.7 Disclosures. Neither this Agreement nor any exhibit hereto nor any
certificate or instrument furnished or to be furnished to the Purchaser or its
counsel in connection with the
- 3 -
<PAGE> 5
transactions contemplated by this Agreement contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading. The Company knows of no information or
fact which has or would have a Material Adverse Effect which has not been
disclosed to the Purchaser.
3. Representations of the Purchaser. The Purchaser represents and warrants
to the Company as follows:
3.1 Investment. The Purchaser is acquiring the Warrant for its own account
for investment and not with a view to, or for sale in connection with, any
distribution thereof, nor with any present intention of distributing or selling
the same. The Purchaser understands that the Warrant has not been registered
under the Securities Act or qualified under any applicable state securities laws
in reliance upon exemptions from such requirements.
3.2 Authority. The execution, delivery and performance by the Purchaser of
this Agreement have been duly authorized by all necessary action on behalf of
the Purchaser. This Agreement constitutes the valid and binding obligation of
the Purchaser enforceable in accordance with its terms.
3.3 Sophisticated Investor. The Purchaser has not been organized,
reorganized or recapitalized specifically for the purpose of investing in the
Company. The Purchaser has sufficient business and financial knowledge and
experience so as to be capable of evaluating the merits and risks of its
investment in the Company.
4. Deliveries at Closing. At Closing, the Company will deliver to the
Purchaser:
(a) A certificate of the Company to the effect that each representation
and warranty contained in Section 2 is true and correct on and as of the Closing
Date.
(b) An opinion of counsel to the Company, in form and substance reasonably
satisfactory to the Purchaser, covering at least the matters set forth in
Exhibit D hereto.
(c) A copy of the currently-effective Certificate of Incorporation of the
Company, certified by the Secretary of State of Delaware.
(d) Certificates, as of the most recent practicable date, as to the legal
existence and good standing of the Company issued by the Secretary of State of
Delaware and as to the due qualification of the Company in Massachusetts issued
by the Secretary of State of Massachusetts.
(e) A Certificate of the Secretary of the Company, dated the Closing Date,
as to (i) the charter and by-laws of the Company, (ii) the signatures and
incumbency of the officers executing the Warrant and this Agreement, and (iii)
the resolutions of the Company's Board of Directors (and, if necessary, its
stockholders) approving the execution, delivery and performance of this
Agreement and the Warrant.
- 4 -
<PAGE> 6
5. Registration Rights.
5.1 Certain Definitions. As used in this Agreement, the following terms
shall have the following meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Holder" shall mean any holder of the Warrant or of Registrable Securities
(as hereinafter defined), including any such holder to whom the rights granted
under this Section 5 are transferred as permitted by this Agreement.
The terms "register", "registered" and "registration" shall refer to a
registration for a public offering and sale of securities of the Company
effected by preparing and filing a registration statement in compliance with the
Securities Act and applicable rules and regulations thereunder, and the
declaration or ordering of the effectiveness of such registration statement.
"Registrable Securities" shall mean the Warrant Shares.
"Registration Expenses" shall mean all expenses incurred by the Company in
compliance with Section 5.2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company and one counsel for the selling Holders, blue sky fees
and expenses, and the expense of any special audits incident to or required by
any such registration (but excluding the compensation of regular employees of
the Company and expenses of regular annual and periodic audits, which shall be
paid in any event by the Company) and the expenses associated with the Company's
obligations under Section 5.4 hereof.
"Restricted Securities" shall refer collectively to all Registrable
Securities unless there is in effect a registration statement under the
Securities Act covering such Registrable Securities.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all fees and
disbursements of counsel for any Holder not included in Registration Expenses.
- 5 -
<PAGE> 7
5.2 Piggyback Registration Rights.
(a) If the Company shall at any time or from time to time determine to
register any of its securities either for its own account or the account of any
security holder or holders, other than a registration relating solely to
employee benefit plans or a registration relating solely to a Rule 145
transaction, the Company shall:
(i) Promptly give to each Holder written notice thereof; and
(ii) Except as set forth in Section 5.2(b), include in such registration
(and any related qualification under state blue sky laws and other compliance
filings, and in any underwriting involved therein), all Registrable Securities
specified in a written request or requests, given by any Holder within thirty
(30) days after the written notice is given by the Company.
(b) If the registration of which the Company gives notice involves an
underwritten public offering, the Company shall so advise the Holders as part of
the written notice given pursuant to Section 5.2(a)(i). In such event, any
Holder may participate in such underwriting and such Holder's Registrable
Securities will be included in the underwriting to the extent provided herein.
All Holders proposing to distribute their securities through such underwriting
shall (together with the Company and the other persons distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected or approved by the
Company. Notwithstanding any other provision of this Section 5.2, if the
underwriter determines that marketing factors require a limitation on the number
of shares to be underwritten, the underwriter may (subject to the allocation
priority set forth below) exclude from such registration and underwriting some
or all of the Registrable Securities which would otherwise be underwritten
pursuant hereto, and the Company shall so advise all Holders of securities
requesting registration. The number of shares of Common Stock that are entitled
to be included in the registration and underwriting shall be allocated pro rata
among the Holders and all other holders of Common Stock requesting to be
included in the registration and underwriting on the basis of the respective
amounts of Common Stock entitled to inclusion in such registration statement. If
any Holder of Registrable Securities requesting registration disapproves of the
terms of any such underwriting, such person may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable Securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
5.3 Expense of Registration. All Registration Expenses incurred on behalf
of Holders in connection with any registration, qualification or compliance
pursuant to this Section 5 shall be borne by the Company, and all Selling
Expenses shall be borne by the Holders of the securities so registered pro rata
on the basis of the number of their Warrant Shares so registered.
5.4 Registration Procedures. In the case of each registration effected by
the Company pursuant to this Section 5, the Company shall:
(a) prepare and file with the Commission a registration statement with
respect to such Registrable Securities in accordance with the Securities Act and
use its best efforts to effect the
- 6 -
<PAGE> 8
registration and sale of such Registrable Securities in accordance with the
intended method of disposition thereof;
(b) prepare and file with the Commission any amendments and supplements to
the registration statement and the prospectus included in the registration
statement as may be necessary to keep the registration statement effective for a
period of not less than ninety (90) days from the effective date;
(c) furnish to each selling Holder such number of copies of the
registration statement and prospectus, including a preliminary prospectus, as is
in conformity with the requirements of the Securities Act, and such other
documents as such Holder may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities owned by such
Holder;
(d) use its best efforts to register or qualify the Registrable Securities
covered by the registration statement under the securities or blue sky laws of
such jurisdictions as the selling Holders shall reasonably request, and do any
and all other acts and things that may be necessary or desirable to enable the
selling Holders to consummate the public sale or other disposition in each such
jurisdiction of the Registrable Securities owned by the selling Holders;
provided, however, that the Company shall not be required in connection with
this paragraph (d) to qualify as a foreign corporation or execute a general
consent to service of process in any jurisdiction;
(e) promptly notify each selling Holder and each underwriter, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus contained in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing and provide the
selling Holders with a revised prospectus or a supplemental prospectus; and,
each Holder agrees that upon receipt of any notice from the Company of the
happening of any event of the kind described in this paragraph (e), such Holder
shall not make any disposition of Registrable Securities until such Holder's
receipt of a revised or supplemented prospectus contemplated hereby or until
such time as the Company has filed with the Commission any report required by
the Exchange Act to disclose any such event; and
(f) make available for inspection by each selling Holder, any underwriter
participating in any distribution pursuant to such registration statement and
any attorney, accountant or other agent retained by a selling Holder or
underwriter, all financial and other records, pertinent corporate documents, and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any selling Holder,
underwriter, attorney, accountant or agent in connection with such registration
statement.
5.5 Indemnification.
(a) The Company shall indemnify each Holder, each Holder's officers,
directors, employees and partners, and each person controlling such Holder, with
respect to each registration, qualification or compliance that has been effected
pursuant to this Section 5, and
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<PAGE> 9
each underwriter, and each person who controls any underwriter, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus or other
document (including any related registration statement, notification or the like
and any documents incorporated therein) incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by the Company of the
Securities Act or Exchange Act or state securities laws, or any rule or
regulation thereunder applicable to the Company relating to action or inaction
required of the Company in connection with any such registration, qualification
or compliance. The Company shall reimburse each such Holder, each Holder's
officers, directors, employees and partners, and each person controlling such
Holder, each such underwriter and each person who controls any such underwriter,
for any legal and any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or action;
provided, however, that the Company shall not be liable to a Holder or such
Holder's officers, directors, employees or partners or to an underwriter or any
person who controls an underwriter in any such case to the extent that any such
claim, loss, damage, liability or expense arises out of or is based on any
untrue statement or omission based upon written information furnished to the
Company by such Holder or such underwriter (as the case may be) and specifically
for use therein.
(b) Each Holder shall, if Registrable Securities held by it are included
in the securities as to which such registration, qualification or compliance is
being effected, severally and not jointly, indemnify the Company, each of its
directors, officers and employees and each underwriter, if any, of the Company's
Registrable Securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of the Securities
Act and the rules and regulations thereunder, each other such Holder and each
other security holder and each of their officers, directors and partners, and
each person controlling such other Holder or other security holder, against all
claims, losses, damages, and liabilities (or actions in respect thereof) of the
type and to the extent described in the last sentence of this Section 5.5(b)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact made by such Holder contained in any such registration
statement, prospectus or other document, or any omission (or alleged omission)
by such Holder to state therein a material fact necessary to make the statements
made therein not misleading. Each Holder shall, if Registrable Securities held
by it are included in the Registrable Securities as to which such registration,
qualification or compliance is being affected, reimburse the Company and each
other Holder, each other security holder and each of their respective directors,
officers, partners, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action. A Holder's
obligation to indemnify and reimburse assumed under this Section 5.5(b) shall be
limited to an untrue statement or omission pertaining to such Holder made in
such registration statement, prospectus or other document in reliance upon and
in conformity with written information furnished to the Company by such Holder
and specifically for use therein; provided, however, that the obligations of
such Holder hereunder shall be limited to an amount equal to the proceeds to
such Holder of Registrable Securities sold as contemplated herein.
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<PAGE> 10
(c) Each party entitled to indemnification under this Section 5.5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld or delayed), and the Indemnified Party may participate
in such defense at the Indemnified Party's expense, and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 5.5. No
Indemnifying Party, in the defense of any claim or litigation, shall, except
with the consent of each Indemnified Party, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to each Indemnified Party of a
release from all liability in respect to such claim or litigation.
5.6 Information by Holder. Each Holder of Registrable Securities, and each
other person holding securities included in any registration, shall furnish to
the Company such information regarding such Holder or other person as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification or compliance referred to in
this Section 5.
5.7 Limitations on Subsequent Registration Rights. From and after the date
of this Agreement, the Company shall not enter into any agreement with any
holder or prospective holder of any securities of the Company giving such holder
or prospective holder the right to require the Company to register any
securities of the Company unless, in the case of any piggyback registration
rights, the Holder shall have the right to participate in such registration to
the extent and in the manner specified in Section 5.2.
5.8 Rule 144 and Rule 144A Requirements. With a view to making available
the benefits of certain rules and regulations of the Commission which may permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to:
(a) Use its best efforts at all times to make and keep public information
available as those terms are understood and defined in Rule 144 under the
Securities Act;
(b) Use its best efforts to file with the Commission in a timely manner
all reports and other documents required of the Company under the Securities Act
and the Exchange Act at any time during which it is subject to such reporting
requirements;
(c) So long as a Holder owns any Restricted Securities, furnish to the
Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of Rule 144 and of the Securities Act
and the Exchange Act (at any time during which it is subject to such reporting
requirements), a copy of the most recent annual or quarterly
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<PAGE> 11
report of the Company, and such other reports and documents so filed as a Holder
may reasonably request in availing itself of any rule or regulation of the
Commission allowing a Holder to sell any such securities without registration;
and
(d) Make available to each Holder and to any prospective purchaser of
Registrable Securities designated by a Holder, the information required by Rule
144A under the Securities Act.
5.9 Transfer of Registration Rights. The right to cause the Company to
register Registrable Securities under this Section 5 may be assigned by any
Holder to one or more transferees or assignees of Registrable Securities;
provided, however, that the Company is given written notice at the time of or
within a reasonable time after said transfer, stating the name and address of
said transferees or assignees and identifying the securities with respect to
which such registration rights are being assigned; and provided, further, that
the transferees or assignees of such rights assume the obligations of such
Holder under this Section 5. All transfers of Registrable Securities shall be
made in compliance with applicable state and federal securities laws.
