<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
CELERITY SYSTEMS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5045 52-2050585
------------------- ------------------- -------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) (Identification No.)
CELERITY SYSTEMS, INC. KENNETH D. VAN METER
9051 EXECUTIVE PARK DRIVE, SUITE 302 CELERITY SYSTEMS, INC.
KNOXVILLE, TENNESSEE 37923 9051 EXECUTIVE PARK DRIVE, SUITE 302
(423) 539-5300 KNOXVILLE, TENNESSEE 37923
(Address and telephone number of principal (423) 539-5300
executive offices and principal place of (Name, address and telephone number of agent
business) for service)
</TABLE>
------------------------
COPIES TO:
<TABLE>
<S> <C>
KENNETH R. KOCH, ESQ. PAUL JACOBS, ESQ.
SQUADRON, ELLENOFF, PLESENT & SHEINFELD, LLP FULBRIGHT AND JAWORSKI L.L.P.
551 FIFTH AVENUE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10176 NEW YORK, NEW YORK 10103-3198
TELEPHONE: (212) 661-6500 TELEPHONE: (212) 318-3000
TELECOPIER: (212) 697-6686 TELECOPIER: (212) 752-5958
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box [x]
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share 2,300,000(2) $7.50 $17,250,000 $5,227.27
Representative's Warrants (3) 200,000 $.001 $200 $0.06
Common Stock, par value
$0.001 per share (4) 200,000 $9.00 $1,800,000 $545.46
Total $5,772.79
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act.
(2) Includes 300,000 shares of Common Stock, par value $0.001 per share, which
the Underwriters have the option to acquire solely to cover over-allotments,
if any.
(3) To be sold to the Representative of the several Underwriters. Each warrant
entitles the Representatives to purchase one share of Common Stock at a
price equal to 120% of the initial public offering price.
(4) Issuable upon the exercise of the Representative's Warrants registered
hereby.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER OF FORM SB-2 LOCATION OR CAPTION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover Page of Prospectus............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Legal Proceedings.................................... Business--Legal Proceedings
10. Directors, Executive Officers, Promoters and Control
Persons.............................................. Management--Executive Officers and Directors
11. Security Ownership of Certain Beneficial Owners and
Management........................................... Principal Stockholders
12. Description of Securities............................ Outside Front Cover Page; Description of Securities
13. Interest of Named Experts and Counsel................ Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Part II
15. Organization Within Last Five Years.................. Management's Discussion and Analysis of Financial
Condition and Results of Operations
16. Description of Business.............................. Business
17. Management's Discussion and Analysis or Plan of
Operation............................................ Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property.............................. Business--Properties
19. Certain Relationships and Related Transactions....... Certain Relationships and Related Transactions
20. Market for Common Equity and Related Stockholder
Matters.............................................. Dividend Policy; Description of Securities
21. Executive Compensation............................... Management--Executive Compensation
22. Financial Statements................................. Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. Not Applicable
24. Indemnification of Directors and Officers............ Part II
25. Other Expenses of Issuance and Distribution.......... Part II
26. Recent Sales of Unregistered Securities.............. Part II
27. Exhibits............................................. Part II; Exhibits
28. Undertakings......................................... Part II
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 13, 1997 [LOGO]
PROSPECTUS
2,000,000 SHARES
CELERITY SYSTEMS, INC.
COMMON STOCK
Celerity Systems, Inc. (the "Company") is hereby offering 2,000,000 shares
(the "Shares") of common stock, par value $0.001 per share (the "Common Stock"),
of the Company.
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock. The Company has applied for listing of the Common Stock on the
Nasdaq SmallCap market under the proposed symbol "CLRT." It is currently
anticipated that the initial public offering price of the Common Stock will be
$7.50 per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
------------------------
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS
SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 7 HEREIN.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS (1) PROCEEDS TO COMPANY (2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
</TABLE>
(1) Does not include additional consideration payable to Hampshire Securities
Corporation, the representative (the "Representative") of the several
underwriters identified elsewhere herein (the "Underwriters"), consisting of
(a) a non-accountable expense allowance equal to 3% of the gross proceeds of
the Offering, and (b) warrants entitling the Representative to purchase up
to an aggregate of 200,000 shares of Common Stock from the Company (the
"Representative's Warrants"). The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated expenses of the Offering payable by the Company
(including the Representative's non-accountable expense allowance) estimated
at $ , assuming no exercise of the Underwriters' over-allotment
option.
(3) The Company has granted an option to the Underwriters, exercisable within 45
days after the date of this Prospectus, to purchase up to an additional
300,000 shares of Common Stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any. If the Underwriters exercise
this option in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ , $ , and
$ , respectively. See "Underwriting."
------------------------------
The Shares are being offered by the Underwriters named herein, subject to
prior sale, when, as, and if delivered to and accepted by them, and subject to
their right to reject orders in whole or in part, and to certain other
conditions. It is expected that delivery of the certificates representing shares
of Common Stock will be made against payment therefor at the offices of
Hampshire Securities Corporation, on or about , 1997.
------------------------
HAMPSHIRE SECURITIES CORPORATION
----------------
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[Chart]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING SYNDICATE COVERING TRANSACTIONS, PENALTY BIDS, AND SHORT SALES. FOR A
DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS (I) GIVES EFFECT TO THE ONE-FOR-TWO-AND-ONE-HALF REVERSE STOCK
SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN AUGUST 1997 (THE "STOCK SPLIT"),
(II) ASSUMES THE AUTOMATIC CONVERSION, UPON THE CLOSING OF THE OFFERING, OF THE
COMPANY'S SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK INTO
APPROXIMATELY 553,726 SHARES OF COMMON STOCK (THE "CONVERSION"), (III) ASSUMES
AN INITIAL PUBLIC OFFERING PRICE OF $7.50 PER SHARE, AND (IV) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. ALL REFERENCES TO
"CELERITY" OR THE "COMPANY" CONTAINED IN THIS PROSPECTUS REFER TO THE COMPANY
AND ITS PREDECESSOR, CELERITY SYSTEMS, INC., A TENNESSEE CORPORATION. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE,
OR CONTRIBUTE TO, SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS."
THE COMPANY
Celerity Systems, Inc. ("Celerity" or the "Company") designs, develops,
integrates, installs, operates, and supports interactive video services hardware
and software. The Company also designs, develops, installs, and supports CD-ROM
software products for business applications. In the interactive video services
area, the Company seeks to provide scalable solutions, including products and
services developed by the Company and by strategic partners, that enable
interactive video programming and applications to be provided to a wide variety
of market niches. The Company has installed 11 digital video servers in four
countries (China, Korea, Israel, and Taiwan), on each of the four major types of
networks accommodating interactive video services. The Company believes that its
demonstrated ability to deploy and operate interactive video systems over each
of these four major network types is a significant competitive advantage.
In the CD-ROM area, the Company provides several products for the storage
and rapid retrieval of large amounts of information. The Company believes such
products are faster, easier to use, provide more features, and are operational
on more diverse network architectures than similar products and services. The
Company's CD-ROM customers include the U.S. Navy, Sprint Corp., Unisys Corp.,
Toronto Dominion Bank, and Herzog, Heine & Geduld, Inc. In December 1995, the
Company's VCD MANAGER and VCD WRITER products were each chosen as IMAGING
MAGAZINE'S Product of the Year in their respective product groups for CD-ROM
software. IMAGING MAGAZINE is a leading industry publication for CD-ROM business
software.
INTERACTIVE VIDEO
Celerity's interactive video products include those manufactured by the
Company, including digital video servers, digital set top boxes, authoring
software and workstations, and operating systems software, and those provided by
strategic partners, including bench and real-time digital encoders, digital
production studio equipment, applications and business support software, set top
boxes, and network switches and equipment. These products are used in the
production, storage, transmission, and display of both conventional linear
(non-interactive) transmissions and interactive video and data applications
across (i) fiber to the curb ("FTTC"), (ii) hybrid fiber/coaxial cable ("HFC"),
(iii) high speed data lines (E1 and T1), or (iv) twisted pair networks (standard
telephone lines) using Asymmetric Digital Subscriber Line ("ADSL") equipment.
These networks may be public networks, such as those of telephone and cable
companies, or may be private networks, such as those of college campuses,
hospitals, hotels, apartment complexes, or businesses. These networks provide
large potential markets for interactive entertainment, including
video-on-demand, music, and interactive applications, such as shopping, banking,
travel, education, games, gaming, public services, advertising, and training.
These digital networks offer faster speed,
3
<PAGE>
more robust appearance, more diverse options, and better security than is
generally available today on narrowband networks, such as the Internet.
The Company's strategy is to market its interactive video products based on
its demonstrated ability to install digital video systems on each of the major
network types and to enter into strategic alliances with others in the industry
to provide end-to-end interactive video solutions. The Company intends to focus
its sales and marketing efforts on small-to-medium sized public and private
networks. The Company believes that the scalability of its products enables the
Company to provide economically viable solutions to relatively small networks
and to efficiently serve the needs of larger networks.
CD-ROM
Celerity's CD-ROM software products consist of two types: network management
and database management. The Company's products are targeted toward industries,
such as financial services, insurance, health care, government, and
telecommunications, where there is extensive current and potential use of
electronic document imaging and management. The potential markets for these
products are expected to increase to include substantially smaller companies as
the cost of the required hardware decreases and its storage capacity increases.
VIRTUAL CD MANAGER ("VCD MANAGER"), VIRTUAL CD WRITER ("VCD WRITER"), and
MEDIATOR are network management software products which allow CD-ROM hardware
components such as changers, towers, and CD-ROM writers to be accessed and used
by a variety of devices, primarily networked PC clients, and their applications.
CD WORKWARE is a database management software product. CD WORKWARE captures and
stores documents and files, both electronic and scanned, and indexes, stores,
and retrieves information stored on CD-ROM, hard disk, or other compatible
sources. This creates an automated paperless office environment where business
reports, files, or other data may be stored and retrieved quickly and easily. In
1997, the Company developed other enhancements to its CD-ROM products allowing
them to function on both NOVELL and WINDOWS NT based networks or networks
containing elements of both. The Company believes such features currently
provide a valuable competitive advantage.
The Company's CD-ROM strategy is to increase distribution channels of its
CD-ROM products by selling through larger system integrators and value added
resellers ("VARs") and through joint marketing arrangements which will allow it
to approach customers with related products as part of an integrated approach to
meeting their needs.
The Company was incorporated in Tennessee in 1993 and was re-incorporated in
Delaware in August 1997. The Company's executive offices are located at 9051
Executive Park Drive, Suite 302, Knoxville, Tennessee, 37923, and its telephone
number is (423) 539-5300. The Company's website address is www.celerity.com.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,000,000 shares
Common Stock outstanding prior to the
Offering...................................... 2,082,239 shares
Common Stock to be outstanding after the
Offering...................................... 4,082,239 shares(1)
Use of Proceeds................................. To repay $5,000,000 principal amount of
indebtedness plus accrued interest
thereon, including debt incurred in the
Company's 1996 and 1997 private
placements; to pay approximately $40,000
under an agreement with one of the
Company's former officers; and for
working capital and general corporate
purposes, including sales and marketing
and the hiring of additional personnel.
See "Use of Proceeds."
Risk Factors.................................... The Shares offered hereby involve a high
degree of risk and substantial dilution
and should be purchased only by persons
who can afford to sustain the loss of
their entire investment. See "Risk
Factors" and "Dilution."
Proposed Nasdaq SmallCap Market Symbol.......... "CLRT"
</TABLE>
- ------------------------
(1) Includes 553,726 shares of Common Stock issuable in connection with the
Conversion. Does not include (i) up to 300,000 shares of Common Stock
issuable upon exercise of the Underwriters' over-allotment option, (ii)
200,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants, (iii) 657,200 shares of Common Stock underlying
outstanding stock options, (iv) 190,714 shares of Common Stock underlying
warrants (the "1995 Warrants") issued by the Company in connection with its
1995 private placement (the "1995 Placement"), (v) 209,520 shares of Common
Stock underlying warrants (the "1996 Warrants") issued by the Company in
connection with its 1996 private placement (the "1996 Placement"), (vi)
38,852 shares of Common Stock underlying warrants issued to the
Representative (as placement agent) in connection with the private placement
of securities in the 1996 Placement, and (vii) 320,000 shares of Common
Stock underlying warrants (the "Bridge Warrants") issued by the Company in
connection with its 1997 private placement (the "Bridge Financing").
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data for the Company set forth below under the caption
"Statement of Operations Data" for the years ended December 31, 1995 and 1996,
and under the caption "Balance Sheet Data" at December 31, 1996, are derived
from the financial statements of the Company, audited by Coopers & Lybrand
L.L.P., independent certified public accountants, included elsewhere in this
Prospectus. The statement of operations data for the six months ended June 30,
1996 and 1997, and the balance sheet data at June 30, 1997, are derived from
unaudited financial statements included elsewhere in this Prospectus, and, in
the opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of the Company's
financial position and results of operations at the end of and for such periods.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of results that may be expected for the full year. The summary
financial data should be read in conjunction with the financial statements and
notes thereto included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 7,703 $ 2,530 $ 1,300 $ 1,255
Cost of revenues......................................... 4,609 3,513 1,252 1,170
Operating expenses....................................... 3,045 4,491 1,787 3,778
Net income (loss)........................................ 10 (5,512) (1,784) (3,825)
Net income (loss) per share.............................. $ 0.01 $ (2.75) $ (1.01) $ (1.61)
Shares used in computing net income(loss) per share...... 1,749,245 2,006,582 1,761,373 2,379,934
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA
AT DECEMBER 31, AS ADJUSTED
1996 ACTUAL PRO FORMA (1) (2)
--------------- --------- --------------- --------------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ 2,105 $ (167) $ 427 $ 9,776
Total assets......................................... 5,650 4,531 5,468 12,622
Total debt........................................... 3,027 3,023 3,023 --
Redeemable, convertible preferred stock.............. 2,746 2,885 -- --
Stockholders' equity (deficit)....................... $ (2,582) $ (5,005) $ (840) $ 10,843
</TABLE>
- ------------------------
(1) Pro forma to give effect to (i) the Conversion and (ii) the issuance in
August 1997 of $2,000,000 aggregate principal amount of notes (the "Bridge
Notes") in the Bridge Financing, debt discount of $1,440,000 related to
320,000 Bridge Warrants issued at an exercise price below the assumed
initial public offering price of $7.50 per share, and the application of the
net proceeds therefrom to reacquire 240,000 shares of Common Stock from a
former officer and 80,000 shares of Common Stock from a director of the
Company for aggregate consideration of $160,000 ($0.50 per share). See
"Certain Relationships and Related Transactions" and Note 16 to Notes to
Financial Statements.
(2) Adjusted to give effect to the sale by the Company of the 2,000,000 Shares
offered hereby at an assumed initial public offering price of $7.50 per
share and the application of the estimated net proceeds therefrom to repay
all outstanding indebtedness which will give rise to a loss on early
extinguishment of approximately $960,000 related to unamortized debt
discount. See "Use of Proceeds" and Note 16 to Notes to Financial
Statements.
6
<PAGE>
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE SUBSTANTIAL RISKS AND SHOULD BE PURCHASED
ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN THE LOSS OF THEIR ENTIRE INVESTMENT.
THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL
DATA SET FORTH ELSEWHERE IN THIS PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE MAKING AN INVESTMENT IN THE
SHARES. THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS ARE NOT
INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC RISKS INVOLVED, BUT
MERELY IDENTIFY CERTAIN RISKS THAT ARE NOW FORESEEN BY THE COMPANY. IT MUST BE
RECOGNIZED THAT OTHER RISKS, NOT NOW FORESEEN, MIGHT BECOME SIGNIFICANT IN THE
FUTURE AND THAT THE RISKS WHICH ARE NOW FORESEEN MIGHT AFFECT THE COMPANY TO A
GREATER EXTENT THAN IS NOW FORESEEN OR IN A MANNER NOT NOW CONTEMPLATED. EACH
PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER ALL INFORMATION CONTAINED IN THIS
PROSPECTUS AND SHOULD GIVE PARTICULAR CONSIDERATION TO THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO PURCHASE THE SHARES OFFERED HEREBY.
HISTORY OF LOSSES. The Company commenced operations in January 1993 and
incurred net losses of approximately $264,000 and $30,000 for the years ended
December 31, 1993 and 1994, respectively; generated net income of approximately
$9,900 for the year ended December 31, 1995; incurred a net loss of
approximately $5,512,000 for the year ended December 31, 1996; and a net loss of
approximately $3,825,000 for the six months ended June 30, 1997. There can be no
assurance that the Company will operate profitably in the near future or at all.
The Company may experience fluctuations in future operating results as a result
of a number of factors, including delays in digital video product enhancements
and new product introductions. There can be no assurance that the Company will
be able to develop commercially viable products or that the Company will
recognize significant revenues from such products.
PROJECT RISKS. A significant portion of the Company's revenues have been,
and are expected to continue to be, derived from substantial long-term projects
which require significant up-front expense to the Company with no assurance of
realizing revenues until the project is completed or certain significant
milestones are met. For example, suppliers and developers for long-term
interactive video projects such as the Korean, Israeli, Taiwanese, and Chinese
projects in which the Company is participating are required to reach certain
milestones prior to the Company's receipt of significant payments. The Company's
failure, or any failure by a third-party with which the Company has contracted,
to perform services or deliver interactive video products on a timely basis
could result in a substantial loss to the Company. Until recently, the Company
has had difficulty in meeting delivery schedules, which has resulted in customer
dissatisfaction. In addition, difficulty in completing a project could have a
material adverse effect on the Company's reputation, business, and results of
operations. As a result of liquidated damages and "hold back" provisions in
customer contracts, the Company has reserved approximately $555,000, as of June
30, 1997, for potential losses which may result from such contractual
provisions. In many instances, the Company is dependent on the efforts of third
parties to adequately complete their portion of the project and, even if the
Company's digital video servers perform as required, a project may still fail
due to other components of the project supplied by third parties.
EMPHASIS ON FIXED PRICE CONTRACTS AND COMMITMENTS. The Company has entered
into and may in the future enter into fixed price agreements for the sale of its
products and services. Pricing for such commitments is made based upon
development and production effort estimates and estimates of future product
costs. The Company bears the risk of faulty estimates, cost overruns, and
inflation in connection with these commitments; therefore, any fixed price
agreement can become unprofitable and could materially adversely affect the
Company. The Company reserved approximately $673,000 for the year ended December
31, 1996, for potential losses on uncompleted contracts and at June 30, 1997,
the balance of such reserve was $348,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." There can be no
assurance that these risks will not continue to negatively affect the Company's
margins and profitability.
RISKS ASSOCIATED WITH CONTRACTS WITH EN KAY TELECOM CO., LTD. In September
1996, the Company entered into an agreement with En Kay Telecom Co., Ltd., a
Korean company ("En K"), pursuant to which
7
<PAGE>
the Company, as licensor, agreed to design a digital set top box which would be
manufactured and sold by En K in the Republic of Korea (the "1996 En K
Agreement"). In February 1997, the Company entered into a second license
agreement with En K for the manufacture and sale by En K of two models of the
Company's servers in Korea, as well as a license to sell those server models on
an exclusive basis in Korea (subject to an exception for the IVISION project)
and on a non-exclusive basis elsewhere (the "1997 En K Agreement"). The Company
has received $600,000 under the 1996 En K Agreement; however, in April 1997, the
Company stopped production under the 1996 En K Agreement pending settlement of
disputes under the 1997 En K Agreement. The 1997 En K Agreement provided for the
payment by En K to the Company of $1,000,000 on each of February 21, 1997 and
May 1, 1997, $4,000,000 during 1998, and minimum annual purchases of $2,000,000
over a five-year period. En K has failed to make the initial two payments under
the 1997 En K Agreement, although En K did pay $200,000 in mid-May. The Company
gave notice of default in April 1997, and placed En K in default in May 1997,
when En K failed to cure the payment default within the agreed thirty-day
period. The Company is considering various options in this matter, including
commencing legal proceedings. There can be no assurance that En K will honor
either of its agreements with the Company, that the Company will prevail in any
legal proceeding, or, if the Company does prevail, that it will collect any
amounts awarded. In addition, although the Company does not believe there is any
basis for such a course of action, it is possible that En K may seek to recover
amounts previously paid by it under the agreements.
NEED FOR STRATEGIC ALLIANCES. The Company believes that there are certain
potential advantages to entering into one or more strategic alliances with major
interactive network or product providers. Although the Company has entered into
certain of such alliances, the Company is actively seeking to enter into more of
such alliances. Certain of the Company's competitors and potential strategic
allies may have entered into or may enter into agreements which may preclude
such potential allies from entering into alliances with the Company. No
assurance can be given that the Company will be successful in entering into any
such strategic alliances on acceptable terms or, if any such strategic alliance
is entered into, that the Company will realize the anticipated benefits from
such strategic alliance. See "Risk Factors-- Competition" and
"Business--Strategic Alliances."
RELIANCE ON KEY CUSTOMERS. For the year ended December 31, 1995, one of the
Company's CD-ROM customers, the U.S. Navy, accounted for approximately 25% of
the Company's revenues. For the year ended December 31, 1996, two of the
Company's CD-ROM customers, the U.S. Navy and Herzog, Heine & Geduld, Inc.,
accounted for approximately 37% and 13% of the Company's revenues, respectively.
The Company's interactive video services revenues to date have been derived
almost exclusively from four telecommunications customers. The loss of any major
customer could have a material adverse effect on the Company. See
"Business--Deployments."
LACK OF PATENT AND COPYRIGHT PROTECTION. The Company holds no patents and
has not filed any patent applications with respect to its technology. The
Company's methods of protecting its proprietary knowledge may not afford
adequate protection and there can be no assurance that any patents will be
applied for or issued, or, if issued, that such patents would provide the
Company with meaningful protection from competition. In Asia and third world
countries, in which the Company does business and has license agreements, the
unauthorized use of technology, whether protected legally or not, is widespread
and it is possible that the Company's technology will be subject to theft and
infringement. Furthermore, pursuant to the Company's current business plan, it
will be necessary for the Company to make its intellectual property available to
vendors, customers, and other companies in the industry, making it even more
difficult to protect its technology.
NO ASSURANCE OF TECHNOLOGICAL SUCCESS. The Company's ability to
commercialize its products is dependent on the advancement of its existing
technology. In order to obtain and maintain a significant market share the
Company will be required continually to make advances in technology. There can
be no assurance that the Company's research and development efforts will result
in the development of such
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technology on a timely basis or at all. Any failures in such research and
development efforts could result in significant delays in product development
and have a material adverse effect on the Company. There can be no assurance
that the Company will not encounter unanticipated technological obstacles which
either delay or prevent the Company from completing the development of its
products. Moreover, the Company believes there are certain technological
obstacles to be overcome in order to develop future products. These obstacles
include the lack of an electronic data interchange server interface (used for
real-time exchange of data between servers) and enhancements in the ability to
access and utilize information stored on remote servers. In certain cases, the
Company will be dependent upon technological advances which must be made by
third parties. There can be no assurance that the Company or such third parties
will not encounter technological obstacles which either delay or prevent the
Company from completing the development of its future products, which could have
a material adverse effect on the Company.
COMPETITION. The interactive video and CD-ROM industries are highly
competitive. Many of the companies with which the Company currently competes or
may compete in the future have greater financial, technical, marketing, sales
and customer support resources, as well as greater name recognition and better
access to customers, than the Company. There can be no assurance that the
Company will be able to compete successfully with existing or future
competitors. Certain of such competitors have entered into strategic alliances
which may provide them with certain competitive advantages. See "Business--
Interactive Video Services Segment--Competition" and "--CD-ROM
Segment--Competition."
UNCERTAIN MARKET ACCEPTANCE. Since inception, the Company has been engaged
in the design and development of interactive video and CD-ROM products. As with
any new technology, there is a substantial risk that the marketplace may not
accept the technology utilized in the Company's products. Market acceptance of
the Company's products will depend, in large part, upon the ability of the
Company to demonstrate the performance advantages and cost-effectiveness of its
products over competing products and the general acceptance of interactive video
services. In particular, the Company believes that widespread deployment of
interactive video services will depend on a number of factors, including (i)
decreases in the cost per subscriber, (ii) the "user-friendliness" of such
systems, particularly set top boxes and remote controls which are relatively
easy to understand and use, and (iii) improvements in the quantity and quality
of interactive services available. Although recent developments have reduced the
cost per subscriber, and the Company anticipates that such costs will continue
to decrease as interactive video systems are more widely deployed, the current
cost per subscriber may make the system too expensive for a number of potential
network operators. There can be no assurance that the Company will be able to
market its technology successfully or that any of the Company's current or
future products will be accepted in the marketplace.
PRODUCT OBSOLESCENCE; TECHNOLOGICAL CHANGE. The industries in which the
Company operates are characterized by unpredictable and rapid technological
changes and evolving industry standards. The Company will be substantially
dependent on its ability to identify emerging markets and develop products that
satisfy such markets. There can be no assurance that the Company will be able to
accurately identify emerging markets or that any products the Company has or
will develop will not be rendered obsolete as a result of technological
developments. The Company believes that competition in its business may
intensify as technological advances in the field are made and become more widely
known. Many companies with substantially greater resources than the Company are
engaged in the development of products similar to those proposed to be sold by
the Company. Commercial availability of such products could render the Company's
products obsolete, which would have a material adverse effect on the Company.
Moreover, from time to time, the Company may announce new products or
technologies that have the potential to replace the Company's existing product
offerings. There can be no assurance that the announcement or expectation of new
product offerings by the Company or others will not cause customers to defer
purchases of existing Company products, which could adversely affect the
Company.
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DEPENDENCE ON SUPPLIERS; MANUFACTURING RISKS. The Company relies primarily
on outside suppliers and subcontractors for substantially all of its parts,
components, and manufacturing supplies. Certain materials are available from
only a limited number of suppliers. The Company does not maintain long-term
supply contracts with its suppliers. The disruption or termination of the
Company's supply or subcontractor arrangements could have a material adverse
effect on the Company's business and results of operations. The Company's
reliance on third parties involves significant risks, including reduced control
over delivery schedules, quality assurance, manufacturing yields and cost, the
potential lack of adequate capacity, and potential misappropriations of the
Company's intellectual property. In addition, vendor delays or quality problems
could also result in lengthy production delays. To obtain manufacturing
resources, the Company may contract for manufacturing by third parties or may
seek to enter into joint venture, sublicense, or other arrangements with another
party which has established manufacturing capability, or it may choose to pursue
the commercialization of such products on its own. There can no assurance that
the Company, either on its own or through arrangements with others, will be able
to obtain such capabilities on acceptable terms.
LIMITED MARKETING AND SALES EXPERIENCE. The Company has limited resources
and limited experience in marketing and selling its products. There can be no
assurance that the Company will be able to establish and maintain adequate
marketing and sales capabilities or make arrangements with others to perform
such activities. Achieving market penetration will require significant efforts
by the Company to create awareness of, and demand for, its products.
Accordingly, the Company's ability to expand its customer base will depend upon
its marketing efforts, including its ability to establish an effective internal
sales organization or strategic marketing arrangements with others. The failure
by the Company to successfully develop its marketing and sales capabilities,
internally or through others, would have a material adverse effect on the
Company's business. Further, there can be no assurance that the development of
such marketing capabilities will lead to sales of the Company's current or
proposed products.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent on the performance and continued service of its senior management,
particularly Kenneth D. Van Meter, Glenn West, Doyal H. Hodge, William R.
Chambers, and Mark Cromwell. The Company's failure to retain the services of key
personnel or to attract additional qualified employees could adversely affect
the Company. The Company has entered into employment agreements with Messrs. Van
Meter and West. Mr. Van Meter's employment agreement expires on January 20,
2000, unless terminated for cause. Mr. West's employment agreement expires May
1, 2000, unless terminated for cause or disability. Messrs. Chambers', Hodge's,
and Cromwell's employment with the Company may be terminated by the employee or
the Company at any time. The Company owns and is the beneficiary of a key man
life insurance policy on the life of Mr. West in the amount of $1,000,000, and
intends to seek to obtain a similar policy in the amount of $2,000,000 with
respect to Mr. Van Meter.
ATTRACTION AND RETENTION OF EMPLOYEES. The Company's business involves the
delivery of professional services and is labor-intensive. The Company's success
will depend, in large part, upon its ability to attract, develop, motivate, and
retain highly skilled technical and sales personnel, including managers and
other senior personnel. Subject to the availability of funds, the Company
intends to recruit approximately 60 employees for its engineering, sales, and
operations staff over the next 12 months. Even if funds are available, there can
be no assurance that the Company will be able to attract and retain sufficient
numbers of highly skilled technical and sales personnel. The loss of some or all
of the Company's managers and other senior personnel could have a material
adverse effect upon the Company, including its ability to secure and complete
projects in which it is currently engaged. No managers or other senior personnel
(other than Messrs. Van Meter and West) have entered into employment agreements
obligating them to remain in the Company's employ for any specific term.
RISKS APPLICABLE TO FOREIGN SALES. For the years ended December 31, 1995
and December 31, 1996, substantially all of the Company's interactive video
revenues were derived from projects in foreign
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countries and a small portion of its CD-ROM revenues were derived from foreign
sales. Foreign projects and product sales are expected to continue to account
for a substantial portion of the Company's revenues in the near future. It may
be difficult to enforce agreements against foreign-based customers. Foreign
sales, whether effected through U.S. or foreign-based entities, could also
expose the Company to certain risks, including the difficulty and expense of
maintaining foreign sales distribution channels, barriers to trade, potential
fluctuations in foreign currency exchange rates, political and economic
instability, unavailability of suitable export financing, tariff regulations,
quotas, shipping delays, foreign taxes, export restrictions, licensing
requirements, changes in duty rates, and other United States and foreign
regulations. In addition, the Company may experience additional difficulties in
providing prompt and cost effective service for its products in foreign
countries. The Company does not carry insurance against any of these risks.
INDUSTRY STANDARDS AND COMPATIBILITY WITH EQUIPMENT AND SOFTWARE. The
interactive video and CD-ROM industries are currently characterized by emerging
technological standards. Widespread commercial deployment of the Company's
products will depend on determinations by the industry as to whether such
products will be compatible with the infrastructure equipment and software which
comprise those standards. Failure to comply substantially with industry
standards in a timely manner, either as they exist at a given time or as they
may evolve in the future, could have a material adverse effect on the Company.
In some cases, to be compatible with industry standards, the Company may need to
obtain the cooperation of its suppliers, partners, and competitors, which cannot
be assured.
ERRORS AND OMISSIONS; SOFTWARE AND HARDWARE BUGS. Certain of the Company's
products consist of internally developed software and hardware component sets,
purchased software from third parties, and purchased hardware components.
Additionally, the Company outsources substantially all of the manufacturing of
its products, including the installation and configuration of certain hardware
and software components. There is a substantial risk that these components will
have or could develop certain errors, omissions, or bugs that may render the
Company's products unfit for the purposes for which they were intended. While
there are no such known errors, omissions, or bugs, there can be no assurance
that such errors, omissions, or bugs do not currently exist or will not develop
in the Company's current or future products. Any such error, omission, or bug
found in the Company's products could lead to delays in shipments, recalls of
previously shipped products, damage to the Company's reputation, and other
related problems which would have a material adverse effect on the Company.
RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT. The technology industry is
characterized by the existence of an increasing number of patents and frequent
litigation based on allegations of patent infringement. From time to time, third
parties may assert patent, copyright, and other intellectual property rights to
technologies that are important to the Company. While there currently are no
outstanding infringement claims pending by or against the Company, there can be
no assurance that third parties will not assert infringement claims against the
Company in the future, that assertions by such parties will not result in costly
litigation, or that the Company would prevail in any such litigation or be able
to license any valid and infringed patents from third parties on commercially
reasonable terms or, alternatively, to redesign products on a cost-effective
basis to avoid infringement. Any infringement claim or other litigation against
or by the Company could have a material adverse effect on the Company.
GOVERNMENT REGULATION. The Federal Communications Commission and certain
state agencies regulate certain of the Company's products and services and
certain of the users of such products and services. The Company is also subject
to regulations applicable to businesses generally, including regulations
relating to manufacturing. In addition, regulatory authorities in foreign
countries in which the Company sells or may sell its products may impose similar
or more extensive governmental regulations. Although the Company has relied
upon, and contemplates that it will continue to rely upon, its corporate
partners or interactive video system sponsors to comply with applicable
regulatory requirements, there can be no assurance that such regulations will
not materially adversely affect the Company, by jeopardizing the projects in
which the Company is participating, by imposing burdensome regulations on the
users of the
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products, by imposing sanctions that directly affect the Company, or otherwise.
Changes in the regulatory environment relating to the industries in which the
Company competes could have an adverse effect on the Company. The Company cannot
predict the effect that future regulation or regulatory changes may have on its
business.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE. The manufacture and sale
of the Company's products entails the risk of product liability claims. In
addition, many of the telephone, cable, and other large companies with which the
Company does or may do business may require financial assurances of product
reliability. The Company has product liability insurance, but may be required to
pay higher premiums associated with new product development. Product liability
insurance is expensive and there can be no assurance that additional insurance
will be available on acceptable terms, if at all, or that it will provide
adequate coverage against potential liabilities. The inability to obtain
additional insurance at an acceptable cost or to otherwise protect against
potential product liability could prevent or inhibit commercialization of the
Company's products. A successful claim brought against the Company in excess of
its insurance coverage could have a material adverse effect on the Company.
VARIABILITY OF QUARTERLY OPERATING RESULTS. Variations in the Company's
revenues and operating results occur from time to time as a result of a number
of factors, such as the number of interactive video projects in which the
Company is engaged, the completion of work or achievement of milestones on long-
term projects, and the timing and progress of the Company's product development
efforts. The timing of revenues is difficult to forecast because the Company's
sales and product development cycles for interactive video products can be
relatively long and may depend on factors such as the size and scope of its
projects. Furthermore, as a result of a variety of other factors, including the
introduction of new products and services by competitors, and pricing pressures
and economic conditions in various geographic areas where the Company's
customers and potential customers do business, the Company's sales and operating
results may vary substantially from year to year and from quarter to quarter. In
addition, the timing of revenue recognition for revenue received from long term
projects under the Company's accounting policies may also contribute to
significant variations in the Company's operating results from quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ANTICIPATED NON-CASH CHARGES. As a result of the issuance of the Bridge
Warrants in connection with the Bridge Financing at a price below the
anticipated offering price, the Company will record non-cash interest expense
and loss on early extinguishment of debt in the aggregate amount of
approximately $1,440,000. The Company will also incur significant non-cash
compensation expenses in the third quarter of 1997 related to the difference
between the exercise price of certain options and the deemed fair value of the
Common Stock underlying such options amounting to approximately $1,215,000.
CONTROL BY EXISTING STOCKHOLDERS. Upon the completion of the Offering, the
Company's existing stockholders will own approximately 51% of the outstanding
shares of Common Stock (including 27.5% beneficially owed by all directors and
executive officers as a group). As a result of such ownership, the existing
stockholders of the Company will have the ability to control the election of the
directors of the Company and the outcome of all issues submitted to a vote of
the stockholders of the Company. See "Principal Stockholders."
DILUTION. The assumed initial public offering price per Share exceeds the
book value per share of the Common Stock. Investors in the Offering will
therefore incur immediate and substantial dilution of $5.12, or 68% per Share,
from the initial public offering price. See "Dilution." Following the Offering,
the executive officers and directors of the Company will beneficially own
approximately 27.5% of the Company's issued and outstanding Common Stock, having
purchased their interest at a cost per share which is substantially below and
wholly unrelated to that which investors in the Offering will pay.
RECENT SALES BELOW OFFERING PRICE. In April, June, and July 1997, the
Company granted options to purchase an aggregate of 251,800 shares of Common
Stock at $1.38 per share, granted options to purchase
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an aggregate of 270,000 shares of Common Stock at $3.00 per share and sold, in
connection with the Bridge Financing, Bridge Warrants to purchase an aggregate
of 320,000 shares of Common Stock at $3.00 per share. In July 1997, the Company
sold to an officer of the Company, 15,000 shares of Common Stock for nominal
consideration plus the cancellation of certain anti-dilution rights. In August
1997, a former officer of the Company and a director of the Company sold 240,000
and 80,000 shares of Common Stock, respectively, to the Company for $0.50 per
share. See "Description of Securities--Options and Warrants" and "Certain
Relationships and Related Transactions."
SUBSTANTIAL OPTIONS AND WARRANTS RESERVED. The Company has reserved up to
178,929 shares of Common Stock for issuance pursuant to its 1995 Stock Option
Plan (the "1995 Plan"). To date, options to purchase an aggregate of 144,000
shares of Common Stock are authorized and outstanding under the 1995 Plan at
exercise prices ranging from $0.10 to $4.90 per share, although substantially
all of such options are exercisable at $0.10 per share. The Company has reserved
up to 200,000 shares of Common Stock for issuance pursuant to its 1997 Stock
Option Plan (the "1997 Plan," and, together with the 1995 Plan, the "Plans"). To
date, no options have been issued under the 1997 Plan. The existence of 144,000
options issued under the 1995 Plan and the Company's additional 1,272,286
outstanding options and warrants, may prove to be a hindrance to future
financings, since the holders of such warrants and options may be expected to
exercise them at a time when the Company will otherwise be able to obtain equity
capital on terms more favorable to the Company. In addition, 553,726 shares of
Common Stock are issuable upon the Conversion. The existence or exercise of such
options and the Company's outstanding warrants, and subsequent sale of the
Common Stock issuable upon such exercise and the Conversion could adversely
affect the market price of the Company's securities. See "Description of
Securities--Options and Warrants."
LACK OF DIVIDENDS. The Company has never paid any cash or other dividends
on its Common Stock. Management anticipates that, for the foreseeable future,
any earnings that may be generated from operations will be used to support its
internal growth and that dividends will not be paid to stockholders. See
"Dividend Policy."
LIMITATIONS ON LIABILITY OF DIRECTORS. The Company's Certificate of
Incorporation includes provisions to eliminate, to the full extent permitted by
law as it may from time to time be in effect, the personal liability of
directors of the Company for monetary damages arising from a breach of their
fiduciary duties as directors. The Company's Certificate of Incorporation
includes provisions to the effect that (subject to certain exceptions) the
Company shall indemnify, and upon request shall advance expenses to, any
director in connection with any action related to such a breach of their
fiduciary duties as directors to the extent that such indemnification and
advancement of expenses is permitted under such law as it may from time to time
be in effect. In addition, the Company's Certificate of Incorporation requires
that the Company indemnify, any director, officer, employee or agent of the
Company for acts which such person conducted in good faith. As a result of such
provisions, stockholders may be unable to recover damages against the directors
and officers of the Company for actions taken by them which constitute
negligence, gross negligence, or a violation of their fiduciary duties, which
may reduce the likelihood of stockholders instituting derivative litigation
against directors and officers and may discourage or deter stockholders from
suing directors, officers, employees, and agents of the Company for breaches of
their duty of care, even though such action, if successful, might otherwise
benefit the Company and its stockholders.
GENERAL ECONOMIC CONDITIONS. The industry in which the Company competes
relies in part upon consumer confidence and the availability of discretionary
income, both of which can be adversely affected during a general economic
downturn.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OR CERTIFICATE OF INCORPORATION
AND DELAWARE LAW. The Company's Certificate of Incorporation authorizes the
issuance up to 3,000,000 shares of "blank check" preferred stock, from time to
time, in one or more series, solely on the authorization of its Board of
Directors. Accordingly, the Board of Directors is empowered, without obtaining
stockholder approval, to
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fix the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, and any other rights, preferences,
privileges, and restrictions applicable to each new series of preferred stock.
The issuance of such stock could, among other results, adversely affect the
voting power of the holders of Common Stock and, under certain circumstances,
make it more difficult for a third party to gain control of the Company,
discourage bids for the Common Stock at a premium, or otherwise adversely affect
the market price of the Common Stock. Such provisions may discourage attempts to
acquire the Company. Certain provisions of Delaware law may also discourage
third party attempts to acquire control of the Company.
BROAD DISCRETION OF PROCEEDS. A significant portion of the net proceeds of
the Offering has been allocated to working capital and general corporate
purposes, including sales and marketing and the hiring of additional personnel,
and will be used for such specific purposes as management may determine.
Accordingly, management will have broad discretion with respect to the
expenditure of that portion of the net proceeds of the Offering. The amount and
timing of expenditures will vary depending upon a number of factors, including
the progress of the Company's product development and marketing efforts,
changing competitive conditions, and general economic conditions. Accordingly,
investors in the Offering will rely upon the judgment of the Company's
management with respect to a significant portion of the use of proceeds, with
only limited information concerning management's specific intentions. See "Use
of Proceeds."