Notwithstanding the foregoing, any Holder may assign its rights under this
Section 5 to any one or more transferees or assignees of all or any part of the
Registrable Securities if such transferee or assignee is an "affiliate" of the
Holder, as that term is defined in Rule 144 under the Securities Act.
5.10 "Market Stand-off" Agreement. Except for sales or transfers pursuant
to an effective registration statement or to persons who agree to be similarly
bound, each Holder agrees, if requested by the Company and the underwriter of
Common Stock (or other securities) of the Company, not to publicly sell or
otherwise publicly transfer or dispose of any Common Stock (or other securities)
of the Company held by it during the ninety (90) day period following the
effective date of any registration statement of the Company filed under the
Securities Act with respect to any underwritten public offering of securities by
the Company, provided that all holders of securities issued by the Company,
including officers and directors of the Company, shall enter into similar
agreements. Such agreement shall be in writing in a form satisfactory to the
Company and such underwriter. The Company may impose stop transfer instructions
with respect to the securities subject to the foregoing restrictions until the
end of said ninety (90) day period.
6. Covenants of the Company.
6.1 Additional Information. The Company shall deliver to each Holder (as
that term is defined in Section 5.1 of this Agreement), for as long as such
Holder continues to hold a Warrant or any Warrant Shares, all information
required to be delivered to the Purchaser, when and as required to be delivered,
pursuant to Section 3.6 of the Loan Agreement (as in effect at the date hereof
and without regard to any further amendment or termination of the Loan
Agreement).
6.2 Assignment of Rights. The Purchaser's rights set forth in this Section
6 are assignable to any one or more purchasers or transferees of the Warrants or
the Warrant Shares (or a portion of either of the foregoing).
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<PAGE> 12
7. Successors and Assigns. The provisions of this Agreement shall be
binding upon, and inure to the benefit of, the respective successors and assigns
of the parties hereto.
8. Survival of Representations and Warranties; Loan Agreement. All
agreements, covenants, representations and warranties contained herein shall
survive the execution and delivery of this Agreement and the closing of the
transactions contemplated hereby. In the event the Loan Agreement is hereafter
terminated or expires, all terms, covenants and agreements therefrom which have
been incorporated herein by reference shall survive such termination or
expiration.
9. Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be given in accordance with
the terms of the Loan Agreement.
10. Brokers. The Company (i) represents and warrants to the Purchaser that
the Company has retained no finder or broker or taken any other action resulting
in the payment of any brokerage fee or sales commission in connection with the
transactions contemplated by this Agreement, and (ii) will indemnify and save
the Purchaser harmless from and against any and all claims, liabilities or
obligations with respect to brokerage or finders' fee or commissions, or
consulting fee in connection with the transactions contemplated by this
Agreement asserted by any person on the basis of any statement or representation
alleged to have been made by such indemnifying party.
11. Entire Agreement. This Agreement and the Warrant, and the exhibits and
schedules hereto and thereto embody the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof and
supersede all prior agreements and understandings relating to such subject
matter.
12. Amendments and Waivers. No term, condition or covenant of this
Agreement may be amended or waived (either generally or in a particular instance
and either retroactively or prospectively), without the prior written consent of
the Company and the holder of the Warrant. No waivers of or exceptions to any
term, condition or provision of this Agreement, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of any
such term, condition or provision.
13. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
14. Headings. The headings of the sections, subsections, and paragraphs of
this Agreement have been added for convenience only and shall not be deemed to
be a part of this Agreement.
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<PAGE> 13
15. Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision.
16. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of The Commonwealth of Massachusetts without
regard for its principles of conflicts of laws.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands under
seal as of the day and year first above written.
COMPANY:
AUGMENT SYSTEMS, INC.
By:___________________________________
Name:
Title:
PURCHASER:
FLEET NATIONAL BANK
By:____________________________________
Name:
Title:
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<PAGE> 14
EXHIBIT A
TO
WARRANT PURCHASE AGREEMENT
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN
ACQUIRED FOR INVESTMENT AND NEITHER THIS WARRANT NOR SUCH SECURITIES HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. THIS WARRANT AND SUCH SECURITIES MAY NOT BE OFFERED, SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND
ANY APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED
HEREBY IS SUBJECT TO THE CONDITIONS SPECIFIED HEREIN.
WARRANT
Warrant No. W-1 Warrant to Purchase 100,000
Shares of Common Stock
AUGMENT SYSTEMS, INC.
This certifies that FLEET NATIONAL BANK, its nominees, successors or
assigns (the "Holder"), for value received, is entitled to purchase from AUGMENT
SYSTEMS, INC., a Delaware corporation (the "Company"), 100,000 fully paid and
nonassessable shares of the Company's Common Stock, $0.01 par value (the "Common
Stock"), at a price of $1.00 per share (the "Exercise Price"), at any time or
from time to time up to and including 5:00 p.m. (Boston time) on the Expiration
Date (as hereinafter defined), upon surrender to the Company at its principal
office at 2 Robbins Road, Westford, Massachusetts 01886 (or at such other
location as the Company may advise the Holder in writing) of this Warrant
properly endorsed with the Form of Subscription attached hereto duly filled in
and signed and upon payment, in any manner set forth herein, of the aggregate
Exercise Price for the number of shares for which this Warrant is being
exercised determined in accordance with the provisions hereof. The Exercise
Price and the number of shares purchasable hereunder are subject to adjustment
as provided in Section 4 of this Warrant. This Warrant and the Warrant Shares
are being or will be issued pursuant to and are subject to the terms and
provisions of that certain Warrant Purchase Agreement of even date herewith
between the Company and Fleet National Bank (the "Agreement"). Capitalized terms
used and not otherwise defined herein shall have the respective meanings
ascribed to them in the Agreement.
This Warrant is subject to the following terms and conditions:
1. Exercise; Issuance of Certificates. This Warrant is exercisable by the
Holder of record hereof, at any time or from time to time, in whole or in part,
until 5:00 p.m., Boston time, on October 9, 2002 (the "Expiration Date"). The
Company agrees that the shares of Common Stock purchased under this Warrant
shall be deemed to be issued to the Holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant shall have
been properly surrendered for exercise, and the Holder shall be deemed for all
purposes
<PAGE> 15
(including voting) to have become the record owner of such shares on such
exercise date. Certificates for the shares of Common Stock so purchased,
together with any other securities or property to which the Holder hereof is
entitled upon such exercise, shall be delivered to the Holder hereof by the
Company at the Company's expense within seven (7) days after the rights
represented by this Warrant have been so exercised. In case of the purchase of
less than all the shares which may be purchased under this Warrant, the Company
shall cancel this Warrant and within such seven-day period shall execute and
deliver to such Holder a new Warrant or Warrants of like tenor for the balance
of the shares purchasable under this Warrant. Each stock certificate so
delivered shall be in such denominations of Common Stock as may be requested by
the Holder hereof and shall be registered in the name of such Holder or such
other name as shall be designated by such Holder, subject to the limitations
contained in Section 9.
2. Shares to be Fully Paid; Reservation of Shares. The Company covenants
and agrees that all shares of Common Stock which may be issued upon the exercise
of the rights represented by this Warrant, upon issuance, shall be duly
authorized, validly issued and, upon payment of the Exercise Price, will be
fully paid and nonassessable and free from all preemptive rights of any
shareholder and free of all taxes, liens, charges or other encumbrances with
respect to the issue thereof. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company shall at all times have authorized and reserved, for the
purpose of issue or transfer upon exercise of the rights evidenced by this
Warrant, a sufficient number of shares of authorized but unissued Common Stock,
or other securities and property, when and as required to provide for the
exercise of the rights represented by this Warrant. The Company shall take all
such action as may be necessary to assure that such shares of Common Stock may
be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of any domestic securities exchange upon
which the Common Stock may be listed. The Company shall not take any action
which would result in any adjustment (pursuant to Section 4 hereof) of the
Exercise Price if the total number of shares of Common Stock issuable after such
action, together with all shares of Common Stock then outstanding and then
issuable upon exercise of all options and all similar rights and upon the
conversion of all convertible securities then outstanding, would exceed the
total number of shares of Common Stock then authorized by the Company's
Certificate of Incorporation.
3. Payment of Exercise Price. Payment of the Exercise Price may be made in
cash or by check.
4. Adjustment of Exercise Price and Number of Shares. The Exercise Price
and/or the number and kind of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 4. Upon each adjustment of the Exercise
Price, the Holder of this Warrant shall thereafter be entitled to purchase, at
the Exercise Price resulting from such adjustment, the number of shares obtained
by multiplying the Exercise Price in effect immediately prior to such adjustment
by the number of shares purchasable pursuant hereto immediately prior to such
adjustment, and by dividing the product thereof by the Exercise Price resulting
from such adjustment.
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<PAGE> 16
4.1 Subdivision or Combination of Stock. In case the Company shall at any
time subdivide its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision shall
be proportionately reduced and, conversely, in case the outstanding shares of
Common Stock of the Company shall be combined into a smaller number of shares,
the Exercise Price in effect immediately prior to such combination shall be
proportionately increased.
4.2 Dividends or Distributions in Common Stock, Other Stock, or Property.
If at any time or from time to time the holders of Common Stock (or any shares
of capital stock or other securities at the time receivable upon the exercise of
this Warrant) shall have received or shall become entitled to receive, without
payment therefor,
(a) Common Stock or any shares of stock or other securities which are at
any time directly or indirectly convertible into or exchangeable for
Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other
distribution,
(b) any cash paid or payable otherwise than as a regular periodic cash
dividend at a rate which is substantially consistent with past
practice (or, in the case of an initial dividend, at a rate which is
substantially consistent with industry practice), or
(c) Common Stock or other or additional capital stock or other
securities or property (including cash) by way of spinoff, split-up,
or similar corporate distribution (other than shares of Common Stock
issued as a stock split, adjustments in respect of which shall be
covered by the terms of Section 4.1 above),
then, and in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and other property (including
cash in the cases referred to in clauses (b) and (c) above) which such Holder
would hold on the date of such exercise had it been the holder of record of such
Common Stock as of the date on which holders of Common Stock received or became
entitled to receive such Common Stock, additional capital stock, other
securities and/or other property.
4.3 Reorganization, Reclassification, Consolidation or Merger. If at any
time while this Warrant is outstanding there is effected any reorganization or
reclassification of the capital stock of the Company (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination of such capital stock), or any
consolidation or merger of the Company with or into another corporation or
entity (other than a consolidation or merger in which the Company is the
surviving corporation and in which there is no change in the Company's
outstanding Common Stock), or sale of all or substantially all of the Company's
assets, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions shall be made by
the Company whereby the Holder hereof shall thereafter have the right to
purchase and receive (in lieu of the shares of the
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<PAGE> 17
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of this Warrant) such shares of stock, securities, assets or
cash as may be issued or payable with respect to or in exchange for a 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
this Warrant. In any such case, appropriate provision shall be made by the
Company with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof (including, without limitation, provisions
for adjustments of the Exercise Price and of the number of shares purchasable
and receivable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities,
assets or cash thereafter deliverable upon the exercise hereof. The Company will
not effect any such consolidation, merger or sale unless, prior to the
consummation thereof, the successor or surviving 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 registered Holder hereof at the last address of such Holder
appearing on the books of the Company, the obligation to deliver to such Holder
such shares of stock, securities, assets or cash as, in accordance with the
foregoing provisions, such Holder may be entitled to purchase.
4.4 Notice of Adjustment. Upon any adjustment of the Exercise Price,
and/or any increase or decrease in the number of shares purchasable upon the
exercise of this Warrant, the Company shall obtain a certificate prepared by the
Company's independent accountants, stating the Exercise Price resulting from
such adjustment and/or the increase or decrease, if any, in the number of shares
purchasable upon the exercise of this Warrant, and setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based. The Company shall send a copy of such certificate to the Holder of this
Warrant, by first class mail, postage prepaid, at the address of such Holder as
shown on the books of the Company, promptly after the occurrence of the event
triggering an adjustment under this Section 4.