NEED FOR ADDITIONAL FINANCING. The Company anticipates that the net
proceeds of the Offering, together with its existing working capital and
anticipated funds generated from operations, will be sufficient to satisfy its
operating and capital requirements for the next 18 months. Such belief is based
upon certain assumptions, and there can be no assurance that such assumptions
are correct. However, the Company may not be able to continue its operations
beyond such time without additional financing. There can be no assurance that
such additional financing will be available when needed on terms acceptable to
the Company, or at all. In addition, in connection with the 1996 Placement, the
Representative received a right of first refusal, until July 1999, to act as
placement agent or underwriter in future financings. Such right may impair the
Company's ability to obtain additional financing. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
ABSENCE OF PUBLIC MARKET; NEGOTIATED OFFERING PRICE. Prior to the Offering,
there has been no public market for the Common Stock, and there can be no
assurance that any trading market therefor will develop or, if any such market
develops, that it will be sustained. Accordingly, purchasers of the Shares may
experience difficulty selling or otherwise disposing of their Shares. The public
offering price of the Shares has been established by negotiation between the
Company and the Representative and does not bear any relationship to the
Company's book value, assets, past operating results, financial condition, or
other established criteria of value.
DELISTING OF SECURITIES FROM NASDAQ SMALLCAP MARKET; LOW STOCK PRICE. The
trading of the Company's Common Stock on the Nasdaq SmallCap Market will be
conditioned upon the Company meeting certain asset, capital and surplus,
earnings, and stock price requirements. To maintain eligibility for trading on
the Nasdaq SmallCap Market, the Company will be required to maintain total
assets in excess of $2,000,000, capital and surplus in excess of $1,000,000, and
(subject to certain exceptions) a bid price of $1.00 per share. In addition,
there are existing proposals to make such maintenance requirements more
stringent. Upon completion of the Offering and the receipt of the net proceeds
therefrom, the Company believes that it will meet the respective asset, capital
and surplus, and minimum stock price requirements. However, if the Company fails
any of the tests, the Common Stock may be delisted from trading on the Nasdaq
SmallCap Market. The effects of delisting include the limited release of the
market prices of the Company's Common Stock and limited news coverage of the
Company. Delisting may restrict investors' interest in the Company's securities
and materially adversely affect the trading market and prices for such
securities and the Company's ability to issue additional securities or to secure
additional financing. In
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addition to the risk of volatile stock prices and possible delisting, low price
stocks are subject to the additional risks of federal and state regulatory
requirements and the potential loss of effective trading markets. In particular,
if the Common Stock were delisted from trading on the Nasdaq SmallCap Market and
the trading price of the Common Stock was less than $5.00 per share, the Common
Stock could be subject to Rule 15g-9 under the Securities Exchange Act of 1934,
as amended, which, among other things, requires that broker/dealers satisfy
special sales practice requirements, including making individualized written
suitability determinations and receiving purchasers' written consent, prior to
any transaction. If the Company's securities could also be deemed penny stocks
under the Securities Enforcement and Penny Stock Reform Act of 1990, this would
require additional disclosure in connection with trades in the Company's
securities, including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market. Such requirements could severely
limit the liquidity of the Company's securities and the ability of purchasers in
the Offering to sell their securities in the secondary market.
SHARES ELIGIBLE FOR FUTURE SALE. Upon the completion of the Offering, the
Company will have 4,082,239 shares of Common Stock outstanding (4,382,239, if
the Underwriters' over-allotment option is exercised in full). Of these shares,
all of the 2,000,000 shares of Common Stock sold in the Offering (2,300,000, if
the Underwriters' over-allotment option is exercised in full) generally will be
freely transferable by persons other than affiliates of the Company, without
restriction or further registration under the Securities Act. The remaining
2,082,239 shares of Common Stock (the "Restricted Shares") outstanding were sold
by the Company in reliance on exemptions from the registration requirements of
the Securities Act and are "restricted securities" as defined in Rule 144 under
the Securities Act. Of such amount, approximately 2,051,639 of the outstanding
shares of Common Stock may be sold pursuant to Rule 144, not including shares of
Common Stock underlying certain options and warrants which may be sold under
Rule 144 pursuant to Rule 701 under the Securities Act or if "cashless exercise"
provisions are utilized in connection with the exercise thereof. The sale of a
substantial number of shares of Common Stock or the availability of Common Stock
for sale could adversely affect the market price of the Common Stock prevailing
from time to time. The Company, its officers, directors, and certain
stockholders holding an aggregate of 895,552 shares of Common Stock have entered
into agreements with the Representative which prohibit them from offering,
issuing, selling, or otherwise disposing of any securities of the Company for a
period of 18 months following the date of this Prospectus, without the prior
written consent of the Representative. In addition, certain stockholders holding
an aggregate of 426,654 shares of Common Stock have entered into agreements with
the Representative which prohibit them from offering, issuing, selling, or
otherwise disposing of any securities of the Company for a period of 12 months
following the date of this Prospectus, without the prior written consent of the
Representative. See "Principal Stockholders," "Shares Eligible for Future Sale,"
and "Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE. The market prices of equity securities
of computer technology and software companies have experienced extreme price
volatility in recent years for reasons not necessarily related to the individual
performance of specific companies. Accordingly, the market price of the Common
Stock following this Offering may be highly volatile. Factors such as
announcements by the Company or its competitors concerning products, patents,
technology, governmental regulatory actions, other events affecting computer
technology and software companies generally as well as general market and
economic conditions may have a significant effect on the market price of the
Common Stock and could cause it to fluctuate substantially.
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USE OF PROCEEDS
The net proceeds from the sale of the Shares offered hereby, at an assumed
initial public offering price of $7.50 per share, and, after deducting
underwriting discounts and commissions and other expenses of the Offering,
estimated to be, in the aggregate $2,357,600, are estimated to be approximately
$12,642,400 ($14,667,400 if the Underwriters' over-allotment option is exercised
in full).
Approximately $5,450,000 of the net proceeds of the Offering will be used to
repay the principal amount of the 1996 Notes and the Bridge Notes, along with
estimated accrued interest thereon through the estimated closing date of the
Offering. Each of the 1996 Notes and Bridge Notes bears interest at a rate of
10% per annum, compounded annually, and are due upon the earlier of (i) the
closing of the Offering or (ii) in June and July 1998, in the case of the 1996
Notes and August 8, 1998, in the case of the Bridge Notes. The 1996 Notes and
Bridge Notes were each sold as units along with warrants in the Company's 1996
Placement and Bridge Financing. As a result of the Bridge Financing, the Company
realized approximately $1,700,000 of net proceeds which funds are being used to
finance the Company's short term working capital needs and to fund expenses of
the Company in connection with the Offering.
Approximately $40,000 of the net proceeds will be used to pay obligations
under a repurchase agreement entered into with Mahmoud Youssefi, a co-founder
and former officer of the Company. Pursuant to such agreement, the Company
purchased 240,000 shares of Common Stock from Mr. Youssefi for $0.50 per share
in August 1997 and agreed, upon the consummation of the Offering, to extinguish
approximately $25,000 of lease obligations guaranteed by Mr. Youssefi and to pay
Mr. Youssefi the remaining balance (approximately $15,000) under a termination
agreement relating to the termination of Mr. Youssefi's employment with the
Company. See "Certain Relationships and Related Transactions."
The balance of the net proceeds of the Offering are intended to be used for
general corporate and working capital purposes, including sales and marketing
and the hiring of additional personnel. Any net proceeds received by the Company
from the exercise of the Underwriters' over-allotment option or the
Representative's Warrants will be added to working capital.
Pending application of the net proceeds, the Company intends to invest the
net proceeds from the Offering in short-term, interest bearing, investment
grade, debt securities, money market accounts, certificates of deposit, or
direct or guaranteed obligations of the United States government.
DIVIDEND POLICY
The Company has not paid dividends on the Common Stock since inception and
does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to retain earnings, if any, for the
development and expansion of its business. The declaration of dividends in the
future will be at the election of the Board of Directors and will depend upon
the earnings, capital requirements, and financial position of the Company,
general economic conditions, and other factors the Board of Directors deems
relevant.
16
<PAGE>
DILUTION
As of June 30, 1997, the Company had a pro forma net tangible book deficit
of approximately ($1,320,000), or ($0.63) per share of Common Stock, after
giving pro forma effect to the Conversion and the repurchase of an aggregate of
320,000 shares of Common Stock for an aggregate of $160,000 as if such
transactions had occurred on June 30, 1997. Without taking into account any
other changes in the pro forma net tangible book value of the Company after June
30, 1997, other than to give effect to the sale by the Company of the Shares
offered hereby at an assumed initial public offering price of $7.50 per share
and the receipt and application of the estimated net proceeds therefrom
(including repayment of the 1996 Notes and the Bridge Notes and accrued cash
interest thereon), the pro forma net tangible book value would have been
approximately $9,732,000, or $2.38 per share, which represents an immediate
increase in the pro forma net tangible book value of $3.01 per share to present
stockholders and an immediate dilution of $5.12 or 68% per share, to new
investors. The following table illustrates this dilution per share.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 7.50
Pro forma net tangible book value (deficit) per share at June 30, 1997.... $ (0.63)
Increase in pro forma net tangible book value per share attributable
to purchase of Shares by new investors.................................. $ 3.01
---------
Pro forma net tangible book value per share to investors after the
Offering.................................................................. $ 2.38
---------
Dilution per share to new investors......................................... $ 5.12
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis at June 30, 1997, the
number of shares of Common Stock purchased, the percentage of total shares of
Common Stock purchased, the total consideration paid, the percentage of total
consideration paid, and the average price per share of Common Stock paid by the
existing stockholders of the Company and by new investors in the Offering
(before deducting the estimated underwriting discounts and offering expenses
payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION(1)
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)(3)......................... 2,082,239 51.0% $ 5,905,000 28.2% $ 2.84
New investors....................................... 2,000,000 49.0% $ 15,000,000 71.8% $ 7.50
---------- --- ------------- ---
Total(3).......................................... 4,082,239 100% $ 20,905,000 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
- ------------------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
of shares of Common Stock held by new investors after the Offering will
increase to 2,300,000 or 52.5% of the total number of shares of Common Stock
to be outstanding after the Offering, the percentage of such shares
outstanding held by all current stockholders will correspondingly decrease
to 47.5%, the total cash consideration from new investors will increase to
$17,250,000, or 74.5% of the total cash consideration, and the percentage of
total cash consideration paid by existing stockholders will decrease to
25.5%.
(2) Includes 553,726 shares of Common Stock issuable in connection with the
Conversion.
(3) Does not include (i) 300,000 shares of Common Stock issuable upon exercise
of the Underwriters' over-allotment option, (ii) 200,000 shares of Common
Stock issuable upon exercise of the Representative's Warrants, at an
exercise price equal to $9.00 per share (iii) 320,000 shares of Common Stock
issuable upon exercise of the Bridge Warrants, at an exercise price of $3.00
per share; (iv) 209,520 shares of Common Stock issuable upon the exercise of
the 1996 Warrants at an exercise price of $8.46 per share, (v) 38,852 shares
of Common Stock issuable upon the exercise of the Hampshire Warrant at an
exercise price of $9.44 per share, (vi) 190,714 shares of Common Stock
issuable upon the exercise of the 1995 Warrants at an exercise of $4.90 per
share, (vii) 200,000 shares of Common Stock reserved for issuance under the
1997 Plan, (viii) 178,929 shares of Common Stock reserved for issuance under
the 1995 Plan, of which options to purchase 144,000 shares of Common Stock
are outstanding,
17
<PAGE>
including options to purchase 111,000 shares of Common Stock exercisable at
$0.10 per share, options to purchase 22,600 shares of Common Stock
exercisable at $1.38 per share, and options to purchase 10,400 shares of
Common Stock exercisable at $4.90 per share granted to certain of the
Company's employees and executive officers, and (ix) 513,200 shares of
Common Stock issuable upon the exercise of options granted to a director and
certain executive officers of the Company outside the Plans, including
options to purchase 14,000 shares of Common Stock exercisable at $0.10 per
share, options to purchase 229,200 shares of Common Stock exercisable at
$1.38 per share, and options to purchase 270,000 shares of Common Stock
exercisable at $3.00 per share. The exercise of any such options and
warrants may have a dilutive effect upon investors in the Offering. See
"Management--Stock Option Plans," "Certain Relationships and Related
Transactions," and "Description of Securities."
18
<PAGE>
CAPITALIZATION
The following table sets forth the short term debt and capitalization of the
Company (i) as of June 30, 1997, (ii) as of June 30, 1997 on a pro forma basis
reflecting the issuance of $2,000,000 aggregate principal amount of Bridge Notes
and (iii) on a pro forma as adjusted basis to reflect (a) the sale of 2,000,000
shares of Common Stock by the Company offered hereby at an assumed initial
public offering price of $7.50 per share and the application of the estimated
net proceeds therefrom and (b) the Conversion. See "Use of Proceeds." This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements of
the Company and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------------- ------------- --------------
<CAPTION>
<S> <C> <C> <C>
Short term debt (pro forma net of debt discount), including capital
lease obligations................................................. $ 3,502 $ 563,502 $ --
------------- ------------- --------------
------------- ------------- --------------
Long term notes payable and capital lease obligations............... 3,019,009 3,019,009 --
Preferred stock, $0.01 par value, 3,553,736 shares authorized,
including 390,344 Series A shares authorized and 163,392 Series B
shares authorized; 390,344 Series A shares issued and outstanding
actual and 163,392 Series B shares issued and outstanding actual;
no shares issued and outstanding pro forma and as adjusted........ 2,885,221 -- --
Stockholders equity:
Common stock, $0.001 par value, 15,000,000 shares authorized;
1,836,476 shares issued and 1,819,113 shares outstanding actual;
2,390,202 shares issued and 2,052,839 shares outstanding, pro
forma; and 4,390,202 shares issued and 4,052,839 shares
outstanding, pro forma as adjusted.............................. 1,836 2,390 4,390
Additional paid-in capital.......................................... 4,682,883 9,007,550 21,647,950
Treasury stock, at cost............................................. (67,500) (227,500) (227,500)
Accumulated deficit................................................. (9,622,180) (9,622,180) (10,582,180)
------------- ------------- --------------
Total stockholders' equity (deficit)............................ (5,004,961) (839,740) 10,842,660
------------- ------------- --------------
Total capitalization............................................ $ (1,982,450) $ 2,742,771 $ 10,842,660
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
- ------------------------
(1) Pro forma to give effect to (i) the Conversion and (ii) the issuance in
August 1997 of $2,000,000 aggregate principal amount of the Bridge Notes in
the Bridge Financing, debt discount of $1,440,000 related to 320,000 Bridge
Warrants issued at an exercise price below the assumed initial public
offering price of $7.50 per share, and the application of the net proceeds
therefrom to reacquire 240,000 shares of Common Stock from a former officer
and 80,000 shares of Common Stock from a director of the Company for
aggregate consideration of $160,000 ($0.50 per share). See "Certain
Relationships and Related Transactions" and Note 16 to Notes to Financial
Statements.
(2) Adjusted to give effect to the sale by the Company of the 2,000,000 Shares
offered hereby at an assumed initial public offering price of $7.50 per
share and the application of the estimated net proceeds therefrom to repay
all outstanding indebtedness which will give rise to a loss on early
extinguishment of approximately $960,000 related to unamortized debt
discount. See "Use of Proceeds" and Note 16 to Notes to Financial
Statements.
19
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data concerning the
Company and is qualified in its entirety by the more detailed information and
financial statements, including the notes thereto, included herein. The selected
financial data as of December 31, 1995 and 1996 and for each of the years then
ended are derived from the financial statements of the Company, which financial
statements have been audited by Coopers & Lybrand L.L.P., independent
accountants. The selected financial data presented below as of June 30, 1996 and
1997 and for each of the six month periods then ended are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods, applied on a basis consistent with the
audited financial statements. Operating results for the six months ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1997. The financial statements as of
December 31, 1996 and for each of the years in the two-year period ended
December 31, 1996, and the report of Coopers & Lybrand L.L.P. thereon, are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................................ $ 7,703 $ 2,530 $ 1,300 $ 1,255
Costs of revenues....................................................... 4,609 3,513 1,252 1,170
--------- --------- --------- ---------
Gross margin (loss)..................................................... 3,094 (983) 48 85
Operating expenses...................................................... 3,045 4,491 1,787 3,778
Income (loss) from operations........................................... 50 (5,474) (1,739) (3,693)
--------- --------- --------- ---------
Net income (loss)....................................................... $ 10 $ (5,512) $ (1,784) $ (3,825)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share............................................. $ 0.01 $ (2.75) $ (1.01) $ (1.61)
--------- --------- --------- ---------
--------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital (deficit)............................................... $ 2,527 $ 2,105 $ 829 $ (167)
Total assets............................................................ 5,800 5,650 4,900 4,531
Total debt.............................................................. 1,070 3,027 640 3,023
Redeemable, convertible preferred stock................................. 2,468 2,746 2,537 2,885
Stockholders' equity (deficit).......................................... (260) (2,582) (1,624) (5,005)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto and other financial information appearing elsewhere
in this Prospectus. Statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Prospectus
that are not statements of historical or current fact constitute
"forward-looking statements." Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors including those set forth under
"Risk Factors" that could cause the actual results of the Company to be
materially different from the historical results or from any future results
expressed or implied by such forward-looking statements. In addition to
statements which explicitly describe such risks and uncertainties, prospective
investors are urged to consider statements labeled with the terms "believes,"
"belief," "expects," "intends," "anticipates," or "plans" to be uncertain and
forward-looking.
OVERVIEW
Sales of interactive video products accounted for approximately 28.4% and
60.2% of revenues for the year ended December 31, 1996 and the six months ended
June 30, 1997, respectively. Although sales of CD-ROM products accounted for
most of the Company's revenues in 1996, the Company has focused most of its
sales, marketing, and research and development efforts in 1997 on its
interactive video products and intends to continue to focus primarily on such
segment in the future.
Commencing August 1996, in connection with a change of management, and until
approximately January 1997, when Kenneth D. Van Meter, the Company's current
Chief Executive Officer, began his employment with the Company, the Company
ceased substantially all of its sales efforts to permit new management to
formulate a new business plan. Accordingly, the period-to-period comparison set
forth below may not be meaningful and may not necessarily be indicative of the
results that may be expected for future periods.
Currently, the principal markets for the Company's interactive video
products are Korea, Israel, Taiwan, and China. The Company has three customers
that represented in excess of 75% of the Company's revenues for the six months
ended June 30, 1997, seven customers that represented in excess of 50% of the
Company's revenues for the year ended December 31, 1996, and four customers that
represented in excess of 90% of the Company's revenues for the year ended
December 31, 1995.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues for the six months ended June 30, 1997 were
approximately $1,254,500 compared to $1,299,900 for the same period in 1996.
Revenues from interactive video products were approximately $755,900 for the six
months ended June 30, 1997 as compared to $461,400 for the same period in 1996.
The increase in revenues from interactive video products reflects $560,000 of
revenue recognized under a design contract with En K in 1997. See "Risk
Factors--Risks Associated with Contracts with En Kay Telecom Co., Ltd." Revenues
for the same period in 1996 related to progress on the Company's two existing
long term interactive video contracts. Revenues from CD-ROM products were
$498,600 for the six months ended June 30, 1997 as compared to $838,500 for the
same period in 1996. The decrease was primarily due to the Company's focus on
Mediator and CD Workware sales rather than on the VCD Manager and Writer
products. The CD Workware products generate larger revenues than the Company's
other CD-ROM products but have a longer sales cycle. The Mediator product's main
customer is the U.S. Navy and it requested certain additional specifications
which the Company did not anticipate. Accordingly, most U.S. Navy sales were
deferred until late 1997.
21
<PAGE>
COST OF REVENUES. Costs of revenues for the six months ended June 30, 1997
were approximately $1,170,000, or 93% of revenues, as compared to approximately
$1,251,700, or 96% of revenues, in the same period in 1996 principally due to
higher labor costs for the first half of 1997, which were offset by lower direct
material costs. As a result of the above factors, the Company recorded a gross
margin of $85,000 in the first half of 1997, compared to a gross margin of
$48,000 in the first half of 1996.
OPERATING EXPENSES. Operating expenses for the six months ended June 30,
1997 were approximately $3,777,900 as compared to approximately $1,786,600 for
the same period in 1996. The increase was primarily due to non-cash compensation
expense of approximately $1,541,000 related to the issuance of options in April,
June, and July 1997 substantially below the anticipated initial public offering
price. In addition, the Company incurred costs totaling approximately $262,000
associated with hiring personnel during the six months ended June 30, 1997
including professional consultants and contract labor to assist in the Company's
operations. Depreciation and amortization for the first six months of 1997
increased by approximately $130,000 as compared to the same period in 1996. The
remaining increase in operating expenses related to incidental expenses incurred
related to the additional personnel, such as employee benefits, rent, and
supplies.
NET LOSS. As a result of the above factors, net loss for the six months
ended June 30, 1997 was $3,825,115 as compared to a net loss of $1,783,600 for
the same period in 1996. The Company expects to incur additional net losses
during the second half of 1997 as a result of certain non-cash expenses as well
as increased expenses associated with hiring additional personnel.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues for the year ended December 31, 1996 were approximately
$2,530,100 as compared to approximately $7,703,400 for the same period in 1995.
Revenues from interactive video products were $720,700 for the year ended
December 31, 1996 as compared to $4,800,000 in 1995. The decrease in revenues
from interactive video products was primarily due to the Company's inability to
complete its existing projects in Korea and Israel. The Company's focus on these
two existing projects limited the Company's ability to pursue new business.
Revenues from CD-ROM products were approximately $1,809,400 for the year ended
December 31, 1996 as compared to approximately $2,900,000 for the same period in
1995. The decrease was primarily due to a reduced focus on selling VCD Manager
related products. The Company analyzed the market and decided to use more of its
resources in selling its Mediator and CD Workware products since the VCD Manager
products were encountering increased competition and lower margins. As a result
of the change in the Company's sales focus, sales to potential customers were
slower. The Mediator product's largest customer is the U.S. Navy. The division
of the U.S. Navy responsible for the majority of the U.S. Navy's purchases
lacked federal funding, and changed its required specifications of the product.
The effort required to meet specifications to the product added to the decreased
revenues in the latter part of 1996.
COSTS OF REVENUES. Costs of revenues for the year ended December 31, 1996
were approximately $3,513,000 as compared to approximately $4,609,200 for the
same period in 1995. The majority of the decrease was attributable to a decrease
in costs of materials offset in part by an increase in labor costs associated
with the completion of long term contracts. As a result of the matters discussed
above, the Company's gross margin decreased from approximately $3,094,100 in
1995 to a loss of approximately $982,900 in 1996.
OPERATING EXPENSES. Operating expenses for the year ended December 31, 1996
were approximately $4,491,400 as compared to $3,044,600 for the same period in
1995. The increase was primarily due to reserves established for accounts
receivable, an increase in depreciation expense, and a severance package for one
of the former officers of the Company, which in the aggregate accounted for
approximately $850,000 of such costs. The remaining increases in 1996 as
compared to 1995 related to direct salaries and
22
<PAGE>
incidental expenses associated with the hiring of additional personnel, such as
employee benefits, rent, and supplies.
NET INCOME (LOSS). As a result of the above factors, net loss for the year
ended December 31, 1996 was $(5,512,000) as compared to net income of $10,000
for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of financing for the Company since its inception has been
through the issuance of common and preferred stocks and debt to accredited
investors, some of which are customers or principals of the Company's customers.
One of the Company's founders funded the initial operations through equity
infusions totaling $155,000 in 1993. In 1994, the founder loaned the Company an
additional $75,000 which, together with $12,784 in accrued interest, was
converted to 17,915 shares of Common Stock on December 31, 1995. During 1995,
the Company received net proceeds in the aggregate amount of $3,252,619 through
the issuance for approximately $1,517,500 of 390,334 shares of Series A
Preferred Stock and warrants to purchase 163,392 shares of Series B Preferred
Stock (the "Series B Warrants"). During 1995, the Company also received
approximately $800,600 of net proceeds from the exercise of the Series B
Warrants and $934,500 of net proceeds from the sale of convertible notes and
warrants. During year 1996, the Company received net proceeds of approximately
$5,404,300 through a private placement of units consisting of Common Stock,
notes, and warrants. Also in 1996, the Company converted the debt issued in
1995, to Common Stock at a rate of $4.90 per share. In August 1997, the Company
received net proceeds of approximately $1,700,000 through a private placement of
$2,000,000 principal amount of Bridge Notes and Bridge Warrants. In connection
with such private placement the Company repurchased 240,000 shares of Common
Stock from a former officer and 80,000 shares of Common Stock from a director of
the Company for aggregate consideration of $160,000 ($0.50 per share).
Additionally, the Company entered into certain capital leases for various office
equipment. The outstanding principal balance under capital lease obligations at
June 30, 1997 amounted to approximately $25,000, all of which is guaranteed by a
former officer and is to be extinguished using a portion of the net proceeds of
the Offering.
At June 30, 1997, the Company had cash and cash equivalents totaling
approximately $461,300 and a net working capital deficit of approximately
$(167,000). The Company had no significant capital spending or purchase
commitments at June 30, 1997 other than certain facility leases and inventory
component purchase commitments required in the ordinary course of its business.
The Company has no existing lines of credit or other financing arrangements
with lending institutions.
The Company anticipates that the net proceeds of the Offering, together with
its existing working capital and anticipated funds generated from operations,
will be sufficient to satisfy its operating and capital requirements for the
next 18 months.
23
<PAGE>
BUSINESS
GENERAL
The Company designs, develops, integrates, installs, operates, and supports
interactive video services hardware and software. The Company also designs,
develops, installs, and supports CD-ROM software products for business
applications. In the interactive video services area, the Company seeks to
provide solutions, including products and services developed by the Company and
by strategic partners, that enable interactive video programming and
applications to be provided to a wide variety of market niches. The Company has
installed 11 digital video servers in four countries (China, Korea, Israel, and
Taiwan), on each of the four major types of networks accommodating interactive
video services. The Company believes that its demonstrated ability to deploy and
operate interactive video systems over each of these four major network types is
a significant competitive advantage.
In the CD-ROM area, the Company provides several products for the storage
and rapid retrieval of large amounts of information. The Company believes such
products are faster, easier to use, provide more features and are operational on
more diverse network architectures than similar products and services. The
Company's CD-ROM customers include the U.S. Navy, Sprint Corp., Unisys Corp.,
Toronto Dominion Bank, and Herzog, Heine & Geduld, Inc. In December 1995, two of
the Company's products, VCD MANAGER and VCD WRITER were each chosen as IMAGING
MAGAZINE's Product of the Year in their respective product groups for CD-ROM
software. IMAGING MAGAZINE is a leading industry publication for CD-ROM business
software.
INTERACTIVE VIDEO SERVICES SEGMENT
INDUSTRY OVERVIEW
LINEAR TELEVISION AND VCR TECHNOLOGY. Until about 25 years ago,
audio-visual home entertainment choices were primarily limited to linear content
(i.e., content that plays in a pre-programmed sequence and which cannot be
controlled by the viewer). In the 1970s, the growing popularity of videocassette
recorders (VCRs) and videocassette tapes provided new choices to home viewing
audiences. VCR and videocassette technology provides viewers with the ability to
view content on demand and to manage content through the use of pause, resume,
fast-forward, rewind, and other features. VCR use, however, entails the
inconvenience of leaving the home to purchase or rent videocassettes or choosing
from among the limited content available for recording on television. Many video
stores have only a limited selection of titles, particularly in areas such as
educational content and games, and the most sought after titles are frequently
unavailable. The proliferation of cable television, satellite television,
pay-per-view, and similar technologies has improved linear television choices,
but these technologies do not offer the ability to select content to be viewed
on demand, rather than on a scheduled basis.
TELECOMMUNICATIONS COMPANIES AND BROADBAND INTERACTIVE SERVICES. In the
early 1990s, large telephone and cable companies and other interested parties,
such as television and motion picture studios, began to experiment with the idea
of providing broadband interactive services. Broadband services are those which
run over high capacity networks such as asynchronous digital subscriber lines
(ADSL), high-speed data lines (T1 and E1), hybrid fiber coaxial (HFC) lines, and
fiber to the curb (FTTC) fiber optic lines. These high-capacity networks, made
possible by breakthroughs in the ability to convert information from analog to
digital form and by improved data compression technologies, have the ability to
deliver vast quantities of data into the home. Broadband networks also have the
capacity to provide for interactivity between the home and the content
providers. Industry sources anticipate that, if broadband networks become widely
deployed, they will usher in a new age of information technology due to the
potential quantity and robustness of content, and the speed, ease of use, and
interactivity of these networks.
Following changes in the regulation of the telecommunications industry in
1992, it was anticipated that the large domestic telephone and cable companies,
and their counterparts abroad, would seek to
24
<PAGE>
deploy broadband networks and interactive services in communities on a
widespread basis. The Regional Bell Operating Companies (RBOCs), for example,
successfully sought relief in the courts to be permitted to become not only
network providers for such services, but content providers as well. Further
regulatory changes in 1995 and 1996 reduced the potential cost of deploying
broadband networks. A number of interactive video trials were run by U.S.
companies such as Time Warner, Tele-Communications, Inc. ("TCI"), GTE, Bell
Atlantic Corporation, and BellSouth Corporation, which demonstrated that the
technology did work, although in varying degrees. International
telecommunications companies, including Telecom Italia, Korea Telecom, Hong Kong
Telecom, Deutsche Telekom, and British Telecom, demonstrated similar results
abroad. These trials were generally costly, in part because they were
characterized by "trial approaches," including development and testing of
prototype versions of equipment and alpha and beta versions of newly developed
software, and experiments in pricing, content, menus, navigation and
methodologies. Further, these trials occurred during a period of rapid
technological change and improvement, and evolving standards. For example, ADSL
equipment which now typically costs a few hundred dollars per home typically
cost a few thousand dollars per home in 1992.
In 1996 and 1997, activity in the broadband services area has been
significantly reduced, and some companies, such as Bell Atlantic and TCI, have
announced reductions or delays in their deployment plans. Reasons given for such
reduction or delays include a change of focus toward local and long distance
competition, the high cost of deploying large broadband networks, business
reorganizations, delays pending the introduction of lower cost, more functional
or industry standard technology, and reduced competitive threats from within the
industry.
NARROWBAND INTERACTIVE SERVICES. Beginning in the 1980s, the proliferation
of home computers and the development of the Internet and Internet service
providers, such as America Online, Prodigy, and CompuServe, has allowed millions
of people to access interactive content and services over telephone lines.
Internet content has become increasingly rich, robust, and interesting. Industry
sources estimate that United States consumers spent more than $620 million for
Internet access in 1996 and project that such expenditures will grow to more
than $15 billion in 2001 and that the number of Internet households will grow
from an estimated 23.4 million in 1996 to 66.6 million by 2000. The Internet has
begun to condition consumers, and younger consumers in particular, to obtaining
information, experiencing content, playing games, and shopping in an interactive
fashion. However, telephony-based services such as the Internet, which are
generically referred to as narrowband services, have constraints on the quantity
of information that can be delivered and are currently unable to download large
files, such as full-length videos, at a satisfactory quality or speed. Computers
tend to be relatively expensive, compared to television sets, and computer
monitors and display technologies are not optimized for viewing video content.
Furthermore, although most people are comfortable with television as a medium,
many people, especially older consumers, lack experience with computers and may
be uncomfortable with, or are averse to, computer technology.
Different companies have employed different strategies to address the
shortcomings of narrowband networks in the absence of generally available
broadband networks. For example, WebTV (recently purchased by Microsoft) has
begun offering enhanced graphics and other features over narrowband networks,
with a television, rather than a PC, interface. In order to address the need for
higher-speed services, the cable industry has begun deploying cable modems, and
the telephone industry has begun deploying ADSL equipment, for high-speed data
access, so that the narrowband services can run at the highest possible speed on
metallic telephone or cable lines. For example, @Home Network is deploying as a
high speed internet service provider (ISP) on several cable companies' networks.
The Company believes that, despite these and other initiatives, narrowband
networks are unlikely to achieve the combination of technological accessibility
and speed, security, and robustness of transmission characteristic of broadband
systems. The public access methodology of Internet and other narrowband
networks, coupled with off-the-shelf modems, make security, both for privacy of
communications and secure commercial transactions, difficult to achieve. The
hardware and software of interactive broadband
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systems and the architecture of such networks creates a more secure environment
for such transactions. In addition, although better software, compression
methods, and other tools have enabled improvements in narrowband services, the
physical constraints of narrowband networks are substantial, compared to those
of broadband networks. Many narrowband lines, especially older lines in cities
(a preferred market segment) cannot run at 56 kilobits per second (kbps), the
highest widely-available PC modem rates. This rate does not compare to the 1.5
Megabits to 25 Megabits per second rates provided via broadband networks.
THE COMPANY'S BROADBAND INTERACTIVE VIDEO SERVICES. The Company believes
that the increase in linear viewing alternatives such as DBS have increased
consumer demand for more content choices and that the development of the
Internet has increased consumer interest in interactive content generally. The
Company believes that the inherent limitations of the Internet and other
narrowband networks, as compared with broadband networks, create a market
opportunity for a broadband technology such as the Company's that offers
superior speed and robustness, combined with a "user-friendly," television-based
technology. See "User Experience." In addition, the lack of major deployments by
the RBOCs and other major U.S. telecommunications companies in the broadband
network market has, the Company believes, kept many large companies from
actively pursuing plans to supply hardware and software for broadband networks,
thus enhancing the niche market opportunities for the Company. Even if major
domestic telecommunications companies were to currently undertake such
initiatives, it would take a substantial number of years and a massive capital
commitment to deploy large-scale broadband networks. The Company also believes
that advances in servers, set top boxes, and network equipment enable operators
of small-scale broadband networks to now offer interactive video services to
their subscribers at attractive prices. See "Potential Markets -- Marketing
Strategy."
BASIC INTERACTIVE SERVICES CONFIGURATION
An interactive video services network system typically includes the
following components: (i) network equipment, including high speed lines and
switches, for transmission of content; (ii) digital set top boxes, which receive
the content and transmit subscriber requests; (iii) digital video servers, which
store the content and control its transmission over the network; (iv) content
preparation equipment, which prepares content for transmission over the network;
and (v) software which runs user applications, and business support
applications, such as subscriber billing. See "Products."
NETWORK EQUIPMENT
High-speed lines (ADSL, T1/E1, HFC, FTTC) connect the network service
provider's central office or head end to subscribers' homes. High-speed network
switching equipment connects subscribers to content furnished by video
information providers (VIPs), either locally or internationally. There are a
large number of providers of this network equipment, including CF Alcatel,
BroadBand Technologies, Incorporated, Ericsson, Integrated Network Corporation,
Lucent Technologies, Scientific-Atlanta, Inc., and Siemens Communications.
DIGITAL SET TOP BOXES
In each subscriber's home, one or more digital set top boxes and remote
control devices are associated with each television set or personal computer
that receives the interactive video programming. Digital set top boxes feature
high-speed processors, RAM memory, high- and low-speed output ports and other
computer components.
DIGITAL VIDEO SERVERS
The digital video server is a high-speed computer to which a subscriber is
connected via the network. The basic functions of a digital video server are to
cost-effectively (i) store and rapidly retrieve and
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transmit large amounts of content, (ii) provide a large number of input/output
ports so that subscribers can access the system quickly and easily retrieve
information, (iii) function with an operating software system to manage user
applications, and (iv) provide business support systems capability to accumulate
and provide data for services such as billing, customer service, and content
management.
CONTENT PREPARATION EQUIPMENT
In order to store content in a digital server, send it over a broadband
network, and interpret the content through a digital set top box, the content
must be encoded (or converted from analog to digital format) and compressed.
Compression standards, primarily Motion Pictures Experts Group 1 and 2 (MPEG 1
and MPEG 2), have been adopted for the preparation and storage of this content.
APPLICATIONS AND BUSINESS SUPPORT SOFTWARE
Operators of interactive video systems require two kinds of software in
addition to the operating system software for servers and set top boxes.
Interactive applications software is designed to offer services, such as
shopping, travel, banking, education, medicine, video-on-demand, karaoke, and
digital music. Business support system (BSS) software includes applications such
as customer service, billing, telemarketing, content management, content
provider management, workforce management, and similar functions. Applications
and BSS software are available from a number of companies, including Arrowsmith,
EDS, IMAKE, Informix, and Strategic Group, and the Company anticipates that the
availability of applications software, in particular, will increase as broadband
networks proliferate.
PRODUCTS
The Company's products for the interactive video services market consist of
products that the Company develops and manufactures and products manufactured by
others that the Company resells and integrates into its systems.
PRODUCTS MANUFACTURED BY THE COMPANY
VIDEO SERVERS. The Company manufactures two different digital video
servers: (i) a server designed to be used with networks utilizing metallic
lines, such as ADSL, E1 and T1, which is currently deployed in Korea and Israel;
and (ii) an asynchronous transfer mode (ATM) based server designed to be used
for FTTC and HFC networks, which is currently deployed in Taiwan and China. The
Company is also developing an analog baseband output digital server, designed to
be used with cable pay-per-view and analog hospitality systems. The ATM-based
server includes improvements in cost per stream, capacity, and operating speed
over previous models and is designed to simplify connections to current networks
and provide valuable new features, including variable bit rate, data stream
grooming, data flow improvement, and higher bandwidth. The servers are all
scalable, enabling them to be used in small to large-scale deployments. For
large-scale deployments, the servers can be deployed in nodes which can include
one or more servers.
The Company has developed its own digital server operating system, known as
Multimedia Interactive eXchange (MIX). MIX is a compact, fully-featured
comprehensive proprietary operating system that interfaces with standard
software and manages all aspects of the digital server's operations. MIX
interfaces easily with industry standard billing systems and other business
support systems. MIX software is capable of operating on other companies'
servers, and the Company may license MIX to third parties if the opportunity
arises and if the Company determines that it would be strategically
advantageous. The Company has also developed middleware called NAV RT, which
simplifies the creation of basic applications and menus for interactive video
services. As a customer inducement, the Company, unlike many of its competitors,
includes the server license for MIX and NAV RT at no additional charge with each
digital video server sold.
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DIGITAL SET TOP BOXES. The Company manufactures trial quantities of digital
set top boxes, which it sold to Bezeq Telecom ("Bezeq") for use in Israel. The
Company is also developing a set top box for use with the Company's ATM-based
server, which is designed to be manufactured by a third party. The Company
expects to continue to design and develop set top boxes, which may be
manufactured by the Company in trial quantities or manufactured by volume set
top box manufacturers under license from the Company. The Company's set top
boxes are designed to operate efficiently on the Company's proprietary systems
or on systems utilizing DAVID, a set of widely-used operating system protocols
for digital set top boxes. Features include a serial output port for peripherals
and a graphics support package. More advanced designs under development include
Universal Serial Bus (a new hardware feature which allows computer and set top
boxes to connect with a variety of peripheral devices), three dimensional
graphics display, and a faster processor. The Company also believes that certain
features of its current set top box architecture may have potential value for
applications such as energy management and home security monitoring.
PRODUCTS MANUFACTURED AND DEVELOPED BY OTHERS
Certain of the products manufactured and developed by others described below
are provided pursuant to strategic alliances. See "Strategic Alliances."
NETWORK EQUIPMENT. The Company has an informal strategic arrangement with
Integrated Network Corporation ("INC") to sell INC's network equipment as part
of overall bids for end-to-end interactive video systems. The Company intends to
enter into similar arrangements with other network equipment companies. The
Company also has a preferred technology arrangement with Fore Systems, Inc.
("Fore
Systems"), a leading manufacturer of ATM switches, which has enabled the Company
to utilize Fore System's technology and to incorporate Fore Systems switches
with the Company's ATM-based servers, such as those deployed in China and
Taiwan. The Company believes that this arrangement has the potential to provide
additional joint marketing opportunities.
DIGITAL SET TOP BOXES. Although the Company manufactures trial quantities
of digital set top boxes, the Company is seeking to enter into joint marketing
arrangements with high volume manufacturers of digital set top boxes, pursuant
to which the Company would sell these set top boxes as a distributor or on an
original equipment manufacturer basis.
OTHER EQUIPMENT. Interactive video services systems also utilize components
such as digital encoders, digital production studio equipment, digital
production software, and other equipment. The Company has entered into certain
arrangements with respect to the resale by the Company of digital encoders and
digital production studio equipment and is seeking to enter into additional
arrangements with sellers of these kinds of equipment, with a view toward
enabling the Company to offer a complete end-to-end system to potential
customers on a fully integrated basis.
OTHER SOFTWARE. The Company provides a basic video-on-demand application at
no cost as part of its server software; however, most system operators will
require a suite of applications upon installation of the system, with the
potential for adding additional applications in the future. The Company has
entered into certain arrangements to provide interactive video applications
software and is seeking to enter into additional arrangements to provide
interactive video applications software and business support systems software to
the Company's customers.
SERVICES
Celerity plans to act as an overall systems integrator for interactive video
projects, which may entail integrating the end-to-end system in Celerity's
facility prior to shipment, on-site integration, or both. The scope of work
required for integration will vary widely, depending upon project size and other
variables.
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Celerity also offers a number of additional services, including classroom
training, documentation, and maintenance.
USER EXPERIENCE
Current subscribers to interactive video services enjoy a broad range of new
content and applications. Korea Telecom subscribers utilizing the Company's
technology are able to obtain movies and other video content, karaoke and
digital music, educational services, and medical information on demand. Content
available "on demand" is stored on a server and may be viewed by any subscriber
at any time chosen by the subscriber through the use of a navigation/menu
system.
The Company anticipates that applications will become more robust and
exciting in the future as new content, applications, and enhanced technical
capabilities become available. For example, travel reservations and information
could be a possible application of interactive video services. A subscriber
equipped with an ordinary television set, a digital set top box, and hand-held
remote control could select a travel company, which would be a VIP on the
system, from an on-screen menu. A typical application might show major
geographic areas, such as Asia, Europe, the United States, and the Caribbean. A
subscriber choosing Europe, for example, would be provided with a further choice
among European countries. Upon choosing a country, e.g., Spain, a subscriber
could be presented a choice among video, graphic, and data content relating to
that country, such as general interest videos and information relating to
packaged tours, airline options, and hotels. Similar applications are currently
available on narrowband services, such as the Internet; however, broadband
applications can accommodate lengthy videos and robust graphics, including
three-dimensional graphics, which cannot currently be as efficiently downloaded
or viewed via a narrowband network. The Company believes that broadband networks
could, in the future, also include applications with an electronic data
interchange (EDI) back end, which would allow the subscriber to ascertain the
availability of and confirm reservations for different products and services
such as hotel or car rental or airline tickets on a near real-time basis.
Customers would typically be billed a monthly fee for access to the
interactive services, a rental fee for the set top box, and additional fees for
the content and applications accessed, although it is anticipated that certain
VIPs would provide applications without a separate charge as a means of
increasing sales of products or services.
POTENTIAL MARKETS
The markets for interactive video systems may be categorized as public or
private networks. Public networks, such as those of telephone or cable companies
or utilities, are potentially available to all consumers within a given
geographical market. Private networks are those offered in a more limited area,
such as a hotel, hospital, college campus, or business complex.
MARKETING STRATEGY
The Company's marketing strategy is to seek customers in each of the
potential emerging markets, to encourage leading companies and organizations to
adopt its technology, and to position itself as a leading provider of
interactive video services within niche markets. The Company believes that it is
important to achieve market penetration at an early stage in the development of
particular niche markets in order to compete successfully in those markets. The
Company is marketing itself based on its demonstrated ability to install digital
video systems on each of the major network types and its potential to provide
end-to-end interactive video solutions. See "Deployments" and "Strategic
Alliances." In addition, the scalability of the Company's servers provides
flexibility in deploying interactive video services systems varying in size from
systems designed to serve five simultaneous users to those capable of serving
many thousands of users in a variety of markets on a cost-effective basis. The
Company believes that this scalability will be an attractive feature to
potential customers. The Company believes that its diversified marketing
approach provides the
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Company with flexibility in targeting emerging markets, enabling it to recognize
market opportunities and adapt to perceived changes in marketing priorities. The
Company has limited sales and marketing experience and there can be no assurance
that it will be successful in implementing its marketing plans. See "Risk
Factors -- Limited Marketing and Sales Experience."
PUBLIC NETWORKS
Potential market opportunities for the Company in public networks are:
foreign telephone and cable companies, domestic electric and gas utilities,
domestic cable companies, and domestic telephone companies.
FOREIGN TELEPHONE AND CABLE COMPANIES. The Company's current customers are
all foreign telephone or cable companies. Foreign companies have been more
active in deploying interactive video services than domestic U.S. companies. The
Company believes that, in part, this is because, in many countries, the
telephone company is owned or supported directly by the government, which may
see the addition of such services, especially public-interest services, such as
education and health-oriented services, as being beneficial to its citizens.
Because of a lack of name recognition and because the Company has lacked its own
direct sales force, the Company has been limited to responding to customer bids
and has made only limited sales in this market, which is large and rapidly
growing. Potential markets are emerging in Europe, Latin America, Canada, and
Africa, in addition to existing and emerging markets in Asia. See "Deployments."
The Company intends to hire a direct sales force and to enter into additional
strategic alliances to target these markets.
DOMESTIC ELECTRIC AND GAS UTILITIES. Domestic electric and gas utilities
are now being deregulated and are subject to intense competitive pressures and
the need to find new sources of revenue. Many electric and gas utilities have
installed or are considering installing fiber optic lines in communities for
remote meter-reading and equipment monitoring purposes. These lines could be
used to provide a full menu of video services. Electric and gas utilities are
not currently regulated in the same manner as cable and telephone companies,
typically have long standing relationships with subscribers, and often have pole
and buried cable rights-of-way which could give them a competitive advantage
over other potential entrants into the interactive video services market.
Electric utilities may also see the provision of additional services as a means
of protecting key customers, such as hospitals, from incursion by other electric
utilities outside their operating territory that can now sell to these customers
under the operating principles of the North American Power Grid System. A number
of electric utilities in the United States and in Canada have expressed an
interest in such deployments.
DOMESTIC TELEPHONE COMPANIES. The Company intends to market to independent
domestic telephone companies, of which there are more than 1,300. Major
independent local telephone companies include Sprint Corp., Buena Vista Tel,
Southern New England Telephone, and Cincinnati Bell Inc. The Company believes
that the size of local telephone company networks is well suited to the
Company's scalable, cost-efficient technology solutions. Many of these local
telephone companies, as well as long-distance carriers that are installing local
telephone networks, have installed or are planning to install modern fiber optic
networks and may be seeking new revenue opportunities to offset the costs of
installation. The Company also believes that many independent telephone
companies may have more flexible management styles than the larger
telecommunication companies, and may be quicker to commit to strategic
decisions, such as providing interactive video services to their customers. The
Company is not targeting the large local telephone companies (GTE and the
RBOCs), since it believes that, if these companies choose to enter the
interactive video services market, they will likely pursue these markets
independently or through joint ventures (such as Tele-TV and Americast).
DOMESTIC CABLE COMPANIES. The Company believes that an opportunity exists
for the smaller, well-funded cable companies, such as Cox Enterprises Inc., to
begin implementing interactive TV as they upgrade their networks from coaxial
cable to HFC, which is often the solution of choice for cable
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companies that wish to improve the quality of their service and add additional
channels. With the entrance of competitors such as DBS, cable companies are
upgrading to HFC to provide a competitive number of channels at a higher
quality. An HFC network readily supports interactive video services, and these
services would represent an additional revenue opportunity for these cable
companies and help offset a portion of the upgrade costs. The Company is also
targeting the domestic cable market by developing a digital server that has an
analog baseband output digital server which converts digital signals to analog
signals for transmission over coaxial cable and reception through an analog set
top box. This server, which is expected to be introduced within the next three
to six months, is designed to replace the current VCR-based system as a
pay-per-view source for cable companies and for the analog hospitality market.
The Company is not currently targeting major domestic cable companies. Some of
these companies, for example, TCI, expressed an interest in the interactive
video services market initially, but have not begun widespread deployment,
possibly due to the cost of converting large, diverse cable systems, such as
TCI's hundreds of cable systems, from the current metal coaxial lines to HFC
lines.
PRIVATE NETWORKS
Many hotels and resorts, colleges and universities, large apartment and
condominium complexes and businesses have installed or are considering
installing private networks, utilizing ADSL, HFC, or FTTC. Private networks are
limited in geographic size and scope, but could potentially offer a range of
interactive video and data services to their customers, generally on a
for-profit basis. Private networks have the significant advantage of relatively
rapid and low-priced deployment, as compared with large-scale public networks,
and they are well-suited to the Company's scalable technology solutions.
ANALOG HOSPITALITY. Many hotels, motels, and resorts have already installed
pay-per-view video or television systems. These systems generally consist of
small local area networks with video stored on a number of VCR players connected
to a control system. There are a number of problems with these VCR-based
solutions: (i) the VCR equipment breaks frequently and repairs generally require
a site visit; (ii) the content is stored on conventional cassette tapes, which
are vulnerable to illegal copying and which results in certain first run movies
being released by studios to hotels substantially later than their theatrical
release; (iii) the capacity of the system is limited; (iv) video quality is
sometimes poor, especially after a tape has been played a number of times, since
these systems are often not cleaned or serviced on a regular basis; and (v)
video choices are limited, due to the size, complexity, and cost of the VCR
decks and controllers. The Company is developing and expects to introduce within
the next three to six months a new digital server that has an analog baseband
output, which is designed for this market and the cable pay-per-view market. See
"Public Networks--Domestic Cable Companies." This system is designed to be
relatively inexpensive and to store video content as digital files in the
server, potentially providing higher quality video, a greater selection, lower
cost, fewer security problems and easier maintenance compared to existing
pay-per-view systems. In addition, much of the maintenance could be performed
remotely from a centralized site. Content could be loaded using computer tape
(which is highly resistant to piracy) at the hotel, or could be downloaded from
a central location over telephone lines or an inexpensive satellite downlink.
This system is designed to be compatible with the existing analog equipment,
including inexpensive analog set top boxes, but might also provide a logical
migration path to digital services in the future.
DIGITAL HOSPITALITY. Some hotels, motels, and resorts are already
considering upgrading to a full digital interactive services solution. For
example, the Company is a finalist in the bidding for a digital hospitality
project in Kuala Lumpur, Malaysia. The Company anticipates that certain upscale
hospitality properties, in particular, will install digital systems during
construction or thereafter upgrade to digital systems. These digital systems
have the potential to offer on-demand video programming, games, gaming,
shopping, health, education, and other services, in addition to high quality
digital pay-per-view programming.
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COLLEGES AND UNIVERSITIES. Many colleges, including the University of
Maryland, Rutgers, and George Mason University, have begun installing modern,
high-speed networks, usually FTTC, on their campuses. Interactive video services
provide an opportunity to add entertainment, educational, and information
services to these networks both as a source of revenue to help defray the cost
of network installation and for educational purposes. For example, popular
courses could be stored on a server for viewing by large audiences on a
fully-interactive basis, with the potential for interactive test-taking and
homework submissions. Such a system could also aid ill or physically handicapped
students, those who work part-time, and absentees.
MULTIPLE DWELLING UNITS (MDUS). Many large apartment complexes,
condominiums, neighborhoods, and other groups of homes, termed Multiple Dwelling
Units or MDUs, are now installing modern HFC, FTTC, or ADSL systems either
during construction or as an upgrade in order to attract or retain tenants or as
a source of revenue. The Company believes that certain types of MDUs, such as
retirement communities, represent particularly attractive potential markets,
since these networks might offer shopping, education, interactive health, and
entertainment services to the elderly or consumers who have limited mobility.
DIGITAL HOSPITALS. Many domestic and foreign hospitals are already wired
with state-of-the-art, high-speed digital networks (usually FTTC) which would be
suitable for interactive video services systems, although it is currently
unclear who would fund these systems. The Company is aware of at least one
project in which health care providers, such as pharmaceutical companies, have
expressed a willingness to underwrite some or all of the cost of content shown
on these systems in return for strategic positioning of advertising. The
Company's digital server and operating system technology could potentially
accommodate an architecture designed to allow patients to view advertisements
targeted to their condition, which could be attractive to advertisers. Another
potential source of funding is electric power utilities, which value hospitals
as high-demand consumers of electric power. At least one power company has
expressed preliminary interest in the idea of installing the Company's
interactive video system in a mid-sized or large hospital as part of a
multi-year power contract. Another potential source of funding for these systems
is the hospitals themselves. Interactive video systems may be password- and
ID-protected, so that the user is individually identified within the system. The
Company believes that systems could be designed to show patients targeted videos
containing medical information or instructions which they would then
electronically "sign" prior to being allowed to view entertainment services.
Such a system could be attractive to hospitals as a means of patient education
and to ensure that patients (or staff) have read and understood instructions and
other information, such as liability warnings.
BUSINESS CAMPUSES. The Company believes that broadband digital networks
represent a logical extension of intranets. Business applications, such as
training, data management, communications and public relations, could
potentially be accommodated on broadband digital networks. The availability of
such networks in a corporate campus could also be employed to attract companies
to a particular business complex. The Company believes that a relatively
inexpensive PC plug-in board could be used instead of a set top box to connect
PCs to a broadband network, while television sets and set top boxes could be
used in appropriate settings, such as corporate briefing and board rooms.
SALES AND MARKETING
The Company currently has only limited internal sales and marketing
personnel for its interactive video business. The Company is developing a
comprehensive sales and marketing plan and intends to recruit personnel to
establish a larger dedicated sales organization following the completion of the
Offering. The Company intends to market its products both directly and through
third parties, including its strategic partners (including companies that might
include the Company's products and services in integrated end-to-end interactive
video system bids), original equipment manufacturers, and agents.
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The Company utilizes several agents, primarily internationally, where the
use of such agents is customary. These include Bescom, Inc. and TeleMedia
International, Inc. in Korea, Hanshine International, Ltd. in China, WarpDrive
Marketing PTE LTD in Singapore, Riger Corporation (M) SDN BHD in Malaysia, and
Tadiran Telecommunications Limited in Israel. The Company's current arrangements
with its agents are non-exclusive, except in the case of En K (which is
exclusive in Korea as to certain server models, subject to an exception for the
IVISION project) and Bescom (which is exclusive as to the IVISION project in
Korea). See "Deployments--Korea" and "Risk Factors--Risks Associated with
Contracts with En Kay Telecom, Inc." The Company expects to continue to enter
into arrangements with agents in the future, and some of these arrangements may
be exclusive. In the domestic hospitality market, the Company intends to market
its products to the five largest firms that supply such services to hotels and
motels, such as On Command Corporation. In some cases, however, the Company may
encounter opportunities to market its hospitality-targeted products directly,
especially outside the United States.
The Company also intends to utilize diverse marketing tools, such as
development of sales and marketing materials and brochures, trade show
participation, public relations efforts, speaking engagements, magazine
articles, and advertising in trade publications.
DEPLOYMENTS
The Company has installed 11 interactive digital video servers in four
countries, consisting of seven servers in Korea, two in Israel, and one each in
Taiwan, and China. Two additional servers are being manufactured and a third is
undergoing systems integration for installation in China. The Company has
deployed these servers on four different network technologies: (i) FTTC (China),
(ii) HFC (Taiwan), (iii) high-speed data lines (E1 or T1) (Israel), and (iv)
twisted pair networks using ADSL (Korea). The Company believes that it is the
only company to have implemented interactive video systems on all four network
types. Information concerning these deployments is set forth below.
KOREA
The Republic of Korea has embarked on a project to provide fully interactive
television ("ITV") services to many of its citizens and companies. The project
is being conducted by a consortium consisting of a government-sponsored research
institute (Electronics and Television Research Institute--ETRI), the national
telephone company (Korea Telecom), and a number of Korean companies (including
Samsung Group ("Samsung"), Hyundai Corporation, Lucky Goldstar International
Corp., Daewoo Corporation, and others). Several U.S. companies, including
Celerity, participate as sub-contractors. The two largest projects are designed
to provide ITV over telephone and cable lines. In 1994, the Company participated
in a pilot interactive video trial for Korea Telecom ("KT"). Other parties to
this trial included INC, which provided the switch and served as project
integrator, and Samsung, which provided the set-top boxes. As part of this
project, the Company received its first order to develop a 40-stream digital
video server and a proprietary digital set top box. The initial phase of this
project, called IVISION, led to an order for six additional digital video
servers of a more advanced design, which have been installed in Seoul, Pusan,
Taegu, Kwangju, Taejon, and Inchon. These systems have been in operation for
nearly two years. Over 2,000 subscribers are receiving services from these
systems, including video-on-demand, movies-on-demand, karaoke, medical
programming, and music. These services are provided over normal telephone lines
using ADSL, which allows rapid and inexpensive deployment without having to
install new lines.
Bescom, Inc. ("Bescom"), a New Jersey-based distributor with business ties
to the Korean market, assisted Celerity in securing the sale of digital video
servers in Korea. To date, Celerity has received approximately $3,780,000 from
Bescom pursuant to an oral distribution agreement; in addition, approximately
$467,000 is due following successful system acceptance testing in August 1997
and subsequent completion of a reliability period. There can be no assurance
that the system acceptance or reliability testing will be successfully
completed, or that the Company will receive payment from Bescom.
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ISRAEL
In 1995, the Company received an order from Bezeq, the Israeli national
telephone company, through Tadiran Telecommunications Limited ("Tadiran"), a
major Israeli telecommunications equipment firm. The Company provided two
digital video servers and a quantity of digital set top boxes to Tadiran for
deployment on a European standard (E1) high-speed dedicated copper data line
network. Since late 1996, this project has offered services similar to those
described above to approximately 100 subscribers in Israel. Tadiran has agreed
to make total payments to the Company of approximately $1,044,000 upon the
achievement of certain milestones, of which approximately $770,000 has been paid
to date. Celerity is currently in discussions with Bezeq with respect to Phase
II of Bezeq's video server contract. There can be no assurance that Celerity
will be selected to participate in Phase II.
TAIWAN
In 1996, the Company received, from IBM Taiwan Corporation ("IBM Taiwan"),
its first order for its most advanced digital video server, an asynchronous
transfer mode ("ATM") server designed to operate on modern fiber optic networks.
The first server has been deployed in Taiwan for IBM Taiwan for use at the
Computer and Communications Research Laboratories/Industrial Technology Research
Institute ("Taiwan CCL"), under an arrangement with IBM Taiwan, the system
integrator. Under this arrangement Celerity is entitled to receive payments of
approximately $650,000 (of which approximately $400,000 has been paid to date
and the balance is to be paid upon the completion of a systems acceptance test).
This system has been operational since February 1997, serving approximately 50
subscribers. The final systems acceptance test was successfully performed. This
system is deployed on a hybrid fiber/coaxial cable network, of the type being
installed by many cable companies as they upgrade to higher capacity, higher
quality digital networks. This type of network, like FTTC (a widely used fiber
optic network), is able to support new applications, such as video conferencing,
video mail, robust three-dimensional graphics, and gaming.
CHINA
In 1997, the Company sold, through its strategic alliance with INC, two of
its advanced video servers to Guangdong Public Telecommunications Authority
("GPTA") for deployment in Shenzen and Guangxiaou, China. The Shenzen server is
installed and has passed its beta test, and the Guangxiaou server was completed
in May 1997 and is at INC's facility undergoing system integration for
anticipated shipment in August 1997. The aggregate value of this contract is
$1,400,000, of which approximately $570,000 has been received to date. In
addition, through INC, the Company has received an order to install two servers
for the Beijing Telecom Authority in late 1997. The aggregate sales price for
such order is $712,000. These are the Company's initial deployments on an FTTC
network, which is the primary type of network which telephone companies,
electric and gas utility companies, colleges, and many business and apartment
complexes are installing to replace aging twisted pair copper networks and to
potentially offer emerging digital video, data, and voice services.
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STRATEGIC ALLIANCES
The Company believes that entering into strategic alliances may give it
certain competitive advantages, including the ability to (i) reach a larger and
more diverse group of networks on which to deploy the Company's products and
services; (ii) provide a broader range of products and services; (iii) provide a
series of new and upgraded products and services, such as encoders and
applications software, which could be attractive to customers seeking to
improve, upgrade or extend their systems over an extended period of time; (iv)
offer end-to-end solutions; (v) access resources and information for utilization
in research and product development and design; (vi) test new Company designs
for compatibility with emerging technology developed by others in order to
facilitate cooperative arrangements; and (vii) pursue cooperative efforts at
trade shows and other joint marketing efforts. See "Deployments" and "Risk
Factors--Risks Associated with Contracts with En Kay Telecom Co., Ltd."
The Company is actively seeking additional strategic alliances and has hired
a key executive as Vice President of Business Development to identify, obtain,
and manage these relationships. The Company is seeking additional alliances with
(i) network system providers for technical interconnection and joint marketing;
(ii) hardware manufacturers of real-time encoders, multiplexers, digital set top
boxes, and related equipment; (iii) content acquisition and management
companies; (iv) hospitality system vendors and distributors; (v) interactive
applications software developers; and (vi) business support systems software
developers.
The Company has commenced discussions as to certain of these relationships,
while others are part of the Company's strategic plan, but are not yet in
progress. No assurance can be given that the Company will be successful in
entering into such strategic alliances on acceptable terms or, if any such
strategic alliances are entered into, that the Company will realize the
anticipated benefits from such strategic alliances. See "Risk Factors--Need for
Strategic Alliances."
The Company has entered into strategic alliances with the following
companies:
INTEGRATED NETWORK CORPORATION does joint marketing with the Company related
to INC's network switching equipment. INC was directly responsible for the
Company's participation in projects with Guangdong PTA, Beijing Telecom
Authority, and Taiwan CCL, and acted as a subcontractor along with the Company
to Bescom in Korea. The Company has bids in progress with INC in Israel,
Malaysia, and Singapore, although there can be no assurance that any of such
bids will be accepted.
TADIRAN TELECOMMUNICATIONS LIMITED is a manufacturer and distributor of
telecommunications equipment in Israel and internationally. Tadiran is also the
agent for the Company's Israel project and is a distributor of the Company's
products.
FORE SYSTEMS is a leading manufacturer of ATM switches. The Company's
agreement with Fore Systems provides for joint marketing and technical
cooperation.
The Company also has strategic alliances with MINERVA SYSTEMS INC.
("Minerva"), a leading manufacturer of digital MPEG encoders, and COMMUNICATIONS
ENGINEERING, INC. ("CEI"), a leading provider of digital production studios,
although, to date, no sales have been made pursuant to these arrangements. The
Company's agreement with Minerva provides for joint marketing, a discounted
distributor sales program, and a discounted laboratory system. The Company's
distribution agreement with CEI allows the Company to bid CEI's systems as part
of Company projects.
COMPETITION
The interactive video services market is highly competitive and
characterized by changing technology and evolving industry standards. In this
area, the Company's competitors include a number of companies, many of which are
significantly larger than the Company and which have greater financial and other
resources or which have entered into strategic alliances with such companies.
Such competition includes
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numerous companies including (i) developers of narrowband solutions (for
applications like the Internet; (ii) manufacturers of very large servers (E.G.,
massively parallel processors, such as those developed by nCube, Sequent
Computer Systems, Inc., Hewlett Packard Co., DEC International, Inc., AT&T Corp.
and IBM) which are generally employed for very large deployments such as whole
cities, but which may not be scalable for smaller market deployments; (iii)
direct competitors to the Company that target the same niche markets as the
Company; (iv) manufacturers of set top boxes, such as Acorn, General Instrument,
Panasonic, Samsung, Scientific Atlantic, Stellar One, and Zenith; and (v)
manufacturers of content preparation equipment, such as DiviCom, Future Tel,
Nuko, Scopus, Vela, Panasonic, Silicon Graphics, and Sony. Although many
manufacturers of large servers have implemented trial deployments of digital
video services, the Company believes that, in almost every case, these
deployments involved general purpose computers which had not been designed for
such interactive video applications. Direct competitors include SeaChange
Systems, Inc., Concurrent Computer Corporation, and IPC. Competitive factors in
the interactive video services market include completeness of features, product
scalability and functionality, network compatibility, product quality,
reliability and price, marketing and sales resources, and customer service and
support. The Company competes on the basis of its demonstrated ability to
install digital video systems on each of the four major types of networks
accomodating interactive video services and its ability to offer economically
viable solutions based on the scalability of its systems. See "Risk
Factors--Competition" and "--Product Obsolescence; Technological Change."
CD-ROM SEGMENT
Industry Overview
Many businesses and other organizations today create, receive and process
large quantities of documents, images, and other records. Some businesses and
organizations, including government units and finance and telecommunications
firms, have begun storing records on CD-ROM disks, disk drives, changers, or
larger CD-ROM systems that include towers and jukeboxes. These systems have many
advantages compared to paper records, including lower costs, compactness,
accuracy and ease of search and retrieval. Although other types of paperless
storage media are available, including RAM, microfilm computer hard disk,
WORM/magneto and tape, CD-ROM offers a standard storage format, enormous storage
capacity, reliability, and random access to the stored data. In order to
optimize use of such systems, they are normally connected to a number of users
via local area networks (LANs) or even at remote locations. Various kinds of
CD-ROM software, such as that offered by the Company, is required to process
information for storage, route it to the proper storage device, archive it, and
search for and retrieve it as needed.
The growing popularity of CD-ROM information storage method is attested by
the increased sales of CD changers that can accomodate 100 to 150 disks, the
most popular type in use. Shipments of these units grew from 1,000 units in 1994
to more than 3,500 units in 1995, according to Disk Trend Magazine. The
electronic document imaging market has also continued to grow, with much of the
growth due to increased acceptance of CD-ROM applications and computer output to
laser disk (COLD) systems. The Company's hardware and software products have
application in both CD-ROM and COLD systems.
The data networks for these systems are commonly configured using one of
three standard operating systems: (i) NetWare, a Novell product used for PC
applications; (ii) NFS, used on larger UNIX-based systems; and (iii) Windows NT,
the fastest growing network operating system. The Company's software products
function on each of these operating systems, and on a wide range of hardware
including scanners, PCs, minicomputers, mainframe computers, and CD jukeboxes.
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PRODUCTS
The Company's CD-ROM division has four major products, all of which are
designed to make document and image storage, management, and retrieval easy,
cost-effective, and more useful for businesses. MEDIATOR provides access to
CD-ROM towers and changers for Novell, UNIX, and Windows NT clients. VIRTUAL CD
MANAGER transforms CD-ROM changers into multi-user information libraries
connected to a Novell network. Like MEDIATOR, VIRTUAL CD MANAGER displays all
the CD devices under a single drive letter, enabling fast and simple access to
information. VIRTUAL CD WRITER is a Novell file extension that allows a large
group of users on a Novell network to record data on CD-ROMs in a streamlined,
single-step process. VIRTUAL CD WRITER and VIRTUAL CD MANAGER, used together,
provide a complete CD-ROM recording and retrieval solution for Novell networks.
CD WorkWare is a group of electronic document storage and imaging tools which
provide information management, indexing, and search capabilities. This product
allows mainframes or minicomputers to print, scan, or tape transfer output onto
a Novell network where documents are placed in an on-line CD-ROM library that
can be accessed by any network user. CD WORKWARE is sold alone or bundled with
the Company's other CD products.
SALES AND MARKETING
The Company's markets its CD-ROM products through the Company's direct sales
and marketing personnel, principally to industries where there is extensive use
of electronic document and imaging and management such as financial services,
healthcare, government, and telecommunications. In addition, the Company markets
its CD-ROM products through sales and marketing materials and brochures, trade
show participation, public relations efforts, speaking engagements and
advertising in trade publications.
COMPETITION
The CD-ROM market is competitive and characterized by changing technology
and evolving industry standards. In this area, the Company's competitors include
a number of companies, many of which are significantly larger than the Company
and have substantially greater financial and other resources. Competitive
factors in the CD-ROM market include completeness of features, product
scalability and functionality, product quality, reliability and price, marketing
and sales resources, distribution channels, and customer service and support.
The Company's competitors with respect to its CD-ROM products include Eastman
Kodak, Smart Storage Inc., Optical Technology Grove, IXOS, Axis Technology,
TenX, and Alchemy. See "Risk Factors--Competition."
INTERACTIVE VIDEO AND CD-ROM SEGMENTS
INTELLECTUAL PROPERTY
The Company does not have any patents on its products and has not filed
patent applications on any products. The Company regards the products that it
owns as proprietary and relies primarily on a combination of trade secret laws,
nondisclosure agreements, other technical copy protection methods (such as
embedded coding), and copyright (where applicable) to protect its rights in and
to its products. It is the Company's policy that all employees and third-party
developers sign nondisclosure agreements. However, this may not afford the
Company sufficient protection for its know-how and its proprietary products.
Other parties may develop similar know-how and products, duplicate the Company's
know-how and products or develop patents that would materially and adversely
affect the Company's business, financial condition and results of operations.
Although the Company believes that its products and services do not infringe the
rights of third parties, and although the Company has not received notice of any
infringement claims, third parties may assert infringement claims against the
Company, and such claims may result in the Company being required to enter into
royalty arrangements, pay damages, or defend litigation, any of which could
materially and adversely affect the Company's business, financial condition and
results of operations. See "Risk Factors--Lack of Patent and Copyright
Protection."
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MANUFACTURING AND MATERIALS
The Company orders the component parts of its products from a number of
outside suppliers and assembles and tests the products at its own facilities.
The Company purchases certain raw materials, components, and subassemblies
included in the Company's products from a limited group of suppliers and does
not maintain long-term supply contracts with its suppliers. The disruption or
termination of the Company's sources of supply could have a material adverse
effect on the Company's business and results of operations. While the Company is
aware of alternative suppliers for most of these products, there can be no
assurance that any supplier could be replaced in a timely manner. See "Risk
Factors--Dependence on Suppliers; Marketing Risks."
QUALITY CONTROL, SERVICE AND WARRANTIES
The Company's products must successfully pass tests at each important stage
of the manufacturing process. The Company offers maintenance and support
programs for its products that provide maintenance, telephone support,
enhancements, and upgrades.
The Company generally warrants its interactive video servers to be free from
defects in material and workmanship for one year from the completion of the
final acceptance test. At the end of the warranty period, the Company offers
maintenance and support programs. In light of the fact that the Company has only
begun selling limited quantities of its interactive video server products in the
past few years, the Company has no basis on which to predict the likelihood of
substantial warranty claims for such products. In some cases, customers may
require a longer or more extensive warranty as part of the competitive bid
process. See "Risk Factors--Product Liability and Availability of Insurance."
The Company warrants its CD-ROM products for 30 days after purchase, with a
replacement or repair option on such CD-ROM products. There have been no
material warranty claims in connection with the CD-ROM products during the past
several years. The Company also provides its CD-ROM customers with access to a
telephone help desk for one year after purchase.
EMPLOYEES
As of June 30, 1997, the Company had 62 full-time employees, approximately
38 of whom were employed in the engineering and product development area, seven
of whom fulfilled marketing and sales functions and 17 of whom fulfilled
management or administrative roles. Subject to the availability of funds, the
Company intends to recruit approximately 60 employees for its engineering,
sales, and operations staff over the next 12 months. The Company's employees are
not represented by a union or governed by a collective bargaining agreement.
PROPERTIES
The Company maintains its executive offices in approximately 11,800 square
feet of space in Knoxville, Tennessee pursuant to a lease expiring in February
28, 2000. Monthly lease payments average approximately $11,000 over the term of
the lease.
LEGAL PROCEEDINGS
The Company knows of no material litigation or proceeding pending,
threatened or contemplated to which the Company is or may become a party. See
"Risk Factors--Risks Associated with Contracts with En Kay Telecom Co., Ltd."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Kenneth D. Van Meter................................. 50 President, Chief Executive Officer and Chairman of
the Board
Glenn West........................................... 38 Executive Vice-President, Director of Technology, and
Director
William R. Chambers.................................. 45 Vice-President of Business Development
Doyal H. Hodge....................................... 43 Vice-President and Chief Financial Officer
Mark Cromwell........................................ 43 Vice-President of Engineering
Fenton Scruggs(1).................................... 59 Director
Donald Greenhouse(1)................................. 61 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
KENNETH D. VAN METER--Mr. Van Meter has been the President and Chief
Executive Officer of the Company since January 20, 1997. He was elected Chairman
of the Board on March 25, 1997. From May 1995 to January 1997, Mr. Van Meter
served as Vice President, Operations, for Tele-TV Systems, a limited partnership
owned by Bell Atlantic Corporation ("Bell Atlantic"), NYNEX, and Pacific
Telesis, which was engaged in providing systems, software, and services for its
three parents in the interactive digital services industry. From June 1994 to
May 1995, Mr. Van Meter was President of Bell Atlantic Video Services
Interactive Multimedia Platforms, a wholly-owned subsidiary of Bell Atlantic.
From April 1993 to June 1994, Mr. Van Meter was Vice President of Bell Atlantic
Video Services. Prior to joining Bell Atlantic, from 1991 to 1993, Mr. Van Meter
was Vice President and General Manager for Thomas Cook Limited, a travel
services company. From 1989 to 1991, Mr. Van Meter was Group Vice President for
two divisions of National Data Corporation ("NDC"). From 1984 to 1989, Mr. Van
Meter was Director and General Manager of two businesses for Sprint Corp.,
United Business Communications (shared tenant services), and the Meeting Channel
(2-way digital video teleconferencing). Mr. Van Meter holds an MBA with highest
honors in management and marketing from the University of Georgia, and a B.S.
with high honors in Chemistry from West Virginia University.
GLENN WEST--Mr. West co-founded the Company in 1993 and has served as
Executive Vice-President and Director of Technology since its inception. Prior
to co-founding the Company, from 1987 to 1993, Mr. West served as Senior Systems
Engineer for Data Research and Applications, a software company.
WILLIAM R. CHAMBERS--Mr. Chambers has been Vice President of Business
Development of the Company since April 1997. From June 1996 to April 1997, Mr.
Chambers was Senior Counsel at Tele-TV Systems. Prior to joining Tele-TV
Systems, Mr. Chambers spent 20 years in private law practice in the Washington,
D.C. area at Verner, Liipfert, Bernhard, MacPherson & Hand, from May 1995 to
June 1996, and at Watt, Tiedorf & Hoffer, from 1978 to 1995. Mr. Chambers also
serves as Chief Counsel of the Company. Mr. Chambers received a B.A. degree,
with honors, in Economics from Princeton University and a J.D., with honors,
from the National Law Center, George Washington University.
DOYAL H. HODGE--Mr. Hodge has been Vice President and Chief Financial
Officer of the Company since January 20, 1997. Mr. Hodge, a certified public
accountant, has over 20 years of experience in accounting and financial
management. Prior to joining the Company, from July 1993 to January 1997, Mr.
Hodge was Vice President and General Manager of Theta Systems, Inc., a computer
distribution company. Before joining Theta Systems, from April 1988 until July
1993, Mr. Hodge was a controller of two divisions for Quadrex Corporation
("Quadrex"), an engineering support and environmental company in the utility
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industry. Mr. Hodge held positions of Chief Financial Officer, Controller, and
Financial Manager at various companies. In April 1996, Mr. Hodge was named as a
defendant in a lawsuit brought against certain of the former officers and
directors of Quadrex, Price Waterhouse LLP (Quadrex' auditors), and Mr. Hodge
alleging violations of federal and state securities laws in connection with the
issuance by Quadrex of its common stock in connection with the acquisition of
the plaintiff's business. Mr. Hodge, who was only the controller of two
divisions of Quadrex during the relevant period, has advised the Company that he
believes the allegations against him are without merit. He holds a B.S. in
Business Administration, Accounting, from the University of Tennessee, and has
two years of post-graduate study in Law.
MARK CROMWELL--Mr. Cromwell joined the Company as Vice President of
Engineering in August, 1997. Prior to joining the Company, Mr. Cromwell was Vice
President of Transmission Product Engineering with DSC Communications
Corporation, where he worked from June 1984 to August 1997. Mr. Cromwell also
held engineering positions with Mostek Corporation, the Electronics Division of
the Chrysler Corporation and General Dynamics. He holds an MSEE from Southern
Methodist University and a B.S. in Physics from the University of Tennessee, and
has done postgraduate work in Management at the University of Texas in Dallas.
FENTON SCRUGGS--Dr. Scruggs funded the initial start-up of the Company, and
has been a member of the Company's Board of Directors since the Company's
inception in 1993. Dr. Scruggs is a Board Certified Pathologist from
Chattanooga, Tennessee, who has been in private practice since 1965. Dr. Scruggs
received his undergraduate degree from University of Virginia in 1959 and his
graduate degree from the University of Tennessee in 1962. Dr. Scruggs completed
his residency at Memphis Memorial Hospital and was a General Medical Officer in
the U.S. Air Force from 1963 to 1965.
DONALD GREENHOUSE--Mr. Greenhouse has been a member of the Company's Board
of Directors, as the designee of the holders of the Company's preferred stock,
since 1995. Mr. Greenhouse also served as interim Chief Executive Officer of the
Company from August 1996 until January 1997. Mr. Greenhouse is President and
Chief Executive Officer of Seneca Point Associates, Inc., a consulting firm
founded by him in November 1989. Mr. Greenhouse has approximately 40 years of
management experience in manufacturing, technology and service industries.
Seneca Point Associates, Inc. is a non-traditional consulting firm engaged by
clients nationally to fill full-time senior management positions.
Each director holds office until the Company's annual meeting of
stockholders and until his successor is duly elected and qualified. The Company
intends to establish an Audit Committee following completion of the Offering.
Officers are elected by the Board of Directors and hold office at the discretion
of the Board of Directors. There are no family relationships between any of the
directors or executive officers of the Company.
DIRECTOR COMPENSATION
Directors do not receive compensation for serving on the Board of Directors
or fees for attending meetings of the Board of Directors; however, they are
reimbursed for related expenses. The Company expects to reconsider its policies
on director compensation in connection with its efforts to recruit additional
outside directors.
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EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities for the fiscal years ended December 31, 1996, 1995
and 1994 paid to Kenneth D. Van Meter, the Company's Chairman of the Board,
President, and Chief Executive Officer, to Glenn West, Executive Vice President
and Director of Technology, and Mahmoud Youssefi, the Company's former Chief
Executive Officer (Messrs. Van Meter, West, and Youssefi, together the "Named
Executive Officers"). No other executive officer received compensation exceeding
$100,000 during the fiscal year ended December 31, 1996, 1995, or 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------- -------------------------- -------------
<CAPTION>
OTHER RESTRICTED SECURITIES LONG-TERM
ANNUAL STOCK UNDERLYING INCENTIVE
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS PLAN PAYOUT
- ------------------------------- --------- --------- --------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth D. Van Meter(1)........ 1996 -- -- -- -- -- --
Chairman of the Board, Chief 1995 -- -- -- -- -- --
Executive Officer, and 1994 -- -- -- -- -- --
President
Glenn West..................... 1996 $ 134,372 -- -- -- -- --
Executive Vice President and 1995 $ 134,198 -- -- -- -- --
Director 1994 $ 72,000 -- -- -- -- --
Mahmoud Youssefi............... 1996 $ 134,372 -- -- -- -- --
Former Chief Executive 1995 $ 131,166 -- -- -- -- --
Officer and former Director 1994 $ 66,000 -- -- -- -- --
<CAPTION>
<S> <C>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION
- ------------------------------- -------------
<S> <C>
Kenneth D. Van Meter(1)........ --
Chairman of the Board, Chief --
Executive Officer, and --
President
Glenn West..................... --
Executive Vice President and --
Director --
Mahmoud Youssefi............... --
Former Chief Executive --
Officer and former Director --
</TABLE>
- ------------------------
(1) Mr. Van Meter joined the Company on January 20, 1997. Pursuant to his
employment agreement, Mr. Van Meter is entitled to receive a salary of
$162,000 for the 1997 fiscal year and a bonus equal to up to 99% of his base
salary. See "Employment Agreements" below.
The following table sets forth certain information concerning options
granted to the Named Executive Officers during the fiscal year ended December
31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS INDIVIDUALS IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR PER SHARE DATE
- -------------------------------------------------------------- ----------- --------------- ----------- -----------
Kenneth D. Van Meter (1)...................................... -- -- -- --
Glenn West.................................................... -- -- -- --
Mahmoud Youssefi.............................................. -- -- -- --
</TABLE>
- ------------------------
(1) For a discussion with respect to options granted to Mr. Van Meter in 1997,
see "Management--Stock Option Plans; Options Granted Outside the Plans."
41
<PAGE>
The following table sets forth certain information concerning the number and
value of securities underlying exercisable and unexercisable stock options as of
the fiscal year ended December 31, 1996 by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 1996 DECEMBER 31, 1996
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------- ----------- ---------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Kenneth D. Van Meter................. -- -- -- --
Glenn West........................... -- -- -- --
Mahmoud Youssefi..................... -- -- -- --
</TABLE>
STOCK OPTION PLANS
On August 10, 1995, the Board of Directors and stockholders adopted the
Company's 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan provides for
the grant of options to purchase up to 178,929 shares of Common Stock to
employees and officers of the Company. In August, 1997, the Board of Directors
and the stockholders adopted the Company's 1997 Stock Option Plan (the "1997
Plan," and, together with the 1995 Plan, the "Plans"). The 1997 Plan provides
for the grant of options to purchase up to 200,000 shares of Common Stock to
employees, directors, and officers of the Company. Options granted under the
Plans may be either "incentive stock options" within the meaning of Section 422A
of the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified
options.
The Plans are administered by the Board of Directors which serves as the
stock option committee and which determines, among other things, those
individuals who receive options, the time period during which the options may be
partially or fully exercised, the number of shares of Common Stock issuable upon
the exercise of each option, and the option exercise price.
The exercise price per share of Common Stock subject to an incentive stock
option may not be less than the fair market value per share of Common Stock on
the date the option is granted. The per share exercise price of the Common Stock
subject to a non-qualified option may be established by the Board of Directors.
The aggregate fair market value (determined as of the date the option is
granted) of Common Stock for which any person may be granted incentive stock
options which first become exercisable in any calendar year may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to such person, more than 10% of the total
combined voting power of all classes of capital stock of the Company (a "10%
Stockholder") shall be eligible to receive any incentive stock options under the
Plan unless the exercise price is at least 110% of the fair market value of the
shares of Common Stock subject to the option, determined on the date of grant.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution and, during the lifetime of an optionee, the
option will be exercisable only by the optionee or a representative of such
optionee. In the event of termination of employment other than by death or
disability, the optionee will have no more than three months after such
termination during which the optionee shall be entitled to exercise the option,
unless otherwise determined by the stock option committee. Upon termination of
employment of an optionee by reason of death, such optionee's options remain
exercisable for one year thereafter to the extent such options were exercisable
on the date of such termination. Under the 1997 Plan, upon termination of
employment of an optionee by reason of total disability (as defined in the 1997
Plan) such optionee's options remain exercisable for one year thereafter.