4.5 Other Notices. If at any time:
(a) the Company shall declare any cash dividend or distribution upon
shares of its Common Stock;
(b) the Company shall declare any dividend upon its Common Stock
payable in stock or make any special dividend or other distribution to the
holders of its Common Stock;
(c) the Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or other rights,
or shall offer any of its securities pursuant to a public offering;
(d) there shall be any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
or into, or sale of all or substantially all of its assets to, another
corporation;
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<PAGE> 18
(e) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(f) the Company shall take or propose to take any other action
notice of which is actually provided (or is required to be provided, pursuant to
any written agreement) to holders of Common Stock;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the Holder of this Warrant at the address of
such Holder as shown on the books of the Company, written notice setting forth
the principal terms of such event (i) at least thirty (30) days prior to the
date on which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for determining rights
to vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up or with respect to any
other action described in clause (f) above and (ii) in the case of any such
public offering, reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up or, in the case of any other action
described in clause (f) above, at least thirty (30) days prior to the date when
the same shall take place. Any notice given in accordance with the foregoing
clause (i) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto. Any notice given in accordance with the foregoing clause (ii)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up or upon any other action described
in clause (f) above, as the case may be.
4.6 Certain Events. If any change in the outstanding Common Stock of the
Company or any other event occurs as to which the other provisions of this
Section 4 are not strictly applicable or if strictly applicable would not fairly
protect the purchase rights of the Holder of this Warrant in accordance with the
essential intent and principles of such provisions, then the Board of Directors
of the Company shall make an adjustment in the number and class of shares
available under this Warrant and/or the Exercise Price and/or the application of
such provisions, in accordance with such essential intent and principles, so as
to protect such purchase rights as aforesaid.
5. Issue Tax. The issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made free of all liens and without charge
to the Holder of this Warrant for any issue or transfer taxes or other
incidental expenses in respect thereof (all of which taxes and expenses shall be
paid by the Company); provided, however, that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
6. Closing of Books. The Company will at no time close its transfer books
against the transfer of this Warrant or of any shares of Common Stock issued or
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.
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<PAGE> 19
7. No Voting Rights; Limitation of Liability. Nothing contained in this
Warrant shall be construed as conferring upon the Holder hereof the right to
vote or to consent as a shareholder in respect of meetings of shareholders for
the election of directors of the Company or any other matters or any rights
whatsoever as a shareholder of the Company. No provisions hereof, in the absence
of affirmative action by the Holder to purchase shares of Common Stock, and no
mere enumeration herein of the rights or privileges of the Holder hereof, shall
give rise to any liability of such holder for the Exercise Price or as a
shareholder of the Company, whether such liability is asserted by the Company or
by its creditors.
8. Registration Rights. The Holder hereof shall be entitled to the
registration rights set forth in Section 5 of the Agreement and to all of the
other rights set forth in Section 6 thereof.
9. Transferability of Securities; Compliance with Securities Act.
9.1 Transferability. This Warrant and the Warrant Shares shall be
transferable, in whole or in part, without charge to the Holder hereof (except
for transfer taxes), upon surrender of this Warrant accompanied by a properly
executed assignment in the form attached hereto, subject to the conditions
specified in this Section 9, which conditions are intended to ensure compliance
with the provisions of the Securities Act. Each Holder of this Warrant or of the
Warrant Shares will cause any proposed transferee of the Warrant or Warrant
Shares to agree to take and hold such securities subject to the provisions and
upon the conditions specified in this Section 9. Each Person to whom this
Warrant is transferred, in whole or in part, shall, as a condition to such
transfer, deliver to the Company a written instrument by which such transferee
agrees to be bound by the obligations imposed upon a Holder. Each taker and
Holder of this Warrant, by taking or holding the same, consents and agrees that
this Warrant, when endorsed in blank, shall be deemed negotiable, and that the
Holder hereof, when this Warrant shall have been so endorsed, may be treated by
the Company and all other Persons dealing with this Warrant as the absolute
owner hereof for any purpose and as the Person entitled to exercise the rights
represented by this Warrant; but until the transfer hereof on the books of the
Company, the Company may treat the registered owner hereof as the owner for all
purposes.
9.2 Restrictive Legend. Each certificate representing (i) the Warrant
Shares and (ii) any other securities issued in respect of the Warrant Shares or
capital stock issued upon any stock split, stock dividend, recapitalization,
merger, consolidation or similar event, shall (unless there is in effect a
registration statement under the Securities Act covering any proposed transfer
or such securities have been sold under Rule 144 or Rule 144A promulgated under
the Securities Act), be stamped or otherwise imprinted with a legend
substantially in the following form (in addition to any legend required under
applicable state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE OFFERED, SOLD OR
TRANSFERRED
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<PAGE> 20
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THE
SECURITIES REPRESENTED HEREBY IS SUBJECT TO THE CONDITIONS SPECIFIED
HEREIN.
9.3 Restrictions on Transfer. The Holder of this Warrant and each Person
to whom this Warrant is subsequently transferred represents and warrants to the
Company (by acceptance of such transfer) that it will not transfer the Warrant
(or securities issuable upon exercise hereof), except pursuant to (i) an
effective registration statement under the Securities Act or (ii) Rule 144 or
Rule 144A under the Securities Act (or any other rule under the Securities Act
relating to disposition of securities), or (iii) any applicable exemption from
registration under the Securities Act.
9.4 Rights and Obligations Survive Exercise of Warrant. The rights and
obligations of the holder of the Warrant Shares contained in Section 9 of this
Warrant and in the Agreement shall survive the exercise of this Warrant.
10. Modification and Waiver. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
11. Notices. Any notice, request or other document required or permitted
to be given or delivered to the Holder hereof or the Company shall be delivered
or shall be sent by certified or registered mail, postage prepaid, to each such
Holder at its address as shown on the books of the Company or to the Company at
the address indicated in the first paragraph of this Warrant or shall be sent by
facsimile transmission to any number provided by a Holder or the Company for the
purposes of this Section 11 or the Agreement.
12. Binding Effect on Successors. This Warrant shall be binding upon any
corporation or other entity succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets. All of the
obligations of the Company relating to the Warrant Shares shall survive the
exercise and termination of this Warrant. All of the covenants and agreements of
the Company shall inure to the benefit of the successors and assigns of the
Holder hereof. The Company will, at the time of the exercise of this Warrant, in
whole or in part, upon request of the Holder hereof but at the Company's
expense, acknowledge in writing its continuing obligation to the Holder hereof
in respect of any rights (including, without limitation, any right to
registration of the shares of Warrant Shares) to which the Holder hereof shall
continue to be entitled after such exercise in accordance with this Warrant;
provided, that the failure of the Holder hereof to make any such request shall
not affect the continuing obligation of the Company to the Holder hereof in
respect of such rights.
13. Descriptive Headings and Governing Law. The descriptive headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a
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<PAGE> 21
part of this Warrant. This Warrant shall be construed and enforced in accordance
with, and the rights of the parties shall be governed by, the laws of The
Commonwealth of Massachusetts.
14. Lost Warrants or Stock Certificates. The Company represents and
warrants to the Holder hereof that upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any Warrant or stock certificate and, in the case of any such loss, theft or
destruction, upon receipt of an indemnity reasonably satisfactory to the Company
(the unsecured agreement of indemnity of Fleet National Bank being satisfactory
for this purpose), or in the case of any such mutilation upon surrender and
cancellation of such Warrant or stock certificate, the Company at its expense
will make and deliver a new Warrant or stock certificate, of like tenor, in lieu
of the lost, stolen, destroyed or mutilated Warrant or stock certificate.
15. Fractional Shares. No fractional shares will be issued upon any
exercise of this Warrant and, in lieu thereof, the Holder will receive a sum in
cash equal to such fraction multiplied by the then fair market value of a share
of Common Stock of the Company, as reasonably determined by the Company's Board
of Directors.
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<PAGE> 22
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized, as of the 9th day of
October, 1997.
AUGMENT SYSTEMS, INC.
By:__________________________________
Name:
Title:
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<PAGE> 23
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
TO:
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ( ) shares of Common Stock of Augment Systems, Inc.
and herewith makes payment of Dollars ($ ), such payment to be made by
[describe method of payment of Exercise Price], and requests that the
certificates for such shares be issued and delivered as follows:
_______________________________________
_______________________________________
_______________________________________
The undersigned represents that it is acquiring such Common Stock for its
own account for investment and not with a view to or for sale in connection with
any distribution thereof (subject, however, to any requirement of law that the
disposition thereof shall at all times be within its control).
DATED:_________________
_______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
_______________________________
_______________________________
(Address)
<PAGE> 24
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned, the holder of the within Warrant,
hereby sells, assigns and transfers all of the rights of the undersigned under
the within Warrant, with respect to the number of shares of Common Stock covered
thereby set forth hereinbelow, unto:
<TABLE>
<CAPTION>
Name of Assignee(s) Address No. of Shares
------------------- ------- -------------
<S> <C> <C>
</TABLE>
Dated:
_______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
_______________________________
_______________________________
(Address)
<PAGE> 1
EXHIBIT 10.26
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement ("this Agreement") is made as of October
9, 1997 between Augment Systems, Inc., a Delaware corporation (the "Borrower")
and Fleet National Bank (the "Bank"). For good and valuable consideration,
receipt and sufficiency of which are hereby acknowledged, the Borrower and the
Bank act and agree as follows:
1. Reference is made to: (i) that certain letter agreement dated August 4,
1997 (the "Letter Agreement") between the Borrower and the Bank; (ii) that
certain $3,000,000 face principal amount promissory note dated August 4, 1997
(the "Revolving Note") made by the Borrower and payable to the order of the
Bank; (iii) that certain Inventory, Accounts Receivable and Intangibles Security
Agreement dated August 4, 1997 (the "IAR Security Agreement") given by the
Borrower to the Bank; (iv) that certain Supplementary Security Agreement -
Security Interest in Goods and Chattels dated August 4, 1997 (the "Supplementary
Security Agreement") given by the Borrower to the Bank; and (v) that certain
$750,000 original principal amount promissory note of even date herewith (the
"Bridge Note") made by the Borrower and payable to the order of the Bank. The
Letter Agreement, the IAR Security Agreement, the Supplementary Security
Agreement and Bridge Note are hereinafter collectively referred to as the
"Financing Documents".
2. The purpose of this Agreement is to provide for the suspension of the
revolving credit facility established by the Letter Agreement during the period
(the "Bridge Loan Period") commencing at the date hereof and ending on the
earlier of (i) the close of business on December 31, 1997, or (ii) the
satisfaction of both of the Resumption Conditions (defined below). During the
Bridge Loan Period, subject to the terms and conditions of the Letter Agreement
(as amended hereby), a $750,000 loan (the "Bridge Loan") will replace said
revolving credit facility. The Bridge Loan is being advanced in full at the date
hereof. If at any time on or before December 31, 1997 the Borrower raises
additional equity capital and satisfies both of the Resumption Conditions, the
revolving credit facility will be reinstated and all of the amendments set forth
in Sections 3, 5 and 6 below will be of no further force or effect; provided,
however, that, even after such reinstatement, (1) Section 3.8 of the Letter
Agreement will be deemed amended to provide that the Borrower's Capital Base (as
defined in the Letter Agreement) will at all times be at least $5,000,000, and
(2) the amendments to the Letter Agreement made in Paragraphs 3i and 3n below
will remain in effect. If the Borrower fails to satisfy both Resumption
Conditions on or prior to December 31, 1997, then the Borrower will have no
further right to obtain any loan or letter of credit under the Letter Agreement
and the Bridge Loan (including all interest thereon to the date of payment) will
become due and payable in full at the close of business on December 31, 1997. As
used herein, the "Resumption Conditions" are: (1) the repayment in full by the
Borrower of all principal of and interest on the Bridge Loan and (2) the
Borrower raising additional equity capital so that, after giving effect to such
repayment of the Bridge Loan, the Borrower's Capital Base is not less than
$5,000,000.