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Options under the 1995 Plan must be issued within 10 years from August 10,
1995, the effective date of the 1995 Plan. Options under the 1997 Plan must be
issued within 10 years from August 6, 1997, the effective date of the 1997 Plan.
Incentive stock options granted under the Plans cannot be exercised more than 10
years from the date of grant. Incentive stock options issued to a 10%
Stockholder are limited to five-year terms. Payment of the exercise price for
options granted under the Plans may be made in cash or, if approved by the Board
of Directors of the Company, by delivery to the Company of shares of Common
Stock already owned by the optionee having a fair market value equal to the
exercise price of the options being exercised, or by a combination of such
methods. Therefore, an optionee may be able to tender shares of Common Stock to
purchase additional shares of Common Stock and may theoretically exercise all of
such optionee's stock options with no additional investment other than the
purchase of the original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the Plan from which they were granted.
Options to purchase 144,000 shares of Common Stock are outstanding under the
1995 Plan at exercise prices ranging from $0.10 to $4.90 per share, although
substantially all of such options are exercisable at $0.10 per share. Of such
optionees, Messrs. Hodge and Chambers, officers of the Company, each have
options to purchase 10,000 shares of Common Stock at $1.38 per share. No options
are outstanding under the 1997 Plan; however, the Company has agreed to grant
Mark Cromwell, an officer of the Company, options to purchase 24,000 shares of
Common Stock by December 31, 1997 at an exercise price equal to the market price
of the Common Stock on the date of grant.
OPTIONS GRANTED OUTSIDE THE PLANS
In addition to the options which may be granted under the Plans, the Company
has granted options to purchase 513,200 shares of Common Stock outside of the
Plans, including: (i) options granted to Donald Greenhouse, a director of the
Company to purchase (x) 14,000 shares of Common Stock at an exercise price of
$0.10 per share and (y) 26,000 shares of Common Stock at an exercise price of
$1.38 per share; (ii) options to purchase 203,200 shares of Common Stock granted
to officers of the Company, including 183,200 to Kenneth Van Meter and 10,000 to
each of Doyal Hodge and William Chambers at an exercise price of $1.38 per
share; and (iii) options to purchase 230,000 shares of Common Stock granted to
Kenneth Van Meter and options to purchase 20,000 shares of Common Stock granted
to each of Doyal Hodge and William Chambers at an exercise price of $3.00 per
share.
401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the "401(k) Plan"), pursuant
to which the Company, at its discretion each year, may make contributions to
such plan which match a certain percentage, as determined by the Company, of the
contributions made by each employee. The Company may elect not to make matching
contributions to the 401(k) Plan in any given year. The Company made matching
contributions with respect to fiscal 1996 (an aggregate of approximately
$29,000) and has not yet made any determinations with respect to fiscal 1997.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Van Meter, as
amended, which expires January 20, 2000. Pursuant to his employment agreement,
Mr. Van Meter receives an annual base salary of $162,000 and may, at the
discretion of the Board of Directors, receive an annual incentive bonus equal to
up to 99% of Mr. Van Meter's base salary if he and the Company reach certain
milestones. Up to two-thirds of such incentive bonus is to be awarded and paid
within thirty days following the end of each calendar year and up to the
remaining one third of such bonus is to be awarded at the end of each calendar
year and vest in two equal installments on the first and second anniversaries of
the date of the award. In connection with his employment, Mr. Van Meter
purchased 15,000 shares of Common Stock for nominal
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consideration plus the cancellation of certain anti-dilution rights and received
options to purchase 183,200 shares of Common Stock at $1.38 per share and
options to purchase 230,000 shares of Common Stock at $3.00 per share.
Additionally, Mr. Van Meter is entitled to reimbursement of up to $45,000 for
expenses incurred as a result of his relocation.
The Company has entered into an employment agreement with Mr. West which
expires on May 1, 2000. Pursuant to his employment agreement, Mr. West received
a base salary of $134,372 in 1996. Such base salary is subject to increase at
the discretion of the Board of Directors based upon, among other things, the
performance of the Company and the performance, duties, and responsibilities of
Mr. West. The employment agreement also provides that Mr. West will not compete
with the Company for two years after the termination of his employment. The
employment agreement is terminable by the Company for cause upon the occurrence
of certain events, or upon physical or mental disability or incapacity.
Pursuant to employment agreements with the Company, William Chambers, Mark
Cromwell, and Doyal Hodge are receiving salaries of $125,000, $125,000, and
$80,000 per annum, respectively. Pursuant to Mr. Chambers' agreement with the
Company, he is eligible to receive, (i) at the discretion of the Board of
Directors of the Company, a bonus of up to twenty five percent (25%) of his
annual salary, and (ii) reimbursement in the amount of $25,000 for expenses
incurred as a result of his relocation. Pursuant to Mr. Cromwell's agreement
with the Company, he is eligible to receive (i) at the discretion of the Board
of Directors of the Company, a bonus of up to twenty-five percent (25%) of his
annual salary, and (ii) reimbursement of up to $30,000 for expenses incurred in
his relocation. Pursuant to Mr. Hodge's agreement with the Company, he is
eligible to receive, at the discretion of the Board of Directors of the Company,
up to $32,000 per annum in incentive compensation. In connection with their
employment, Messrs. Chambers and Hodge have also each received options to
purchase 20,000 shares of Common Stock at an exercise price of $1.38 and options
to purchase 20,000 shares of Common Stock at an exercise price of $3.00 per
share and, by December 31, 1997, subject to the approval of the Board of
Directors of the Company, Mr. Cromwell will receive an option to purchase 24,000
shares of Common Stock at an exercise price per share equal to the market price
of the Common Stock on the date of grant. Messrs. Chamber's, Cromwell's, and
Hodge's employment with the Company may be terminated by either the employee or
the Company at any time.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's voting securities as of the
date of this Prospectus and as adjusted to reflect the sale of 2,000,000 shares
of Common Stock offered hereby by (i) each person who is known by the Company to
own of record or beneficially more than 5% of the outstanding Common Stock, (ii)
each of the Company's directors and the Named Executive Officers and (iii) all
directors and executive officers of the Company as a group. Unless otherwise
indicated, each of the stockholders listed in the table below has sole voting
and dispositive power with respect to the shares beneficially owned by such
stockholder.
<TABLE>
<CAPTION>
PERCENT OF CLASS(1)
-------------------------------
<S> <C> <C> <C>
NUMBER OF SHARES
BENEFICIALLY BEFORE
NAME OF BENEFICIAL OWNER(2) OWNED OFFERING AFTER OFFERING
- ----------------------------------------------------- --------------------------- -------------- ---------------
Glenn West........................................... 382,636 18.4% 9.4%
Dr. Fenton Scruggs................................... 337,915 16.2% 8.3%
Donald Greenhouse(3)................................. 40,000(4) 1.9% 1.0%
Kenneth D. Van Meter................................. 428,200(5) 17.2% 9.5%
Mahmoud Youssefi(6).................................. 160,000 7.7% 3.9%
Special Situations Fund.............................. 198,064(7) 9.3% 4.8%
All directors and executive officers as a group (six
persons) (3)(4)(5)(8).............................. 1,268,752 48.5% 27.5%
</TABLE>
- ------------------------
(1) For each beneficial owner, shares of Common Stock subject to securities
exercisable or convertible within 60 days of the date of this Prospectus are
deemed outstanding for computing the percentage of such beneficial owner.
(2) The address for Messrs. West, Greenhouse, Van Meter, and Dr. Scruggs is c/o
Celerity Systems, Inc., 9051 Executive Park Drive, Suite 302, Knoxville,
Tennessee 37932.
(3) Mr. Greenhouse is the father of David Greenhouse who is a principal of the
Special Situations Fund. Mr. Greenhouse disclaims beneficial ownership of
the shares owned by such fund.
(4) Includes options to purchase 40,000 shares of Common Stock which will be
exercisable upon consummation of the Offering.
(5) Includes 413,200 shares of Common Stock which are either subject to
currently exercisable stock options or will be exercisable upon consummation
of the Offering. Also includes an aggregate of 10,000 shares of Common Stock
owned by Mr. Van Meter's children.
(6) The address of Mr. Youssefi is 211 Flynn Road, Walland, Tennessee 37886.
(7) Includes warrants to purchase 51,020 shares of Common Stock which are
currently exercisable. The address of Special Situations Fund is 153 East
53rd Street, New York, New York 10022.
(8) Includes options issued to executive officers of the Company to purchase an
aggregate of 80,000 shares of Common Stock which will be exercisable upon
consummation of the Offering.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was initially capitalized by Dr. Fenton Scruggs, a director of
the Company, who contributed $155,000 in capital from January to June 1993. In
June 1993, Mahmoud Youssefi, a co-founder of the Company and a principal officer
until April 1997, loaned the Company $30,000 in the form of an unsecured loan
bearing interest at the rate of 0.4% per five-day period. The balance of the
loan, together with accrued interest thereon, was paid in full in December 1995.
In April 1994, the Company received a secured loan from Herzog, Heine &
Geduld, Inc., a customer of the Company, in the principal amount of $250,000 and
bearing interest at a rate of 9.75% per annum. The loan was converted into
181,290 shares of Series A Preferred Stock in May 1995, which will be converted
into 72,516 shares of Common Stock upon the closing of the Offering.
In November 1994, the Company received an unsecured loan from Dr. Scruggs in
the principal amount of $75,000 and bearing interest at a rate of 9% per annum.
Dr. Scruggs converted the outstanding balance, including accrued interest
thereon, into 17,915 shares of the Company's Common Stock at $4.90 per share on
December 31, 1995.
In May 1995, the Company sold 390,334 shares of Series A Preferred Stock at
$3.88 per share and warrants to purchase 163,392 Series B Preferred Stock at
$4.90 per share. The warrants to purchase the Series B Preferred Stock were
exercised in August 1995. The Preferred Stock, voting together as a single
class, had the right to elect one member of the Company's Board of Directors.
Donald Greenhouse has served as the designee of the holders of the preferred
stock.
In May 1995, the Company redeemed 17,364 shares of Common Stock from Glenn
West, the Company's Executive Vice President, Director of Technology, and a
member of the Board of Directors, for an aggregate purchase price of $67,500.
In November 1995, the Company issued 12-month promissory notes under an
arrangement with certain parties, including a number of holders of the Series A
and B Preferred Stock. The purchasers of such notes also received warrants to
purchase 190,714 shares of the Company's Common Stock at an exercise price of
$4.90 per share. The warrants expire upon the earlier of (i) May 1998 or (ii)
the issuance by the Company of shares of its Common Stock in a public offering
at an aggregate purchase price of $5,000,000 or more, and at a Company valuation
of at least $10,000,000. The Offering would meet this criteria. The principal
amount of the promissory notes was $934,500 and interest accrued at a fixed rate
of 10% per annum. When payments on such notes were not made by November 30,
1996, they automatically converted, at a rate of $4.90 per share, into an
aggregate of 190,714 shares of Common Stock. The interest which had accrued on
the debt was forgiven.
During the year ended December 31, 1996, the Company paid approximately
$35,000 in consulting fees to Seneca Point Associates, Inc., a management
consulting firm of which Donald Greenhouse, a member of the Board of Directors,
is President and Chief Executive Officer. In addition, Mr. Greenhouse's son,
David Greenhouse, is a principal of Special Situations Fund, a principal
stockholder of the Company's securities and an investor in the Company's
November 1995 private placement of promissory notes and warrants.
In July 1996, the Company completed the 1996 Placement, pursuant to which
the Representative acted as placement agent in such offering and received sales
commissions of $480,000, was reimbursed a total of $120,000 for certain
expenses, and was issued the Hampshire Warrant.
On April 5, 1997, the Company entered into an agreement with Mr. Youssefi
pursuant to which Mr. Youssefi's employment as President of the Company was
terminated (the "Termination Agreement"). Pursuant to the Termination Agreement,
Mr. Youssefi agreed, among other things, (i) not to compete with the Company for
a three-year period (ii) to waive all claims and rights against the Company,
(iii) to cooperate with the Company in its business endeavors and (iv) to assist
with the Company's efforts in an
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initial public offering. Under the Termination Agreement, the Company agreed to
pay Mr. Youssefi $4,000 in April 1997, $11,458.33 from May 1997 to and including
April 1998; $7,458.33 on or before May, 1, 1998, and $11,458.33 from June 1998
to May 1, 2000. The Termination Agreement included a clause which conditioned
these obligations upon a May 5, 1997 payment by En K to the Company. The Company
did not receive En K's May 5, 1997 payment and was therefore only obligated to
provide Mr. Youssefi the $11,458 monthly payments through December 1997.
Pursuant to a letter agreement, dated July 15, 1997, between the Company and
Mahmoud Youssefi (the "Youssefi Repurchase Agreement"), Mr. Youssefi sold to the
Company 240,000 shares of the Company's Common Stock held by him at a purchase
price of $0.50 per share concurrently with the closing of the Bridge Financing.
Additionally, pursuant to the Youssefi Repurchase Agreement, in exchange for Mr.
Youssefi's execution of an agreement (the "Youssefi Lock-Up"), pursuant to which
he promised not to sell any securities of the Company owned by him for a period
of 18 months following the Company's initial public offering, the Company agreed
to pay Mr. Youssefi (i) upon the Company's receipt of the Youssefi Lock-Up, (a)
$11,458.33 allegedly owed to Mr. Youssefi at such time under the Termination
Agreement and (b) approximately $7,400 for reimbursable credit card and business
expenses; (ii) concurrently with the closing of the Bridge Financing, $53,291.65
as payment in full (except for $15,458.33) for the Company's remaining
obligations under the Termination Agreement; and (iii) the remaining $15,458.33
upon the earlier of (a) 150 days after the closing of the Bridge Financing or
(b) the closing of this Offering. Finally, the Company agreed, within 30 days
following the closing of the Offering, to pay off approximately $25,000 of
leases guaranteed by Mr. Youssefi "See Use of Proceeds."
Pursuant to a letter agreement, dated July 15, 1997, between the Company and
Dr. Fenton Scruggs, Dr. Scruggs sold to the Company 80,000 shares of the
Company's Common Stock held by him at a purchase price of $0.50 per share
concurrently with the closing of the Bridge Financing.
In connection with his employment agreement, in July 1997, Kenneth D. Van
Meter purchased 15,000 shares of Common Stock for nominal consideration plus the
termination of certain anti-dilution rights. See "Management--Employment
Agreements."
In August 1997, the Company completed the Bridge Financing, pursuant to
which the Representative acted as placement agent in such offering and received
sales commissions of $200,000, as well as a non-accountable expense allowance of
$60,000.
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<PAGE>
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock, other
securities, and selected provisions of its Certificate of Incorporation and
Bylaws is qualified in its entirety by reference to the Company's Certificate of
Incorporation, Bylaws, and warrants, copies of which have been filed with the
Securities and Exchange Commission as exhibits to the Registration Statement of
which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue up to 15,000,000 shares of Common Stock,
par value $0.001 per share, of which 2,082,239 shares are issued and outstanding
as of the date hereof, after giving effect to the Conversion.
Holders of shares of the Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Subject to preferences which
may be applicable to preferred stock outstanding at any time, holders of shares
of Common Stock are entitled to receive ratably such dividends, if any, as may
be declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy."
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of shares of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
preferred stock, if any, then outstanding. Shares of Common Stock have no
preemptive, conversion, or other subscription rights and there are no repurchase
or sinking fund provisions applicable to the Common Stock. As of the date
hereof, there are approximately 105 record holders of Common Stock, after giving
effect to the Conversion.
PREFERRED STOCK
After giving effect to the Conversion, the Company is authorized to issue up
to 3,000,000 shares of preferred stock, par value $0.01 per share, of which no
shares are outstanding as of the date hereof. 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 (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion rights,
redemption rights, and sinking fund provisions. The issuance of any such
preferred stock could adversely affect the rights of the holders of Common Stock
and, therefore, reduce the value of the Common Stock. The ability of the Board
of Directors to issue preferred stock could discourage, delay, or prevent a
takeover of the Company. See "Risk Factors--Anti-Takeover Effects of Certain
Provisions of Certificate of Incorporation and Delaware Law."
REPRESENTATIVE'S WARRANTS
In connection with this Offering, the Company has agreed to issue to the
Representative and its designees Representative's Warrants to purchase up to
200,000 shares of Common Stock. The Representative's Warrants will be
exercisable, at a price equal to 120% of the public offering price, for a period
of four years commencing one year after the closing of this Offering. The
Representative and its designees are entitled to certain registration rights
under the Securities Act relating to the shares of Common Stock received upon
the exercise of the Representative's Warrants. The Representative's Warrants may
not be sold or transferred during the first year after issuance, except to
members of the selling group and persons who are officers and partners of the
Representative or members of the selling group or by operation of law. The
Representative's Warrants contain anti-dilution provisions providing for
adjustment to the exercise price and number of shares of Common Stock issuable
upon exercise of the Representative's Warrants (the "Warrant Shares") upon the
occurrence of certain events, including stock dividends, stock splits and
recapitalizations.
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<PAGE>
The Company has agreed that, at the request of the holders of a majority of
the Representative's Warrants and Warrant Shares (and on no more than one
occasion), the Company will file a registration statement under the Securities
Act for an offering of the Representative's Warrants and the Warrant Shares
during the four-year period beginning on the first anniversary of the date of
this Prospectus, and the Company has agreed to use its best efforts to cause
each such registration statement to be declared effective under the Securities
Act at the Company's expense (subject to certain limitations). In addition, the
Company has agreed to give advance notice to holders of the Representative's
Warrants and Warrant Shares of its intention to file a registration statement,
and in one such case, holders of the Representative's Warrants and the Warrant
Shares will have the right to require the Company to include the
Representative's Warrants and the Warrant Shares in such registration statement
at the Company's expense (subject to certain limitations).
OPTIONS AND WARRANTS
1995 WARRANTS
In connection with the Company's November 1995 private placement of 12-month
promissory notes, the Company issued the 1995 Warrants to purchase 190,714
shares of Common Stock at an exercise price of $4.90 per share. Such warrants
may be exercised in whole or in part any time prior to the earlier of (i) May
31, 1998 and (ii) the issuance by the Company of at least $5,000,000 in
additional capital based on a valuation of the Company of at least $10,000,000
through a public offering, including the Offering.
1996 WARRANTS
The 1996 Warrants entitle the holders thereof to purchase, in the aggregate,
up to 209,520 shares of Common Stock, at an exercise price of $8.46 per share.
The 1996 Warrants may be exercised at any time and expire on the earlier of (i)
five years from the date of the issuance of such warrant or (ii) the third
anniversary of the closing of the Offering.
HAMPSHIRE WARRANT
The Hampshire Warrant is exercisable for 38,852 shares of Common Stock at an
exercise price of $9.44. The Hampshire Warrant may be exercised in whole or in
part at any time and expire on the earlier of (i) five years from the date of
the issuance of such warrant or (ii) the third anniversary of the closing of the
Offering.
BRIDGE WARRANTS
In connection with the Company's Bridge Financing, the Company issued the
Bridge Warrants to purchase 320,000 shares of the Common Stock at an exercise
price of $3.00 per share. Such warrants may be exercised at any time after
August 8, 1998 and expire on August 8, 2001.
STOCK OPTIONS
In addition to the 1995 Warrants, the 1996 Warrants, the Hampshire Warrant,
and the Bridge Warrants, the Company has outstanding 657,200 options for the
purchase of the Common Stock, 144,000 of which have been issued under the 1995
Plan. See "Management--Stock Option Plans."
STOCKHOLDER REPORTS
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other periodic reports as the
Company may deem appropriate and as may be required by law.
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<PAGE>
TRANSFER AGENT
American Stock Transfer & Trust Company, New York, New York is the Transfer
Agent for the Company's Common Stock.
DIRECTORS' LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation includes provisions which (a)
eliminate the personal liability of directors for monetary damages resulting
from breaches of their fiduciary duty (except for liability for breaches of the
duty of loyalty, acts, or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, violations under Section
174 of the Delaware General Corporation Law ("DGCL"), or for any transaction
from which the director derived an improper personal benefit and (b) states that
damages shall, to the extent permitted by law, include, without limitation, any
judgment, fine, amount paid in settlement, penalty, punitive damages, excise, or
other tax, including, without limitation, any of the foregoing incurred or
assessed with respect to an employee benefit plan, or expense of any nature
(including, without limitation, counsel fees and disbursements) The Company
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers.
Section 145 of the DGCL permits indemnification by a corporation of certain
officers, directors, employees, and agents. Consistent therewith, the Company's
Certificate of incorporation requires that the Company indemnify all persons who
it may indemnify pursuant thereto to the fullest extent permitted by Section
145.
The Company's Certificate of Incorporation and Bylaws provide that the
Company will indemnify each of its directors and officers to the fullest extent
permitted by law with respect to all liability and loss suffered and expenses
incurred by such person in any action, suit, or proceeding in which such person
was or is made or threatened to be made a party or is otherwise involved by
reason of the fact that such person is or was a director or officer of the
Company. The Company is also obligated to pay the expenses of the directors and
officers incurred in defending such proceedings, subject to reimbursement if it
is subsequently determined that such person is not entitled to indemnification.
In addition, the Company's Certificate of Incorporation provides that the
Company's directors shall not be liable to the Company or its stockholders for
monetary damages for breaches of their fiduciary duties to the Company and its
stockholders except to the extent such exemption from liability or limitation
thereof is not permitted under the DGCL. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available under the DGCL. In addition, each
director will continue to be subject to liability for monetary damages for
misappropriation of any corporate opportunity in violation of the director's
duties, for acts or omissions involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for distributions (including payment of dividends or stock
repurchases or redemptions) that are unlawful under the DGCL. The provision does
not affect a director's responsibilities under any other law, such as the
federal securities laws. The Certificate of Incorporation further provides that
if the DGCL is amended to authorize corporate action further eliminating or
limiting the personal liability of directors then the liability of a director of
the Company shall be eliminated or limited to the fullest extent permitted by
the DGCL as amended or supplemented.
The Company maintains a policy of insurance under which the directors and
officers of the Company will be insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers by reason of any acts or omissions covered under such policy in their
respective capacities as directors or officers, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised
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that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to Section 203 of the DGCL ("Section 203") which,
subject to certain exceptions and limitations, prohibits a Delaware corporation
from engaging in any "business combination" with any "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such time, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for the purposes of determining the number of shares
outstanding at the time the transaction commenced, those shares owned (x) by
persons who are directors and also officers and (y) by employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer are excluded from the calculation); or (iii) on or subsequent to such
time, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66- 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
For purposes of Section 203, "a business combination" includes (i) any
merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested stockholder; (iii)
subject to certain exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 4,082,239 shares of
Common Stock outstanding (4,382,239 shares of Common Stock outstanding if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
2,000,000 Shares offered hereby (2,300,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
further registration under the Securities Act.
All of the presently outstanding 2,082,239 shares of Common Stock are, and
the 1,416,286 shares of Common Stock issuable upon exercise of the Company's
outstanding options and warrants, will be, "restricted securities" within the
meaning of Rule 144 and, if held for at least one year would be eligible for
sale in the public market in reliance upon, and in accordance with, the
provisions of Rule 144 following the expiration of such one-year period. In
general, under Rule 144 as currently in effect, a person or persons whose shares
are aggregated, including a person who may be deemed to be an "affiliate" of the
Company as that term is defined under the Securities Act, would be entitled to
sell within any three-month period a number of shares beneficially owned for at
least one year that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock, or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain requirements as to the manner of sale,
notice, and the availability of current public information about the Company.
However, a person who is not deemed to have been an affiliate of the Company
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<PAGE>
during the 90 days preceding a sale by such person and who has beneficially
owned shares of Common Stock for at least two years may sell such shares without
regard to the volume, manner of sale, or notice requirements of Rule 144.
Up to 200,000 additional shares of Common Stock may be purchased by the
Representative through the exercise of the Representative's Warrants during the
period commencing one year from the date of the closing of the Offering and
terminating on the fourth anniversary of such date. The holders of the
Representative's Warrants have certain demand and "piggyback" registration
rights as to such warrants and the underlying shares of Common Stock. Such
warrants and any and all shares of Common Stock purchased upon the exercise of
the Representative's Warrants may be freely tradeable, provided that the Company
satisfies certain securities registration and qualification requirements in
accordance with the terms of the Representative's Warrants. See "Description of
Securities--Representative's Warrants" and "Underwriting."
The Company intends to file a registration statement covering the shares of
Common Stock underlying options which have been, or may be, granted under the
Plans and options granted outside the Plans. In addition, the holders of (i)
553,726 shares of Common Stock have certain demand and "piggyback" registration
rights as to such shares commencing immediately upon the consummation of the
Offering, (ii) 426,648 shares of Common Stock have certain demand and
"piggyback" registration rights as to such shares commencing 6 months after
consummation of the Offering, (iii) the holders of 880,551 shares of Common
Stock have certain "piggyback" registration rights as to such shares commencing
immediately upon consummation of the Offering, (iv) 190,714 shares of Common
Stock underlying the 1995 Warrants have "piggyback" registration rights
commencing immediately upon the consummation of the Offering and (v) 209,520
shares of Common Stock underlying the 1996 Warrants and 320,000 shares of Common
Stock underlying the Bridge Warrants have certain demand and "piggyback"
registration rights commencing six months and 12 months respectively, after
consummation of the Offering. The Company, its officers, directors, and certain
stockholders holding an aggregate of 895,552 shares of Common Stock have entered
into agreements with the Representative which prohibit them from offering,
issuing, selling, or otherwise disposing of any securities of the Company for a
period of 18 months following the date of this Prospectus, without the prior
written consent of the Representative. In addition, certain stockholders holding
an aggregate of 426,654 shares of Common Stock have entered into agreements with
the Representative which prohibit them from offering, issuing, selling, or
otherwise disposing of any securities of the Company for a period of 12 months
following the date of this Prospectus, without the prior written consent of the
Representative. See "Principal Stockholders" and "Underwriting."
Prior to the Offering, there has been no public market for the Company's
securities. Following the Offering, the Company cannot predict the effect, if
any, that sales of shares of Common Stock pursuant to Rule 144, registration
rights, or otherwise, or the availability of such shares for sale, will have on
the market price prevailing from time to time. In addition, sales by the current
stockholders of a substantial number of shares of Common Stock in the public
market could materially adversely affect prevailing market prices for the Common
Stock. The availability for sale of a substantial number of shares of Common
Stock acquired through the exercise of the options or warrants could also
materially adversely affect prevailing market prices for the Common Stock. See
"Risk Factors--Shares Eligible for Future Sale."
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Hampshire
Securities Corporation is acting as Representative, has severally agreed to
purchase, the respective number of Shares set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Hampshire Securities Corporation.....................................................
-----------------
Total.................................................................... 2,000,000
-----------------
-----------------
</TABLE>
A copy of the Underwriting Agreement has been filed as an exhibit to the
Registration Statement, to which reference is hereby made. The Underwriting
Agreement provides that the obligation of the Underwriters to purchase the
Shares is subject to certain conditions. The Underwriters are committed to
purchase all of the Shares (other than those covered by the Underwriters'
over-allotment option described below), if any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus, and that they may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
("NASD") and to certain foreign dealers, concessions not in excess of $
per Share, of which amount a sum not in excess of $ per Share may in
turn be reallowed by such dealers to other dealers who are members of the NASD
and to certain foreign dealers. After the initial public offering, the offering
price, the concession to selected dealers and the reallowance to other dealers
may be changed by the Representative.
The Company has agreed to pay the Representative an expense allowance, on a
non-accountable basis, equal to 3% of the gross proceeds received by the Company
from the sale of the 2,000,000 Shares offered hereby (and any shares sold upon
the exercise of the Underwriters' over-allotment option). The Company has also
granted to the Representative and its designees, for nominal consideration,
Representative's Warrants to purchase from the Company up to 200,000 shares of
Common Stock at an exercise price per share equal to 120% of the public offering
price per share. See "Description of Securities-- Representative's Warrants."
The Company has granted the Representative the right, for a period of three
years commencing on the closing date of the Offering, to appoint an observer to
attend all meetings of the Board of Directors of the Company and receive
reimbursement for all out-of-pocket expenses incurred in attending such
meetings. In addition, the observer will be entitled to indemnification, to the
same extent as the Company directors.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales of the Shares offered hereby to any account over which
they exercise discretionary authority.
The Company has also granted to the Underwriters, exercisable for 45 days
from the date of this Prospectus, to purchase up to 300,000 additional shares of
Common Stock at the public offering price less the underwriting discounts and
commissions. To the extent such option is exercised, each Underwriter will
53
<PAGE>
become obligated, subject to certain conditions, to purchase additional shares
of Common Stock proportionate to such Underwriter's initial commitment as
indicated in the preceding table. The Underwriters may exercise such right of
purchase only for the purpose of covering over-allotments, if any, made in
connection with the sale of the Shares. Purchases of shares of Common Stock upon
exercise of the over-allotment option will result in the realization of
additional compensation by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company, its officers, directors, and certain stockholders holding an
aggregate of 895,552 shares of Common Stock have entered into agreements with
the Representative which prohibit them from offering, issuing, selling, or
otherwise disposing of any securities of the Company for a period of 18 months
following the date of this Prospectus, without the prior written consent of the
Representative. In addition, certain stockholders holding an aggregate of
426,654 shares of Common Stock have entered into agreements with the
Representative which prohibit them from offering, issuing, selling, or otherwise
disposing of any securities of the Company for a period of 12 months following
the date of this Prospectus, without the prior written consent of the
Representative. See "Principal Stockholders" and "Shares Eligible for Future
Sale."
Prior to the Offering, there has been no public trading market for the
Common Stock. The initial public offering price of the Common Stock has been
determined by arms-length negotiation between the Company and the Representative
and does not necessarily bear any relationship to the Company's book value,
assets, past operating results, financial condition, or other established
criteria of value. Factors considered in determining the offering price, in
addition to prevailing market conditions, included the history of and prospects
for the Company and the industry in which the Company competes, an assessment of
the Company's management, its capital structure and such other factors as were
deemed relevant.
During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such shares are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock
which may be higher than the price that might otherwise prevail in the open
market. Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued at any time.
The Representative acted as the placement agent in connection with the 1996
Placement and the Bridge Financing. See "Certain Relationships and Related
Transactions."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain other
legal matters will be passed upon for the Company by Squadron, Ellenoff, Plesent
& Sheinfeld, LLP, New York, New York. Certain legal matters in connection with
the Offering will be passed upon for the Underwriters by Fulbright & Jaworski
L.L.P., New York, New York.
54
<PAGE>
EXPERTS
The balance sheet as of December 31, 1996 and the statements of operations,
stockholders' equity and cash flows for the two years in the period ended
December 31, 1996, included in this prospectus, have been included herein in
reliance on the report, which report includes an explanatory paragraph relating
to the removal of a going concern explanation paragraph included in a previously
issued report, of Coopers & Lybrand L.L.P. independent certified public
accountants, given on the authority of that firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington D.C. 20549, a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act, with respect to the Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto, as permitted by rules and
regulations of the Commission. For further information, reference is made to the
Registration Statement and to the exhibits filed therewith. Statements contained
in this Prospectus as to the content of any contract or other document which has
been filed as an exhibit to the Registration Statement are qualified in their
entirety by reference to such exhibits for a complete statement of their terms
and conditions. The Registration Statement and the exhibits thereto may be
inspected without charge at the offices of the Commission and copies of all or
any part thereof may be obtained from the Commission's Public Reference Section
at 450 Fifth Street, N.W., Washington, D.C. 20549 or at certain of the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
upon payment of the fees prescribed by the Commission. The Commission maintains
a World Wide Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the Commission. In addition, following
approval of the Common Stock for quotation on the Nasdaq SmallCap Maraket,
reports and other information concerning the Company may be inspected at the
offices of the NASD, 1801 K Street, N.W., Washington, D.C. 20006.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CELERITY SYSTEMS, INC.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Coopers & Lybrand L.L.P.......................................................................... F-1
Balance Sheets............................................................................................. F-2
Statements of Operations................................................................................... F-3
Statements of Stockholders' Equity......................................................................... F-4
Statements of Cash Flows................................................................................... F-5
Notes to Financial Statements.............................................................................. F-6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Celerity Systems, Inc.
We have audited the accompanying balance sheet of Celerity Systems, Inc.
(the "Company") as of December 31, 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated March 7, 1997,
except for Notes 1, 7, 16 and 17 as to which the date is July 18, 1997, which
report contained an explanatory paragraph regarding the Company's ability to
continue as a going concern, the Company has received proceeds from a private
placement which, along with generated revenues, has alleviated the Company's
working capital shortage. Additionally, the Company obtained waivers of default
from certain debt holders regarding a late interest payment. In light of the
Company's improved financial condition, the conditions that raised substantial
doubt about whether the Company will continue as a going concern no longer
exist.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Celerity Systems, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
March 7, 1997, except for Notes 1, 7, 11
and 16 for which the date is August 8, 1997
F-1
<PAGE>
CELERITY SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents....................................................... $ 2,344,666 $ 461,320
Accounts receivable, less allowance for doubtful accounts of $555,050 and
$570,050 in 1996 and 1997, respectively....................................... 713,232 1,627,063
Inventory....................................................................... 1,325,903 1,314,515
Prepaid expenses................................................................ -- 61,843
Costs in excess of billings on uncompleted contracts............................ 187,749 --
------------------ ------------
Total current assets...................................................... 4,571,550 3,464,741
Property and equipment, net..................................................... 813,290 885,983
Other assets.................................................................... 264,955 180,231
------------------ ------------
$ 5,649,795 $ 4,530,955
------------------ ------------
------------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................................................ $ 315,832 $ 1,385,471
Accrued liabilities............................................................. 672,740 763,748
Deferred revenue................................................................ 359,970 --
Interest payable................................................................ 150,000 300,000
Current portion of leases payable............................................... 7,821 3,502
Reserve for management compensation............................................. 137,500 106,584
Allowance for estimated losses on uncompleted contracts......................... 672,600 348,000
Billings in excess of costs and estimated earnings on uncompleted contracts..... 150,000 724,381
------------------ ------------
Total current liabilities................................................. 2,466,463 3,631,686
Long term notes payable......................................................... 3,000,000 3,000,000
Long term leases payable........................................................ 19,009 19,009
Commitments and contingencies (Notes 1, 5, 6 and 16)
Preferred stock, Series A, noncumulative, redeemable, convertible, $0.01 par
value, 390,334 shares authorized, issued and outstanding at December 31, 1996
and June 30, 1997, respectively............................................... 1,813,412 1,904,462
Preferred stock, Series B, noncumulative, redeemable, convertible, $0.01 par
value, 163,392 shares authorized, issued and outstanding at December 31, 1996
and June 30, 1997, respectively............................................... 932,720 980,759
Common stock, $0.001 par value, 15,000,000 shares authorized, 1,836,476 issued
and 1,819,113 outstanding at December 31, 1996 and June 30, 1997.............. 1,836 1,836
Additional paid-in capital...................................................... 3,280,920 4,682,883
Treasury stock, at cost......................................................... (67,500) (67,500)
Accumulated deficit............................................................. (5,797,065) (9,622,180)
------------------ ------------
Total liabilities and stockholders' equity................................ $ 5,649,795 $ 4,530,955
------------------ ------------
------------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
CELERITY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------------ ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................... $ 7,703,386 $ 2,530,097 $ 1,299,900 $ 1,254,503
Cost of revenues....................................... 4,609,262 3,513,023 1,251,746 1,169,978
------------ ------------- ------------- -------------
Gross margin......................................... 3,094,124 (982,926) 48,154 84,525
Operating expenses..................................... 3,044,584 4,491,433 1,786,648 3,777,905
------------ ------------- ------------- -------------
Income (loss) from operations........................ 49,540 (5,474,359) (1,738,494) (3,693,380)
Interest expense....................................... (34,889) (150,042) (53,770) (153,386)
Interest income........................................ 10,641 96,888 8,663 21,651
------------ ------------- ------------- -------------
Income (loss) before income taxes.................... 25,292 (5,527,513) (1,783,601) (3,825,115)
Income tax provision (benefit)......................... 15,400 (15,400) -- --
------------ ------------- ------------- -------------
Net income (loss).................................... $ 9,892 $ (5,512,113) $ (1,783,601) $ (3,825,115)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Income (loss) per common share (Note 12):
Primary income (loss) per share...................... $ .01 $ (2.75) $ (1.01) $ (1.61)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
CELERITY SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY ACCUMULATED
STOCK CAPITAL STOCK DEFICIT
----------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Balances, January 1, 1995..................................... $ 1,200 $ 153,800 $ -- $ (294,844)
Conversion of amounts due to stockholder to 17,915 shares of
common stock................................................ 17 87,767 -- --
Acquisition of 17,364 shares of common stock held in
treasury.................................................... -- -- (67,500) --
Accretion of premiums on preferred stocks..................... -- (149,839) -- --
Net income.................................................... -- -- -- 9,892
----------- ------------ ---------- -------------
Balances, December 31, 1995................................... 1,217 91,728 (67,500) (284,952)
Issuance of 426,648 shares of common stock for private
placement offering.......................................... 427 2,532,938 -- --
Conversion of note payable to 190,714 shares of common
stock....................................................... 191 934,309 -- --
Issuance of 1,200 shares of common stock under stock option
plan........................................................ 1 119 -- --
Accretion of premiums on preferred stocks..................... -- (278,174) -- --
Net loss...................................................... -- -- -- (5,512,113)
----------- ------------ ---------- -------------
Balances, December 31, 1996................................... 1,836 3,280,920 (67,500) (5,797,065)
Accretion of premiums on preferred stocks (unaudited)......... -- (139,087) -- --
Grant of stock options at below the assumed offering price
(unaudited)................................................. -- 1,541,050 -- --
Net loss (unaudited).......................................... -- -- -- (3,825,115)
----------- ------------ ---------- -------------
Balances, June 30, 1997 (unaudited)........................... $ 1,836 $ 4,682,883 $ (67,500) $ (9,622,180)
----------- ------------ ---------- -------------
----------- ------------ ---------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
CELERITY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- --------------------------
1995 1996 1996 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net cash flows from operating activities:
Net income (loss)..................................... $ 9,892 $ (5,512,113) $ (1,783,601) $ (3,825,115)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization....................... 124,078 277,287 84,734 214,636
Compensation expense for issuance of stock
options........................................... -- -- -- 1,541,050
Provision for doubtful accounts receivable.......... -- 555,050 30,000 15,000
Provision for inventory obsolescence................ -- 500,000 106,298 --
Reserve for management compensation................. -- 137,500 -- (30,916)
Deferred income taxes............................... 15,400 (15,400) -- --
Changes in current assets and liabilities:
Accounts receivable............................... (3,963,973) 2,887,635 2,867,644 (928,831)
Prepaid expenses.................................. -- -- -- (61,843)
Inventory......................................... (348,463) (1,383,416) (980,792) 11,388
Costs in excess of billings on uncompleted
contracts....................................... -- (187,749) -- 187,749
Accounts payable.................................. 1,632,096 (1,526,213) (440,203) 1,069,639
Accrued expenses.................................. 174,271 368,451 33,068 91,008
Deferred revenue.................................. -- 359,970 -- (359,970)
Interest payable.................................. (1,722) 139,508 46,736 150,000
Allowance for estimated losses on uncompleted
contracts....................................... -- 672,600 -- (324,600)
Billings in excess of costs and estimated earnings
on uncompleted contracts........................ 350,000 (200,000) 96,385 574,381
----------- ------------ ------------ ------------
Net cash provided (used) by operating
activities.................................... (2,008,421) (2,926,890) 60,269 (1,676,424)
----------- ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment................... (506,637) (300,577) (166,245) (202,603)
Additions to other assets............................. (1,171) 25 25 --
----------- ------------ ------------ ------------
Net cash used in investing activities........... (507,808) (300,552) (166,220) (202,603)
----------- ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable........................... 934,500 3,000,000 607,500 --
Principal payments on long-term debt, notes payable
and capital leases.................................. (8,000) (108,243) (22,546) (4,319)
Change in amounts due stockholders.................... (21,000) -- -- --
Proceeds from issuance of common stock................ -- 2,533,485 489,159 -
Repurchase of common stock............................ (67,500) -- -- --
Proceeds from issuance of preferred stock............. 2,068,119 -- -- --
Debt offering costs................................... -- (338,910) (60,750) --
----------- ------------ ------------ ------------
Net cash provided (used) by financing
activities.................................... 2,906,119 5,086,332 1,013,363 (4,319)
----------- ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.... 389,890 1,858,890 907,412 (1,883,346)
Cash and cash equivalents, beginning of period.......... 95,886 485,776 485,776 2,344,666
----------- ------------ ------------ ------------
Cash and cash equivalents, end of period................ $ 485,776 $ 2,344,666 $ 1,393,188 $ 461,320
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Celerity Systems, Inc., a Tennessee corporation founded in 1993, designs,
develops, integrates, installs, operates and supports interactive video services
hardware and software ("interactive video"). The Company also designs, develops,
installs, and supports CD-ROM software products for business applications. In
the interactive video services area, the Company seeks to provide solutions,
including products and services developed by the Company and by strategic
partners, that enable interactive video programming and applications to be
provided to a wide variety of market niches. The sales of interactive video
products are principally made on a contract by contract basis. Currently, the
principal markets for the Company's interactive video products are Korea,
Israel, Taiwan and China. In the CD-ROM area, the Company provides several
products for the storage and rapid retrieval of large amounts of information.
The majority of the Company's existing CD-ROM customer base is in the security
brokerage industry and in U.S. Government applications.
The Company was founded under Subchapter S corporation status. In
conjunction with an equity infusion from certain outside investors in May of
1995, the Company elected to become a C corporation. Subsequent to June 30,
1997, Celerity Systems, Inc., a Delaware corporation, was formed. The Tennessee
corporation will be merged with the Delaware corporation during the third
quarter of 1997.
The Company is currently preparing a registration statement under Regulation
SB-2. Management anticipates that the registration statement will be filed with
the Securities and Exchange Commission (SEC) in August 1997.
The Company had seven customers that in the aggregate represented in excess
of 50% of its revenues in 1996 and four customers represented in excess of 90%
of its revenues in 1995. The Company had three customers that in the aggregate
represented in excess of 75% of its revenues for the six month period ended June
30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS--Information in the accompanying financial
statements and notes to the financial statements for the interim periods as of
and for the six months ended June 30, 1995 and 1996, is unaudited. The
accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles and Regulation S-B. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid debt
instruments with an original maturity of three months or less as cash
equivalents. The Company places its temporary cash investments principally in
bank repurchase agreements with one bank. The Company does not obtain collateral
on its investment or deposit accounts.
ACCOUNTS RECEIVABLE--The Company does not require collateral or other
security to support customer receivables.
F-6
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY--Inventory, consisting primarily of electronic components for
interactive video servers, is stated at the lower of cost or market, with cost
being determined using the first-in first-out (FIFO) method.
REVENUE RECOGNITION--Long-term contracts related to the Company's
interactive video segment are accounted for under the percentage of completion
method as these contracts extend over relatively long periods of time. The
Company measures the percentage complete by contract based upon the costs
incurred to date in relation to the total estimated costs for the contract.
Costs are charged to contracts as incurred based upon material costs, hours
dedicated to the contract, and allocations of overhead costs based on
predetermined overhead rates. Billings in excess of costs and estimated earnings
on uncompleted contracts are reflected as liabilities in the accompanying
balance sheet. The Company has established an allowance for estimated losses on
uncompleted contracts to record management's estimates of losses that have been
projected on certain contracts in progress. The Company entered into one
short-term contract related to the interactive video segment in 1996 and another
in 1997, and income from these contracts is recorded by the completed contract
method of accounting. Billings in excess of costs are recorded net as a current
liability related to these two contracts. The Company records sales of products
not under contract when the related products are shipped.
RECLASSIFICATION--Certain amounts presented in the December 31, 1995 and
1996 financial statements have been reclassified from amounts previously
reported to conform to Regulation S-B requirements.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the underlying assets, generally five years. Routine repair and
maintenance costs are expensed as incurred. Costs of major additions,
replacements and improvements are capitalized. Gains and losses from disposals
are included in income.
SEGMENT INFORMATION REPORTING--In June 1997, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. In accordance with this Statement, the
Company has presented segment information for the CD-ROM and interactive video
segments for the year ended December 31, 1996, and for the interim periods ended
June 30, 1996 and 1997 (unaudited). In accordance with SFAS 131, the interim
information is condensed in comparison with the audited period presented.
OTHER ASSETS--Other assets consist of debt offering costs related to a
private placement offering in 1996. The costs are being amortized straight-line
over the term of the related debt. Amortization expense in 1996 was $84,726.
RESEARCH AND DEVELOPMENT COSTS--Research and development costs are expensed
as incurred and amounted to $810,772 and $479,558 for the years ended December
31, 1995 and 1996, respectively. These amounts are included in operating
expenses in the accompanying statements of operations.
INCOME TAXES--The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES
(FAS 109). Under FAS 109, the asset and liability method is used in accounting
for income taxes, whereby deferred tax assets and liabilities are determined
based upon the differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
F-7
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVERSE STOCK SPLIT--In August 1997, the Board of Directors approved a
1-for-2 1/2 reverse stock split of the Company's common stock for shareholders
of record. All common share and per share amounts included in the accompanying
financial statements have been restated to retroactively reflect the reverse
split.
STOCK BASED COMPENSATION--On January 1, 1996, the Company adopted SFAS 123,
ACCOUNTING FOR STOCK BASED COMPENSATION. As permitted by SFAS 123, the Company
has chosen to apply APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES
(APB 25) and related interpretations in accounting for its Plans. The pro forma
disclosures of the impact of SFAS 123 are described in Note 11 of the financial
statements.
ESTIMATES--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. The
significant areas of estimation included in the accompanying financial
statements relate principally to the percentage of completion calculations for
long-term contracts, the collection of accounts receivable and inventory
valuation.
IMPACT OF SFAS 128--In February 1997, the FASB issued SFAS 128, EARNINGS PER
SHARE. The Statement simplifies the standards for computing earnings per share
(EPS). Additionally, the Statement requires dual presentation of basic and
diluted EPS on the face of the income statement and requires a reconciliation of
the numerator and denominator of the diluted EPS calculation. The Company plans
to adopt the provisions of SFAS 128 for the fiscal year ended December 31, 1998.
Had the pronouncement been in effect at June 30, 1996 and 1997, basic EPS would
have been $(1.49) and $(2.10). Basic EPS at December 31, 1995 and 1996, would
have been $.01 and $(3.81), respectively. The diluted EPS for the six month
periods ended June 30, 1996 and 1997, and for the years ended December 31, 1995
and 1996, would have been $(1.01), $(1.61), $.01 and $(2.75), respectively.
IMPACT OF SFAS 130--In June 1997, the FASB issued SFAS 130, REPORTING
COMPREHENSIVE INCOME, which will be effective for fiscal years beginning after
December 15, 1997. This standard will have no material impact on the Company.
3. INVENTORY
Inventory at December 31, 1996, consists of:
<TABLE>
<S> <C>
Raw materials................................................... $1,045,530
Finished goods.................................................. 780,373
---------
1,825,903
Reserve for inventory valuation................................. 500,000
---------
$1,325,903
---------
---------
</TABLE>
F-8
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Substantially all property and equipment of the Company is comprised of
computers and computer related equipment, therefore all property and equipment
is included in one category entitled "Property and equipment, net." Following is
a schedule of the cost and related accumulated depreciation for December 31,
1996.
<TABLE>
<S> <C>
Property and equipment.......................................... $1,181,552
Accumulated depreciation........................................ 368,262
---------
Property and equipment, net..................................... $ 813,290
---------
---------
</TABLE>
5. LONG-TERM CONTRACTS
The Company was awarded two projects during 1995 that are being accounted
for under the percentage of completion method for long-term contracts. These
contracts generate a significant amount of revenues and future revenue potential
for the Company as well as providing the funding mechanism for the related
product's development.
The following summary delineates the costs incurred, estimated earnings and
billings through December 31, 1996, for the Israel project (Project #1).
<TABLE>
<S> <C>
Contract revenues............................................... $1,044,004
---------
---------
Costs incurred through December 31.............................. $ 436,005
Estimated costs to complete..................................... 133,000
---------
Total estimated costs....................................... $ 569,005
---------
---------
Percentage complete............................................. 76.63%
Contract billings............................................... $ 949,977
Costs and estimated earnings to be recognized................... 799,977
---------
Billings in excess of costs and estimated earnings.............. $ 150,000
---------
---------
</TABLE>
The Korea project (Project #2) began to incur losses during fiscal year
1996, and the Company recorded the losses as they occurred. Management estimates
that the project will lose an additional $672,600 prior to completion of the
project in 1997 and has recorded an allowance and increased cost of revenues by
this amount for the year ended December 31, 1996. The effect of the change in
estimate for the fiscal year ending December 31, 1996, was to increase the net
loss by $672,600 and the loss per share by $.34.
Amounts included in BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON
UNCOMPLETED CONTRACTS represent billings in excess of costs and estimated
earnings on Project #1 and on contracts recorded under the completed contract
method.
At June 30, 1997, the balance of the allowance for estimated losses on
uncompleted contracts was $348,000 and these projects remain in progress with no
additional losses expected.
F-9
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. MANAGEMENT COMPENSATION RESERVE
On April 5, 1997, the Company entered into a termination agreement with one
of the Company's original founders, whereby the individual would no longer be an
employee or board member of the Company. The Company agreed to certain payment
schedules in accordance with the individual's prior employment contract. The
Company's obligations under the termination agreement could be eliminated or
reduced dependant upon the occurrence of certain events. One provision was the
timeliness and amounts of cash receipts from a customer with which the Company
had a signed contract (Note 16). That customer defaulted which resulted in a
decrease in the number of payments the Company was required to pay under the
terms of the agreement. As of December 31, 1996, the Company accrued $137,500
for management compensation relating to this agreement.
7. INCOME TAXES
The tax effects of temporary differences giving rise to the Company's
deferred tax assets (liabilities) at December 31, 1996, are as follows:
<TABLE>
<S> <C>
Current:
Allowance for doubtful accounts............................... $ 211,000
Inventory reserve............................................. 190,000
Warranty reserve.............................................. 76,000
Deferred revenue.............................................. 137,000
Management compensation reserve............................... 52,000
---------
666,000
Valuation allowance for net current deferred tax assets....... (666,000)
---------
Total net current deferred tax asset.......................... $ --
---------
---------
Noncurrent:
Net operating loss carryforwards.............................. $1,467,000
Property and equipment........................................ (72,000)
---------
1,395,000
Valuation allowance for net non-current deferred tax assets... (1,395,000)
---------
Total net non-current deferred tax asset...................... $ --
---------
---------
</TABLE>
As a result of the significant pretax loss in fiscal 1996, management can
not conclude that it is more likely than not that the deferred tax asset will be
realized. Accordingly, a valuation allowance has been established against the
total net deferred tax assets.
F-10
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The December 31, 1995 and 1996 provisions for income taxes consist of the
following:
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Federal:
Current tax expense..................................................................... $ -- $ --
Deferred tax expense attributable to change in valuation allowance...................... -- 1,844,100
Deferred tax (benefit) attributable to temporary differences............................ 32,700 (564,100)
Deferred tax (benefit) attributable to net operating loss carryforwards................. (18,900) (1,293,700)
State:
Current tax expense..................................................................... -- --
Deferred tax expense attributable to change in valuation allowance...................... -- 216,900
Deferred tax (benefit) attributable to temporary differences............................ 3,800 (66,400)
Deferred tax (benefit) attributable to net operating loss carryforwards................. (2,200) (152,200)
--------- -----------
$ 15,400 $ (15,400)
--------- -----------
--------- -----------
</TABLE>
The Company's income tax benefit differs from that obtained by using the
statutory rate of 34% as a result of the following:
<TABLE>
<CAPTION>
1995 1996
--------- -------------
<S> <C> <C>
Computed "expected" tax expense (benefit)............................................... $ 8,600 $ (1,879,000)
State income taxes, net of federal income tax benefit................................... 1,000 (221,000)
Change in valuation allowance........................................................... -- 2,061,000
Permanent differences................................................................... 5,000 18,000
Other................................................................................... 800 5,600
--------- -------------
$ 15,400 $ (15,400)
--------- -------------
--------- -------------
</TABLE>
At December 31, 1996, the Company had approximately $3,800,000 of net
operating loss carryforwards. These amounts are available to reduce the
Company's future taxable income and expire in the years 2010 through 2011.
8. NOTES PAYABLE
In June and July 1996, the Company sold 60 units in a private placement
offering to outside investors. The units consisted of one 10% Note (the "1996
Notes") in the principal amount of $50,000, 7,111 shares of common stock, and
warrants to purchase 2,625 shares of common stock. Additionally, the agent
received warrants to purchase 35,556 shares of common stock at $10.31 per share.
In November 1996, the Company issued an additional 867 warrants for each unit
held by the outside investors in connection with the Company's default on
previously outstanding investor debt, and subsequent conversion of the principal
to common stock (see Note 9). All warrants issued in the 1996 placement now have
an exercise price of $8.46 and will expire on the earlier of the fifth
anniversary of the date of issuance of the warrant or the third anniversary of
the closing of the initial public offering of the Company's securities. The
warrants issued to the agent were increased to 38,852 in connection with the
default and the exercise price was decreased to $9.44. These will expire five
years from the date of grant.
F-11
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. NOTES PAYABLE (CONTINUED)
Notes payable at December 31, 1996, consisted of the $3,000,000 unsecured
promissory notes payable to outside investors due June 1998, bearing interest at
10% per annum. The Company missed an interest payment due June 30, 1997, with
respect to the 1996 Notes, however, the Company has received waivers as to such
defaults through the date of the earlier of an initial public offering or the
maturity date of the 1996 Notes.
9. INVESTOR DEBT WITH DETACHABLE WARRANTS
In November of 1995, the Company issued twelve month promissory notes under
an arrangement with certain third parties, including a number of previous
investors in the Company's Series A and B Preferred Stock. The purchasers of the
notes also received warrants to purchase 190,714 shares of the Company's common
stock at an exercise price of $4.90 per share.
The related warrant agreements contain certain provisions which include the
expiration of the warrants upon the earlier of May 31, 1998 or the issuance of
shares of the Company's common stock in a public offering with an aggregate
price of $5 million or more and at a Company valuation of at least $10 million.
The outstanding principal balance at December 31, 1995, was $934,500.
Interest accrued at a fixed rate of 10% and was payable at the end of the notes'
term. When interest payments on such notes were not made by November 30, 1996,
the notes automatically converted, at a rate of $4.90 per share, into an
aggregate of 190,714 shares of common stock. The interest, which had been
accrued on the debt, was forgiven.
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Board of Directors authorized the issuance of 390,334 shares of Series A
Preferred Stock at $3.88 per share and 163,392 shares of Series B Preferred
Stock at $4.90 per share in May 1995. The Company issued the Series A Preferred
Stock on May 17, 1995, and the Series B Preferred Stock on August 20, 1995. The
holders of the preferred stock have generally the same voting rights as those of
the common stockholders. Each class of preferred stock has a redemption feature
available to the holders thereof at any time after April 1, 2000, or upon
default by the Company of certain provisions included in the stock purchase
agreements. Additionally, the holders of the preferred stock have appointed a
member of the Board of Directors of the Company.
Each class of preferred stock includes certain conversion, liquidation and
redemption privileges, including the accrual of premiums of 12% annually. The
accretion of the premiums which has been reflected as a reduction in additional
paid-in capital in the accompanying financial statements. Each share of
preferred stock is convertible into one share of common stock, adjusted for
dilution, if any, for the issuance of the Company's common stock at purchase
prices below those of the respective preferred share issuances. Each class of
the preferred stock automatically converts to common stock upon the issuance of
a minimum of $5 million, net of underwriters fees, through an initial public
offering of the Company's stock under the Securities Act of 1933. Upon the
effective date of a registration statement for an initial public offering, all
of the Company's issued and outstanding classes of preferred stock will be
converted into 553,726 shares of common stock.
F-12
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
11. STOCK OPTIONS
The Company established a stock option plan in 1995 to provide additional
incentives to its officers and employees. Eligible persons are all employees
employed on the date of grant. Management may vary the terms, provisions and
exercise price of individual options granted, with both incentive stock options
and non-qualified options authorized for grant. Each option granted under the
plan shall be exercisable only during a fixed term from the date of grant as
specified by management, but generally equal to 10 years. Options are vested
upon completion of three full years of service with the Company or upon the
Company's issuance of at least $5 million of capital. In 1995, the Board of
Directors approved the issuance of up to 178,929 options to acquire common
shares of which 164,800 options were granted. In 1997, the Company established
an additional stock option plan under which 200,000 options to acquire common
shares may be granted. There have been no shares granted under this plan.
In December 1995, the Company granted options to acquire 14,000 common
shares to a member of the Company's Board outside the 1995 plan. These options
vest over a three year period, are exercisable at $0.10 per share and expire
upon the earlier of (a) three months after the board member ceases to be a
member, (b) twelve months from the board member's death, or (c) ten years from
date of grant.
A summary of outstanding options as of December 31, 1995 and 1996, and
changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1995 1996
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year(1).......................... -- $ -- 178,800 $ 0.10
Granted...................................................... 178,800(1) 0.10 14,800 4.90
Exercised.................................................... -- -- (1,200) 0.10
Forfeited.................................................... -- -- (6,600) 0.10
--------- ----- --------- -----
Outstanding at end of year................................... 178,800 $ 0.10 185,800 $ 0.43
--------- ----- --------- -----
--------- ----- --------- -----
Options exercisable at year end.............................. -- $ -- 74,400 $ 0.10
--------- ----- --------- -----
--------- ----- --------- -----
Weighted-average fair value of options granted during the
year....................................................... 178,800 $ 0.03 14,800 $ 0.53
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
- ------------------------
(1) Includes 14,000 options granted to an outside director. These options were
granted outside the 1995 plan.
The following table summarizes information about stock options at December
31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ----------- ---------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.10 173,000 8.58 years $ 0.10 74,400 $ 0.10
$ 4.90 12,800 9.25 years $ 4.90 -- $ --
</TABLE>
F-13
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS (CONTINUED)
Had compensation cost for the option grants been determined based on the
fair value at the grant dates for awards under the Plan consistent with the
method of SFAS 123, the Company's net income (loss) would have been reduced to
the pro forma amounts indicated below at December 31:
<TABLE>
<CAPTION>
1995 1996
------------------------ ----------------------------
AS AS
REPORTED PRO FORMA REPORTED PRO FORMA
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net income................................................... $ 9,892 $ 7,490 $ (5,512,113) $ (5,519,984)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: risk-free interest rate of 6.46%
and expected lives of 10 years.
The Company expects to recognize approximately $1,215,000 of compensation
expense in the third quarter of fiscal 1997, related to options granted from
July 1, 1997 to August 8, 1997.
12. INCOME (LOSS) PER SHARE
Income (loss) per share has been computed by dividing net income (loss) by
the weighted average number of common and common equivalent shares outstanding
during each period. Common equivalent shares relating to options issued during
the twelve month period preceding the filing of a registration statement at a
price below the estimated offering price have been calculated using the treasury
stock method assuming that the options were outstanding during each period
presented and that the fair value of the Company's common stock during each
period was equal to the assumed initial public offering price of $7.50 per
share. Remaining warrants, options, and preferred stock granted prior to the one
year period before the filing of the initial public offering were considered
common stock equivalents but were not included for purposes of calculating
primary income (loss) per share because they were anti-dilutive.
After giving effect to the items described above, income (loss) per common
share have been computed based on the assumed weighted average number of shares
outstanding in each period (1,749,245 shares in fiscal year 1995; 2,006,582
shares in fiscal year 1996; 1,761,373 and 2,379,934 shares for the six months
ended June 30, 1996 and 1997 (unaudited), respectively).
13. SEGMENT INFORMATION
The Company has two reportable segments: CD-ROM and interactive video. The
CD-ROM segment includes the design, development, installation and support of
CD-ROM storage and imaging software products for business applications. The
interactive video segment includes the design, development, integration,
installation, operation and support of interactive video services hardware and
software. The Company's two reportable segments offer different products and
services and market such products to different customer bases. The two segments
are managed separately because each business requires different technology and
marketing strategies. The two segments evolved over the life of the Company and
have specifically identifiable tangible assets. The segments share certain
corporate assets and, as such, those are not specifically identified in the
segment information.
F-14
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENT INFORMATION (CONTINUED)
Summarized financial information by business segment for the year ended
December 31, 1996, approximates the following:
<TABLE>
<CAPTION>
INTERACTIVE
CD-ROM VIDEO TOTALS
------------ ----------- ------------
<S> <C> <C> <C>
Revenues from external customers........................................ $ 1,809,400 $ 720,697 $ 2,530,097
Depreciation and amortization........................................... 71,700 187,200 258,900
Segment loss............................................................ (820,400) (4,691,700) (5,512,100)
Other significant noncash items:
Bad debt provision.................................................... -- 555,050 555,050
Inventory valuation provision......................................... -- 500,000 500,000
Segment long-lived assets............................................... 530,900 2,432,500 2,963,400
Expenditures for segment long-lived assets.............................. 66,800 214,900 281,700
</TABLE>
The total of the segment assets reported above varies from the total assets
of the Company due to the inability to allocate corporate assets. The corporate
assets consist of cash, fixed assets, offering costs, and other assets. The
following is a reconciliation of the Company's total assets, depreciation and
amortization expense, and cash expenditures for assets to the totals of the
segments' reported above:
<TABLE>
<S> <C>
ASSETS
Total assets of the segments.................................................. $2,963,400
Unallocated corporate assets.................................................. 2,686,395
---------
Total assets.............................................................. $5,649,795
---------
---------
DEPRECIATION AND AMORTIZATION EXPENSE
Segment depreciation and amortization......................................... $ 258,900
Unallocated corporate depreciation............................................ 18,387
---------
Total depreciation and amortization expense............................... $ 277,287
---------
---------
EXPENDITURES FOR LONG-LIVED ASSETS
Segment expenditures for long-lived assets.................................... $ 281,700
Unallocated corporate expenditures for long-lived assets...................... 18,852
---------
Total expenditures for assets............................................. $ 300,552
---------
---------
</TABLE>
F-15
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENT INFORMATION (CONTINUED)
The segment information for the six month periods ending June 30, 1996 and
1997, is as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
---------------- ----------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
REVENUES FROM EXTERNAL CUSTOMERS
CD-ROM..................................................................... $ 838,500 $ 498,600
Interactive video.......................................................... 461,400 755,903
---------------- ----------------
Total.................................................................. $ 1,299,900 $ 1,254,503
---------------- ----------------
---------------- ----------------
SEGMENT PROFIT (LOSS)
CD-ROM..................................................................... $ (233,300) $ 727,500
Interactive video.......................................................... (1,550,301) 1,556,565
---------------- ----------------
Total.................................................................. $ (1,783,601) $ 2,284,065
---------------- ----------------
---------------- ----------------
SEGMENT ASSETS
CD-ROM..................................................................... Not applicable $ 517,600
Interactive video.......................................................... Not applicable 3,245,800
---------------- ----------------
Total.................................................................. Not applicable $ 3,763,400
---------------- ----------------
---------------- ----------------
</TABLE>
The change in the asset balance at June 30, 1997, for the interactive video
segment when compared to the aforementioned December 31, 1996 segment
information is approximately $813,300. This change is due to an increase in
interactive video segment accounts receivable relating to one of the Company's
current short-term contracts. There were no significant changes in the CD-ROM
segment assets between the audited financial statements and June 30, 1997. The
segment asset information for the period ended June 30, 1996, is not presented
as no balance sheet is presented for this period.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The segment information provided
contains allocations of certain corporate assets and expenses which are shared
by each of the segments. The allocations are generally based on a 25%/75% basis
for the CD-ROM and interactive video segments, respectively. Neither of the
segments have financial operations and, therefore, there are no material amounts
of interest revenue or expense generated. There was a net interest expense for
the Company of $53,154 for the year ended December 31, 1996.
14. CASH FLOWS:
Supplemental disclosure of cash flow information for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Cash paid during year for:
Interest..................................................................................... $ 38,010 $ 9,973
Taxes........................................................................................ -- --
</TABLE>
Noncash investing and financing activities:
Capital lease obligations of $34,973 were incurred when the Company
entered into leases for new equipment in 1995.
Amounts due to stockholders and related interest payable totaling
$87,784 were converted into the Company's common stock in 1995.
F-16
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. CASH FLOWS: (CONTINUED)
The Company recorded $149,839 and $278,174 for accretion of interest on
preferred stocks in 1995 and 1996, respectively.
Notes payable of $250,000 were converted to the Company's Series A
Preferred Stock in 1995.
Notes payable of $934,500 were converted to the Company's common stock
in 1996.
15. LEASES
Operating leases -- The Company leases office space and certain equipment
under operating leases. Future minimum lease payments by year, and in the
aggregate, under noncancellable operating leases with remaining terms of one
year or more at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.............................................................................. $ 125,646
1998.............................................................................. 136,592
1999.............................................................................. 139,423
2000.............................................................................. 48,857
---------
Total minimum lease payments.................................................. $ 450,518
---------
---------
</TABLE>
Rent expense for operating leases was $70,957 and $126,903 in 1995 and 1996,
respectively.
16. SUBSEQUENT EVENTS
PRIVATE PLACEMENT
In August 1997, the Company sold 20 units, each consisting of a 10% Note in
the principal amount of $100,000 and warrants to purchase 16,000 shares of
common stock at $3.00 per share. This private placement provided approximately
$1,700,000 in net proceeds to the Company. The proceeds will be used principally
to pay outstanding trade payables and provide working capital. In connection
with this placement, the Company entered into stock repurchase agreements with
one of the Company's former officers and with a director. The Company is to pay
$0.50 per share for a combined total of 320,000 shares currently held by the two
individuals, using a portion of the funds from the private placement.
The Company recorded debt discount and additional paid in capital for the
fair value of the warrants which was $1,440,000. The fair value of the warrants
was determined based on the difference between the $7.50 estimated offering
price and the $3.00 exercise price of the warrants.
Upon the initial public offering, the Company expects that it will repay
amounts due under the placement creating a charge of $1,440,000 in the third
quarter of fiscal 1997, related to interest expense and loss on early
extinguishment of debt.
LICENSE AGREEMENT
In September 1996, the Company entered into an agreement with En Kay Telecom
Co., Ltd. a Korean company ("En K"), pursuant to which the Company, as licensor,
agreed to design a digital set top box which would be manufactured and sold by
En K in the Republic of Korea (the "1996 En K Agreement"). In February 1997, the
Company entered into a second license agreement with En K for the manufacture
and sale by En K of additional Company products in Korea (the "1997 En K
Agreement"). The Company
F-17
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (CONTINUED)
has stopped production under the 1996 En K Agreement under which it has received
$600,000, pending settlement of disputes under the 1997 En K Agreement. The 1997
En K Agreement provided for the payment by En K to the Company of $1,000,000 on
each of February 19, 1997, and May 1, 1997, and $4,000,000 during 1998. En K
failed to make the initial two payments under the 1997 En K Agreement, although
it did pay $200,000 in mid-May, and promised to pay an additional $1,800,000 due
by June 30, 1997 (which it failed to do). The Company gave notice of default on
April 5, 1997, and placed En K in default on May 5, 1997, when En K failed to
cure within the agreed thirty-day period. The Company is considering various
options in this matter, including commencing legal proceedings. There can be no
assurance that En K will honor either of its agreements with the Company, that
the Company will prevail in any legal proceedings, or, if the Company does
prevail, that it will collect any amounts awarded. In addition, although the
Company does not believe there is any basis for such a course of action, it is
possible that En K may seek to recover amounts previously paid by it under the
agreements.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with two key employees.
One of the agreements provides for a base salary of approximately $162,000,
opportunity for an annual incentive bonus of up to 99% of the base salary
dependent upon reaching certain milestones, up to $45,000 in expense
reimbursement related to relocation, and grants of common stock and options to
purchase common stock. This employee has been granted 413,200 options which are
non-qualified. Options totaling 183,200 which were granted in April and June
1997, with an exercise price of $1.38 per share, are vested over the sooner of
(a) a two year period or (b) an initial public offering raising $5 million or
more in capital, with the remaining 230,000 options which were granted in July
1997, being 100 percent vested with an exercise price of $3.00 per share. The
413,200 options expire ten years from the date of grant. The Company has
recorded compensation expense for the six months ended June 30, 1997, totaling
approximately $1,122,000 relating to the 183,200 options granted in April and
June 1997. In addition, in July 1997, the employee purchased 15,000 shares of
common stock for payment of $.001 per share as well as for giving up certain
anti-dilution rights. This agreement expires January 20, 2000 and may not be
terminated without cause.
Under the other employment agreement, which can be terminated only for cause
or disability, the employee receives a base salary of approximately $134,000
subject to increases to be approved by the Board. This agreement expires May 1,
2000.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 7
Use of Proceeds................................. 16
Dividend Policy................................. 16
Dilution........................................ 17
Capitalization.................................. 19
Selected Financial Data......................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 21
Business........................................ 24
Management...................................... 39
Principal Stockholders.......................... 45
Certain Relationships and Related
Transactions.................................. 46
Description of Securities....................... 48
Shares Eligible for Future Sale................. 51
Underwriting.................................... 53
Legal Matters................................... 54
Experts......................................... 55
Available Information........................... 55
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OF
SUBSCRIPTIONS.
2,000,000 SHARES
CELERITY SYSTEMS,
INC.
COMMON STOCK
------------------
PROSPECTUS
------------------
HAMPSHIRE SECURITIES CORPORATION
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. The Company's Certificate of Incorporation includes the
following language:
"No director of the Corporation shall be liable to the Corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision does not eliminate or limit the liability
of the director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from
which the director derived an improper personal benefit. For purposes of the
prior sentence, the term "damages" shall, to the extent permitted by law,
include, without limitation, any judgment, fine, amount paid in settlement,
penalty, punitive damages, excise, or other tax, including, without limitation,
any of the foregoing incurred or assessed with respect to an employee benefit
plan, or expense of any nature (including, without limitation, counsel fees and
disbursements)." According to the Certificate of Incorporation, the limitations
of liability discussed in this provision cannot be limited by a modification of
the Certificate of Incorporation for acts that occurred prior to that
modification.
Article NINTH of the Certificate of Incorporation of the Company, permits
indemnification of, and advancement of expenses to, among others, officers and
directors of the Corporation. Such Article provides as follows:
"A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director, officer, employee, or
agent of the Corporation or any of its direct or indirect subsidiaries or is or
was serving at the request of the Corporation as a director, officer, employee,
or agent of any other corporation or of a partnership, joint venture, trust, or
other enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee, or agent or in
any other capacity while serving as a director, officer, employee, or agent,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware Code, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than permitted
prior thereto), against all expense, liability, and loss (including attorneys'
fees, judgments, fines, excise or other taxes assessed with respect to an
employee benefit plan, penalties, and amounts paid in settlement) reasonably
incurred or suffered by such indemnitee in connection therewith, and such
indemnification shall continue as to an indemnitee who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of the
indemnitee's heirs, executors, and administrators; provided, however, that,
except as provided in Paragraph C of this Article Ninth with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation."
"B. The right to indemnification conferred in paragraph A of this Article
Ninth shall include the right to be paid by the Corporation the expenses
incurred in defending any proceeding for which such right to indemnification is
applicable in advance of its final disposition (hereinafter an "advancement of
II-1
<PAGE>
expenses"); PROVIDED, HOWEVER, that, if the Delaware Code so requires, an
advancement of expenses incurred by an indemnitee in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, service to an
employee benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee,
to repay all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter a
"final adjudication") that such indemnitee is not entitled to be indemnified for
such expenses under this Article Ninth or otherwise."
"C. The rights to indemnification and to the advancement of expenses
conferred in paragraphs A and B of this Article Ninth shall be contract rights.
If a claim under paragraph A or B of this Article Ninth is not paid in full by
the Corporation within 60 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by an indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware Code, and (ii) any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware Code. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware Code, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel, or its stockholders) that the
indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee, be a defense to such
suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article Ninth or
otherwise, shall be on the Corporation."
"D. The rights to indemnification and to the advancement of expenses
conferred in this Article Ninth shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, this certificate of
incorporation, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise."
"E. The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, or agent of the Corporation or
another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability, or loss
under the Delaware Code."
"F. The Corporation's obligation, if any, to indemnify any person who was or
is serving as a director, officer, employee, or agent of any direct or indirect
subsidiary of the Corporation or, at the request of the Corporation, of any
other corporation or of a partnership, joint venture, trust, or other enterprise
shall be reduced by any amount such person may collect as indemnification from
such other corporation, partnership, joint venture, trust, or other enterprise."
"G. Any repeal or modification of the foregoing provisions of this Article
Ninth shall not adversely affect any right or protection hereunder of any person
in respect of any act or omission occurring prior to the time of such repeal or
modification."
II-2
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby (items
marked with an asterisk (*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 5,773
---------
Legal Fees and Expenses............................................ ---------
Blue Sky Fees (including counsel fees)............................. ---------
NASD Filing Fees................................................... 2,405
---------
Listing and Nasdaq SmallCap Market fees............................ 25,020
---------
Accounting Fees and Expenses....................................... ---------
Transfer Agent and Registrar Fees.................................. ---------
Printing and Engraving Expenses.................................... ---------
Underwriting Non-Accountable Expense Allowance..................... ---------
Miscellaneous...................................................... ---------
Total.............................................................. $
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, the Registrant has made the following sales of
unregistered securities, all of which sales were exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof or as
otherwise indicated herein. The following section gives effect to the
one-for-two-and-one-half reverse stock split of the Company's Common Stock
effected in August 1997.
In May 1995, the Company sold 390,334 shares of Series A Preferred Stock at
$3.88 per share (including 181,290 shares of Series A Preferred Stock to Herzog,
Heine & Geduld, Inc., a customer of the Company, as a result of the conversion
of a loan in the principal amount of $250,000 received from such customer in
April 1994) and warrants to purchase 163,392 shares of Series B Preferred Stock
at $4.90 per share for an aggregate purchase price of $1,517,500. The warrants
to purchase the shares of Series B Preferred Stock were exercised in August 1995
and the Company issued 163,392 shares of Series B Preferred Stock to certain
accredited investors. The Company believes that the issuance and sale of such
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act and/or Rule 506 promulgated thereunder.
In November 1995, the Company issued subordinated debt in the principal
amount of $934,500 to certain accredited investors, many of which had
participated in the previous preferred stock offerings. Such debt bore interest
at 10% per annum and, if not paid by November 30, 1996, automatically converted
to Common Stock at a rate of $4.90 per share. Purchasers of the debt received
the 1995 Warrants to purchase 476,876 shares of the Company's Common Stock for
an aggregate purchase price equal to the principal amount of the debt
($934,500). The 1995 Warrants expire on the earlier of (i) May 31, 1998 and (ii)
the closing of the Offering. Accordingly, such warrants will expire if not
exercised prior to the consummation of the Offering. The debt was automatically
converted to 190,714 shares of Common Stock in November 1996. All interest,
which had been accrued on the debt, was forgiven. The Company believes that each
issuance and sale of such securities was exempt from registration pursuant to
Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder.
In December 1995, the Company issued 17,915 shares of Common Stock to Dr.
Fenton Scruggs, a director of the Company, as a result of the conversion of a
loan in the principal amount of $75,000 received from Dr. Scruggs in November
1994. The Company believes that such issuance and sale was exempt from
registration pursuant to Section 4(2) of the Securities Act and/or Rule 506
promulgated thereunder.
II-3
<PAGE>
In June 1996, the Company, through Hampshire Securities Corporation, acting
as placement agent, issued and sold 60 units of its securities, each consisting
of 7,111 shares of Common Stock, one 10% Note in the principal amount of $50,000
and one three-year 1996 Warrant to purchase 2,625 shares of Common Stock at an
exercise price equal to $8.46 per share, at $100,000 per unit ($6,000,000 total)
solely to accredited investors. The Company believes that each issuance and sale
of such securities was exempt from registration pursuant to Section 4(2) of the
Securities Act and/or Rule 506 promulgated thereunder. Hampshire Securities
Corporation received, for its services, a placement fee of 8% of the gross
proceeds from the sale of such securities, a warrant to purchase 38,852 shares
of Common Stock at an exercise price of $9.44 per share, and reimbursement of
certain other expenses.
In July 1997, the Company, through Hampshire Securities Corporation, acting
as placement agent, issued and sold 20 units of its securities, each consisting
of one 10% Note in the principal amount of $100,000 and one four-year Warrant to
purchase 16,000 shares of Common Stock at an exercise price equal to $3.00 per
share, at $100,000 per unit ($2,000,000 total) solely to accredited investors.
The Company believes that such issuance and sale of such securities was exempt
from registration pursuant to Section 4(2) of the Securities Act and/or Rule 506
promulgated thereunder. Hampshire Securities Corporation received, for its
services, a placement fee of 10% of the gross proceeds from the sale of such
securities and reimbursement of certain other expenses.
Options to purchase 144,000 shares of Common Stock are outstanding under the
1995 Plan at exercise prices ranging from $0.10 to $4.90 per share, although
substantially all of such options are exercisable at $0.10 per share. In
addition to the options granted under the 1995 Plan, the Company has granted
options to purchase 513,200 shares of Common Stock outside of the 1995 Plan at
exercise prices ranging from $0.10 to $3.00. The Company believes that each such
issuance and sale of securities was exempt from registration pursuant to Section
4(2) of the Securities Act.
II-4
<PAGE>
ITEM 16. EXHIBITS
(a) The following exhibits, unless otherwise indicated are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of Celerity Systems, Inc.
3.2 By laws of Celerity Systems, Inc.
4.1 Form of Representative's Warrant*
4.2 1995 Stock Option Plan
4.3 1997 Stock Option Plan
4.4 Form of Stock Certificate*
4.5 Form of Bridge Warrant
4.6 Form of 1996 Warrant*
4.7 Form of Hampshire Warrant*
4.8 Form of 1995 Warrant
4.9 Letter Agreement dated July 15, 1997, between the Company and Mahmoud Youssefi, including exhibits
4.10 Letter Agreement, dated July 11, 1997, between the Company and Dr. Fenton Scruggs
5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP*
10.1 Employment Agreement, dated January 7, 1997, as amended, between the Company and Kenneth D. Van
Meter*
10.2 Employment, Non-Solicitation, Confidentiality and Non-Competition Agreement, dated as of May 1, 1996,
between the Company and Glenn West
10.3 Termination Agreement, dated as of April 5, 1997, between the Company and Mahmoud Youssefi
10.4 Letter Agreement, dated January 3, 1997, between the Company and Doyal H. Hodge*
10.5 Letter Agreement, dated March 7, 1997, between the Company and William Chambers*
10.6 Letter Agreement, dated July 22, 1997, between the Company and Mark. C. Cromwell*
10.7 Exclusive OEM/Distribution Agreement, dated March 10, 1995, between the Company and InterSystem
Multimedia, Inc.
10.8 Purchase Order Agreement, dated June 26, 1995, between Tadiran Telecommunications Ltd. and the
Company
10.9 License Agreement, dated as of September 26, 1996, between the Company and En Kay Telecom Co., Ltd.
10.10 License Agreement, dated as of February 21, 1997, between the Company and En Kay Telecom Co., Ltd.
10.11 Remarketer Agreement, dated as of June 15, 1997, between the Company and Minerva Systems, Inc.
10.12 Memorandum of Understanding, dated April 25, 1996, between Integrated Network Corporation and the
Company
10.13 Letter of Agreement, dated March 31, 1993, between the Company and Herzog, Heine & Geduld, Inc. and
Development Agreement attached thereto
10.14 Subcontract Agreement, dated June 26, 1997, between Unisys Corporation and the Company
11 Statement re: computation of per share earnings
23.1 Consent of Coopers & Lybrand L.L.P
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the Opinion filed as Exhibit
5.1)
24 Power of Attorney (included in signature page)
27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
in the registration statement;
(iii) to include any additional or changed material information on the
plan of distribution;
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of securities
offered, and the offering of such securities at that time be the initial
bona fide offering thereof; and
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of the offering.
(d) The Registrant hereby undertakes that it will provide to the
Underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(f) The undersigned Registrant hereby undertakes that it will:
(1) for determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective; and
(2) determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered therein, and the offering
of such securities at that time as the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of New
York, New York on August 13, 1997.
CELERITY SYSTEMS, INC.
BY: /S/ KENNETH D. VAN METER
-----------------------------------------
Name: Kenneth D. Van Meter
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
Know all men by these presents, that the Registrant and each person whose
signature appears below constitutes and appoints Kenneth D. Van Meter and Doyal
H. Hodge, and each of them, his, her or its true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution for him, her or it
and in his, her, or its name, place and stead, in any and all capacities, to
sign and file (i) any and all amendments (including post-effective amendments)
to this Registration Statement, with all exhibits thereto, and all other
documents in connection therewith, and (ii) any registration statement, and any
and all amendments thereto, relating to the offering covered hereby filed
pursuant to Rule 462(b) under the Securities Act of 1933, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he, she, or it might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agrees or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
In accordance with to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ KENNETH D. VAN METER Officer and Chairman of
- ------------------------------ the Board (Principal August 13, 1997
Kenneth D. Van Meter Executive Officer)
Vice President and Chief
/s/ DOYAL H. HODGE Financial Officer
- ------------------------------ (Principal Financial and August 13, 1997
Doyal H. Hodge Principal Accounting
Officer)
/s/ GLENN WEST
- ------------------------------ Executive Vice President August 13, 1997
Glenn West and Director
II-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ FENTON SCRUGGS
- ------------------------------ Director August 13, 1997
Fenton Scruggs
/s/ DONALD GREENHOUSE
- ------------------------------ Director August 13, 1997
Donald Greenhouse
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of Celerity Systems, Inc.