3. The Letter Agreement is hereby amended, effective during, but (except
with respect to Paragraphs 3i and 3n below) only during the Bridge Loan Period,
as follows:
<PAGE> 2
a. By deleting in its entirety clause (i) of Section 1.1 of the Letter
Agreement and by substituting in its stead the following:
"(i) that certain $750,000 face principal amount promissory note
(the `Bridge Note') dated October 9, 1997 issued by the Borrower and
payable to the order of the Bank,"
b. By deleting in their entireties Sections 1.2 and 1.3 of the Letter
Agreement and by substituting in their stead the following:
"1.2. Bridge Loan; Bridge Note. The Bank is this day making a loan
(the `Bridge Loan') to the Borrower in the original principal amount
of $750,000. The Bridge Loan is evidenced by the Bridge Note and
interest on the Bridge Loan will be payable at the times and at the
rate provided for in the Bridge Note. Overdue principal of the
Bridge Loan and, to the extent permitted by law, overdue interest
shall bear interest at a fluctuating rate per annum which at all
times shall be equal to the sum of (i) four (4%) percent per annum
plus (ii) the per annum rate otherwise payable under the Bridge Note
(but in no event in excess of the maximum rate from time to time
permitted by applicable law), compounded monthly and payable on
demand. The Borrower hereby irrevocably authorizes the Bank to make
or cause to be made, on a schedule attached to the Bridge Note or on
the books of the Bank, at or following the time of receiving any
payment of principal, an appropriate notation reflecting such
transaction and the then aggregate unpaid principal balance of the
Bridge Loan. The amount so noted shall constitute presumptive
evidence as to the amount owed by the Borrower with respect to
principal of the Bridge Loan. Failure of the Bank to make any such
notation shall not, however, affect any obligation of the Borrower
or any right of the Bank hereunder or under the Bridge Note. All
payments by the Borrower hereunder and/or in respect of the Bridge
Note shall be made net of any impositions or taxes and without
deduction, set-off or counterclaim, notwithstanding any claim which
the Borrower may now or at any time hereafter have against the Bank.
All payments of interest, principal and any other sum payable
hereunder and/or under the Bridge Note shall be made to the Bank, in
lawful money of the United States in immediately available funds, at
its offices at 75 State Street, Boston, MA 02109 or to such other
address as the Bank may from time to time direct. All payments
received by the Bank after 2:00 p.m. on any day shall be deemed
received as of the next succeeding Business Day. All monies received
by the Bank shall be applied first to fees, charges, costs and
expenses payable to the Bank under this letter agreement, the Bridge
Note and/or any of the other Loan Documents, next to interest then
accrued on account of the Bridge Loan and only thereafter to
principal of the Bridge Loan. All fees and interest payable
hereunder and/or under the Bridge Note will be calculated on the
basis of a 360-day year for the actual number of days elapsed.
- 2 -
<PAGE> 3
1.3. Principal Repayment. The Borrower shall repay in full the
Bridge Loan and all interest accrued thereon upon the first to occur
of (i) February 28, 1998 or (ii) an acceleration under ss.5.2(a)
following an Event of Default. The Borrower may repay, at any time,
without penalty or premium, the whole or any portion of the Bridge
Loan. Any amounts paid or prepaid with respect to principal of the
Bridge Loan will not be available for reborrowing."
c. By providing that, in the Letter Agreement generally, (i) all
references to a "Revolving Loan" or to the "Revolving Loans" will be deemed to
refer to the Bridge Loan and (ii) all references to the "Revolving Note" will be
deemed to refer to the Bridge Note.
d. By deleting in its entirety the second sentence of the first paragraph
of Section 1.4 of the Letter Agreement and by substituting in its stead the
following:
"The proceeds of the Bridge Loan will be used by the
Borrower solely for working capital purposes."
e. By deleting in its entirety Section 1.5 of the Letter Agreement.
f. By deleting in its entirety the last sentence of clause (iii) of
Section 3.6 of the Letter Agreement.
g. By deleting in its entirety subclause (B) of clause (iv) of Section 3.6
of the Letter Agreement.
h. By deleting in their entireties Sections 3.7-3.10, inclusive, of the
Letter Agreement.
i. By adding to Article III of the Letter Agreement, at the end of such
Article, the following:
"3.13. Warrants. The Borrower will issue to the Bank, as soon as
reasonably practicable, detachable warrants (the `Warrants') to
purchase 100,000 shares of the Borrower's common stock at an
exercise price of $1.00 per share. The Warrants will be issued for
no consideration other than the Bank's agreement to enter into the
October 9, 1997 amendments to this letter agreement and to make a
$750,000 bridge loan pursuant thereto. The Warrants will be in form
and substance satisfactory to the Bank, will have an exercise period
of 5 years and will be governed by a warrant purchase agreement (the
`Warrant Agreement') in form and substance satisfactory to the
Bank."
j. By deleting from clause (c) of Section 5.1 of the Letter Agreement the
references to Sections 3.7, 3.8, 3.9 and 3.10.
- 3 -
<PAGE> 4
k. By deleting in its entirety Section 5.4 of the Letter Agreement.
l. By deleting in its entirety Section 6.3 of the Letter Agreement;
provided that the amendment made by this paragraph will not become effective
until the Borrower has paid all commitment fees accrued through October 9, 1997.
m. By deleting from the fourth sentence of Section 6.7 of the Letter
Agreement the words "together with payment of the sum described in the fourth
sentence of ss.6.3".
n. By inserting into the definition of "Loan Documents" appearing in
Section 7.1 of the Letter Agreement, immediately after the words "Revolving
Note", the following:
"the Warrants, the Warrant Agreement,"
4. In order to induce the Bank to enter into this Agreement and to make
the Bridge Loan, the Borrower is paying to the Bank a non-refundable amendment
fee of $10,000. This fee is not to be reduced by or applied against any fees,
interest or other payments heretofore, now or hereafter required under the
Letter Agreement, the Revolving Note and/or the Bridge Note.
5. Wherever in any Financing Document, or in any certificate or opinion to
be delivered in connection therewith, reference is made to a "letter agreement"
or to the "Letter Agreement", from and after the date hereof same will be deemed
to refer to the Letter Agreement, as hereby amended.
6. Simultaneously with the execution and delivery of this Agreement, the
Borrower is executing and delivering to the Bank the Bridge Note, in
substitution of the Revolving Note. The Bridge Note is a $750,000 promissory
note of the Borrower, substantially in the form attached hereto as Exhibit 1.
Wherever in any of the Financing Documents or in any certificate or opinion to
be delivered in connection therewith, reference is made to a "Revolving Note",
from and after the date hereof same will be deemed to refer to the Bridge Note.
7. In order to induce the Bank to enter into this Agreement, the Borrower
further represents and warrants as follows:
a. The execution, delivery and performance of this Agreement and the
Bridge Note have been duly authorized by the Borrower by all necessary corporate
and other action, will not require the consent of any third party and will not
conflict with, violate the provisions of, or cause a default or constitute an
event which, with the passage of time or the giving of notice or both, could
cause a default on the part of the Borrower under its charter documents or
by-laws or under any contract, agreement, law, rule, order, ordinance,
franchise, instrument or other document, or result in the imposition of any lien
or encumbrance (except in favor of the Bank) on any property or assets of the
Borrower.
b. The Borrower has duly executed and delivered each of this Agreement and
the Bridge Note.
- 4 -
<PAGE> 5
c. Each of this Agreement and the Bridge Note is the legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
d. The statements, representations and warranties made in the Letter
Agreement and/or in the Security Agreement continue to be correct as of the date
hereof; except as amended, updated and/or supplemented by the attached
Supplemental Disclosure Schedule.
e. Giving effect to the amendments set forth in Section 3 above, the
covenants and agreements of the Borrower contained in the Letter Agreement
and/or in the Security Agreement have been complied with on and as of the date
hereof.
f. Giving effect to the amendments set forth in Section 3 above, no event
which constitutes or which, with notice or lapse of time, or both, could
constitute, an Event of Default (as defined in the Letter Agreement) has
occurred and is continuing.
g. Except as heretofore disclosed to the Bank in writing, no material
adverse change has occurred in the financial condition of the Borrower from that
disclosed in the annual financial statements of the Borrower dated December 31,
1996, heretofore furnished to the Bank.
8. Except as expressly affected hereby, the Letter Agreement and each of
the other Financing Documents remains in full force and effect as heretofore.
Without limitation of the foregoing, the IAR Security Agreement and the
Supplementary Security Agreement remain in full force and effect and secure
inter alia the Borrower's obligations under the Bridge Note and under the Letter
Agreement, as amended by this Agreement.
Executed, as an instrument under seal, as of the day and year first above
written.
AUGMENT SYSTEMS, INC.
By:__________________________________
Name:
Title:
Accepted and agreed:
FLEET NATIONAL BANK
By:________________________________
Name:
Title:
- 5 -
<PAGE> 1
EXHIBIT 10.27
AUGMENT SYSTEMS, INC.
A minimum of 6,000,000 and
a maximum of 9,000,000 Shares of Common Stock
SALES AGENCY AGREEMENT
Sunrise Securities Corp.
135 E. 57th Street
New York, New York 10022
December 8, 1997
Dear Sirs:
Augment Systems, Inc., a Delaware corporation (the "Company"), proposes to
offer for sale in a private offering (the "Offering") pursuant to Rule 506 of
Regulation D ("Regulation D") under the Securities Act of 1933, as amended (the
"Act"), a minimum of 6,000,000 (including "Affiliate Shares", as hereinafter
defined, if any) and a maximum of 9,000,000 shares of common stock, par value
$.01 per share (the "Shares"). This Offering is being made solely to "accredited
investors" as defined in Regulation D. This is to confirm our agreement
concerning your acting as our exclusive placement agent (the "Placement Agent")
in connection with the Offering.
The Company has prepared and has delivered to the Placement Agent copies
of a confidential private placement memorandum, dated December 8, 1997, relating
to, among other things, the Company, the Shares and the terms of the sale of the
Shares. Such confidential private placement memorandum, including all exhibits
thereto and all documents delivered therewith and incorporated by reference
therein, is referred to herein as the "Memorandum" unless such confidential
private placement memoranda or any such exhibits or documents shall be
supplemented or amended in accordance with this Agreement, in which event the
term "Memorandum" shall refer to such confidential private offering memorandum
and such exhibits and documents as so supplemented or amended from and after the
time of delivery to the Placement Agent of such supplement or amendment.
1. Appointment of Placement Agent.
On the basis of the representations and warranties contained herein, and
subject to the terms and conditions set forth herein, the Company hereby
appoints you as its Placement Agent and grants to you the exclusive right to
offer, as its agent, the Shares pursuant to the terms of this Agreement. On the
basis of such representations and warranties, and subject to such conditions,
<PAGE> 2
you hereby accept such appointment and agree to use your best efforts to secure
subscriptions to purchase a minimum of 6,000,000 and a maximum of 9,000,000
Shares pursuant to the terms of this Agreement. The agency created hereby is not
terminable by the Company except upon termination of the Offering pursuant to
the terms of this Agreement or upon expiration of the Offering Period (as
hereinafter defined) in accordance with the terms of this Agreement.
2. Terms of the Offering.
(a) A minimum of 6,000,000 and a maximum of 9,000,000 Shares shall be
offered for sale to prospective investors in this Offering ("Prospective
Investors") at a purchase price of $1.00 per share (the "Purchase Price") of the
Company's common stock, par value $.01 (the "Common Stock"). Officers, directors
and employees of the Company and the Placement Agent may purchase Shares on the
same terms and conditions as other investors (the "Affiliate Shares"). The
Affiliate Shares shall be included in determining whether the minimum and
maximum number of Shares have been subscribed for, and all references herein to
subscriptions from Prospective Investors shall be deemed to include the
Affiliate Shares.
(b) The Offering shall commence on the date hereof and shall expire at
5:00 P.M., New York time, on January 31, 1998, unless extended from time to time
for up to an aggregate of 30 days by mutual agreement of the Company and the
Placement Agent. Such period, as the same may be so extended, shall hereinafter
be referred to as the "Offering Period".
(c) Each Prospective Investor who desires to purchase Shares shall be
required to deliver to the Placement Agent one copy of a subscription agreement
in the form annexed to the Memorandum (a "Subscription Agreement"), including
the investor questionnaire, and payment in the amount necessary to purchase the
number of Shares such Prospective Investor desires to purchase. The Placement
Agent shall not have any obligation to independently verify the accuracy or
completeness of any information contained in any Subscription Agreement or the
authenticity, sufficiency or validity of any check or other form of payment
delivered by any Prospective Investor in payment for Shares.
(d) Pursuant to an Escrow Agreement, dated as of December 8, 1997 (the
"Escrow Agreement"), the Placement Agent has established a special account with
the United States Trust Company of New York (the "Escrow Agent") entitled
"Augment Systems, Inc. - Escrow Account" (the "Special Account"). The Placement
Agent shall deliver each check received from a Prospective Investor to the
Escrow Agent for deposit in the Special Account and shall deliver the executed
copy of the Subscription Agreement received from such Prospective Investor to
the Company. The Company shall notify the Placement Agent promptly of the
acceptance or rejection of any subscription. The Company shall not unreasonably
reject any subscription.