3.2 By laws of Celerity Systems, Inc.
4.1 Form of Representative's Warrant*
4.2 1995 Stock Option Plan
4.3 1997 Stock Option Plan
4.4 Form of Stock Certificate*
4.5 Form of Bridge Warrant
4.6 Form of 1996 Warrant*
4.7 Form of Hampshire Warrant*
4.8 Form of 1995 Warrant
4.9 Letter Agreement, dated July 15, 1997, between the Company and Mahmoud Youssefi, including
exhibits
4.10 Letter Agreement, dated July 11, 1997, between the Company and Dr. Fenton Scruggs
5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP*
10.1 Employment Agreement, dated January 7, 1997, as amended, between the Company and Kenneth D.
Van Meter*
10.2 Employment, Non-Solicitation, Confidentiality and Non-Competition Agreement, dated as of May
1, 1996, between the Company and Glenn West
10.3 Termination Agreement, dated as of April 5, 1997, between the Company and Mahmoud Youssefi
10.4 Letter Agreement, dated January 3, 1997, between the Company and Doyal H. Hodge*
10.5 Letter Agreement, dated March 7, 1997, between the Company and William Chambers*
10.6 Letter Agreement, dated July 22, 1997, between the Company and Mark. C. Cromwell*
10.7 Exclusive OEM/Distribution Agreement, dated March 10, 1995, between the Company and
InterSystem Multimedia, Inc.
10.8 Purchase Order Agreement, dated June 26, 1995, between Tadiran Telecommunications Ltd. and the
Company
10.9 License Agreement, dated as of September 26, 1996, between the Company and En Kay Telecom Co.,
Ltd.
10.10 License Agreement, dated as of February 21, 1997, between the Company and En Kay Telecom Co.,
Ltd.
10.11 Remarketer Agreement, dated as of June 15, 1997, between the Company and Minerva Systems, Inc.
10.12 Memorandum of Understanding, dated April 25, 1996, between Integrated Network Corporation and
the Company
10.13 Letter of Agreement, dated March 31, 1993, between the Company and Herzog, Heine & Geduld,
Inc. and Development Agreement attached thereto
10.14 Subcontract Agreement, dated June 26, 1997, between Unisys Corporation and the Company
11 Statement re: computation of per share earnings
23.1 Consent of Coopers & Lybrand L.L.P
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the Opinion filed as
Exhibit 5.1)
24 Power of Attorney (included in signature page)
27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
CELERITY SYSTEMS, INC.
FIRST. The name of the corporation (the "Corporation") is Celerity
Systems, Inc.
SECOND. The address, including street, number, city and county of the
Corporation's registered office in the State of Delaware is 9 East Loockerman
Street, in the City of Dover, County of Kent, Delaware 19901, and the name of
the Corporation's registered agent at such address is National Corporate
Research, Ltd.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "Delaware Code").
FOURTH. The total number of shares of capital stock that the Corporation
has authority to issue is (i) fifteen million (15,000,000) shares of common
stock with a par value of $0.001 per share ("Common Stock"); (ii) one million,
three hundred and eighty-four thousand and three hundred and fifteen (1,384,315)
shares of redeemable, convertible preferred stock with a par value of $0.01 per
share ("Preferred Stock"), nine hundred and seventy-five thousand and eight
hundred and thirty-six (975,836) of which shall be designated Series A Preferred
Stock and four hundred and eight thousand and four hundred and seventy-nine
(408,479) of which shall be designated Series B Preferred Stock; and (iii)
three million (3,000,000) shares of Preferred Stock with a par value of $0.01
per share (the "Designation Preferred Stock"). The Designation Preferred Stock
may be issued in one or more series, from time to time, with each such series to
have such designations, powers, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue of such series adopted by the Board of
Directors, subject to the limitations prescribed by law and in accordance with
the provisions hereof, the Board of Directors being hereby expressly vested with
authority to adopt any such resolution or resolutions. The authority of the
Board of Directors with respect to each such series shall include, but shall not
be limited to, the determination of fixing of the following:
(a) The distinctive designation and number of shares
constituting such series, which number may (except where otherwise
provided by the Board of Directors in creating such series) be
increased or decreased (but not below the number of shares then
outstanding) from time to time by like action of the Board of
Directors;
<PAGE>
(b) The dividend rate, if any, of such series or the
method of determination thereof, the conditions and times upon which
such dividends shall or may be payable, the relation which such
dividends shall bear to the dividends payable on any other class or
classes of stock or series thereof, or any other series thereof, or
any other series of the same class, and whether dividends shall be
cumulative or noncumulative;
(c) The conditions upon which the shares of such series
shall be subject to redemption by the Corporation or the holder
thereof and the times, prices and other terms and provisions upon
which the shares of the series may be redeemed;
(d) Whether or not the shares of the series shall be
subject to the operation of a retirement or sinking fund to be
applied to the purchase or redemption of such shares and, if such
retirement or sinking fund be established, the annual amount thereof
and the terms and provisions relative to the operation thereof;
(e) Whether or not the shares of the series shall be
convertible into or exchangeable for shares of any other stock of
the Corporation or any other securities and, if provision is made
for conversion or exchange, the times, prices, rates, adjustments
and other terms and conditions of such conversion or exchange;
(f) Whether or not the shares of the series shall have
voting rights in addition to the voting rights provided by law,
including whether or not the shares shall have cumulative voting
rights, and, if so, subject to the limitations hereinafter set
forth, the terms of such voting rights;
(g) The rights of the shares of the series in the event
of voluntary or involuntary liquidation or dissolution, or upon the
distribution of assets, of the Corporation; and
(h) Any other powers, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, of the shares of such series,
as the Board of Directors may deem advisable and as shall not be
inconsistent with the provisions of this Certificate of
Incorporation.
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A. Common Stock
1. Relative Rights of Preferred Stock and Common Stock. All designations,
voting powers, preferences and relative participating, optional or other special
rights of, and such qualifications, limitations and restrictions on, the Common
Stock are expressly made subject and subordinate to those that are fixed with
respect to any shares of the Preferred Stock.
2. Voting Rights. Except as provided by law or this Certificate of
Incorporation, each holder of Common Stock shall have one vote in respect of
each share of stock held by him of record on the books of the Corporation for
the election of directors and on all matters submitted to a vote of stockholders
of the Corporation. Except as otherwise expressly provided for herein or as
required by law, the holder of shares of Preferred Stock and Common Stock shall
be entitled to vote together as a single class on all matters.
3. Dividends. Subject to the rights of the Preferred Stock, the holders of
shares of Common Stock shall be entitled to receive, when and if declared by the
Board of Directors, out of the assets of the Corporation which are by law
available therefor, dividends payable either in cash, in property or in shares
of capital stock.
4. Dissolution, Liquidation or Winding Up. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of the Preferred Stock, holders of Common Stock shall be
entitled, unless otherwise provided herein or by law, to receive all of the
remaining assets of the Corporation of whatever kind available for distribution
to stockholders ratably in proportion to the number of shares of Common Stock
held by them respectively. The Board of Directors may distribute in kind to the
holders of Common Stock such remaining assets of the Corporation or may sell,
transfer or otherwise dispose of all or any part of such remaining assets to any
other corporation, trust or other entity, and distribute such payment to holders
of Common Stock.
B. Preferred Stock
The designations, powers, preferences, rights and privileges of, and the
qualifications, limitations and restrictions on, the Preferred Stock are as
follows:
1. Dividends. No dividends shall be declared and set aside for any share
of the Preferred Stock; provided, however, that in the event the Board of
Directors of the Corporation shall declare a dividend payable upon the
outstanding shares of any class of Common Stock of the Corporation, other than a
dividend to which the provisions of paragraph 4(e) or (f) apply, the holders of
the Preferred Stock shall be entitled to the same amount of dividends per share
of Preferred Stock as would be declared payable on the largest number of full
shares of Common Stock into which each such share of Preferred Stock could be
converted pursuant to the provisions of Section 4 hereof, such number determined
as of the record date for the determination of holders of Common Stock entitled
to receive such
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dividend.
2. Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, holders of outstanding shares of
Series A Preferred Stock and Series B Preferred Stock shall be entitled to be
paid out of the assets of the Corporation available for distribution to
stockholders, whether such assets are capital, surplus, or earnings, (i) an
amount equal to the greater of (x) $1.55 per share in the case of the Series A
Preferred Stock and $1.96 per share in the case of the Series B Preferred Stock,
or (y) an amount equal to the redemption price per share which would have been
payable pursuant to Section 5 had such holders of Preferred Stock been entitled
to redeem their shares as of the effective date of such liquidation, dissolution
or winding up and had elected to do so, plus (ii) all declared but unpaid
dividends accrued through the date of such payment. If upon any liquidation,
dissolution, or winding up of the Corporation, the assets to be distributed to
the holders of the Preferred Stock under the foregoing sentence shall be
insufficient to permit payment to such stockholders of the full preferential
amounts aforesaid, then all of the assets of the Corporation available for
distribution to such holders under such sentence shall be distributed to such
holders pro rata, so that each holder receives that portion of the assets
available for distribution as the maximum total preferential distribution to
such holder under the preceding sentence bears to the maximum total preferential
distribution under the preceding sentence to all holders of shares of Preferred
Stock then outstanding. After all payments shall have been made in full to all
of the holders of Preferred Stock, or funds necessary for such payments shall
have been set aside by the Corporation in trust for the account of such holders
so as to be available for such payment, any assets remaining available for
distribution shall be distributed to the holders of the Common Stock, and no
further distribution shall be made to the holders of shares of Preferred Stock.
(b) A consolidation or merger of the Corporation (including a merger or
consolidation in which the Corporation is the survivor but its Common Stock is
exchanged for stock, securities or property of another entity), or a sale of all
or substantially all of the assets of the Corporation shall be regarded as a
liquidation, dissolution or winding up of the affairs of the Corporation within
the meaning of this Section 2; provided, however, that each holder of Preferred
Stock shall have the right to elect the benefits of the provision of paragraph
4(a) hereof in lieu of receiving payment in liquidation, dissolution or winding
up of the Corporation pursuant to this Section 2.
(c) In the event of a liquidation, dissolution or winding up of the
Corporation resulting in the availability of assets other than cash for
distribution to the holders of the Preferred Stock, the holders of the Preferred
Stock shall be entitled to a distribution of cash and/or assets equal in value
to the liquidation preference and other distribution rights stated in paragraph
2(a). In the event that such distribution to the holders of the Preferred Stock
shall include any assets other than cash, the following provisions shall govern.
The Board of Directors shall first determine the value of such assets for such
purpose, and shall notify all
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holders of shares of Preferred Stock of such determination. The value of such
assets for purposes of the distribution under this paragraph 2(c) shall be the
value as determined by the Board of Directors in good faith and with due care,
unless the holders of a majority of the outstanding shares of Preferred Stock
shall object thereto in writing within 15 days after the date of such notice. In
the event of such objection, the valuation of such assets for purposes of such
distribution shall be determined by arbitration in which (i) the objecting
stockholders shall name in their notice of objection one arbitrator, (ii) the
Board of Directors shall name a second arbitrator within 15 days from the
receipt of such notice, (iii) the two arbitrators thus selected shall select a
third arbitrator, and (iv) the three arbitrators thus selected shall determine
the valuation of such assets for purposes of such distribution by majority vote.
The costs of such arbitration shall be borne by the Corporation and by the
holders of the Preferred Stock (on a pro rata basis out of the assets otherwise
distributable to them) as follows: (i) if the valuation as determined by the
arbitrators is greater than 90% of the valuation as determined by the Board of
Directors, the holders of the Preferred Stock shall pay the costs of the
arbitration, and (ii) otherwise, the Corporation shall bear the costs of the
arbitration.
3. Voting Power.
(a) Except as otherwise expressly provided herein or as required by law,
the holder of each share of Preferred Stock shall be entitled to vote on all
matters. Each share of Preferred Stock shall entitle the holder thereof to such
number of votes per share as shall equal the number of shares of Common Stock
into which such share of Preferred Stock is then convertible. Except as
otherwise expressly provided herein (including without limitation the provisions
of paragraph 3(b) below and Sections 6 and 7 hereof) or as required by law, the
holders of shares of the Preferred Stock and the Common Stock shall vote
together as a single class on all matters.
(b) So long as at least 20% of the shares of the Preferred Stock
originally issued shall remain outstanding, the number of directors of the
Corporation shall be fixed at a number no greater than five, and the holders of
the Preferred Stock shall be entitled to vote as a class separately from all
other classes of stock of the Corporation in any vote for the election of
directors of the Corporation, and shall be entitled to elect voting together as
a single class, one member of the Corporation's Board of Directors, and the
other directors shall be elected by the holders of Preferred Stock and Common
Stock voting together in accordance with paragraph 3(a) above.
4. Conversion. The holders of the Preferred Stock shall have the following
conversion rights ("Conversion Rights").
(a) Right to Convert. Each share of Preferred Stock shall be convertible,
without the payment of any additional consideration by the holder thereof and at
the option of the holder thereof, at any time after the date of issuance of such
share, at the office of the Corporation or any transfer agent for the Preferred
Stock, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing One Dollar and Fifty-
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Five Cents ($1.55) with respect to the Series A Preferred Stock, and One Dollar
and Ninety-Six Cents ($1.96) with respect to the Series B Preferred Stock, by
the applicable Conversion Price, determined as hereinafter provided, in effect
at the time of conversion. The Conversion Price at which shares of Common Stock
shall be deliverable upon conversion without the payment of any additional
consideration by the holder thereof (the "Conversion Price") shall initially be
One Dollar and Fifty-Five Cents ($3.875) per share of Common Stock with respect
to the Series A Preferred Stock, and One Dollar and Ninety-Six Cents ($4.90) per
share with respect to the Series B Preferred Stock. Such initial Conversion
Price shall be subject to adjustment, in order to adjust the number of shares of
Common Stock into which the Preferred Stock is convertible, as hereinafter
provided.
(b) Automatic Conversion. Each share of Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Conversion Price upon any of the following events: (i) the closing of a firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock for the account of the Corporation to the public in which
proceeds to the Corporation, net of underwriting discounts and commissions, are
at least $5,000,000 (in the event of which offering, the person(s) entitled to
receive the Common Stock issuable upon such conversion of the Preferred Stock
shall not be deemed to have converted that Preferred Stock until immediately
prior to the closing of such offering), or (ii) the affirmative vote or written
consent to such automatic conversion of holders of not less than seventy-five
percent of the then outstanding shares of Preferred Stock. Each person who holds
of record Preferred Stock immediately prior to such automatic conversion shall
be entitled to all dividends which have accrued to the time of the automatic
conversion, but not paid on the Preferred Stock, pursuant to Section 5 hereof.
Such dividends shall be paid to all such holders within thirty (30) days of the
automatic conversion.
(c) Mechanics of Conversion. No fractional shares of Common Stock shall be
issued upon conversion of the Preferred Stock. In lieu of any fractional shares
to which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Conversion Price. Before
any holder of Preferred Stock shall be entitled to convert the same into full
shares of Common Stock, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Preferred Stock, and shall give written notice to the Corporation
at such office that he elects to convert the same and shall state therein his
name or the name or names of his nominees in which he wishes the certificate or
certificates for shares of Common Stock to be issued. The Corporation shall, as
soon as practicable thereafter, issue and deliver at such office to such holder
of Preferred Stock, or to his nominee or nominees, a certificate or certificates
for the number of shares of Common Stock to which he shall be entitled as
aforesaid, together with cash in lieu of any fraction of a share. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date.
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(d) Adjustments to Conversion Price for Diluting Issues:
(i) Special Definitions. For purposes of this Section 4(d), the
following definitions shall apply:
(1) "Option" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "Original Issue Date" shall mean, with respect to the
Series A Preferred Stock, the date on which a share of Series A Preferred
Stock was first issued and, with respect to the Series B Preferred Stock,
the date on which a warrant to purchase shares of Series B Preferred Stock
was first issued.
(3) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than Common Stock and Preferred Stock) or
other securities directly or indirectly convertible into or exchangeable
for Common Stock, but shall not include the Series B Warrants (as defined
below).
(4) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be
issued) by the Corporation after the Original Issue Date, other than
shares of Common Stock issued or issuable:
(A) upon conversion of shares of Preferred Stock or upon
exercise of warrants to purchase up to 408, 479 shares of Series B
Preferred Stock (the "Series B Warrants");
(B) pursuant to the 1997 Stock Incentive Plan of the
Corporation or to officers or employees of, or consultants to, the
Corporation (not including Messrs. Glenn and Youssefi) with the approval
of the Board of Directors of the Corporation, pursuant to share options or
purchase rights for up to an aggregate of up to 482,323 shares of Common
Stock; or
(C) by way of dividend or other distribution of shares
of Common Stock excluded from the definition of Additional Shares of
Common Stock by the foregoing clauses (A) and (B) or this clause (C) or on
shares of Common Stock so excluded.
(ii) No Adjustment of Conversion Price. No adjustment in the number
of shares of Common Stock into which a series of the Preferred Stock is
convertible shall be made, by adjustment in the Conversion Price of such
series of Preferred Stock in respect of the issuance of Additional Shares
of Common Stock or otherwise, unless the consideration per share for an
Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Conversion Price for such series of
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Preferred Stock in effect on the date of, and immediately prior to, the
issue of such Additional Share.
(iii) Issue of Securities Deemed Issue of Additional Shares of
Common Stock.
(1) Options and Convertible Securities. In the event the
Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities entitled
to receive any such Options or Convertible Securities, then the maximum
number of shares (as set forth in the instrument relating thereto without
regard to any provisions contained therein for a subsequent adjustment of
such number) of Common Stock issuable upon the exercise of such Options
or, in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed to
be Additional Shares of Common Stock issued as of the time of such issue
or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common
Stock shall not be deemed to have been issued unless the consideration per
share (determined pursuant to Section 4(d)(v) hereof), of such Additional
Shares of Common Stock would be less than the applicable Conversion Price
in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, and provided further that in any such
case in which Additional Shares of Common Stock are deemed to be issued:
(A) no further adjustment in the applicable Conversion
Price shall be made upon the subsequent issue of Convertible Securities or
shares of Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities.
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the Corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the applicable Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities:
(C) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the applicable Conversion Price computed
upon the original issue thereof (or upon the occurrence of a record date
with respect thereto), and any subsequent adjustments based thereon,
shall, upon such expiration, be recomputed as if:
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(I) in the case of Convertible Securities or
Options for Common Stock the only Additional Shares of Common Stock issued
were the shares of Common Stock, if any, actually issued upon the exercise
of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options,
whether or not exercised, plus the consideration actually received by the
Corporation upon such exercise, or for the issue of all such Convertible
Securities which were actually converted or exchanged, plus the additional
consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(II) in the case of Options for Convertible
Securities only the Convertible Securities, if any, actually issued upon
the exercise thereof were issued at the time of issue of such Options, and
the consideration received by the Corporation for the Additional Shares of
Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options,
whether or not exercised, plus the consideration deemed to have been
received by the Corporation (determined pursuant to Section 4(d)(v)) upon
the issue of the Convertible Securities with respect to which such Options
were actually exercised;
(D) no readjustment pursuant to clause (B) or (C) above
shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (i) the Conversion Price on the original
adjustment date, or (ii) the Conversion Price that would have resulted
from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date;
(E) in the case of any Options which expire by their
terms not more than 30 days after the date of issue thereof, no adjustment
of the Conversion Price shall be made until the expiration or exercise of
all such Options, whereupon such adjustment shall be made in the same
manner provided in clause (C) above; and
(F) if such record date shall have been fixed and such
Options or Convertible Securities are not issued on the date fixed
therefor, the adjustment previously made in the Conversion Price which
became effective on such record date shall be canceled as of the close of
business on such record date, and thereafter the Conversion Price shall be
adjusted pursuant to this subparagraph 4(d)(iii) as of the actual date of
their issuance.
(2) Stock Dividends, Stock Distributions and Subdivisions. In
the event the Corporation at any time or from time to time after the
Original Issue Date shall declare or pay any dividend or make any other
distribution of the Common Stock payable in Common Stock, or effect a
subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in Common Stock), then and in
any such event, Additional Shares of Common Stock
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shall be deemed to have been issued:
(A) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive
such dividend or distribution, or
(B) in the case of any such subdivision, at the close of
business on the date immediately prior to the date upon which such
corporate action becomes effective.
If such record date shall have been fixed and such dividend shall
not have been fully paid on the date fixed therefor, the adjustment
previously made in the Conversion Price which became effective on such
record date shall be canceled as of the close of business on such record
date, and thereafter the Conversion Price shall be adjusted pursuant to
this subparagraph 4(d)(iii) as of the time of actual payment of such
dividend.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
Shares of Common Stock.
In the event the Corporation shall issue Additional Shares of Common
Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 4(d)(iii), but excluding Additional Shares of Common
Stock issued pursuant to Section 4(d)(iii)(2), which event is dealt with
in Section 4(d)(vi) hereof) without consideration or for a consideration
per share less than the Conversion Price of a series of Preferred Stock in
effect on the date of and immediately prior to such issue, then and in
such event, such Conversion Price of such series shall be reduced
concurrently with such issue in order to increase the number of shares of
Common Stock into which the series of Preferred Stock is convertible, to a
price (calculated to the nearest cent) determined by multiplying such
Conversion Price by a fraction (x) the numerator of which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such
issue (including shares of Common Stock issuable upon conversion of any
outstanding Preferred Stock or Convertible Securities), plus (2) the
number of shares of Common Stock which the aggregate consideration
received by the Corporation for the total number of Additional Shares of
Common Stock so issued would purchase at such Conversion Price, and (y)
the denominator of which shall be (1) the number of shares of Common Stock
outstanding immediately prior to such issue (including shares of Common
Stock issuable upon conversion of any outstanding Preferred Stock or
Convertible Securities), plus (2) the number of such Additional Shares of
Common Stock so issued, provided that the Conversion Price shall not be so
reduced at such time if the amount of such reduction would be an amount
less than $0.01, but any such amount shall be carried forward and
reduction with respect thereto made at the time of and together with any
subsequent reduction which, together with such amount and any other amount
or amounts so carried forward, shall aggregate
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$0.01 or more.
(v) Determination of Consideration. For purposes of this Section
4(d), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration shall:
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts
paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B)
above, as determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration per
share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Section 4(d)(iii)(1), relating to
Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration) payable to the
Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities, by
(y) the maximum number of shares of Common Stock (as set forth
in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities.
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(vi) Adjustment for Dividends, Distributions, Subdivisions,
Combinations or Consolidation of Common Stock.
(1) Stock Dividends, Distributions or Subdivisions. In the
event the Corporation shall issue Additional Shares of Common Stock
pursuant to Section 4(d)(iii)(2) in a stock dividend, stock distribution
or subdivision, the Conversion Price in effect immediately prior to such
stock dividend, stock distribution or subdivision shall, concurrently with
the effectiveness of such stock dividend, stock distribution or
subdivision, be proportionately decreased.
(2) Combinations or Consolidations. In the event the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common
Stock, the Conversion Price in effect immediately prior to such
combination or consolidation shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
(vii) Adjustment for Merger or Reorganization, etc.
In case of any consolidation or merger of the Corporation with or
into another corporation or the conveyance of all or substantially all of
the assets of the Corporation to another corporation, each share of
Preferred Stock shall thereafter be convertible into the number of shares
of stock or other securities or property to which a holder of the number
of shares of Common Stock of the Corporation deliverable upon conversion
of such Preferred Stock would have been entitled upon such consolidation,
merger or conveyance, and, in any such case, appropriate adjustment (as
determined by the Board of Directors) shall be made in the application of
the provisions herein set forth with respect to the rights and interest
thereafter of the holders of the Preferred Stock, to the end that the
provisions set forth herein (including provisions with respect to changes
in and other adjustments of the Conversion Price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of
stock or other property thereafter deliverable upon the conversion of the
Preferred Stock.
(e) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation but will at all times in good faith assist in the carrying
out of all the provisions of this Section 4 and in the taking of all the
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Preferred Stock against
impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
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adjustment or readjustment of the Conversion Price pursuant to this
Section 4, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish
to each holder of Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (i)
such adjustments and readjustments, (ii) the Conversion Price at the time
in effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of Preferred Stock.
(g) Notice of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends
paid in previous quarters) or other distribution, the Corporation shall
mail to each holder of Preferred Stock at least ten (10) days prior to the
date specified herein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend or distribution.
(h) Common Stock Reserved. The Corporation shall reserve and keep
available out of its authorized but unissued Common Stock such number of
shares of Common Stock as shall from time to time be sufficient to effect
conversion of the Preferred Stock.
5. Redemption. The Corporation shall redeem outstanding shares of
Preferred Stock pursuant to the request of the holders thereof in accordance
with the following provisions:
(a) Any holder of shares of Preferred Stock of any series may
request redemption of, on or after April 1, 2000, (the "Redemption Date"), that
number of shares as equals all or any part of the shares of Preferred Stock then
held by him that remain outstanding, by giving written notice to the Corporation
at least 120 days prior to the Redemption Date stating in such notice the number
of shares to be redeemed. On the Redemption Date the Corporation shall redeem
all shares as to which it has received requests for redemption from the holders
thereof in accordance with the foregoing. Any redemption hereunder shall be at
the redemption price set forth in paragraph 5(c). In the event that redemption
pursuant to this Section 5 shall be unlawful in whole or in part for any reason,
the obligation of the Corporation to make such redemption shall continue in
effect without restriction as to date or year until such time or times as such
redemption (or any portion thereof not yet made) shall no longer be unlawful,
and the Corporation shall promptly make such redemption at such time as it
becomes lawful, to the extent that it is lawful at that time.
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(b) In the event of the occurrence and declaration of any Event of
Default (as defined in paragraph 6(a)), the Corporation shall promptly notify
each holder of Preferred Stock then outstanding, that such holder shall be
entitled to redeem, subject to the provisions of this paragraph 5(b), all or any
part of such holder's shares of Preferred Stock on the date 120 days following
the date of such notice. Any redemption under this paragraph 5(b) shall be at
the redemption price set forth in paragraph 5(c). To exercise its option
hereunder any holder of Preferred Stock shall give the Corporation written
notice specifying the number of shares to be redeemed at least 30 days prior to
the date fixed for redemption, and shall present and surrender the certificate
or certificates for such shares (duly endorsed for transfer) to the Corporation
at its principal office and thereupon the redemption price of such shares shall
be paid to, or to the order of, the person whose name appears on such
certificate or certificates as the owner thereof; provided, however, that the
Corporation shall redeem shares of Preferred Stock hereunder only to the extent
permitted by law, and if not all of the shares otherwise redeemable hereunder
can be redeemed, redemptions shall be made on a pro rata basis in the same
manner as set forth in paragraph 5(a).
(c) The redemption price per share of Series A Preferred Stock
redeemed pursuant to this Section 5 shall be $1.55, and the redemption price per
shares of Series B Preferred Stock redeemed to this Section 5 shall be $1.96,
the amount per share increasing on the first day of each April after April 1,
1995, by 12.00% annually (prorated for any redemption on a date other than April
1 and subject to appropriate adjustment for stock splits, reverse stock splits
and similar recapitalization affecting the Preferred Stock).
(d) Each holder of shares of the Preferred Stock to be redeemed
shall surrender the certificate or certificates representing such shares to the
Corporation at the principal office of the Corporation or such other place
designated in writing by it, and thereupon the applicable redemption price for
such shares as set forth in this Section 5 shall be paid to the order of the
person whose name appears on such certificate or certificates and each
surrendered certificate shall be canceled and retired. If the number of shares
represented by the certificate or certificates surrendered shall exceed the
number of shares to be redeemed, the Corporation shall issue and deliver to the
person entitled thereto a certificate or certificate representing the unredeemed
balance of such shares.
6. Crisis Voting Rights.
(a) If any one or more of the following events shall occur and be
continuing, that is to say: (i) if any amount required to be paid pursuant to
paragraph 5(a) or 5(b) hereof are not paid within 15 days after the dates such
payments are due; (ii) if the Corporation or any of its subsidiaries shall (a)
admit in writing its inability to pay its debts generally as they become due,
(b) file a petition or answer a consent seeking relief under the Federal
Bankruptcy Code, as now constituted or hereafter amended, or any other
applicable Federal or state bankruptcy or insolvency law or other similar law,
(c) consent to the institution of proceedings under any law listed in (b) above,
or to the filing of any such petition or to the appointment or taking possession
or a receiver, liquidator, assignee, trustee,
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custodian (or other similar official) of the Corporation or any such subsidiary
or of any substantial part of their property, (d) fail generally to pay its
debts as such debts become due, or take corporate action in furtherance of any
such action, or (e) make an assignment for the benefit of its creditors; (iii)
if a decree or order shall be entered by a court for relief in respect of the
Corporation or any of its subsidiaries under the Federal Bankruptcy Code, as now
constituted or hereafter amended, or any other applicable Federal or state
bankruptcy or insolvency law or other similar law, or appointing a receiver,
liquidator, assignee, trustee (or similar official) of the Corporation or any
such subsidiary or of any substantial part of their property or ordering the
winding-up or liquidation of their affairs and such decree or order shall not be
vacated or set aside or stayed within a period of 60 days from the date of entry
thereof; or (iv) if default shall be made in the performance or observance by
the Corporation of any material condition, agreement, covenant or obligation set
forth in Section 4 or 6 of the Stock Purchase Agreement among the Corporation
and holders of the Series A Preferred Stock dated as of the date of purchase of
the shares of Series A Preferred Stock (the"Purchase Agreement"), or in this
Certificate of Incorporation or the by-laws of the Corporation, and such default
is not cured within 30 days following notice thereof from any holder of
Preferred Stock (or if such default is of a nature not capable of being cured
within 30 days, the Corporation has not commenced and is not pursuing with due
diligence curing such default), then, and in each and every case, the holders of
not less than a majority in interest of the Preferred Stock may by vote at a
meeting of stockholders or by written notice to the Corporation, declare the
Corporation to be in default hereunder ("Event of Default") whereupon: (A) if
such holders shall so specify in such vote or notice, all of the Preferred Stock
shall immediately become redeemable and shall be redeemed by the Corporation in
accordance with the provisions of paragraph 5 (b) hereof; and (B) if less than
80% of the outstanding Preferred Stock is redeemed under paragraph 5(b), the
holders of Preferred Stock shall have the right, voting as a class separately
from all other classes of the Corporation, to elect a number of directors of the
Corporation which would entitle such holders to elect a majority of the members
of the Corporation's Board of Directors, the remaining directors to be elected
by the other classes of stock entitled to vote therefor. If and when such right
of the holders of the Preferred Stock becomes operative, the maximum authorized
number of members of the Board of Directors of the Corporation shall
automatically be increased to the extent necessary to create such number of
vacancies, to be filled only by vote of the holders of the Preferred Stock then
outstanding as hereinabove set forth, as are required to permit the holders of
the Preferred Stock to elect a majority of the members of such Board of
Directors. Whenever such right of the holders of the Preferred Stock shall
become operative, such right shall be exercised initially either at a special
meeting of the holders of the Preferred Stock called as provided in paragraph
6(b) hereof or at any annual meeting of stockholders held for the purpose of
electing directors, and thereafter at such annual meetings. In electing
directors to be elected by the holders of the Preferred Stock pursuant to this
Section 6, each share of Preferred Stock shall be entitled to the number of
votes determined as provided in paragraph 3(a) hereof. The right of the holders
of the Preferred Stock voting together as a class separately from all other
classes of stock, to elect the members of the Board of Directors of the
Corporation as aforesaid, shall continue until such time as the Event of
Default shall have been cured, at which time the right of the holders of the
Preferred Stock to vote for directors
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shall be reduced to one director, as provided for in paragraph 3(b) hereof
(subject to becoming operative again upon the occurrence of a subsequent Event
of Default) and the maximum authorized number of members of the Board of
Directors of the Corporation shall automatically be reduced if such number was
increased at the time when the terminated voting right of the holders of the
Preferred Stock became operative.
(b) At any time when voting right of the holders of the Preferred
Stock provided in paragraph 6(a) above shall have become operative and not have
been exercised, a proper officer of the Corporation shall, upon the written
request of the holders of record of at least 20% of the shares of Preferred
Stock then outstanding addressed to the secretary of the Corporation, call a
special meeting of the holders of the Preferred Stock for the purpose of
electing the additional director or directors to be elected by the holders of
the Preferred Stock. Such meeting shall be held at the earliest practicable date
upon the notice required for meetings of stockholders at such place in the
continental United States as may be specified in such written request. If such
meeting shall not be called by the proper officer of the Corporation within 20
days after the personal service of such written request upon the secretary of
the Corporation, or within 20 days after mailing the same within the United
States by registered or certified mail enclosed in a postage-paid envelope
addressed to the secretary of the Corporation at its principal office, then the
holders of record of at least 20% of the shares of Preferred Stock then
outstanding may designate in writing one of their number to call such meeting at
the expense of the Corporation, and such meeting may be called by the person so
designated upon the notice required for annual meetings of stockholders and
shall be held at such place in the continental United States as may be specified
in such notice.
(c) Upon any termination pursuant to paragraph 6(a) of the right of
the holders of the Preferred Stock to vote for directors as provided by
paragraph 6(a) above, the term of office of any director then in office elected
by the Preferred Stock pursuant to such paragraph shall terminate immediately.
If the office of any director elected by the holders of the Preferred Stock
becomes vacant by reason of death, resignation, retirement, disqualification,
removal from office or otherwise, then subject to the procedures provided for in
paragraph 6(b) above, the vacancy shall be filled by a person nominated by the
remaining directors designated by the holders of the Preferred Stock entitled to
vote for such director.
7. Restrictions and Limitations. As long as at least 20% of the
shares of Preferred Stock originally issued shall remain outstanding, the
Corporation shall not, without the vote or written consent of the holders of
seventy-five percent (75%) in voting power of the then outstanding shares of the
Preferred Stock, voting together in accordance with paragraph 3(a) hereof:
(i) Redeem, purchase or otherwise acquire for value (or pay into or
set aside for a sinking fund for such purpose), any share or shares of Preferred
Stock, other than pursuant to Section 2 or 5 hereof;
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(ii) Purchase, redeem or otherwise acquire (or pay into or set aside
for a sinking fund for such purpose) any of the Common Stock of any class or any
other capital stock of the Corporation (other then the Preferred Stock):
provided, however, that this restriction shall not apply to the repurchase of
shares of Common Stock issued pursuant to employee stock purchase or stock
option plans or subject to stock repurchase agreements, provided that (unless
the purchase is approved by the unanimous vote of the Board of Directors of the
Corporation ) the repurchase price paid by the Corporation does not exceed the
purchase price paid by such employee, pursuant to restrictive stock purchase
agreements under which the Corporation has the option to repurchase such shares
upon the occurrence of certain events, including the termination of employment;
(iii) Authorize or issue, or obligate itself to issue, any
additional shares of Preferred Stock or any other equity security senior to or
on a parity with the Preferred Stock as to liquidation preferences, dividend
rights or voting rights:
(iv) Increase or decrease (other than by issuance, redemption, or
conversion as permitted herein) the total number of authorized shares of
Preferred Stock;
(v) Authorize any merger or consolidation of the Corporation with or
into any other corporation or entity (except with or into a wholly-owned
subsidiary of the Corporation ), or authorize the sale of substantially all of
the assets of the Corporation: or
(vi) Amend this Certificate of Incorporation or the by-laws of the
Corporation in any manner which adversely affects the preferences, voting
powers, qualifications, rights and privileges of any series of Preferred Stock.
8. No Reissuance of Preferred Stock. No shares of the Preferred
Stock acquired by the Corporation by reason of redemption, purchase, conversion
or otherwise shall be reissued, and all such shares shall be canceled, retired,
and eliminated for the shares which the Corporation shall be authorized to
issue. The Corporation may from time to time take such appropriate corporate
action as may be necessary to reduce the authorized number of shares of the
Preferred Stock accordingly.
9. Notices of Record Date. In the event (i) the Corporation
establishes a record date to determine the holders of any class of securities
who are entitled to receive any dividend or other distribution, or (ii) there
occurs any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation and any transfer of all or substantially all of
the assets of the Corporation to any other corporation, or any other entity or
person, or any voluntary or involuntary dissolution, liquidation or winding up
of the Corporation, the Corporation shall mail to each holder of Preferred Stock
at least twenty (20) days prior to the record date specified therein, a notice
specifying (a) the date of such record date for the purpose of such dividend or
distribution and a description of such dividend or distribution, (b) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger,
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dissolution, liquidation or winding up is expected to become effective, and (c)
the time, if any that is to be fixed, as to when the holders of record of Common
Stock (or other securities) shall be entitled to exchange their shares of Common
Stock (or other securities) for securities or other property deliverable upon
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up.
10. Other Rights. Except as otherwise provided in this Certificate
of Incorporation, shares of Preferred Stock and shares of Common Stock shall be
identical in all respects (each share of Preferred Stock having equivalent
rights to the number of shares of Common Stock into which it is then
convertible), shall have the same powers, preferences and rights, without
preference of any such class or share over any other such class or share, and
shall be treated as a single class of stock for all purposes.
FIFTH. The name and mailing address of the incorporator is Kenneth R.
Koch, Esq., Squadron, Ellenoff, Plesent and Sheinfeld, LLP, 551 Fifth Avenue,
New York, NY 10176.
SIXTH. Elections of directors need not be by written ballot unless the
by-laws of the Corporation shall so provide.
SEVENTH. 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 all rights conferred upon
stockholders herein are granted subject to this reservation.
EIGHTH. The Board of Directors is expressly authorized to adopt, amend or
repeal the by-laws of the Corporation except as and to the extent provided in
the by-laws.
NINTH. A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation or any of its direct or indirect
subsidiaries or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of any other corporation or of a
partnership, joint venture, trust, or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
director, officer, employee, or agent or in any other capacity while serving as
a director, officer, employee, or agent, shall be indemnified and held harmless
by the Corporation to the fullest extent authorized by the Delaware Code, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than permitted prior thereto), against all
expense, liability, and loss (including attorneys' fees, judgments, fines,
excise, or other taxes assessed with respect to an employee benefit plan,
penalties, and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection
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therewith, and such indemnification shall continue as to an indemnitee who has
ceased to be a director, officer, employee, or agent and shall inure to the
benefit of the indemnitee's heirs, executors, and administrators; provided,
however, that, except as provided in Paragraph C of this Article Ninth with
respect to proceedings to enforce rights to indemnification, the Corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Paragraph A of this
Article Ninth shall include the right to be paid by the Corporation the expenses
incurred in defending any proceeding for which such right to indemnification is
applicable in advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the Delaware Code so requires, an
advancement of expenses incurred by an indemnitee in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, service to an
employee benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee,
to repay all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter a
"final adjudication") that such indemnitee is not entitled to be indemnified for
such expenses under this Article Ninth or otherwise.
C. The rights to indemnification and to the advancement of expenses
conferred in Paragraphs A and B of this Article Ninth shall be contract rights.
If a claim under Paragraph A or B of this Article Ninth is not paid in full by
the Corporation within 60 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by an indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware Code, and (ii) any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon a
final adjudication that the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware Code. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware Code, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel, or its stockholders) that the
indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of
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conduct or, in the case of such a suit brought by the indemnitee, be a defense
to such suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article Ninth or
otherwise, shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article Ninth shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, this certificate of
incorporation, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee, or agent of the Corporation
or another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability, or loss
under the Delaware Code.
F. The Corporation's obligation, if any, to indemnify any person who
was or is serving as a director, officer, employee, or agent of any direct or
indirect subsidiary of the Corporation or, at the request of the Corporation, of
any other corporation or of a partnership, joint venture, trust, or other
enterprise shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust,
or other enterprise.
G. Any repeal or modification of the foregoing provisions of this
Article Ninth shall not adversely affect any right or protection hereunder of
any person in respect of any act or omission occurring prior to the time of such
repeal or modification.
TENTH. No director of the Corporation shall be liable to the Corporation
or any of its stockholders for monetary damages for breach of fiduciary duty as
a director, provided that this provision does not eliminate or limit the
liability of the director (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of Title 8 of the Delaware Code, or (iv) for any
transaction from which the director derived an improper personal benefit. For
purposes of the prior sentence, the term "damages" shall, to the extent
permitted by law, include, without limitation, any judgment, fine, amount paid
in settlement, penalty, punitive damages, excise, or other tax, including,
without limitation, any of the foregoing incurred or assessed with respect to an
employee benefit plan, or expense of any nature (including, without limitation,
counsel fees and disbursements). Each person who serves as a director of the
Corporation while this Article TENTH is in effect shall be deemed to be doing so
in reliance on the provisions of this Article TENTH, and neither the amendment
or repeal of this Article TENTH, nor the adoption of any provision of this
Certificate of Incorporation inconsistent with this Article
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TENTH, shall apply to or have any effect on the liability or alleged liability
of any director of the Corporation for, arising out of, based upon, or in
connection with any acts or omissions of such director occurring prior to such
amendment, repeal, or adoption of an inconsistent provision. The provisions of
this Article TENTH are cumulative and shall be in addition to and independent of
any and all other limitations on or eliminations of the liabilities of directors
of the Corporation, as such, whether such limitations or eliminations arise
under or are created by any law, rule, regulation, by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate of Incorporation the 12th day of August, 1997.