(e) If subscriptions to purchase at least 6,000,000 Shares are not
received from Prospective Investors prior to the expiration of the Offering
Period and accepted by the Company, the Offering shall be canceled, all funds
received by the Escrow Agent on behalf of the Company shall be refunded in full
with interest, and this Agreement and the agency created hereby shall be
terminated without any further obligation on the part of either party, except as
provided in Section 10 hereof.
- 2 -
<PAGE> 3
(f) Pursuant to a Stock Escrow Agreement to be entered into on or prior to
the Closing Date (the "Stock Escrow Agreement"), certain stockholders of the
Company will place their shares of Common Stock into escrow with the Escrow
Agent. These shares will remain in escrow until certain conditions as described
therein have been satisfied, at which point, the Company and the Placement Agent
shall deliver a letter to the Escrow Agent notifying it of the termination of
the Stock Escrow Agreement.
(g) You may engage other persons selected by you to assist you in the
Offering (each such person being hereinafter referred to as a "Selected Dealer")
and you may allow such persons such part of the compensation payable to you
hereunder as you shall determine. Each Selected Dealer shall be required to
agree in writing to comply with the provisions of, and to make the
representations, warranties and covenants contained in Sections 5(b) and 6(b)
hereof by executing a form of Selected Dealer Agreement attached hereto as
Exhibit I. On or prior to the Closing (as hereinafter defined), the Placement
Agent shall deliver a copy of each executed Selected Dealer Agreement to the
Company. By executing this Agreement, the Company hereby agrees to make, and is
deemed to make, the representations and warranties to, and covenants and
agreements with, each Selected Dealer (including an agreement to indemnify such
Selected Dealer under Section 9 hereof) who has executed the Selected Dealer
Agreement as are contained in this Agreement.
3. Closing.
(a) Subject to the conditions set forth in Section 8 hereof, if
subscriptions to purchase at least 6,000,000 Shares have been received prior to
the expiration of the Offering Period and accepted by the Company, the initial
closing under this Agreement (the "Closing") shall be held at the offices of
Squadron, Ellenoff, Plesent & Sheinfeld, LLP ("SEP&S"), 551 Fifth Avenue, New
York, New York, at 10:00 A.M., New York time, on the third business day
following the date upon which the Placement Agent receives notice from the
Company that subscriptions to purchase at least 6,000,000 Shares (including
Affiliate Shares) have been so accepted or at such other place, time and/or date
as the Company and the Placement Agent shall agree upon. The Company shall
provide the notice required by the preceding sentence as promptly as
practicable. The date upon which the Closing is held shall hereinafter be
referred to as the "Closing Date."
(b) Subject to the conditions set forth in Section 8 hereof, if,
subsequent to the date the subscriptions referred to in Section 3(a) hereof are
received and accepted and prior to the expiration of the Offering Period,
additional subscriptions to purchase Shares are received from Prospective
Investors, which subscriptions are accepted by the Company, one or more
additional closings under this Agreement (each, an "Additional Closing") shall
be held at the offices of SEP&S at 10:00 A.M., New York time, on the third
business day following the date upon which the Placement Agent receives notice
from the Company that additional subscriptions have been so accepted, or at such
other place, time or date as the Company and the Placement Agent shall agree
upon. The Company shall notify the Placement Agent as promptly as practicable
whether any additional subscriptions so received have been accepted. The date
upon which any Additional Closing is held shall hereinafter be referred to as an
"Additional Closing Date."
Notwithstanding anything contained here into the contrary, in no event
shall the Company accept subscriptions to purchase in excess of 9,000,000 Shares
including Affiliate Shares.
- 3 -
<PAGE> 4
(c) At the Closing, or an Additional Closing, as the case may be, the
Company shall instruct the Escrow Agent to pay to the Placement Agent at the
Closing or an Additional Closing, from the funds deposited in the Special
Account in payment for the Shares, the amounts payable to the Placement Agent
pursuant to Section 4 of this Agreement. Promptly after the Closing Date, or an
Additional Closing Date, as the case may be, the Company shall deliver to the
purchasers of Shares certificates representing the Shares to which they are
entitled.
4. Compensation.
(a) If subscriptions to purchase at least 6,000,000 Shares (including
Affiliate Shares) are received from Prospective Investors prior to the
expiration of the Offering Period and accepted by the Company, you shall be
entitled, as compensation for your services as Placement Agent under this
Agreement, to an amount equal to 10% of the gross proceeds received by the
Company from the sale of the Shares. Such compensation is payable by the Company
on the Closing Date, or an Additional Closing Date, as the case may be, with
respect to the Shares sold on such date and may be paid, at the Placement
Agent's option, in part or in whole, in shares of the Common Stock, valued at
$.90 per share, provided, however, that any such shares of Common Stock shall
not be included in the calculation of the minimum or the maximum number of
Shares offered for sale to prospective investors in the Offering. Any such
shares of Common Stock issued pursuant to this paragraph shall be subject to the
identical registration rights granted pursuant to the Registration Rights
Agreement (as defined below) to investors in the Offering.
(b) If subscriptions to purchase at least 6,000,000 Shares (including
Affiliate Shares) have been received from Prospective Investors prior to the
expiration of the Offering Period and accepted by the Company, the Company shall
issue to you or, at your discretion, your Selected Dealers or your designees, in
addition to the amount set forth in Section 4(a) above, warrants (individually,
a "Warrant" and collectively, the "Warrants") to purchase a number of Shares of
the Company equal to 10% of the aggregate number of Shares issued in the
Offering including Shares issued, if any, to the Placement Agent in satisfaction
of its selling commission or the non-accountable expense allowance. Each Warrant
will entitle the holder thereof for a five-year period commencing on the first
anniversary of the Closing Date or any Additional Closing Date as the case may
be, to purchase one share of Common Stock of the Company at an exercise price
equal to the Purchase Price per share (the "Warrant Shares"). The Warrants shall
be in the form attached hereto as Exhibit II.
(c) Notwithstanding anything contained herein to the contrary, the number
of Shares upon which the commission provided for in Section 4(a) and the
Warrants described in Section 4(b) shall be based shall include Shares with
respect to which the Company unreasonably rejected subscriptions.
- 4 -
<PAGE> 5
(d) If the Offering is terminated by the Company (i) during the Offering
Period (provided you are actively pursuing the Offering during such period),
(ii) during the 30 day extension period (provided you are actively pursuing the
Offering during such period), or (iii) at the completion of the Offering
(provided that you shall have obtained offers to purchase at least the required
minimum), and within six months after such termination, the Company completes
the sale of any of its equity securities (including securities convertible into
equity securities) for cash, other than in connection with exercise of existing
options, strategic alliances or pursuant to a transaction incident to a sale of
the Company, then in any such case, the Company shall pay to you 10% of the
gross sales price of such securities and shall issue to you, on the terms set
forth in Section 4, warrants to purchase 10% of the securities so sold.
5. Representations and Warranties.
(a) Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Placement Agent and the Selected Dealers
that:
(i) The Memorandum, as supplemented or amended from time to time, at
all times during the period from the date hereof to and including the later of
the Closing Date and the expiration of the Offering Period, and the last
Additional Closing Date (if any), does not, and during such period will not,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, all in light of the circumstances under which they were made.
Each contract, agreement, instrument, lease, license or other document described
in the Memorandum has been accurately described therein in all material
respects.
(ii) No document provided by the Company to Prospective Investors
pursuant to Section 6(a)(vii) hereof, and no oral information provided by the
Company to Prospective Investors, will contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. Contracts to which
the Company is a party provided by the Company to Prospective Investors shall
not be deemed to contain any untrue statement of a material fact or to omit to
state any material fact if the contract so provided is a true, correct and
complete copy of such contract, as amended or modified through the date it is so
provided.
(iii) The Company has not, directly or indirectly, solicited any
offer to buy or offered to sell any Shares or any other securities of the
Company during the twelve-month period ending on the date hereof except as may
be described in the Memorandum or which would not be integrated with the sale of
the Shares in a manner that would require the registration of the Offering
pursuant to the Act and has no present intention to solicit any offer to buy or
offer to sell any Shares or any other securities of the Company other than
pursuant to this Agreement or pursuant to a registered public offering of the
Company's securities which may be commenced after the completion of the
Offering.
(iv) The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware, with full power
and authority, and all necessary consents, authorizations, approvals, orders,
licenses, certificates, and permits of and from, and declarations and filings
with (collectively, "Consents"), all federal, state, local, foreign, and other
governmental authorities and all courts and other tribunals, to own, lease,
license and use its
- 5 -
<PAGE> 6
properties and assets and to carry on its business in the manner described in
the Memorandum, except where the failure to have obtained such Consents would
not have a material adverse effect on the Company and the Company has not
received any notice of proceedings relating to the revocation or modification of
any such consent, authorization, approval, order, license certificate, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding would result in a material adverse change in the financial
condition, results of operations, business, properties, assets, liabilities or
future prospects of the Company. The Company is duly qualified to do business
and is in good standing in every jurisdiction in which its ownership, leasing,
licensing or use of property and assets or the conduct of its business makes
such qualification necessary. The Company does not have any subsidiaries.
(v) The Company has, as of the date hereof, an authorized and
outstanding capitalization as set forth in the Memorandum. Each outstanding
share of capital stock of the Company is duly authorized, validly issued, fully
paid and nonassessable and has not been issued and is not owned or held in
violation of any preemptive rights set forth in the Company's Certificate of
Incorporation or By-laws, each as amended to date, or any agreement to which the
Company is a party. There is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the issuance of, any
share of capital stock of the Company or any security or other instrument which
by its terms is convertible into, exercisable for or exchangeable for shares of
capital stock of the Company, except as may be described in the Memorandum.
There is outstanding no security or other instrument which by its terms is
convertible into or exchangeable for any class of share of capital stock of the
Company, except as may be described in the Memorandum. The capital stock of the
Company conforms to the description thereof contained in the Memorandum.
(vi) The financial statements of the Company included in the
Memorandum (by incorporation by reference or otherwise) fairly present the
financial position, the results of operations, cash flows and the other
information purported to be shown therein at the respective dates and for the
respective periods to which they apply. Such financial statements have been
prepared in accordance with United States generally accepted accounting
principles consistently applied throughout the periods involved, are correct and
complete and are in accordance with the books and records of the Company. The
selected financial data set forth under the caption "Selected Financial Data" in
the Company's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1997 ("Form 10-QSB") fairly presents on the basis stated in the Form 10- QSB
the information included therein. There has at no time been a material adverse
change in the financial condition, results of operations, business, properties,
assets, liabilities or future prospects of the Company from the latest
information set forth in the Memorandum, except as may be described in the
Memorandum as having occurred.
(vii) The financial projections provided to the Placement Agent were
prepared by the management of the Company and reflect management's best
estimates of future performance based upon assumptions which management believes
were reasonable and fair at the time of preparation in context of the Company's
history and current and reasonably foreseeable business conditions.
(viii) There is no litigation, arbitration, governmental or other
proceeding (formal or informal) or claim or investigation pending or, to the
knowledge of the Company, threatened with respect to the Company or any of its
operations, businesses, properties or assets, except as may
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<PAGE> 7
be described in the Memorandum or such as individually or in the aggregate do
not now have and will not in the future have a material adverse effect upon the
operations, business, properties or assets of the Company. The Company is not in
violation of, or in default with respect to, any law, rule, regulation, order,
judgment or decree, except as may be described in the Memorandum or such as in
the aggregate do not now have and will not in the future have a material adverse
effect upon the operations, business, properties, assets or future prospects of
the Company.
(ix) Any real property and buildings held under lease by the Company
are held by it under valid, subsisting and enforceable leases with such
exceptions as in the aggregate are not material.
(x) Neither the Company, nor, to the knowledge of the Company, any
other party, is in violation or breach of or in default with respect to,
complying with any material provision of any contract, agreement, instrument,
lease, license, arrangement or understanding which is material to the Company,
and each such contract, agreement, instrument, lease, license, arrangement and
understanding is in full force and effect and is the legal, valid and binding
obligation of the parties thereto enforceable as to them in accordance with its
terms (subject to applicable bankruptcy, insolvency and other laws affecting the
enforceability of creditors' rights generally and to general equitable
principles). Except as described in the Memorandum, the Company enjoys peaceful
and undisturbed possession under all real property leases under which it is
operating. The Company is not in violation or breach of, or in default with
respect to, any term of its Certificate of Incorporation or its By-laws, each as
amended to date.
(xi) There is no right under any patent, patent application,
trademark, trademark application, trade name, service mark, copyright, franchise
or other intangible property or asset (all of the foregoing being herein called
"Intangibles") necessary to the business of the Company as presently conducted
or as the Memorandum indicates it contemplates conducting, except as may be so
designated in the Memorandum and which the Company has the right or license to
use as necessary. To the Company's knowledge, except as described in the
Memorandum, the Company has not infringed nor is it infringing with respect to
Intangibles of others, and the Company has not received notice of infringement
with respect to asserted Intangibles of others. Except as described in the
Memorandum, there is no Intangible of others which has had or may in the future
have a materially adverse effect on the financial condition, results of
operations, business, properties, assets, liabilities or future prospects of the
Company.
(xii) The Company has all requisite power and authority to execute,
deliver and perform this Agreement, the Warrants, the Subscription Agreements,
the Escrow Agreement, the Stock Escrow Agreement and the Registration Rights
Agreement made by the Company for the benefit of purchasers of Shares (the
"Registration Rights Agreement") (collectively, the "Operative Agreements") and
to consummate the transactions contemplated by the Operative Agreements. All
necessary corporate proceedings of the Company have been duly taken to authorize
the execution, delivery and performance by the Company of the Operative
Agreements. This Agreement, the Escrow Agreement and the Stock Escrow Agreement
have been duly authorized, executed, and delivered by the Company, are the
legal, valid and binding obligations of the Company and are enforceable as to
the Company in accordance with their terms (subject to applicable bankruptcy,
insolvency and other laws affecting the enforceability of creditors' rights
generally and to general equitable principles). The Subscription Agreements and
the Registration Rights Agreement have been duly authorized by the Company and,
when executed and delivered by the Company, will be
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<PAGE> 8
the legal, valid and binding obligations of the Company enforceable against it
in accordance with their respective terms (subject to applicable bankruptcy,
insolvency and other laws affecting the enforceability of creditors' rights
generally and to general equitable principles). No consent, authorization,
approval, order, license, certificate or permit of or from, or registration,
qualification, declaration or filing with, any federal, state, local, foreign or
other governmental authority or any court or other tribunal is required by the
Company for the execution, delivery or performance by the Company of the
Operative Agreements or the consummation of the transactions contemplated by the
Operative Agreements, except (A) the filing of a Notice of Sales of Securities
on Form D pursuant to Regulation D and (B) such consents, authorizations,
approvals, registrations and qualifications as may be required under securities
or "blue sky" laws in connection with the issuance, sale and delivery of the
Shares pursuant to this Agreement. No consent of any party to any contract,
agreement, instrument, lease, license, arrangement or understanding to which the
Company is a party or to which any of their properties or assets are subject is
required for the execution, delivery or performance of the Operative Agreements
or the consummation of the transactions contemplated by the Operative
Agreements, which has not been or will not be obtained prior to the Closing or
any Additional Closings and the execution, delivery and performance of the
Operative Agreements, and the consummation of the transactions contemplated by
the Operative Agreements, will not violate, result in a breach of, conflict with
or (with or without the giving of notice or the passage of time or both) entitle
any party to terminate or call a default under any such contract, agreement,
instrument, lease, license, arrangement or understanding (except for any such
violation, breach or conflict which has been properly waived thereunder),
violate or result in a breach of any term of the Company's Certificate of
Incorporation or By-laws, each as amended to date, or violate, result in a
breach of or conflict with any law, rule, regulation, order, judgment or decree
binding on the Company, or to which any of its operations, businesses,
properties or assets are subject.
(xiii) The Shares, the Warrants and the Warrant Shares conform to
all statements relating thereto contained in the Memorandum. The Shares, when
issued and delivered to the subscribers therefor, pursuant to the terms of this
Agreement and the Subscription Agreements, and the Warrant Shares, when issued
and delivered pursuant to the terms of the Warrants, shall be duly authorized,
validly issued, fully paid and nonassessable and shall not have been issued in
violation of any preemptive rights set forth in the Company's Certificate of
Incorporation or By-laws, each as amended to date, or any agreement to which the
Company is a party.
(xiv) Subsequent to the dates as of which information is given in
the Memorandum, and except as may otherwise be properly described in the
Memorandum, (A) the Company has not, except in the ordinary course of business,
incurred any liability or obligation, primary or contingent, for borrowed money,
(B) there has not been any material change in the capital stock, short-term debt
or long-term debt of the Company, (C) the Company has not entered into any
transaction not in the ordinary course of business, (D) the Company has not
purchased any of its outstanding capital stock nor declared or paid any dividend
or distribution of any kind on its capital stock, (E) the Company has not
sustained any material loss or interference with its businesses or properties
from fire, flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental proceeding
or (F) there has not been any material adverse change, or any development which
the Company reasonably believes could result in a prospective material adverse
change, in the financial condition results of operations, business, properties,
assets, liabilities or future prospects of the Company, except in each case as
described in or contemplated by the Memorandum.
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<PAGE> 9
(xv) Neither the Company nor, to the knowledge of the Company, any
of its affiliates has, directly or through any agent, sold, offered for sale or
solicited offers to buy, nor will any of the foregoing directly buy (other than
pursuant to the Offering) any security of the Company, as defined in the Act,
which is or will be integrated with the sale of the Shares, the Warrants or the
Warrant Shares in a manner that would require the registration, pursuant to the
Act, of the Offering.
(xvi) The Company has not, directly or indirectly, taken any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares or sold, bid for, purchased, or paid anyone any compensation for
soliciting purchases of, the Shares.
(xvii) The Company has good and marketable title to all real and
personal property owned by it, in each case free and clear of any security
interests, liens, encumbrances, equities, claims and other defects, except such
as do not materially and adversely affect the value of such property and do not
interfere with the use made or proposed to be made of such property by the
Company, and any real property and buildings held under lease by the Company are
held under valid, subsisting and enforceable leases, with such exceptions as are
not material and do not interfere with the use made or proposed to be made of
such property and buildings by the Company, in each case except as described in
or contemplated by the Memorandum.
(xviii) No labor dispute with the employees of the Company exists or
is threatened or imminent that could result in a material adverse change in the
financial condition results of operations, business, properties, assets,
liabilities or future prospects of the Company, except as described in or
contemplated by the Memorandum.
(xix) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which they are engaged; the Company has not
been refused any insurance coverage sought or applied for; and the Company has
no reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
insurers of recognized financial responsibility as may be necessary to continue
its business at a cost that would not materially and adversely affect the
financial condition results of operations, business, properties, assets,
liabilities or future prospects of the Company, except as described in or
contemplated by the Memorandum.
(xx) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse affect on the Company; and has paid all taxes required to be paid by it
and any other assessment, fine or penalty levied against it to the extent that
any of the foregoing is due and payable, except for any such assessment, fine or
penalty that is currently being contested in good faith or as described in or
contemplated by the Memorandum.
(xxi) The Company is not in violation of any federal or state law or
regulation relating to occupational safety and health or to the storage,
handling or transportation of hazardous or toxic materials and the Company has
received all permits, licenses or other approvals required of it under
applicable federal and state occupational safety and health and environmental
laws and
- 9 -
<PAGE> 10
regulations to conduct its business, and the Company is in compliance with all
terms and conditions of any such permit, license or approval, except any such
violation of law or regulation, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals which would not, singly or in the aggregate,
result in a material adverse change in the financial condition, results of
operations, business, properties, assets, liabilities or future prospects of the
Company, except as described in or contemplated by the Memorandum.
(xxii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (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 the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxiii) No default by the Company exists, and no event has occurred
which, with notice or lapse of time or both, would constitute a default by the
Company in the due performance and observance of any term, covenant or condition
of any contract, agreement, instrument, lease, license, arrangement or
understanding to which the Company is a party or by which the Company or any of
its properties is bound or may be affected in any material adverse respect with
regard to property, business or operations of the Company.
(xxiv) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(b) Representations and Warranties of the Placement Agent and Selected
Dealers. The Placement Agent, and each Selected Dealer that the Placement Agent
may from time to time appoint, by signing the Selected Dealer Agreement, hereby
represent and warrant to, and agree with, the Company and each other as to
themselves only as follows:
(i) Neither the Placement Agent nor any Selected Dealer will offer
or sell any Shares to any investor which the Placement Agent or such Selected
Dealer did not have reasonable grounds to believe and did not believe, was an
"accredited investor".
(ii) Neither the Placement Agent nor any Selected Dealer will offer
or sell any Shares by means of any form of general solicitation or general
advertising, including, without limitation, the following:
(A) any advertisement, article, notice or other communication
published in any newspaper, magazine or similar medium or broadcast over
television or radio; and
(B) any seminar or meeting whose attendees have been invited
by any general solicitation or general advertising.
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<PAGE> 11
(iii) The Placement Agent and each Selected Dealer is a member in
good standing of the National Association of Securities Dealers, Inc. or a
registered representative thereof.
(iv) The representations and warranties contained in the Certificate
of Selected Dealer attached to the form of Selected Dealer Agreement are true
and correct as to the Selected Dealer which executed such Certificate and are
true and correct as to the Placement Agent as if it had executed such a
certificate.
(v) Each of the Placement Agent and each Selected Dealer has all
requisite power and authority to execute, deliver and perform this Agreement and
to consummate the transactions contemplated hereby. All necessary corporate
proceedings of the Placement Agent and each Selected Dealer have been duly taken
to authorize the execution, delivery and performance by the Placement Agent and
each Selected Dealer of this Agreement. This Agreement has been duly authorized,
executed, and delivered by the Placement Agent and each Selected Dealer and is
the legal, valid and binding obligation of the Placement Agent and each Selected
Dealer in accordance with its terms (subject to applicable bankruptcy,
insolvency and other laws affecting the enforceability of creditors' rights
generally and to general equitable principles).
6. Covenants.
(a) Covenants of the Company. The Company covenants to the Placement Agent
and each Selected Dealer that it will:
(i) Notify you immediately, and confirm such notice promptly in
writing, (A) when any event shall have occurred during the period commencing on
the date hereof and ending on the later of the Closing Date, the expiration of
the Offering Period and the last Additional Closing Date (if any) as a result of
which the Memorandum would include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (B) of the receipt of any
notification with respect to the modification, rescission, withdrawal or
suspension of the qualification or registration of the Shares or of an exemption
from such registration or qualification in any jurisdiction. The Company will
use its best efforts to prevent the issuance of any such modification,
rescission, withdrawal or suspension and, if any such modification, rescission,
withdrawal or suspension is issued and you so request, to obtain the lifting
thereof as promptly as possible.
(ii) Not supplement or amend the Memorandum unless you shall have
approved of such supplement or amendment in writing. If, at any time during the
period commencing on the date hereof and ending on the later of the Closing
Date, the expiration of the Offering Period or the last Additional Closing Date
(if any), any event shall have occurred as a result of which the Memorandum
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
not misleading, or if, in the opinion of counsel to the Company or counsel to
the Placement Agent, it is necessary at any time to supplement or amend the
Memorandum to comply with the Act, Regulation D or any applicable securities or
"blue sky" laws, the Company will promptly prepare an appropriate supplement or
amendment (in form and substance satisfactory to you) which will correct such
statement or omission or which will effect such compliance.
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<PAGE> 12
(iii) Deliver without charge to the Placement Agent such number of
copies of the Memorandum and any supplement or amendment thereto as may
reasonably be requested by the Placement Agent.
(iv) Not, directly or indirectly, solicit any offer to buy from, or
offer to sell to any person any Shares except through the Placement Agent.
(v) Not solicit any offer to buy or offer to sell Shares by any form
of general solicitation or advertising, including, without limitation, any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar medium or broadcast over television or radio or
any seminar or meeting whose attendees have been invited by any general
solicitation or advertising.
(vi) Use its best efforts to qualify or register the Shares for
offering and sale under, or establish an exemption from such qualification or
registration under, the securities or "blue sky" laws of such jurisdictions as
you may reasonably request. The Company will not consummate any sale of Shares
in any jurisdiction or in any manner in which such sale may not be lawfully
made.
(vii) At all times during the period commencing on the date hereof
and ending on the later of the Closing Date, the expiration of the Offering
Period and the last Additional Closing Date (if any), provide to each
Prospective Investor or his purchaser representative, if any, on request, such
information (in addition to that contained in the Memorandum) concerning the
Offering, the Company and any other relevant matters as it possesses or can
acquire without unreasonable effort or expense and extend to each Prospective
Investor or his purchaser representative, if any, the opportunity to ask
questions of, and receive answers from, the Company concerning the terms and
conditions of the Offering and the business of the Company and to obtain any
other additional information, to the extent it possesses the same or can acquire
it without unreasonable effort or expense, as such Prospective Investor or
purchaser representative may consider necessary in making an informed investment
decision or in order to verify the accuracy of the information furnished to such
Prospective Investor or purchaser representative, as the case may be.