/s/ Kenneth R. Koch, Esq.
-----------------------------------
Kenneth R. Koch, Esq., Incorporator
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EXHIBIT 3.2
BY-LAWS
of
CELERITY SYSTEMS, INC.
<PAGE>
CELERITY SYSTEMS, INC.
A Delaware Corporation
BY-LAWS
---------------------------
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual Meeting.
An annual meeting of stockholders for the purposes of electing directors
and of transacting such other business as may come before it shall be held on
such date and time as shall be designated from time to time by the Board of
Directors or the President, either within or without the State of Delaware, as
may be specified by the Board of Directors.
Section 1.2 Special Meetings.
Special meetings of stockholders for any purpose or purposes may be held
at any time upon call of the Chairman of the Board, if any, the President, the
Secretary, or a majority of the Board of Directors, at such time and place
either within or without the State of Delaware as may be stated in the notice. A
special meeting of stockholders shall be called by the President or the
Secretary upon the written request, stating time, place, and the purpose or
purposes of the meeting, of stockholders who together own of record 10% of the
outstanding stock of all classes entitled to vote at such meeting.
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Section 1.3 Notice of Meetings.
Written notice of stockholders meetings, stating the place, date, and hour
thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an Assistant
Secretary, to each stockholder entitled to vote thereat at least ten days but
not more than sixty days before the date of the meeting, unless a different
period is prescribed by law.
Section 1.4 Quorum.
Except as otherwise provided by law or in the Certificate of Incorporation
or these ByLaws, at any meeting of stockholders, the holders of a majority of
the Corporation's shares of one or more classes or series that are entitled to
vote and be counted together collectively at a meeting of stockholders (a
"voting group"), present in person or represented by proxy, shall be necessary
to and shall constitute a quorum for the transaction of business at all meetings
of that voting group. In the absence of a quorum, a majority in interest of the
stockholders present or the chairman of the meeting may adjourn the meeting from
time to time in the manner provided in Section 1.5 of these By-Laws until a
quorum shall attend.
Section 1.5 Adjournment.
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
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Section 1.6 Organization.
The Chairman of the Board, if any, or in his absence the President, or in
their absence any Vice President, shall call to order meetings of stockholders
and shall act as chairman of such meetings. The Board of Directors or, if the
Board fails to act, the stockholders may appoint any stockholder, director, or
officer of the Corporation to act as chairman of any meeting in the absence of
the Chairman of the Board, the President, and all Vice Presidents.
The Secretary of the Corporation shall act as secretary of all meetings of
stockholders, but, in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of the meeting.
Section 1.7 Voting.
Except as otherwise provided by law or in the Certificate of Incorporation
or these By-Laws and except for the election of directors, at any meeting of
stockholders duly called and held at which a quorum is present, a majority of
the votes cast at such meeting upon a given question by the holders of
outstanding shares of stock of all classes of stock of the Corporation or a
voting group entitled to vote thereon who are present in person or by proxy
shall decide such question. At any meeting of stockholders or a voting group
duly called and held for the election of directors at which a quorum is present,
those directors receiving a plurality of the votes cast by the holders (acting
as such) of shares of any voting group entitled to elect directors as a voting
group shall be elected.
Section 1.8 Action Without a Meeting.
The stockholders may take any action required or permitted to be taken by
them without a meeting unless otherwise prohibited by law or the Certificate of
Incorporation.
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Section 1.9 List of Stockholders.
A list of stockholders as of the record date, certified by the corporate
officer responsible for its preparation or by the transfer agent, shall be
available for inspection by any stockholders beginning two business days after
notice of the meeting is given for which the list was prepared and continuing
through the meeting, at the Corporation's principal office or at a place
identified in the meeting notice in the city where the meeting will be held. The
list of stockholders shall be alphabetical by voting group (and within each
voting group by class or series of shares) and show the address and number of
shares held by each stockholder.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office.
The business, property, and affairs of the Corporation shall be managed by
or under the direction of a board of at least one director; provided, however,
that the Board, by resolution adopted by vote of a majority of the then
authorized numbers of directors, may increase or decrease the number of
directors. The directors shall be elected by the holders of shares entitled to
vote thereon at the annual meeting of stockholders, and each shall serve
(subject to the provisions of Article IV) until the next succeeding annual
meeting of stockholders and until his respective successor is elected and
qualified.
Section 2.2 Chairman of the Board.
The directors may elect one of their members to be Chairman of the Board
of Directors. The Chairman shall be subject to the control of and may be removed
by the Board of Directors. He shall perform such duties as may from time to time
be assigned to him by the Board.
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Section 2.3 Meetings.
Regular meetings of the Board of Directors may be held without notice at
such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time and
place as shall be designated in the notice of the meeting whenever called by the
Chairman of the Board, if any, the President, or by any two of the directors
then in office.
Section 2.4 Notice of Special Meetings.
The Secretary, or, in his absence, any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by mail at least five days before the
meeting, or by telex, telecopy, telegraph, cable or overnight courier at least
three days before the meeting. Unless otherwise stated in the notice thereof,
any and all business may be transacted at any meeting without specification of
such business in the notice.
Section 2.5 Quorum and Organization of Meetings.
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another time and place, and
the meeting may be held as adjourned without further notice or waiver. Except as
otherwise provided by law or in the Certificate of Incorporation or these
By-Laws, a majority of the directors present at any meeting at which a quorum is
present may decide any question brought before such meeting. Meetings shall be
presided over by the Chairman of the Board, if any, or in his absence, by the
President, or in the absence of both by such other person as the directors may
select. The
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Secretary of the Corporation shall act as secretary of the meeting, but in his
absence the chairman of the meeting may appoint any person to act as secretary
of the meeting.
Section 2.6 Committees.
The Board of Directors may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the power and authority of
the Board of Directors in the management of the business, property, and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but no such committee shall have power or
authority in reference to amending the Certificate of Incorporation of the
Corporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors pursuant to authority expressly granted to the Board
of Directors by the Corporation's Certificate of Incorporation, fix any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation, or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation), adopting an agreement of merger or consolidation under Section 251
or 252 of the General Corporation Law of the State
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<PAGE>
of Delaware, recommending to the stockholders the sale, lease, or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of
dissolution, or amending these By-Laws; and, unless the resolution expressly so
provided, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock, or to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
the State of Delaware. Each committee which may be established by the Board of
Directors pursuant to these By-Laws may fix its own rules and procedures. Notice
of meetings of committees, other than of regular meetings provided for by the
rules, shall be given to committee members. All action taken by committees shall
be recorded in minutes of the meetings.
Section 2.7 Action Without Meeting.
The Board of Directors or any committee designated by the Board may take
any action required or permitted to be taken by them without a meeting unless
otherwise prohibited by law or the Certificate of Incorporation.
Section 2.8 Telephone Meetings.
Nothing contained in these By-laws shall be deemed to restrict the power
of members of the Board of Directors, or any committee designated by the Board,
to participate in a meeting of the Board, or committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.
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<PAGE>
ARTICLE III
OFFICERS
Section 3.1 Executive Officers.
The executive officers of the Corporation shall be a Chief Executive
Officer, a President, one or more Vice Presidents, a Chief Financial Officer,
and a Secretary, each of whom shall be elected by the Board of Directors. The
Board of Directors may elect or appoint such other officers (including a
Treasurer, Controller and one or more Assistant Treasurers and Assistant
Secretaries) as it may deem necessary or desirable. Each officer shall hold
office for such term as may be prescribed by the Board of Directors from time to
time. Any person may hold at one time two or more offices.
Section 3.2 Powers and Duties.
The Chairman of the Board, if any, or, in his absence, the Chief Executive
Officer, or in his absence, the President, shall preside at all meetings of the
stockholders and of the Board of Directors. The Chief Executive Officer shall be
the chief executive officer of the Corporation. In the absence of the Chief
Executive Officer, the President and, in the absence of the President, a Vice
President appointed by the President or, if the President fails to make such
appointment, by the Board, shall perform all the duties of the Chief Executive
Officer. The officers and agents of the Corporation shall each have such powers
and authority and shall perform such duties in the management of the business,
property and affairs of the Corporation as generally pertain to their respective
offices, as well as such powers and authorities and such duties as from time to
time may be prescribed by the Board of Directors.
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<PAGE>
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
Section 4.1 Resignations.
Any director or officer of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board of
Directors, the Chief Executive Officer, the President, or the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein or, if the time be not specified therein, then upon receipt thereof. The
acceptance of such resignation shall not be necessary to make it effective.
Section 4.2 Removals.
The Board of Directors, by a vote of not less than a majority of the
entire Board, at any meeting thereof, or by written consent, at any time, may,
to the extent permitted by law, remove with or without cause, from office or
terminate the employment of any officer or member of any committee and may, with
or without cause, disband any committee.
Any director or the entire Board of Directors may be removed, with or
without cause, by the holders of a majority of the shares entitled at the time
to vote at an election of directors.
Section 4.3 Vacancies.
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from any increase in the number of directors, may be
filled at any time by a majority of the directors then in office (even though
less than a quorum remains) or, in the case of any vacancy in the office of any
director, by the stockholders, and, subject to the provisions of this Article
IV, the person so chosen shall hold office until his successor shall have been
elected and qualified; or, if the person so chosen is a
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<PAGE>
director elected to fill a vacancy, he shall (subject to the provisions of this
Article IV) hold office for the unexpired term of his predecessor. If the vacant
office was held by a director elected by a voting group of stockholders, then
only the holders of shares of that voting group are entitled to vote to fill the
vacancy if it is filled by stockholders.
ARTICLE V
CAPITAL STOCK
Section 5.1 Stock Certificates.
The certificates for shares of the capital stock of the Corporation shall
be in such form as shall be prescribed by law and approved, from time to time,
by the Board of Directors.
Section 5.2 Transfer of Shares.
Shares of the capital stock of the Corporation may be transferred on the
books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
Section 5.3 Fixing Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which, unless
otherwise provided by law, shall not be more than sixty
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<PAGE>
nor less than ten days before the date of such meeting, nor more than sixty days
prior to any other action.
Section 5.4 Lost Certificates.
The Board of Directors or any transfer agent of the Corporation may direct
a new certificate or certificates representing stock of the Corporation to be
issued in place of any certificate or certificates theretofore issued by the
Corporation, alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution of the Board of Directors) may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to give the Corporation a bond in such sum as the Board of
Directors (or any transfer agent so authorized) shall direct to indemnify the
Corporation against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed or
the issuance of such new certificates, and such requirement may be general or
confined to specific instances.
Section 5.5 Regulations.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
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<PAGE>
ARTICLE VI
MISCELLANEOUS
Section 6.1 Corporate Seal.
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal" and
"Delaware".
Section 6.2 Fiscal Year.
The fiscal year of the Corporation shall be determined by resolution of
the Board of Directors.
Section 6.3 Notices and Waivers Thereof.
Wherever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, telex, telecopy, telegraph, cable or overnight courier
addressed to such address as appears on the books of the Corporation. Any notice
given by telex, telecopy, telegraph or cable shall be deemed to have been given
when it shall have been delivered for transmission, and any notice given by mail
or overnight courier shall be deemed to have been given when it shall have been
deposited in the United States mail with postage thereon prepaid or given to
such courier service, as applicable.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-Laws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
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<PAGE>
Section 6.4 Stock of Other Corporations or Other Interests.
Unless otherwise ordered by the Board of Directors, the Chief Executive
Officer, the President, the Secretary, and such attorneys or agents of the
Corporation as may be from time to time authorized by the Board of Directors,
the Chief Executive Officer, or the President, shall have full power and
authority on behalf of the Corporation to attend and to act and vote in person
or by proxy at any meeting of the holders of securities of any corporation or
other entity in which the Corporation owns or holds shares or other securities,
and at such meetings shall possess and may exercise all the rights and powers
incident to the ownership of such shares or other securities which the
Corporation, as the owner or holder thereof, might have possessed and exercised
if present. The Chief Executive Officer, the President, the Secretary, or such
attorneys or agents, may also execute and deliver on behalf of the Corporation
powers of attorney, proxies, consents, waivers, and other instruments relating
to the shares or securities owned or held by the Corporation.
ARTICLE VII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the By-laws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board of Directors shall have power equal in all
respects to that of the stockholders to adopt, amend, or repeal the By-Laws by
vote of not less than a majority of the entire Board. However, any By-Law
adopted by the Board may be amended or repealed by vote of the holders of a
majority of the shares entitled at the time to vote for the election of
directors.
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<PAGE>
ARTICLE VIII
PROVISIONS OF LAW
The By-Laws shall be subject to such provisions of the statutory and
common laws of the State of Delaware as may be applicable to corporations
organized under the laws of the State of Delaware. References herein to
provisions of law shall be deemed to be references to the aforesaid provisions
of law unless otherwise explicitly stated. All references in the By-Laws to such
provisions of law shall be construed to refer to such provisions as from time to
time amended.
ARTICLE IX
CERTIFICATE OF INCORPORATION
The By-Laws shall be subject to the Certificate of Incorporation of the
Corporation. All references in the By-Laws to the Certificate of Incorporation
shall be construed to mean the Certificate of Incorporation of the Corporation
as from time to time amended.
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<PAGE>
EXHIBIT 4.2
CELERITY SYSTEMS, INC.
INCENTIVE STOCK OPTION PLAN
1. PURPOSE. The purpose of the Celerity Systems, Inc. Incentive Stock
Option Plan (the "Plan") is to offer an opportunity for officers and employees
of Celerity Systems, Inc., a Tennessee corporation (the "Company"), and its
subsidiaries to participate in the growth of the Company, thus stimulating their
efforts on behalf of the Company and strengthening their desire to remain with
the Company or one of its subsidiaries.
2. ADMINISTRATION. The Plan will be administered by a Committee of not
less than three Directors of the Company appointed by the Company's Board of
Directors (the "Committee"). The Committee is authorized to interpret and
administer the Plan, and its interpretations and decisions shall be final and
conclusive. Whether authorized leave of absence shall constitute termination of
employment for purposes of the Plan shall be determined by the Committee. The
Committee may, with the consent of the optionee, make such modifications to an
outstanding stock option as it, in its sole discretion, shall deem advisable.
The Committee shall have full power to grant options that qualify as incentive
stock options ("Incentive Stock Options") under Section 422A of the internal
Revenue Code of 1986, as amended (the "Code"), and options that do not so
qualify.
3. SHARES SUBJECT TO THE PLAN. Options may be granted from time to time
to purchase shares of the $.001 par value Common Stock ("Common Stock") of the
Company not to exceed 447,323 shares in the aggregate. The shares may be
authorized but unissued or reacquired shares. If any option is surrendered
before exercise or for any reason ceases to be exercisable in whole or in part,
the shares allocated to the unexercised portion of such option shall continue to
be available under the Plan.
<PAGE>
4. PARTICIPANTS. Options to purchase Common Stock of the Company under
this Plan may be granted only to officers and other employees of the Company and
its subsidiaries (as such term is defined in Section 435 of the Code), including
officers and employees who are members of the Board of Directors. Employment by
the Company shall be deemed to include employment by a subsidiary. From such
eligible officers and employees, the Committee shall from time to time choose
those to whom options shall be granted. In selecting the individuals to whom
options shall be granted, as well as in determining the number of shares subject
to each option, the Committee shall consider the positions and responsibilities
of the employees being considered, the nature of the services and
accomplishments of each, the value to the Company or one of its subsidiaries of
their services, their present and potential contribution to the success of the
Company or one of its subsidiaries, the anticipated number of years of service
remaining, and such other factors as the Committee may deem appropriate.
5. TERM OF THE PLAN. The Plan will become effective upon approval thereof
by the holders of a majority of the shares of voting stock of the Company
entitled to vote. Incentive Stock Options may be granted hereunder at any time
within ten (10) years from the date of approval by the Company's shareholders.
6. OPTION PRICE. The option price per share shall be determined by the
Committee from time to tune, but, in the case of options that are intended to
qualify as Incentive Stock Options under Section 422A of the Code, the price
shall not be less than the par value per share or 100% of the fair market value
per share on the date an option is granted, whichever is greater. The option
price for an employee owning more than 10% of the total combined voting power of
all classes of stock of the Company or of its parent or subsidiary (as those
terms are defined in Section 425 of the Code) shall not be less than 110% of the
fair market value per
<PAGE>
share on the date an option is granted. Fair market value shall be determined
by the Board of Directors
7. OPTION PERIOD. The term of each Incentive Stock Option shall be fixed
by the Committee, but in no event shall any Incentive Stock Option permit the
exercise thereof after the expiration of ten (10) years from the date such
option is granted. No Incentive Stock Option issued to any person at a time when
such person owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of its parent or subsidiary
corporations (as those terms are defined in Section 425 of the Code) shall
permit the exercise thereof after the expiration of five (5) years from the date
such option is granted.
8. MAXIMUM AMOUNT OF INCENTIVE STOCK OPTIONS. With respect to options
that are intended to qualify as Incentive Stock Options under Section 422A of
the Code (i) granted by the Company under this Plan, or (ii) granted by a
subsidiary or a parent corporation (as defined in Section 425 of the Code) under
a plan described in Code Section 422A(b), and subsequently adopted by the
Company, the aggregate fair market value (determined at the time the option is
granted) of the Common Stock with respect to which such Incentive Stock Options
are exercisable for the first time in any calendar year by any individual shall
not exceed $100,000.
9. STOCK OPTION AGREEMENT Each stock option granted under this Plan shall
be offered to the employee in the form of a Stock Option Agreement which the
employee may accept in writing by agreeing to comply with the terms of the
offer. Such Stock Option Agreements shall contain the following provisions and
such other provisions as the Committee may determine (which determinations need
not be uniform as between the various Stock Option Agreements):
<PAGE>
a. The number of shares to which the option relates, the option
price and the period within which the option may be exercised.
b. A provision that the option is not transferable by the optionee
to whom it is granted otherwise than by will or the laws of descent and
distribution; and a provision that the option is exercisable during the lifetime
of the employee only by him or his legal representative while he is in the
employ of the Company or within three months following termination of
employment.
c. A provision that no option granted under the Plan may be
exercised at any time after its term. Subject to such limitation, every option
shall be exercisable in full for all shares not theretofore exercised (i) by the
optionee within three months after the dare the optionee for any reason except
death ceases to be an employee of the Company, and (ii) by the person designated
in the optionee's will for such purpose or by the optionee's executor or
administrator as circumstances provide within twelve (12) months from the date
of the optionee's death, provided the optionee dies while he is employed by the
Company or dies within three months after he ceases to be an employee.
d. A provision that the Company shall not be required to issue or
deliver any certificate for shares of its Common Stock purchased upon the
exercise of any part of an option granted under this Plan prior to the
completion of any registration or other qualification of such shares under any
state or federal law or ruling or regulation of any governmental regulatory body
which the Company shall, in its sole discretion, determine is necessary or
advisable.
e. A provision that if any person holding Common Stock (the
"Employee") at any time proposes to sell all or any portion of the Common Stock,
whether
<PAGE>
pursuant to this Plan or otherwise, then the Employee shall so inform the
Company by notice in writing (the "Notice") stating the number of shares that
are the subject of such proposed sale (the "Offered Shares"), the identity of
the proposed purchaser, and other terms and conditions of such proposed sale,
including any consideration proposed to be received for the Offered Shares (and,
if the proposed sale is to be wholly or partly for a consideration other than
money, the Notice shall state the proposed price as being equal to the amount of
monetary consideration, if any, plus the fair market value of the other
consideration). The Notice shall constitute an irrevocable offer to sell the
offered Shares to the Company at the same price and on the same terms and
conditions as offered by the prospective purchaser named in the Notice. The
Company shall have thirty (30) days after receiving the Notice given by the
Employee within which to notify the Employee in writing of its election to
purchase all of the Offered Shares at the price and on the terms set forth in
the Notice. If the Company elects to purchase the Offered Shares, within thirty
(30) days after receiving notice of such election the Employee shall deliver to
the Company, against receipt from the Company of the required consideration
therefor, a certificate or certificates representing the Offered Shares to be
purchased, duly endorsed by the Employee or accompanied by duly executed
instruments necessary to transfer the Offered Shares. If the Company elects not
to purchase the Offered Shares within the thirty (30) day period provided for
hereinabove, then the Offered Shares not to be so purchased by the Company may
be disposed of by the Employee to the prospective purchaser named in the Notice
for a price and on terms and conditions not more favorable to such purchaser
than those set forth in the Notice, at any time within thirty (30) days after
the expiration of the thirty (30) day period provided for hereinabove for the
Company to accept the offer contained in the Notice. Any Offered Shares sold to
such purchaser shall remain subject to all the terms and conditions of this
Plan, and in particular this
<PAGE>
ARTICLE 9, in the hands of such purchaser, and such purchaser shall, prior to
the transfer of the Offered Shares so purchased, acknowledge in writing
agreement to be bound by the terms and provisions thereof. Any Offered Shares
not so disposed of within such thirty (30) day period shall remain subject to
all the terms and provisions of this Plan, and in particular this ARTICLE 9 The
Employee agrees that each certificate representing shares of the Stock owned by
him, whether now owned or hereafter acquired, whether pursuant to this Plan or
otherwise, shall have placed thereon any legend deemed by the Company to be
necessary or desirable to restrict the transfer of such shares in accordance
with the provisions hereof.
10. EFFECT OF CHANGES IN COMMON STOCK OF THE COMPANY.
a. In the event of a change in the capitalization of the Company which
is limited to a change of all of its authorized shares with par value into the
same number of shares with a different par value or without par value, the
shares resulting from any such change shall be deemed to be Common Stock within
the meaning of the Plan.
b. If the outstanding Common Stock of the Company is changed by any
action such as or similar to a declaration of a stock dividend or a split-up or
combination of shares, the maximum number of shares for which options may be
granted under this Plan, the number of shares reserved for future options, the
number of shares covered by options then outstanding and the Option prices,
shall be appropriately adjusted.
c. If the Company shall not be the surviving corporation in any
merger, reorganization, liquidation or consolidation, or if substantially all of
the property or more than 50% of the stock of the Company shall be acquired by
another corporation, the Board of Directors of the Company, or the hoard of
directors of any corporation assuming the obligations of the Company hereunder,
shall either (i) make appropriate provisions for protection of any
<PAGE>
outstanding options by substitution on an equitable basis of appropriate stock
of the Company, or of the merged, consolidated or otherwise reorganized
corporation which will be issuable in respect in the shares of Common Stock of
the Company, or (ii) upon written notice to the employee provide that the option
shall terminate unless exercised within ninety (90) days of the date of such
notice. If an option is terminated pursuant to action by a board of directors
under this subsection, the optionee shall receive a cash payment equal to the
difference between (i) the fair market value on the termination date of the
shares subject to the option and (ii) the option price of such shares. For
purposes of the foregoing, the termination date shall be a date specified in the
notice from a board of directors.
d. In the event of any other recapitalization, reclassification,
reorganization or change of the Company's capital or business structure, the
Committee may in its discretion make an adjustment in the number or kind of
shares for which options may be granted under this Plan, the number and/or kind
of shares covered by options then outstanding and the option prices, and its
determination in that respect shall be final and conclusive.
e. Except as provided in this ARTICLE 10, the optionee shall have no
rights by reason of any subdivision or consolidation of shares of stock of any
class or the payment of any stock dividend or any other increase or decrease in
rile number of shares of stock of any class or by reason of any dissolution,
liquidation merger, consolidation or reorganization. The existence of the Plan
or of options thereunder shall not prevent any of the foregoing changes or
exchanges.
f. All adjustments provided for in this ARTICLE 10 shall be made by
the Committee, whose determination in that respect shall be final.
<PAGE>
11. EXERCISE OF RIGHTS. No shares shall be issued until all required
payment therefor (including payment of all required taxes) has been made. The
granting of an option to an individual shall give such individual no rights as a
stockholder except as to shares issued to him.
12. AMENDMENT OF THE PLAN. This Plan may be terminated at any time by
the Board of Directors of the Company, except with respect to any options then
outstanding under the Plan. The Board of Directors may make such modifications
of the Plan as it shall deem advisable, but may not, without approval of the
stockholders of the Company, (a) increase the maximum number of shares as to
which options may be granted under the Plan (other than as provided in ARTICLE
10 above), (b) extend the period during which options may be granted or
exercised, (c) extend the date within which options may be granted under this
Plan, or (d) withdraw the administration of the Plan from a committee of
Directors of the Company, or (e) change the class of employee eligible to
receive options.
The foregoing Celerity Systems, Inc. Incentive Stock Option Plan was
adopted by the Board of Directors of the Company on August 10, 1995.
Celerity Systems, Inc.
By: /s/ Mahomed Youssef
----------------------
Chairman
<PAGE>
The foregoing Celerity Systems, Inc. Incentive Stock Option Plan was
approved by the shareholders of the Company on August 10, 1995.
Celerity Systems, Inc.
By: /s/ Glenn West
---------------------
Secretary
<PAGE>
EXHIBIT 4.3
CELERITY SYSTEMS, INC.
1997 STOCK OPTION PLAN
SECTION 1. Purpose. The purpose of the Celerity Systems, Inc. (this
"Plan") is to provide a means whereby selected employees, officers, directors,
agents, consultants and independent contractors of Celerity Systems, Inc. (the
"Company") or of any parent or subsidiary (as defined in subsection 5.7 and
referred to hereinafter as "related corporations") thereof, may be granted
incentive stock options and/or non-qualified stock options to purchase the
Common Stock (as defined in Section 3) of the Company, in order to attract and
retain the services or advice of such employees, officers, directors, agents,
consultants and independent contractors and to provide added incentive to them
by encouraging stock ownership in the Company.
SECTION 2. Administration.
(a) This Plan shall be administered by the Board of Directors of the
Company (the "Board"), except to the extent the Board delegates its authority to
a committee of the Board to administer this Plan. The administrator of this Plan
shall hereinafter be referred to as the "Plan Administrator."
(b) For so long as the Company's Common Stock is registered under Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no
option shall be granted to a director or officer (subject to Section 16 of the
Exchange Act) of the Company by the Board unless (i) approved in advance by the
Board or the Plan Administrator in accordance with the provisions of Rule
16b-3(d)(1) under the Exchange Act (where the Plan Administrator, if not the
entire Board, is a committee of the Board composed solely of two or more
non-employee directors who satisfy the requirements of Rule 16b-3(b)(3) under
the Exchange Act), or (ii) approved in advance, or subsequently ratified by, the
stockholders in accordance with the provisions of Rule 16b-3(d)(2) under the
Exchange Act, except that an option may be granted absent such approval if the
option provides that no officer or director of the Company may sell shares
received upon the exercise of such option during the six-month period
immediately following the grant of such option.
2.1 Procedures. The Board shall designate one of the members of the
Plan Administrator as chairman. The Plan Administrator may hold meetings at such
times and places as it shall determine. The acts of a majority of the members of
the Plan Administrator present at meetings at which a quorum exists, or acts
reduced to or approved in writing by all Plan Administrator members, shall be
valid acts of the Plan Administrator.
2.2 Responsibilities. Except for the terms and conditions explicitly
set forth in this Plan, the Plan Administrator shall have the authority, in its
discretion, to determine all matters relating to the options to be granted under
this Plan, including selection of the individuals to be granted options, the
number of shares to be subject to each option, the exercise price, and all other
terms and conditions of the options, including the designation of such options
as an incentive stock option or non-qualified stock option. Grants under this
Plan need not be identical in any respect, even when made simultaneously. The
interpretation and construction by the Plan Administrator of any terms or
provisions of this Plan or any option issued hereunder, or of any rule or
regulation promulgated in connection herewith, shall be conclusive and binding
on all interested parties, so long as such interpretation and construction with
respect to incentive stock options corresponds to the
-1-
<PAGE>
requirements of Internal Revenue Code (the "Code") Section 422, the regulations
thereunder, and any amendments thereto.
2.3 Section 16(b) Compliance and Bifurcation of Plan. It is the
intention of the Company that this Plan comply in all respects with Section
16(b) and Rule 16b-3 under the Exchange Act, to the extent applicable, and, if
any Plan provision is later found not to be in compliance with such Section or
Rule, as the case may be, the provision shall be deemed null and void, and in
all events the Plan shall be construed in favor of its meeting the requirements
of Section 16(b) and Rule 16b-3 under the Exchange Act. Notwithstanding anything
in the Plan to the contrary, the Board, in its absolute discretion, may
bifurcate the Plan so as to restrict, limit or condition the use of any
provision of the Plan to participants who are officers and directors or other
persons subject to Section 16(b) of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other participants.
SECTION 3. Stock Subject to This Plan. The stock subject to this Plan
shall be the Company's common stock, par value $0.001 per share (the "Common
Stock"), presently authorized but unissued or subsequently acquired by the
Company. Subject to adjustment as provided in Section 7 hereof, the aggregate
amount of Common Stock to be delivered upon the exercise of all options granted
under this Plan shall not exceed 500,000 shares as such Common Stock was
constituted on the effective date of this Plan. If any option granted under this
Plan shall expire, be surrendered, exchanged for another option, canceled or
terminated for any reason without having been exercised in full, the unpurchased
shares subject thereto shall thereupon again be available for purposes of this
Plan, including for replacement options which may be granted in exchange for
such surrendered, canceled or terminated options.
SECTION 4. Eligibility. An incentive stock option may be granted only to
any individual who, at the time the option is granted, is an employee of the
Company or any related corporation. A nonqualified stock option may be granted
to any director, employee, officer, agent, consultant or independent contractor
of the Company or any related corporation, whether an individual or an entity.
Any party to whom an option is granted under this Plan shall be referred to
hereinafter as an "Optionee."
SECTION 5. Terms and Conditions of Options. Options granted under this
Plan shall be evidenced by written agreements which shall contain such terms,
conditions, limitations and restrictions as the Plan Administrator shall deem
advisable and which are not inconsistent with this Plan (the "Option
Agreement"). Notwithstanding the foregoing, options shall include or incorporate
by reference the following terms and conditions:
5.1 Number of Shares and Price. The maximum number of shares that
may be purchased pursuant to the exercise of each option and the price per share
at which such option is exercisable (the "exercise price") shall be as
established by the Plan Administrator, provided that the Plan Administrator
shall act in good faith to establish the exercise price which shall be not less
than the fair market value per share of the Common Stock at the time the option
is granted with respect to incentive stock options and not less than the par
value per share of the Common Stock at the time the option is granted with
respect to nonqualified stock options and also provided that, with respect to
incentive stock options granted to greater than 10% stockholders, the exercise
price shall be as required by Section 6.
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5.2 Term and Maturity. Subject to the restrictions contained in
Section 6 with respect to granting incentive stock options to greater than 10%
stockholders, the term of each incentive stock option shall be as established by
the Plan Administrator and, if not so established, shall be 10 years from the
date it is granted but in no event shall the term of any incentive stock option
exceed 10 years. The term of each nonqualified stock option shall be as
established by the Plan Administrator and, if not so established, shall be 10
years from the date it is granted. To ensure that the Company or related
corporation will achieve the purpose and receive the benefits contemplated in
this Plan, any option granted to any Optionee hereunder shall, unless the
condition of this sentence is waived or modified in the agreement evidencing the
option or by resolution adopted by the Plan Administrator, be exercisable
according to the following schedule:
Period of Optionee's
Continuous Relationship
With the Company or Related
Corporation From the Date Portion of Total Option
the Option is Granted Which is Exercisable
--------------------- --------------------
after 1 year 33 1/3%
after 2 years 66 2/3%
after 3 years 100%
5.3 Exercise. Subject to any vesting schedule described in
subsection 5.2 above, each option may be exercised in whole or in part;
provided, however, that no fewer than 100 shares (or the remaining shares then
purchasable under the option, if less than 100 shares) may be purchased upon any
exercise of an option hereunder and that only whole shares will be issued
pursuant to the exercise of any option. Options shall be exercised by delivery
to the Company of notice of the number of shares with respect to which the
option is exercised, together with payment of the exercise price.
5.4 Payment of Exercise Price. Payment of the option exercise price
shall be made in full at the time the notice of exercise of the option is
delivered to the Company and shall be in cash, bank certified or cashier's check
or personal check (unless at the time of exercise the Plan Administrator in a
particular case determines not to accept a personal check) for the Common Stock
being purchased.
The Plan Administrator can determine at the time the option is
granted for incentive stock options, or at any time before exercise for
nonqualified stock options, that additional forms of payment will be permitted.
To the extent permitted by the Plan Administrator and applicable laws and
regulations (including, but not limited to, federal tax and securities laws and
regulations and state corporate law), an option may be exercised by:
(a) delivery of shares of stock of the Company held by an Optionee
having a fair market value equal to the exercise price, such fair market value
to be determined in good faith by the Plan Administrator;
(b) delivery of a properly executed exercise notice, together with
irrevocable instructions to a broker, all in accordance with the regulations of
the Federal Reserve Board, to promptly deliver to the Company the amount of sale
or loan proceeds necessary to pay the exercise
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price and any federal, state or local withholding tax obligations that may arise
in connection with the exercise; or
(c) delivery of a properly executed exercise notice together with
instructions to the Company to withhold from the shares that would otherwise be
issued upon exercise that number of shares having a fair market value equal to
the option exercise price.
5.5 Withholding Tax Requirement. The Company or any related
corporation shall have the right to retain and withhold from any payment of cash
or Common Stock under the Plan the amount of taxes required by any government to
be withheld or otherwise deducted and paid with respect to such payment. At its
discretion, the Company may require an Optionee receiving shares of Common Stock
to reimburse the Company for any such taxes required to be withheld by the
Company and withhold such shares in whole or in part until the Company is so
reimbursed. In lieu thereof, the Company, at its option in its sole discretion,
shall (a) have the right to withhold from any other cash amounts due or to
become due from the Company to the Optionee an amount equal to such taxes or (b)
retain and withhold a number of shares having a market value not less than the
amount of such taxes required to be withheld by the Company to reimburse the
Company for any such taxes and cancel (in whole or in part) any such shares so
withheld. If required by Section 16(b) of the Exchange Act, the election to pay
withholding taxes by delivery of shares held by any person who at the time of
exercise is subject to Section 16(b) of the Exchange Act, shall be made either
six months prior to the date the option exercise becomes taxable or at such
other times as the Company may determine as necessary to comply with Section
16(b) of the Exchange Act.
5.6 Assignability and Transferability of Option. Options granted
under this Plan and the rights and privileges conferred hereby may not be
transferred, assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) other than (i) by will or by the applicable laws
of descent and distribution, (ii) pursuant to a qualified domestic relations
order as defined in Section 414(p) of the Code, or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder or
(iii) as otherwise determined by the Plan Administrator and set forth in the
applicable Option Agreement. Any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of any option under this Plan or of any right
or privilege conferred hereby, contrary to the Code or to the provisions of this
Plan, or the sale or levy or any attachment or similar process upon the rights
and privileges conferred hereby shall be null and void. The designation by an
Optionee of a beneficiary does not, in and of itself, constitute an
impermissible transfer under this Section.
5.7 Termination of Relationship. If the Optionee's relationship with
the Company or any related corporation ceases for any reason other than
termination for cause, death or total disability, and unless by its terms the
option sooner terminates or expires, then the Optionee may exercise, for a
three-month period, that portion of the Optionee's option which is exercisable
at the time of such cessation, but the Optionee's option shall terminate at the
end of the three-month period following such cessation as to all shares for
which it has not theretofore been exercised, unless, in the case of a
nonqualified stock option, such provision is waived in the agreement evidencing
the option or by resolution adopted by the Plan Administrator within 90 days of
such cessation. If, in the case of an incentive stock option, an Optionee's
relationship with the Company or related corporation changes (i.e., from
employee to non-employee, such as a consultant), such change shall
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constitute a termination of an Optionee's employment with the Company or related
corporation and the Optionee's incentive stock option shall become a
non-qualified stock option.
If an Optionee is terminated for cause, any option granted hereunder
shall automatically terminate as of the first discovery by the Company of any
reason for termination for cause, and such Optionee shall thereupon have no
right to purchase any shares pursuant to such option. "Termination for cause"
shall mean dismissal for dishonesty, conviction or confession of a crime
punishable by law (except minor violations), fraud, misconduct or disclosure of
confidential information. If an Optionee's relationship with the Company or any
related corporation is suspended pending an investigation of whether or not the
Optionee shall be terminated for cause, all Optionee's rights under any option
granted hereunder likewise shall be suspended during the period of
investigation.
If an Optionee's relationship with the Company or any related
corporation ceases because of a total disability, the Optionee's option shall
not terminate or, in the case of an incentive stock option, cease to be treated
as an incentive stock option until the end of the 12-month period following such
cessation (unless by its terms it sooner terminates and expires). As used in
this Plan, the term "total disability" refers to a mental or physical impairment
of the Optionee which is expected to result in death or which has lasted or is
expected to last for a continuous period of 12 months or more and which causes
the Optionee to be unable, in the opinion of the Company and two (if more than
one is required by the Company in its sole discretion) independent physicians,
to perform his or her duties for the Company and to be engaged in any
substantial gainful activity. Total disability shall be deemed to have occurred
on the first day after the Company and the two (if more than one is required by
the Company in its sole discretion) independent physicians have furnished their
opinions of total disability to the Plan Administrator.
For purposes of this subsection 5.7, a transfer of relationship
between or among the Company and/or any related corporation shall not be deemed
to constitute a cessation of relationship with the Company or any of its related
corporations. For purposes of this subsection 5.7, with respect to incentive
stock options, employment shall be deemed to continue while the Optionee is on
military leave, sick leave or other bona fide leave of absence (as determined by
the Plan Administrator). The foregoing notwithstanding, employment shall not be
deemed to continue beyond the first 90 days of such leave, unless the Optionee's
reemployment rights are guaranteed by statute or by contract.
As used herein, the term "related corporation," when referring to a
subsidiary corporation, shall mean any corporation (other than the Company) or
other entity in, at the time of the granting of the option, an unbroken chain of
corporations ending with the Company, if stock or other interests possessing 50%
or more of the total combined voting power of all classes of stock or other
interests of each of the corporations or other entities other than the Company
is owned by one of the other corporations or other entities in such chain. When
referring to a parent corporation or other entity, the term "related
corporation" shall mean any corporation or other entity in an unbroken chain of
corporations or other entities ending with the Company if, at the time of the
granting of the option, each of the corporations or other entities other than
the Company owns stock or other interests possessing 50% or more of the total
combined voting power of all classes of stock or other interests in one of the
other corporations or other entities in such chain.
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5.8 Death of Optionee. If an Optionee dies while he or she has a
relationship with the Company or any related corporation or within the
three-month period (or 12-month period in the case of totally disabled
Optionees) following cessation of such relationship, any option held by such
Optionee to the extent that the Optionee would have been entitled to exercise
such option, may be exercised within one year after his or her death by the
personal representative of his or her estate or by the person or persons to whom
the Optionee's rights under the option shall pass by will or by the applicable
laws of descent and distribution.
5.9 Status of Shareholder. Neither the Optionee nor any party to
which the Optionee's rights and privileges under the option may pass shall be,
or have any of the rights or privileges of, a shareholder of the Company with
respect to any of the shares issuable upon the exercise of any option granted
under this Plan unless and until such option has been exercised.
5.10 Continuation of Employment. Nothing in this Plan or in any
option granted pursuant to this Plan shall confer upon any Optionee any right to
continue in the employ of the Company or of a related corporation, or to
interfere in any way with the right of the Company or of any such related
corporation to terminate his or her employment or other relationship with the
Company at any time.
5.11 Modification and Amendment of Option. Subject to the
requirements of Code Section 422 with respect to incentive stock options and to
the terms and conditions and within the limitations of this Plan, the Plan
Administrator may modify or amend outstanding options granted under this Plan.
The modification or amendment of an outstanding option shall not, without the
consent of the Optionee, impair or diminish any of his or her rights or any of
the obligations of the Company under such option. Except as otherwise provided
in this Plan, no outstanding option shall be terminated without the consent of
the Optionee. Unless the Optionee agrees otherwise, any changes or adjustments
made to outstanding incentive stock options granted under this Plan shall be
made in such a manner so as not to constitute a "modification" as defined in
Code Section 424(h) and so as not to cause any incentive stock option issued
hereunder to fail to continue to qualify as an incentive stock option as defined
in Code Section 422(b).
5.12 Limitation on Value for Incentive Stock Options. As to all
incentive stock options granted under the terms of this Plan, to the extent that
the aggregate fair market value (determined at the time the incentive stock
option is granted) of the stock with respect to which incentive stock options
are exercisable for the first time by the Optionee during any calendar year
(under this Plan and all other incentive stock option plans of the Company, a
related corporation or a predecessor corporation) exceeds $100,000, such options
shall be treated as nonqualified stock options. The previous sentence shall not
apply if the Code is amended or if the Internal Revenue Service publicly rules,
issues a private ruling to the Company, any Optionee, or any legatee, personal
representative or distributee of an Optionee or issues regulations, changing or
eliminating such annual limit, in which case the limitation shall be that
provided by the Code or the Internal Revenue Service, as the case may be.