(viii)Before accepting any subscription to purchase Shares from, or
making any sale to, any Prospective Investor, have reasonable grounds to believe
and actually believe that (A) such Prospective Investor meets the suitability
requirements for investing in the Shares set forth in the Memorandum and (B)
such Prospective Investor is an accredited investor.
(ix) Notify you promptly of the acceptance or rejection of any
subscription. The Company shall not unreasonably reject any subscription for
Shares unless it pays the Placement Agent its compensation pursuant to Section 4
with respect thereto. Any subscription unreasonably rejected shall be deemed to
have been accepted for purposes of determining whether at least 6,000,000 Shares
(including Affiliate Shares) have been sold solely for the purpose of
determining whether the Placement Agent is entitled to its compensation pursuant
to Section 4 hereof and this subsection (ix).
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<PAGE> 13
(x) File five (5) copies of a Notice of Sales of Securities on Form
D with the Securities and Exchange Commission (the "Commission") no later than
15 days after the first sale of the Shares and file a final notice on Form D
with the Commission no later than 60 days after the last sale of Shares. The
Company shall file promptly such amendments to such Notices on Form D as shall
become necessary and shall also comply with any filing requirement imposed by
the laws of any state or jurisdiction in which offers and sales are made. The
Company shall furnish you with copies of all such filings.
(xi) Place the following legend on all certificates representing the
Shares and the Warrants:
"The securities represented hereby have not been registered
under the Securities Act of 1933, as amended or any state securities
laws and neither the securities nor any interest therein may be
offered, sold, transferred, pledged or otherwise disposed of except
pursuant to an effective registration statement under such act or
such laws or an exemption from registration under such act and such
laws which, in the opinion of counsel for the holder, which counsel
and opinion are reasonably satisfactory to counsel for this
corporation, is available."
(xii) Not, directly or indirectly, engage in any act or activity
which may jeopardize the status of the offering and sale of the Shares as exempt
transactions under the Act or under the securities or "blue sky" laws of any
jurisdiction in which the Offering may be made. Without limiting the generality
of the foregoing, and notwithstanding anything contained herein to the contrary,
the Company shall not, during the six (6) months following completion of the
Offering, (A) directly or indirectly, engage in any offering of securities
which, if integrated with the Offering in the manner prescribed by Rule 502(a)
of Regulation D and applicable releases of the Commission, may jeopardize the
status of the Offering and sale of the Shares as exempt transactions under
Regulation D or (B) engage in any offering of securities, without the opinion of
counsel reasonably satisfactory to the Placement Agent, to the effect that such
offering would not result in integration with this Offering, or if integration
would so result, that such integration would not jeopardize the status of this
Offering as an exempt transaction under Regulation D.
(xiii) Apply the net proceeds from the sale of the Shares for the
purposes set forth under the caption "Use of Proceeds" in the Memorandum in
substantially the manner indicated thereunder.
(xiv) Not, during the period commencing on the date hereof and
ending on the later of the Closing Date, the expiration of the Offering Period
and the last Additional Closing Date (if any), issue any press release or other
communication or hold any press conference with respect to the Company, its
financial condition, results of operations, business, properties, assets,
liabilities or future prospects or the Offering, without your prior written
consent.
(xv) Not, for a period of 12 months if the minimum number of Shares
is sold, or 18 months if the maximum number of Shares is sold, from the
effective date (the "Effective Date")
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<PAGE> 14
on which on which the registration statement pursuant to which the Shares sold
in the Offering are registered, as the same may be amended from time to time
shall have been declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended, without your prior written
consent, offer, issue, sell, contract to sell, grant any option for the sale of
or otherwise dispose of, directly or indirectly, any shares of Common Stock (or
any security or other instrument which by its terms is convertible into,
exercisable for, or exchangeable for shares of Common Stock), except for (A) the
securities issuable under this Agreement or the Warrants, (B) shares of Common
Stock issuable upon the exercise of stock options under any stock option plan of
the Company, warrants and other commitments, each of which are outstanding on
the date hereof and which are described in the Memorandum, (C) options granted
after the date hereof under existing stock option plans, provided that the
shares underlying the options granted to certain officers and directors of the
Company are subject to the lock-up provided in Section 8(g) hereof and (D)
securities disposed of in strategic alliances. Additionally, for a period of 24
months after the date hereof the Company will not, without your prior written
consent, change any terms of the Company's outstanding stock options or
warrants.
(xvi) For a period of five years after the date hereof, furnish you,
without charge, the following:
(A) within 90 days after the end of each fiscal year, three
(3) copies of financial statements certified by independent certified public
accountants, including a balance sheet, statement of income and statement of
cash flows of the Company and its then existing subsidiaries, with supporting
schedules, prepared in accordance with generally accepted accounting principles,
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<PAGE> 15
as at the end of such fiscal year and for the 12 months then ended, which may be
on a consolidated basis, copies of which financial statements shall also be
furnished to the purchasers in this Offering and, within 45 days after the end
of each fiscal quarter, three (3) copies of unaudited interim financial
statements, as at the end of such quarter and for the three (3) months then
ended;
(B) as soon as practicable after they have been sent to
stockholders of the Company or filed with the Commission, three (3) copies of
each annual and interim financial and other report or communication sent by the
Company to its stockholders or filed with the Commission; and
(C) as soon as practicable, two copies of every press release
and every material news item and article in respect of the Company or its
affairs which was released by the Company.
(xvii)Comply in all respects with its obligations under the
Operative Agreements.
(xviii) Not, prior to the completion of the Offering, bid for,
purchase, attempt to induce others to purchase, or sell, directly or indirectly,
any Shares or any other securities of the Company of the same class and series
as the Shares in violation of the provisions of Regulation M under the Exchange
Act.
(xix) For a period of two years from the Closing Date, the Company
shall use its best efforts to cause two individuals selected by the Placement
Agent to be elected as directors of the Company. Such directors shall be
entitled to receive reimbursement for expenses and shall be compensated in the
same manner as the other directors of the Company. Such directors shall be
indemnified to the same extent as the other directors of the Company.
(b) Covenants of the Placement Agent and Selected Dealers.
(i) Neither the Placement Agent nor any Selected Dealer, by signing
the Selected Dealer Agreement, will accept the subscription of any person unless
immediately before accepting such subscription the Placement Agent or such
Selected Dealer has reasonable grounds to believe and does believe that (A) such
person is an accredited investor and (B) all representations made and
information furnished by such person in the Subscription Agreement and related
documents are true and correct in all material respects. The Placement Agent and
Selected Dealers agree to notify the Company promptly if the Placement Agent or
a Selected Dealer, as applicable, shall, at any time during the period after
delivery of the documents furnished by such person to the Company in connection
with subscription for Shares and immediately before the sale of Shares to such
person, no longer reasonably believe one or more of the foregoing matters with
respect to such person.
(ii) Neither the Placement Agent nor any Selected Dealer will
solicit purchasers of Shares other than in the jurisdictions in which such
solicitation may, upon the advice of counsel, be made under applicable
securities or "blue sky" laws and in which the Placement Agent or such Selected
Dealer, as the case may be, is qualified so to act.
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<PAGE> 16
(iii) Neither the Placement Agent nor any Selected Dealer will sell
any Shares to any investor unless a Memorandum is furnished to such investor
within a reasonable time prior thereto.
(iv) Upon notice from the Company that the Memorandum is to be
amended or supplemented (which the Company will promptly give upon becoming
aware of any untrue statement of a material fact required to be stated in the
Memorandum or omission to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading), the Placement Agent and each Selected Dealer, if any, will
immediately cease use of the Memorandum until the Placement Agent and such
Selected Dealers have received such amendment or supplement and thereafter will
make use of the Memorandum only as so amended or supplemented, and the Placement
Agent and each Selected Dealer, if any, will deliver a copy of such amendment or
supplement to each Prospective Investor to whom a copy of the Memorandum had
previously been delivered (and who had not returned such copy) and whose
subscription had not been rejected.
7. Payment of Expenses.
(a) The Company hereby agrees to pay all fees, charges and expenses of the
Offering, including, without limitation, all fees, charges, and expenses in
connection with (i) the preparation, printing, reproduction, filing,
distribution and mailing of the Memorandum, and all other documents relating to
the offering, purchase, sale and delivery of the Shares, and any supplements or
amendments thereto, including the fees and expenses of counsel to the Company,
and the cost of all copies thereof, (ii) the issuance, sale, transfer and
delivery of the Shares and the Warrants, including any transfer or other taxes
payable thereon and the fees of any Transfer Agent, Warrant Agent or Registrar,
(iii) the registration or qualification of the Shares or the securing of an
exemption therefrom under state or foreign "blue sky" or securities laws,
including, without limitation, filing fees payable in the jurisdictions in which
such registration or qualification or exemption therefrom is sought, the costs
of preparing preliminary, supplemental and final "Blue Sky Surveys" relating to
the offer and sale of the Shares and the fees and disbursements of counsel
actually incurred to the Placement Agent in connection with such "blue sky"
matters, (iv) the filing fees, if any, payable to the Commission; and (v) the
retention of the Escrow Agent, including the fees and expenses of the Escrow
Agent for serving as such and the fees and expenses of its counsel.
(b) If subscriptions to purchase at least 6,000,000 shares (including the
Affiliate Shares) are received prior to the expiration of the Offering Period
and accepted by the Company, the Company shall pay to the Placement Agent a
non-accountable expense allowance equal to 3% of the gross proceeds. Such
amounts (less amounts, if any, previously paid to you in respect of such
non-accountable expense allowance) shall be paid by the Company out of the funds
received from the sale of the Shares or, at the Placement Agent's option, in
part or in whole, in shares of Common Stock valued at $.90 per share.
(c) If subscriptions to purchase at least 6,000,000 shares (including the
Affiliate Shares) are not received prior to the expiration of the Offering
Period or if this Agreement is terminated by the Placement Agent pursuant to
Section 8 hereof prior to the issuance, sale and delivery of any
- 16 -
<PAGE> 17
Shares, the Company shall reimburse the Placement Agent for its reasonable
out-of-pocket expense hereunder (including, without limitation, the reasonable
fees and expenses of counsel).
8. Conditions of Placement Agent's Obligations. The obligations of the
Placement Agent pursuant to this Agreement shall be subject, in its discretion,
to the continuing accuracy of the representations and warranties of the Company
contained herein and in each certificate and document contemplated under this
Agreement to be delivered to the Placement Agent, as of the date hereof and as
of the Closing Date (and, if applicable, each Additional Closing Date) to the
performance by the Company of its obligations hereunder, and to the following
conditions:
(a) At the Closing and each Additional Closing, as the case may be, the
Placement Agent shall have received the favorable opinion of Warner & Stackpole,
LLP, counsel for the Company, dated the date of delivery, addressed to the
Placement Agent, in substantially the forms of Exhibit III-1 and Exhibit III-2
hereto, respectively.
(b) On or prior to the Closing Date and each Additional Closing Date, as
the case may be, the Placement Agent shall have been furnished such information,
documents and certificates as it may reasonably require for the purpose of
enabling it to review the matters referred to in this Section 8 and in order to
evidence the accuracy, completeness or satisfaction of any of the
representations, warranties, covenants, agreements or conditions herein
contained, or as it may otherwise reasonably request.
(c) At the Closing and each Additional Closing, as the case may be, the
Placement Agent shall have received a certificate of the chief executive officer
and of the chief financial officer of the Company, dated the Closing Date or
such Additional Closing Date, as the case may be, to the effect that, as of the
date of this Agreement and as of the Closing Date or such Additional Closing
Date, as the case may be, the representations and warranties of the Company
contained herein were and are accurate, and that as of the Closing Date or such
Additional Closing Date, as the case may be, the obligations to be performed by
the Company hereunder on or prior thereto have been fully performed.
(d) All proceedings taken in connection with the issuance, sale and
delivery of the Shares shall be reasonably satisfactory in form and substance to
you and your counsel.
(e) There shall not have occurred, at any time prior to the Closing or, if
applicable, an Additional Closing, as the case may be, (i) any domestic or
international event, act or occurrence which has materially disrupted, or in
your reasonable opinion will in the immediate future materially disrupt, the
securities markets; (ii) a general suspension of, or a general limitation on
prices for, trading in securities on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market; (iii) any outbreak of major
hostilities or other national or international calamity affecting securities
markets in the United States; (iv) any banking moratorium declared by a state or
federal authority; (v) any moratorium declared in foreign exchange trading by
major international banks or other persons; (vi) any material interruption in
the mail service or other means of communication within the United States; (vii)
any material adverse change in the business, properties, assets, results of
operations or financial condition of the Company; or (viii) any change in the
market for securities in general or in political, financial or
- 17 -
<PAGE> 18
economic conditions which, in your reasonable business judgment, makes it
inadvisable to proceed with the offering, sale and delivery of the Shares.
(f) The Sales Agent shall have received an agreement reflecting the
provisions of Section 6(a)(xv) hereof.
(g) The Sales Agent shall have received from certain officers or directors
of the Company agreements to the effect that such officers and directors will
not, without the Sales Agent's prior written consent, offer, issue, sell,
contract to sell, grant any option for the sale of or otherwise dispose of,
directly or indirectly, any shares of Common Stock (or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock) for a period of 12 months from the
filing date of a Registration Statement for the resale of the Shares. This
paragraph shall not be applicable to the Escrow Agent or to an officer or
director who has terminated service to the Company.
(h) The Sales Agent shall have received evidence of the resignation of two
current members of the Company's Board of Directors.
Any certificate or other document signed by any officer of the Company on
behalf of the Company and delivered to you or to your counsel as required
hereunder shall be deemed a representation and warranty by the Company hereunder
as to the statements made therein. If any condition to your obligations
hereunder has not been fulfilled as and when required to be so fulfilled, you
may terminate this Agreement or, if you so elect, in writing waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment. In the event that you elect to terminate this Agreement, you shall
notify the Company of such election in writing. Upon such termination, neither
party shall have any further liability or obligation to the other except as
provided in Section 10 hereof.
9. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the Placement Agent,
the Selected Dealers, their officers, directors, stockholders, employees,
agents, advisors, consultants and counsel, and each person, if any, who controls
the Placement Agent or a Selected Dealer within the meaning of Section 15 of the
Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), against any and all loss, liability, claim, damage and expense
whatsoever (which shall include, for all purposes of this Section 9, without
limitation, attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever and any and all amounts paid in settlement
of any claim or litigation) as and when incurred arising out of, based upon or
in connection with (i) any untrue statement or alleged untrue statement of a
material fact contained in (A) the Memorandum or in any document delivered or
statement made pursuant to Section 6(a)(vii), or (B) in any application or other
document or communication (in this Section 9 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify the Shares under the "blue sky" or securities
laws thereof or in order to secure an exemption from such registration or
qualification or filed with the Commission; or any omission
- 18 -
<PAGE> 19
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, all in light of the
circumstances in which made, unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company as stated in Section 9(b) with respect to the Placement Agent expressly
for inclusion in the Memorandum or in any application, as the case may be; or
(ii) any breach of any representation, warranty, covenant or agreement of the
Company contained in this Agreement or any Operative Agreement. The foregoing
agreement to indemnify shall be in addition to any liability the Company may
otherwise have, including liabilities arising under this Agreement.
If any action is brought against the Placement Agent, a Selected Dealer or
any of their officers, directors, stockholders, employees, agents, advisors,
consultants and counsel, or any controlling persons of the Placement Agent or a
Selected Dealer (an "indemnified party"), in respect of which indemnity may be
sought against the Company pursuant to the foregoing paragraph, such indemnified
party or parties shall promptly notify the Company (the "indemnifying party") in
writing of the institution of such action (but the failure so to notify shall
not relieve the indemnifying party from any liability it may have other than
pursuant to this Section 9(a) unless such failure materially prejudices the
indemnifying party), and the indemnifying party shall promptly assume the
defense of such action, including the employment of counsel (reasonably
satisfactory to such indemnified party or parties) and payment of expenses. Such
indemnified party shall have the right to employ its own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party unless the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action or the indemnifying party shall not have promptly employed
counsel reasonably satisfactory to such indemnified party or parties to have
charge of the defense of such action or such indemnified party or parties shall
have reasonably concluded that there may be one or more legal defenses available
to it or them or to other indemnified parties which are different from or
additional to those available to one or more of the indemnifying parties and it
would be inappropriate for the same counsel to represent both parties due to
actual or potential differing interests between them, in any of which events
such fees and expenses shall be borne by the indemnifying party and the
indemnifying party shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties. Anything in this paragraph to the
contrary notwithstanding, the indemnifying party shall not be liable for any
settlement of any such claim or action effected without its written consent. The
Company agrees promptly to notify the Placement Agent of the commencement of any
litigation or proceedings against the Company or any of its officers or
directors in connection with the sale of the Shares, the Memorandum or any
application.
(b) The Placement Agent agrees to indemnify and hold harmless the Company,
its officers, directors, employees, agents and counsel, and each other person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity
from the Company to the Placement Agent in Section 9(a), but only with respect
to statements or omissions, if any, made in the Memorandum in reliance upon and
in conformity with written information furnished to the Company as stated in
this Section 9(b) with respect to the Placement Agent expressly for inclusion in
the Memorandum. If any action shall be brought against the Company or any other
person so indemnified based on the Memorandum and in respect of which indemnity
may be sought against the Placement Agent pursuant to this Section 9(b), the
Placement Agent shall have the rights and duties given to the
- 19 -
<PAGE> 20
indemnifying party, and the Company and each other person so indemnified shall
have the rights and duties given to the indemnified parties, by the provisions
of Section 9(a). The foregoing agreement to indemnify shall be in addition to
any liability the Placement Agent may otherwise have, including liabilities
arising under this Agreement.
(c) To provide for just and equitable contribution, if (i) an indemnified
party makes a claim for indemnification pursuant to Section 9(a) or 9(b) but it
is found in a final judicial determination, not subject to further appeal, that
such indemnification may not be enforced in such case, even though this
Agreement expressly provides for indemnification in such case, or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the Exchange
Act, or otherwise, then the Company (including for this purpose any contribution
made by or on behalf of any officer, director, employee, agent or counsel of the
Company or any controlling person of the Company), on the one hand, and the
Placement Agent and the Selected Dealers (including for this purpose any
contribution by or on behalf of an indemnified party), on the other hand, shall
contribute to the losses, liabilities, claims, damages and expenses whatsoever
to which any of them may be subject, in such proportions as are appropriate to
reflect the relative benefits received by the Company, on the one hand, and the
Placement Agent and the Selected Dealers, on the other hand; provided, however,
that if applicable law does not permit such allocation, then other relevant
equitable considerations such as the relative fault of the Company and the
Placement Agent and the Selected Dealers in connection with the facts which
resulted in such losses, liabilities, claims, damages and expenses shall also be
considered. The relative benefits received by the Company, on the one hand, and
the Placement Agent and the Selected Dealers, on the other hand, shall be deemed
to be in the same proportion as (x) the total proceeds from the Offering (net of
compensation payable to the Placement Agent pursuant to Section 4 hereof but
before deducting expenses) received by the Company, and (y) the compensation
received by the Placement Agent pursuant to Section 4 hereof or, in the case of
a Selected Dealer, the allowance paid to such Selected Dealer.
The relative fault, in the case of an untrue statement, alleged untrue
statement, omission or alleged omission, shall be determined by, among other
things, whether such statement, alleged statement, omission or alleged omission
relates to information supplied by the Company or by the Placement Agent and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement, alleged statement, omission or alleged
omission. The Company and the Placement Agent agree that it would be unjust and
inequitable if the respective obligations of the Company and the Placement Agent
and the Selected Dealers for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages and
expenses or by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 9(c). In no case shall the
Placement Agent or a Selected Dealer be responsible for a portion of the
contribution obligation in excess of the compensation received by it pursuant to
Section 4 hereof or the Selected Dealer Agreement, as the case may be, less the
aggregate amount of any damages that such Placement Agent or Selected Dealer has
otherwise been required to pay in respect of the same or any substantially
similar claim. 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 is not guilty of such fraudulent misrepresentation. For purposes of
this Section 9(c), each person, if any, who controls the Placement Agent or a
Selected Dealer within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act and each officer, director, stockholder, employee, agent and
counsel of the Placement Agent and the Selected Dealers shall have the same
rights to contribution as the Placement Agent or the Selected Dealer, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act
- 20 -
<PAGE> 21
and each officer, director, employee, agent and counsel of the Company shall
have the same rights to contribution as the Company, subject in each case to the
provisions of this Section 9(c). Anything in this Section 9(c) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
Section 9(c) is intended to supersede any right to contribution under the Act,
the Exchange Act or otherwise.
10. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants and
agreements at the Closing Date and, if applicable, each Additional Closing Date,
and such representations, warranties, covenants and agreements, including the
indemnity and contribution agreements contained in Section 9, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Placement Agent or any indemnified person, or by or on
behalf of the Company or any person or entity which is entitled to be
indemnified under Section 9(b), and shall survive termination of this Agreement
or the issuance, sale and delivery of the Shares. In addition, notwithstanding
any election hereunder or any termination of this Agreement, and whether or not
the terms of this Agreement are otherwise carried out, the provisions of
Sections 6(a)(xvii), 7, 9, 10 and 12 shall survive termination of this Agreement
and shall not be affected in any way by such election or termination or failure
to carry out the terms of this Agreement or any part thereof.
11. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to the Placement
Agent, shall be mailed, delivered or telexed or telegraphed and confirmed by
letter, to its address set forth above, or if sent to the Company, shall be
mailed, delivered or telexed or telegraphed and confirmed by letter, to Augment
Systems, Inc., 2 Robbins Road, Westford, Massachusetts 01886. All notices
hereunder shall be effective upon receipt by the party to which it is addressed.
12. Assignment. This Agreement shall not be assigned by any party hereto
without the prior written consent of the other parties hereto.
13. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Placement Agent and the Company and the persons and
entities referred to in Section 9 who are entitled to indemnification or
contribution and their respective successors, legal representatives and assigns
(which shall not include any purchaser, as such, of Shares), 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 provision herein
contained.
14. Construction. This Agreement shall be construed in accordance with the
laws of the State of New York, without giving effect to conflict of laws.
15. Counterparts. This Agreement may be executed in counterparts, each of
which shall constitute an original and all of which, when taken together, shall
constitute one agreement.
- 21 -
<PAGE> 22
16. Entire Agreement. This Agreement, including the Exhibits attached
hereto, constitutes the entire agreement between the parties hereto and
supersedes all previous negotiations, agreements and commitments with respect
thereto, and may only be amended by a written document, signed by duly
authorized officers or representatives of each of the parties hereto.
- 22 -
<PAGE> 23
If the foregoing correctly sets forth the understanding between us, please
so indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among us.
Very truly yours,
AUGMENT SYSTEMS, INC.
By:____________________________
Lorrin G. Gale
President
Accepted as of the date first above written.
New York, New York
SUNRISE SECURITIES CORP.
By:_____________________________
Alan Swerdloff
Vice President
- 23 -
<PAGE> 1
EXHIBIT 10.28
ALLONGE TO PROMISSORY NOTE
The maturity date of the attached Promissory Note dated October 9, 1997 for
$750,000.00 is extended to April 1, 1998 from February 28, 1998.
This Allonge will be governed by the terms and conditions of the Letter
Agreement dated August 4, 1997, as amended by the Loan Modification Agreement
dated as of October 9, 1997, by and between Fleet National Bank and Augment
Systems, Inc. Nothing herein shall be deemed to constitute a waiver, release or
amendment of any terms of the Letter Agreement.
_______________________________ ____________________________________
Witness Name:
Title:
Augment Systems, Inc.
Date:_______________________________
_______________________________ ____________________________________
Witness Kimberly Martone
Vice President
Fleet National Bank
Date:_______________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 47,224
<SECURITIES> 0
<RECEIVABLES> 224,969
<ALLOWANCES> 0
<INVENTORY> 1,162,920
<CURRENT-ASSETS> 1,550,213
<PP&E> 409,848
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,238,806
<CURRENT-LIABILITIES> 3,221,085
<BONDS> 0
0
0
<COMMON> 47,133
<OTHER-SE> (1,152,858)
<TOTAL-LIABILITY-AND-EQUITY> 2,238,806
<SALES> 989,609
<TOTAL-REVENUES> 989,609
<CGS> 597,924
<TOTAL-COSTS> 8,519,443
<OTHER-EXPENSES> 1,252,297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,380,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,380,055)
<EPS-PRIMARY> (2.31)
<EPS-DILUTED> (1.67)
</TABLE>