5.13 Valuation of Common Stock Received Upon Exercise
5.13.1 Exercise of Options Under Sections 5.4(a) and (c). The
value of Common Stock received by the Optionee from an exercise under Sections
5.4(a) and 5.4(c) hereof
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shall be the fair market value, which shall mean the last reported sales price,
regular way, of the Common Stock on the date of receipt by the Company of the
Optionee's delivery of shares under Section 5.4(a) hereof or delivery of the
exercise notice under Section 5.4(c) hereof (or, if no sale takes place on any
such day, the closing bid price of the Common Stock on such day), on the
principal securities exchange (including the National Association of Securities
Dealers, Inc. (the "NASD'") National Market System) on which the Common Stock is
admitted or listed for trading, or, if the Common Stock is not listed on any
such exchange on any such day, the highest reported bid price for the Common
Stock as furnished by the NASD through NASDAQ, or a similar organization if
NASDAQ is no longer reporting such information, or, if the Common Stock is not
listed for trading on an exchange and is not quoted on NASDAQ or any similar
organization on any such day, the fair value of a share of Common Stock on such
day as determined by the Plan Administrator of the Company in good faith.
5.13.2 Exercise of Option Under Section 5.4(b). The value of
Common Stock received by the Optionee from an exercise under Section 5.4(b)
hereof (a) in the case of the sale of the Common Stock received as a result of
the exercise by a broker on the date of receipt by the Company of the Optionee's
exercise notice, shall equal the sales price received for such shares; and (b)
in all other cases, shall be determined as provided in Section 5.13.1 hereof.
SECTION 6. Greater Than 10% Stockholders.
6.1 Exercise Price and Term of Incentive Stock Options. If incentive
stock options are granted under this Plan to employees who own more than 10% of
the total combined voting power of all classes of stock of the Company or any
related corporation, the term of such incentive stock options shall not exceed
five years and the exercise price shall be not less than 110% of the fair market
value of the Common Stock at the time the incentive stock option is granted.
This provision shall control notwithstanding any contrary terms contained in an
option agreement or any other document. The term and exercise price limitations
of this provision shall be amended to conform to any change required (or, in the
sole discretion of the Plan Administrator, permitted) by a change in the Code or
by a ruling or pronouncement of the Internal Revenue Service.
6.2 Attribution Rule. For purposes of subsection 6.1, in determining
stock ownership, an employee shall be deemed to own the stock owned, directly or
indirectly, by or for his or her brothers, sisters, spouse, ancestors and lineal
descendants. Stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be deemed to be owned proportionately by or
for its stockholders, partners or beneficiaries. If an employee or a person
related to the employee owns an unexercised option or warrant to purchase stock
of the Company, the stock subject to that portion of the option or warrant which
is unexercised shall not be counted in determining stock ownership. For purposes
of this Section 6, stock owned by an employee shall include all stock owned by
him which is actually issued and outstanding immediately before the grant of the
incentive stock option to the employee.
SECTION 7. Adjustments Upon Changes in Capitalization. The aggregate
number and class of shares for which options may be granted under this Plan, the
number and class of shares covered by each outstanding option, and the exercise
price per share thereof (but not the total price), shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of
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Common Stock of the Company resulting from a split-up or consolidation of shares
or any like capital adjustment, or the payment of any stock dividend.
7.1. Effect of Liquidation, Reorganization or Change in Control.
7.1.1 Cash, Stock or Other Property for Stock. Except as
provided in subsection 7.1.2, upon a merger (other than a merger of the Company
in which the holders of Common Stock immediately prior to the merger have the
same proportionate ownership of common stock in the surviving corporation
immediately after the merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or the creation of
a holding company) or liquidation of the Company, as a result of which the
stockholders of the Company receive cash or property other than capital stock in
exchange for or in connection with their shares of Common Stock, any option
granted hereunder shall terminate, but the Optionee shall have the right
immediately prior to any such merger, consolidation, acquisition of property or
stock, separation, reorganization or liquidation to exercise such Optionee's
option in whole or in part, whether or not the vesting requirements set forth in
the option agreement have been satisfied.
7.1.2 Conversion of Options on Stock for Stock Exchange. If
the stockholders of the Company receive capital stock of another corporation
("Exchange Stock") in exchange for their shares of Common Stock in any
transaction involving a merger (other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation
or reorganization (other than a mere reincorporation or the creation of a
holding company), all options granted hereunder shall be converted into options
to purchase shares of Exchange Stock unless the Company and corporation issuing
the Exchange Stock, in their sole discretion, determine that any or all such
options granted hereunder shall not be converted into options to purchase shares
of Exchange Stock but instead shall terminate in accordance with the provisions
of subsection 7.1.1. The amount and price of converted options shall be
determined by adjusting the amount and price of the options granted hereunder in
the same proportion as used for determining the number of shares of Exchange
Stock the holders of the Common Stock receive in such merger, consolidation,
acquisition of property or stock, separation or reorganization. Unless the Board
determines otherwise, the converted options shall be fully vested whether or not
the vesting requirements set forth in the option agreement have been satisfied.
7.2 Fractional Shares. In the event of any adjustment in the number
of shares covered by an option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the number
of full shares resulting from such adjustment.
7.3 Determination of Board to Be Final. All Section 7 adjustments
shall be made by the Board, and its determination as to what adjustments shall
be made, and the extent thereof, shall be final, binding and conclusive. Unless
an Optionee agrees otherwise, any change or adjustment to an incentive stock
option shall be made in such a manner so as not to constitute a "modification"
as defined in Code Section 425(h) and so as not to cause his or her incentive
stock option issued hereunder to fail to continue to qualify as an incentive
stock option as defined in Code Section 422(b).
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SECTION 8. Securities Regulation. Shares shall not be issued with respect
to an option granted under this Plan unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange or inter-dealer quotation system upon which the shares may then be
listed, and shall be further subject to the approval of counsel for the Company
with respect to such compliance, including the availability of an exemption from
registration for the issuance and sale of any shares hereunder. Inability of the
Company to obtain, from any regulatory body having jurisdiction, the authority
deemed by the Company's counsel to be necessary for the lawful issuance and sale
of any shares hereunder or the unavailability of an exemption from registration
for the issuance and sale of any shares hereunder, shall relieve the Company of
any liability in respect of the nonissuance or sale of such shares as to which
such requisite authority shall not have been obtained.
As a condition to the exercise of an option, the Company may require the
Optionee to represent and warrant at the time of any such exercise that the
shares are being purchased only for investment and without any present intention
to sell or distribute such shares if, in the opinion of counsel for the Company,
such representation is required by any relevant provision of the aforementioned
laws. At the option of the Company, a stop-transfer order against any shares of
stock may be placed on the official stock books and records of the Company, and
a legend indicating that the stock may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided (concurred in by counsel
for the Company) stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on stock certificates in order to
assure exemption from registration. The Company may also require such other
action or agreement by the Optionees as it may from time to time deem to be
necessary or advisable.
Should any of the Company's capital stock of the same class as the stock
subject to options granted hereunder be listed on a national securities exchange
or inter-dealer quotation system, all stock issued hereunder if not previously
listed on such exchange or inter-dealer quotation system shall be authorized by
that exchange or system for listing thereon prior to the issuance thereof.
SECTION 9. Amendment and Termination.
9.1 Board Action. The Board may at any time suspend, amend or
terminate this Plan, provided that except as set forth in Section 7, the
approval of the holders of a majority of the Company's outstanding shares of
voting capital stock present and entitled to vote at any meeting is necessary
for the adoption by the Board of any amendment which will:
(a) increase the number of shares which are to be reserved for
the issuance of options under this Plan;
(b) permit the granting of stock options to a class of persons
other than those presently permitted to receive stock options under this Plan;
or
(c) require shareholder approval under applicable law,
including Section 16(b) of the Exchange Act.
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9.2 Automatic Termination. Unless sooner terminated by the Board,
this Plan shall terminate ten years from the earlier of (a) the date on which
this Plan is adopted by the Board or (b) the date on which this Plan is approved
by the stockholders of the Company. No option may be granted after such
termination or during any suspension of this Plan. The amendment or termination
of this Plan shall not, without the consent of the option holder, alter or
impair any rights or obligations under any option theretofore granted under this
Plan.
SECTION 10. Effectiveness Of This Plan. This Plan shall become effective
upon adoption by the Board so long as it is approved by the holders of a
majority of the Company's outstanding shares of voting capital stock present and
entitled to vote at any meeting at any time within 12 months before or after the
adoption of this Plan.
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CELERITY SYSTEMS, INC.
INCENTIVE STOCK OPTION LETTER AGREEMENT
Date:_________________
TO: _____________________
We are pleased to inform you that you have been selected by the Plan
Administrator of the Celerity Systems, Inc. (the "Company") 1997 Stock Option
Plan (the "Plan"). The Plan was adopted by the Board of Directors, subject to
stockholder approval, which approval was received on August 6, 1997. When you
sign and return to the Company the Acceptance and Acknowledgment attached to
this Stock Option Agreement you will be entitled to receive an incentive option
for the purchase of ________ shares of the Company's common stock, $0.001 par
value ("Common Stock"), at an exercise price of $_____ per share (the "exercise
price") subject to the vesting provisions set forth herein. A copy of the Plan
is attached and the provisions thereof, including, without limitation, those
relating to withholding taxes, are incorporated into this Agreement by
reference.
The terms of the option are as set forth in the Plan and in this
Agreement. The most important of the terms set forth in the Plan are summarized
as follows:
Number of Shares: The option granted to you covers an aggregate of ______
shares of Common Stock.
Exercise Price: The exercise price per share of Common Stock subject to
your option is $_____ per share (the "Exercise Price").
Adjustments. The number of shares of Common Stock subject to your option
and the Exercise Price may be subject to adjustment under certain circumstances
as described in the Plan.
Date of Grant: The date of grant of the option is _______________.
Term. The term of the option is ten years from date of grant, unless
sooner terminated.
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Vesting: Your option shall vest according to the following schedule,
provided you continue your relationship with the Company or a related
corporation:
Period of Your Continuous
Relationship With the
Company or a Related
Corporation From the Portion of Total Option
Date Option is Granted Which is Exercisable
---------------------- --------------------
after 1 year 33 1/3%
after 2 years 66 2/3%
after 3 years 100%
Exercise. The vested portion of the option may be exercised, in whole or
in part, but not as to any fractional shares, during the term of the option. You
should use a Notice of Exercise of Incentive Stock Option in the form attached
to this Agreement when you exercise the option. During your lifetime only you
can exercise the option. The Plan also provides for exercise of the option by
the personal representative of your estate or the beneficiary thereof following
your death.
Payment for Shares. The vested portion of this option may be exercised by
the delivery of:
(a) Cash, personal check (unless at the time of exercise the Plan
Administrator determines otherwise), or certified or bank cashier's checks in an
amount equal to the aggregate Exercise Price for the number of shares as to
which the option is being exercised together with a properly executed Notice of
Exercise;
(b) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise, together with shares of the
capital stock of the Company held by you having a fair market value at the time
of exercise, as determined by the Plan Administrator in accordance with the
Plan, equal to the aggregate Exercise Price for the number of shares as to which
the option is being exercised;
(c) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise together with instructions to
the Company to withhold from the shares that would otherwise be issued upon
exercise that number of shares having a fair market value equal to the aggregate
Exercise Price for the number of shares as to which the option is being
exercised; or
(d) A properly executed Notice of Exercise together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of sale
or loan proceeds to pay the aggregate Exercise Price for the number of shares as
to which the option is being exercised.
Upon receipt of written Notice of Exercise and payment and delivery of any
other required documentation, the Company shall deliver to the person exercising
the option a certificate or certificates for the appropriate number of shares of
Common Stock. It shall be a condition to the
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performance of the Company's obligation to issue or transfer Common Stock upon
exercise of this option that you pay, or make provision satisfactory to the
Company for the payment of, any taxes which the Company is obligated to collect
with respect to the issue or transfer of Common Stock upon exercise.
Termination. Your option will terminate immediately upon termination for
cause, as defined in the Plan, or three months after cessation of your
relationship with the Company or a related corporation thereof, unless cessation
is due to death or total disability, in which case the portion of this option
which is vested at the time of such termination shall terminate one year after
cessation of such relationship. All unvested options will terminate immediately
upon the cessation of your relationship with the Company or a related
corporation for any reason, including, without limitation, termination for
cause, resignation, death or disability.
Transfer of Option. The option is not transferable except by will or by
the applicable laws of descent and distribution or pursuant to a qualified
domestic relations order.
Notice: All notices sent in connection with this option shall be in
writing and, if to the Company, shall be delivered personally to the President
of the Company or mailed to its principal office, addressed to the attention of
the President, and, if to you, shall be delivered personally or mailed to you at
the address noted on the attached Acceptance and Acknowledgment. Such addresses
may be changed at any time by notice from one party to the other.
YOUR PARTICULAR ATTENTION IS DIRECTED TO SECTION 8 OF THE PLAN WHICH
DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO FEDERAL AND STATE SECURITIES
LAWS THAT MUST BE SATISFIED BEFORE THE OPTION CAN BE EXERCISED AND BEFORE THE
COMPANY CAN ISSUE ANY SHARES TO YOU. THE COMPANY HAS NO OBLIGATION TO REGISTER
THE SHARES THAT WOULD BE ISSUED UPON THE EXERCISE OF YOUR OPTION, AND IF IT
NEVER REGISTERS THE SHARES, YOU WILL NOT BE ABLE TO EXERCISE THE OPTION UNLESS
AN EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE PRESENT TIME, EXEMPTIONS
FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY LIMITED AND
MIGHT BE UNAVAILABLE TO YOU PRIOR TO THE EXPIRATION OF THE OPTION. CONSEQUENTLY,
YOU MIGHT HAVE NO OPPORTUNITY TO EXERCISE THE OPTION AND TO RECEIVE SHARES UPON
SUCH EXERCISE. IN ADDITION, YOU SHOULD CONSULT WITH YOUR TAX ADVISOR CONCERNING
THE RAMIFICATIONS TO YOU OF HOLDING OR EXERCISING YOUR OPTIONS OR HOLDING OR
SELLING THE SHARES UNDERLYING SUCH OPTIONS.
It is the intention of the Company that this Plan comply in all respects
with Section 16(b) and Rule 16b-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), to the extent applicable, and, if any Plan provision is later
found not to be in compliance with such Section or Rule, as the case may be, the
provision shall be deemed null and void, and in all events the Plan shall be
construed in favor of its meeting the requirements of Section 16(b) and Rule
16b-3 under the Exchange Act. Notwithstanding anything in the Plan to the
contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to
participants who are officers and directors or other persons subject to Section
16(b) of the
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Exchange Act without so restricting, limiting or conditioning the Plan with
respect to other participants.
All decisions or interpretations made by the Plan Administrator with
regard to any question arising hereunder or under the Plan shall be binding and
conclusive on the Company and you.
This Agreement shall bind and inure to the benefit of the parties hereto
and the successors and assigns of the Company and, to the extent provided in the
Plan, your executors, administrators, legatees and heirs.
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<PAGE>
Please execute the Acceptance and Acknowledgment set forth below on the
enclosed copy of this Agreement and return it to the undersigned.
Very truly yours,
CELERITY SYSTEMS, INC.
By:________________________________
Name:
Title:
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<PAGE>
ACCEPTANCE AND ACKNOWLEDGMENT
I, a resident of the State of __________, accept the stock option
described above granted under the Celerity Systems, Inc., 1997 Stock Option
Plan, and acknowledge receipt of a copy of this Agreement, including a copy of
the Plan. I have read and understand this Agreement and the Plan, including the
provisions of Section 8 thereof.
Dated: _____________________
_______________________________________ _____________________________________
Taxpayer I.D. Number Signature
By his or her signature below, the spouse of the Optionee, if such
Optionee is legally married as of the date of such Optionee's execution of this
Agreement, acknowledges that he or she has read this Agreement and the Plan and
is familiar with the terms and provisions thereof, and agrees to be bound by all
the terms and conditions of this Agreement and the Plan.
Dated: _____________________
________________________________
Spouse's Signature
________________________________
Printed Name
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<PAGE>
NOTICE OF EXERCISE
Celerity Systems, Inc.
9051 Executive Park Drive,
Suite 302
Knoxville, TN 37921
Gentlemen:
I hereby exercise my right to purchase ______ shares of Common Stock (the
"Shares") of Celerity Systems, Inc., a [Tennessee] [Delaware] corporation,
pursuant to, and in accordance with, the Celerity Systems, Inc., 1997 Incentive
Stock Option Agreement ("Agreement") dated __________. As provided in that
Agreement, I deliver herewith a certified or bank cashier's check in the amount
of the aggregate option price (unless alternative payment methods have been
approved by the Plan Administrator). Please deliver to me stock certificates
representing the subject shares registered as follows:
Name:_______________________________________
Address:____________________________________
____________________________________
Social Security Number:_____________________
The aggregate exercise price is $___________ (total number of shares to be
purchased x $____ per share).
1. If the sale of the Shares and the resale thereof has not, prior to the
date hereof, been registered pursuant to a registration statement filed and
declared effective under the Securities Act of 1933, as amended (the "Act"), the
undersigned hereby agrees, represents, and warrants that:
(a) the undersigned is acquiring the Shares for his or her own
account (and not for the account of others), for investment and not with a view
to the distribution or resale thereof;
(b) by virtue of his or her position, the undersigned has access to
the same kind of information which would be available in a registration
statement filed under the Act;
(c) the undersigned is a sophisticated investor;
(d) the undersigned understands that he or she may not sell or
otherwise dispose of the Shares in the absence of either (i) a registration
statement filed under the Act or (ii) an exemption from the registration
provisions thereof; and
(e) the certificates representing the Shares may contain a legend to
the effect of subsection (d) of this Section 1.
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<PAGE>
2. If the sale of the Shares and the resale thereof has been registered
pursuant to a registration statement filed and declared effective under the Act,
the undersigned hereby represents and warrants that he or she has received the
applicable prospectus and a copy of the most recent annual report, as well as
all other material sent to stockholders generally.
3. The undersigned acknowledges that the number of shares of Common Stock
subject to the Agreement is hereafter reduced by the number of shares of Common
Stock represented by the Shares.
4. The undersigned understands that there are certain tax implications to
his or her exercise of his or her right to purchase shares of Common Stock under
the Agreement. The undersigned further understands that it is his or her
obligation to confer with his or her own tax advisor with respect to such tax
implications.
Very truly yours,
_____________________________________
(signature)
_____________________________________
(please type or print name)
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<PAGE>
EXHIBIT 4.5
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN.
CELERITY SYSTEMS, INC.
Warrant for the Purchase of _______ Shares of Common Stock,
par value $.001 per share
No. ____ _______ Shares
THIS CERTIFIES that, for value received, _______________
____________________ with an address at ___________________ (including any
transferee, the "Holder"), is entitled to subscribe for and purchase from
Celerity Systems, Inc., a Tennessee corporation (the "Company"), upon the terms
and conditions set forth herein, at any time or from time to time after 5:00
P.M., New York City time, on August 8, 1998 and before 5:00 P.M., New York City
time, August 8, 2001 (the "Exercise Period"), ____________ (_________) shares
of the Company's Common Stock, par value $.001 per share ("Common Stock"), at an
initial exercise price equal to $1.20 (the
<PAGE>
"Exercise Price"). This Warrant is one of the warrants issued pursuant to an
offering (the "Offering") by the Company of units (the "Units"), each Unit
consisting of (i) one 10% Promissory Note in the principal amount of $100,000
(collectively, the "Notes"), and (ii) one Four-Year Warrant to purchase 40,000
shares of Common Stock at the Exercise Price (subject to adjustment upon the
occurrence of certain events and without giving effect to a contemplated reverse
stock split which will adjust the Warrants included in each Unit);
(collectively, the "Warrants"). As used herein, the term "this Warrant" shall
mean and include this Warrant and any Warrant or Warrants hereafter issued as a
consequence of the exercise or transfer of this Warrant in whole or in part.
The number of shares of Common stock issuable upon exercise of the
Warrant (the "Warrant Shares") and the Exercise Price may be adjusted from time
to time as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period, as to
the whole or any lesser number of whole Warrant Shares, by the surrender of this
Warrant (with the election at the end hereof duly executed) to the Company at
its office at 9051 Executive Park Drive, Suite 302, Knoxville, Tennessee 37923,
Attention: Kenneth D. Van Meter, President, or at such other place as is
designated in writing by the Company, (a) together with a certified or bank
cashier's check payable to the order of the Company in an amount equal to the
Exercise Price multiplied by the number of Warrant Shares for which this Warrant
is being exercised or (b) if the Conversion Right (as defined below) is
exercised, together with the completed Conversion Notice referred below. In lieu
of the payment of the Exercise Price, the Holder shall have the right (but not
the obligation), during the Exercise Period, to require the Company to convert
this Warrant, in whole or in part, into the Warrant Shares as provided for in
this Section (the "Conversion Right"). Upon exercise of the Conversion Right,
the Company shall deliver to the Holder (without payment by the Holder of the
Exercise Price) that number of shares of Common Stock equal to (i) the number of
Warrant Shares issuable upon exercise of the portion of the Warrant being
converted, multiplied by (ii) the quotient obtained by dividing (x) the value of
the Warrant (on a per Warrant Share basis) at the time the Conversion Right is
exercised (determined by subtracting the Exercise Price from the Current Market
Price (as determined pursuant to Section 5(e) below), by (y) the Current Market
Price of one share of Common Stock immediately prior to the exercise of the
Conversion Right. The Conversion Rights provided under this Section may be
exercised in whole or in part and at any time and from time to time while any
Warrants remain outstanding. In order to exercise the Conversion Right, the
Holder shall surrender to the Company, at its offices, this Warrant accompanied
by a duly completed Conversion Notice in the form attached hereto. The
presentation and surrender shall be deemed a waiver of the Holder's obligation
to pay all or any portion of the aggregate purchase price payable for the
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<PAGE>
Warrant Shares being issued upon such exercise of this Warrant. This Warrant (or
so much thereof as shall have been surrendered for conversion) shall be deemed
to have been converted immediately prior to the close of business on the day of
surrender of this Warrant for conversion in accordance with the foregoing
provisions. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver to the Holder (i) a certificate or
certificates representing the largest number of whole Warrant Shares to which
the Holder shall be entitled as a result of the conversion, and (ii) if such
Warrant is being converted in part only, a new Warrant exercisable for the
number of Warrant Shares equal to the unconverted portion of the Warrant. Upon
any exercise (which term, as used herein, shall include any exercise of the
Conversion Right) of the Warrant, in lieu of any fractional Warrant Shares to
which the Holder shall be entitled, the Company shall pay to the Holder cash in
accordance with the provisions of Section 5(j) hereof.
2. Upon each exercise of the Holder's rights to purchase Warrant
Shares, the Holder shall be deemed to be the holder of record of the Warrant
Shares issuable upon such exercise, notwithstanding that the transfer books of
the Company shall then be closed or certificates representing such Warrant
Shares shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Warrant, the Company shall issue
and deliver to the Holder a certificate or certificates for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
3. (a) Any Warrants issued upon the transfer or exercise in part of
this Warrant shall be numbered and shall be registered in a Warrant Register as
they are issued. The Company shall be entitled to treat the registered holder of
any Warrant on the Warrant Register as the owner in fact thereof for all
purposes and shall not be bound to recognize any equitable or other claim to or
interest in such Warrant on the part of any other person, and shall not be
liable for any registration or transfer of Warrants which are registered or to
be registered in the name of a fiduciary or the nominee of a fiduciary unless
made with the actual knowledge that a fiduciary or nominee is committing a
breach of trust in requesting such registration or transfer, or with the
knowledge of such facts that its participation therein amounts to bad faith.
This Warrant shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment,
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his or its
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<PAGE>
authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Warrant or Warrants to the person entitled thereto. This
Warrant may be exchanged, at the option of the Holder thereof, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder.
(b) The Holder acknowledges that he has been advised by the
Company that neither this Warrant nor the Warrant Shares have been registered
under the Act, that this Warrant is being or has been issued and the Warrant
Shares may be issued on the basis of the statutory exemption provided by Section
4(2) of the Act or Regulation D promulgated thereunder, or both, relating to
transactions by an issuer not involving any public offering, and that the
Company's reliance thereon is based in part upon the representations made by the
original Holder in the original Holder's Subscription Agreement executed and
delivered in accordance with the terms of the Offering (the "Subscription
Agreement"). The Holder acknowledges that he has been informed by the Company
of, or is otherwise familiar with, the nature of the limitations imposed by the
Act and the rules and regulations thereunder on the transfer of securities. In
particular, the Holder agrees that no sale, assignment or transfer of this
Warrant or the Warrant Shares issuable upon exercise hereof shall be valid or
effective, and the Company shall not be required to give any effect to any such
sale, assignment or transfer, unless (i) the sale, assignment or transfer of
this Warrant or such Warrant Shares is registered under the Act, it being
understood that neither this Warrant nor such Warrant Shares are currently
registered for sale and that the Company has no obligation or intention to so
register this Warrant or such Warrant Shares except as specifically provided
herein, or (ii) this Warrant or such Warrant Shares are sold, assigned or
transferred in accordance with all the requirements and limitations of Rule 144
under the Act, it being understood that Rule 144 is not available at the time of
the original issuance of this Warrant for the sale of this Warrant or such
Warrant Shares and that there can be no assurance that Rule 144 sales will be
available at any subsequent time, or (iii) such sale, assignment, or transfer is
otherwise exempt from registration under the Act.
4. The Company shall at all times reserve and keep available out its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the rights to purchase all Warrant Shares granted pursuant to
the Warrants, such number of shares of Common Stock as shall, from time to time,
be sufficient therefor. The Company covenants that all shares of Common Stock
issuable
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<PAGE>
upon exercise of this Warrant, upon receipt by the Company of the full Exercise
Price therefor, shall be validly issued, fully paid, nonassessable, and free of
preemptive rights.
5. (a) In case the Company shall at any time after the date the
Warrants were first issued (i) declare a dividend on the outstanding Common
Stock payable in shares of its capital stock, (ii) subdivide the outstanding
Common Stock, (iii) combine the outstanding Common Stock into a smaller number
of shares, or (iv) issue any shares of its capital stock by reclassification of
the Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation),
then, in each case, the Exercise Price, and the number of Warrant Shares
issuable upon exercise of this Warrant, in effect at the time of the record date
for such dividend or of the effective date of such subdivision, combination, or
reclassification, shall be proportionately adjusted so that the Holder after
such time shall be entitled to receive the aggregate number and kind of shares
which, if such Warrant had been exercised immediately prior to such time, he
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for
the issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion or
exchange price per share, if a security convertible into or exchangeable for
Common Stock) less than the Current Market Price per share of Common Stock (as
defined in Section 5(e) hereof) on such record date, then, in each case, the
Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding on such record date
plus the number of shares of Common Stock which the aggregate offering price of
the total number of shares of Common Stock so to be offered (or the aggregate
initial conversion or exchange price of the convertible or exchangeable
securities so to be offered) would purchase at such Current Market Price and the
denominator of which shall be the number of shares of Common Stock outstanding
on such record date plus the number of additional shares of Common Stock to be
offered for subscription or purchase (or into which the convertible or
exchangeable securities so to be offered are initially convertible or
exchangeable). Such adjustment shall become effective at the close of business
on such record date; provided, however, that, to the extent the shares of Common
Stock (or securities convertible into or exchangeable for shares of Common
Stock) are not delivered, the Exercise Price shall be readjusted after the
expiration of such rights, options, or warrants (but only with respect to
Warrants exercised after such expiration), to the Exercise Price which would
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<PAGE>
then be in effect had the adjustments made upon the issuance of such rights,
options, or warrants been made upon the basis of delivery of only the number of
shares of Common Stock (or securities convertible into or exchangeable for
shares of Common Stock) actually issued. In case any subscription price may be
paid in a consideration part or all of which shall be in a form other than cash,
the value of such consideration shall be as determined in good faith by the
board of directors of the Company, whose determination shall be conclusive
absent manifest error. Shares of Common Stock owned by or held for the account
of the Company or any majority-owned subsidiary shall not be deemed outstanding
for the purpose of any such computation.
(c) In case the Company shall distribute to all holders of
Common Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness, cash (other than any cash
dividend which, together with any cash dividends paid within the 12 months prior
to the record date for such distribution, does not exceed 5% of the Current
Market Price at the record date for such distribution) or assets (other than
distributions and dividends payable in shares of Common Stock), or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for shares of Common Stock (excluding those
with respect to the issuance of which an adjustment of the Exercise Price is
provided pursuant to Section 5(b) hereof), then, in each case, the Exercise
Price shall be adjusted by multiplying the Exercise Price in effect immediately
prior to the record date for the determination of stockholders entitled to
receive such distribution by a fraction, the numerator of which shall be the
Current Market Price per share of Common Stock on such record date, less the
fair market value (as determined in good faith by the board of directors of the
Company, whose determination shall be conclusive absent manifest error) of the
portion of the evidences of indebtedness or assets so to be distributed, or of
such rights, options, or warrants or convertible or exchangeable securities, or
the amount of such cash, applicable to one share, and the denominator of which
shall be such Current Market Price per share of Common Stock. Such adjustment
shall become effective at the close of business on such record date.
(d) In case the Company shall issue shares of Common Stock or
rights, options, or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for Common Stock (excluding shares,
rights, options, warrants, or convertible or exchangeable securities issued or
issuable (i) in any of the transactions with respect to which an adjustment of
the Exercise Price is provided pursuant to Sections 5(a), 5(b) or 5(c) above,
(ii) upon any issuance of securities pursuant to the Offering, or (iii) upon
exercise of the Warrants), at a price per share (determined, in the case of such
rights, options, warrants, or convertible or exchangeable securities, by
dividing (x) the total amount received or receivable by the
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<PAGE>
Company in consideration of the sale and issuance of such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum aggregate
consideration payable to the Company upon exercise, conversion, or exchange
thereof, by (y) the maximum number of shares covered by such rights, options,
warrants, or convertible or exchangeable securities) lower than the Current
Market Price per share of Common Stock in effect immediately prior to such
issuance, then the Exercise Price shall be reduced on the date of such issuance
to a price (calculated to the nearest cent) determined by multiplying the
Exercise Price in effect immediately prior to such issuance by a fraction, (1)
the numerator of which shall be an amount equal to the sum of (A) the number of
shares of Common Stock outstanding immediately prior to such issuance plus (B)
the quotient obtained by dividing the consideration received by the Company upon
such issuance by such Current Market Price, and (2) the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
after such issuance. For the purposes of such adjustments, the maximum number of
shares which the holders of any such rights, options, warrants, or convertible
or exchangeable securities shall be entitled to initially subscribe for or
purchase or convert or exchange such securities into shall be deemed to be
issued and outstanding as of the date of such issuance, and the consideration
received by the Company therefor shall be deemed to be the consideration
received by the Company for such rights, options, warrants, or convertible or
exchangeable securities, plus the minimum aggregate consideration or premiums
stated in such rights, options, warrants, or convertible or exchangeable
securities to be paid for the shares covered thereby. No further adjustment of
the Exercise Price shall be made as a result of the actual issuance of shares of
Common Stock on exercise of such rights, options, or warrants or on conversion
or exchange of such convertible or exchangeable securities. On the expiration or
the termination of such rights, options, or warrants, or the termination of such
right to convert or exchange, the Exercise Price shall be readjusted (but only
with respect to Warrants exercised after such expiration or termination) to such
Exercise Price as would have obtained had the adjustments made upon the issuance
of such rights, options, warrants, or convertible or exchangeable securities
been made upon the basis of the delivery of only the number of shares of Common
Stock actually delivered upon the exercise of such rights, options, or warrants
or upon the conversion or exchange of any such securities; and on any change of
the number of shares of Common Stock deliverable upon the exercise of any such
rights, options, or warrants or conversion or exchange of such convertible or
exchangeable securities or any change in the consideration to be received by the
Company upon such exercise, conversion or exchange, including, without
limitation, a change resulting from the antidilution provisions thereof, the
Exercise Price, as then in effect, shall forthwith be readjusted (but only with
respect to Warrants exercised after such change) to such Exercise Price as would
have been obtained had an adjustment been made upon the issuance of such rights,
options, or warrants not exercised prior to such change, or securities not
converted or exchanged prior to such change, on the basis of such change.
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<PAGE>
In case the Company shall issue shares of Common Stock or any such rights,
options, warrants, or convertible or exchangeable securities for a consideration
consisting, in whole or in part, of property other than cash or its equivalent,
then the "price per share" and the "consideration received by the Company" for
purposes of the first sentence of this Section 5(d) shall be as determined in
good faith by the board of directors of the Company, whose determination shall
be conclusive absent manifest error. Shares of Common Stock owned by or held for
the account of the Company or any majority-owned subsidiary shall not be deemed
outstanding for the purpose of any such computation.
(e) For the purpose of any computation under this Section 5,
the Current Market Price per share of Common Stock on any date shall be deemed
to be the average of the daily closing prices for the 30 consecutive trading
days immediately preceding the date in question. The closing price for each day
shall be the last reported sales price regular way or, in case no such reported
sale takes place on such day, the closing bid price regular way, in either case
on the principal national securities exchange (including, for purposes hereof,
the Nasdaq National Market) on which the Common Stock is listed or admitted to
trading or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the highest reported bid price for the Common
Stock as furnished by the National Association of Securities Dealers, Inc.
through Nasdaq or a similar organization if Nasdaq is no longer reporting such
information. If on any such date the Common Stock is not listed or admitted to
trading on any national securities exchange and is not quoted by Nasdaq or any
similar organization, the fair value of a share of Common Stock on such date, as
determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error, shall be used;
provided, that the fair value of a share of Common Stock shall not be less than
the Exercise Price in effect on such date.
(f) No adjustment in the Exercise Price shall be required if
such adjustment is less than $.05; provided, however, that any adjustments which
by reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest cent or to the nearest one-thousandth of
a share, as the case may be.
(g) In any case in which this Section 5 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the Holder, if the Holder exercised this Warrant after such
record date, the shares of Common Stock, if any, issuable upon such exercise
over and above the shares of Common Stock, if any, issuable upon such exercise
on the basis of the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver
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<PAGE>
to the Holder a due bill or other appropriate instrument evidencing the Holder's
right to receive such additional shares upon the occurrence of the event
requiring such adjustment.
(h) Upon each adjustment of the Exercise Price as a result of
the calculations made in Sections 5(b), 5(c) or 5(d) hereof, this Warrant shall
thereafter evidence the right to purchase, at the adjusted Exercise Price, that
number of shares (calculated to the nearest thousandth) obtained by dividing (A)
the product obtained by multiplying the number of shares purchasable upon
exercise of this Warrant prior to adjustment of the number of shares by the
Exercise Price in effect prior to adjustment of the Exercise Price by (B) the
Exercise Price in effect after such adjustment of the Exercise Price.
(i) Whenever there shall be an adjustment as provided in this
Section 5, the Company shall promptly cause written notice thereof to be sent by
registered mail, postage prepaid, to the Holder, at its address as it shall
appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares purchasable
upon the exercise of this Warrant and the Exercise Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment and
the computation thereof, which officer's certificate shall be conclusive
evidence of the correctness of any such adjustment absent manifest error.
(j) The Company shall not be required to issue fractions of
shares of Common Stock or other capital stock of the Company upon the exercise
of this Warrant. If any fraction of a share would be issuable on the exercise of
this Warrant (or specified portions thereof), the Company shall purchase such
fraction for an amount in cash equal to the same fraction of the Current Market
Price of such share of Common Stock on the date of exercise of this Warrant.
6. (a) In case of any consolidation with or merger of the Company
with or into another corporation (other than a merger or consolidation in which
the Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Warrant solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance, and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
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<PAGE>
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 5.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Warrant (other than a change in par
value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) of the shares of Common
Stock (other than a change in par value, or from no par value to a specified par
value, or as a result of a subdivision or combination, but including any change
in the shares into two or more classes or series of shares), the Holder shall
have the right thereafter to receive upon exercise of this Warrant solely the
kind and amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such reclassification, change,
consolidation, or merger by a holder of the number of shares of Common Stock for
which this Warrant might have been exercised immediately prior to such
reclassification, change, consolidation, or merger. Thereafter, appropriate
provision shall be made for adjustments which shall be as nearly equivalent as
practicable to the adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly
apply to successive reclassifications and changes of shares of Common Stock and
to successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose to:
(a) pay any dividend or make any distribution on shares of
Common Stock in shares of Common Stock or make any other distribution (other
than regularly scheduled cash dividends which are not in a greater amount per
share than the most recent such cash dividend) to all holders of Common Stock;
or
(b) issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(c) effect any reclassification or change of outstanding
shares of Common Stock, or any consolidation, merger, sale, lease, or conveyance
of property, described in Section 6 other than the contemplated reincorporation
of the Company in the State of Delaware; or
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<PAGE>
(d) effect any liquidation, dissolution, or winding-up of the
Company; or
(e) take any other action which would cause an adjustment to
the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
8. The issuance of any shares or other securities upon the exercise
of this Warrant, and the delivery of certificates or other instruments
representing such shares or other securities, shall be made without charge to
the Holder for any tax or other charge in respect of such issuance. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of any certificate in a name
other than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. (a) If, at any time commencing 12 months after the
consummation of the initial public offering of the capital stock of the
Company (or such shorter period as may be determined by the managing or lead
underwriter of such initial public offering, in its sole discretion) and
prior to August 8, 2003, the Company shall file a registration statement
(other than on Form S-4, Form S-8, or any successor form) with the Securities
and Exchange Commission (the "Commission") while any Registrable Securities
(as hereinafter defined) are outstanding, the Company shall give all the then
holders of any Registrable Securities (the "Eligible Holders") at least 30
days prior written notice of the filing of such registration statement. If
requested by any Eligible Holder in writing within 20 days after receipt of
any such notice, the Company shall, at the Company's
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sole expense (other than the fees and disbursements of counsel for the Eligible
Holders and the underwriting discounts, if any, payable in respect of the
Registrable Securities sold by any Eligible Holder), register or qualify all or,
at each Eligible Holder's option, any portion of the Registrable Securities of
any Eligible Holders who shall have made such request, concurrently with the
registration of such other securities, all to the extent requisite to permit the
public offering and sale of the Registrable Securities through the facilities of
all appropriate securities exchanges and the over-the-counter market, and will
use its best efforts through its officers, directors, auditors, and counsel to
cause such registration statement to become effective as promptly as
practicable. Notwithstanding the foregoing, if the managing underwriter of any
such offering shall advise the Company in writing that, in its opinion, the
distribution of all or a portion of the Registrable Securities requested to be
included in the registration concurrently with the securities being registered
by the Company would materially adversely affect the distribution of such
securities by the Company for its own account, then any Eligible Holder who
shall have requested registration of his or its Registrable Securities, and all
or a portion of whose Registrable Securities are not included in such
registration statement, shall delay the offering and the sale of such
Registrable Securities (or the portions thereof so designated by such managing
underwriter) for such period, not to exceed 180 days (the "Delay Period"), as
the managing underwriter shall request, provided that no such delay shall be
required as to any Registrable Securities if any securities of the Company are
included in such registration statement for the account of any person other than
the Company and any Eligible Holder unless the securities included in such
registration statement and eligible for sale during the Delay Period for such
other person shall have been reduced pro rata to the reduction of the
Registrable Securities which were requested to be included and eligible for sale
during the Delay Period in such registration. As used herein, "Registrable
Securities" shall mean the Warrant Shares, if any, which have not been
previously sold pursuant to a registration statement or Rule 144 promulgated
under the Act.
(b) If, at any time commencing 12 months after the
consummation of the initial public offering of the capital stock of the
Company (or such shorter period as may be determined in the sole discretion
of the managing or lead underwriter of such initial public offering) but
prior to August 8, 2001, the Company shall receive a written request from
Eligible Holders who in the aggregate own (or who upon exercise of all
Warrants then outstanding would own) a majority of the total number of shares
of Common Stock then included (or upon such exercise would be included) in
the Registrable Securities ("Majority Holders") (provided, that the
Registrable Securities must include Warrant Shares or Warrants exercisable
for Warrant Shares which in the aggregate represent at least 10% of the
aggregate number of Warrant Shares underlying all Warrants initially issued
pursuant to the Offering), to register the sale of all or part of such
Registrable Securities, the Company shall, as promptly as practicable,
prepare and file
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<PAGE>
with the Commission a registration statement sufficient to permit the public
offering and sale of the Registrable Securities through the facilities of all
appropriate securities exchanges and the over-the-counter market, and will use
its best efforts through its officers, directors, auditors, and counsel to cause
such registration statement to become effective as promptly as practicable;
provided, however, that the Company shall only be obligated to file one such
registration statement for which all expenses incurred in connection with such
registration (other than the fees and disbursements of counsel for the Eligible
Holders and underwriting discounts, if any, payable in respect of the
Registrable Securities sold by the Eligible Holders) shall be borne by the
Company and one additional such registration statement for which all such
expenses shall be paid by the Eligible Holders. The Company shall not be
obligated to effect any registration of its securities pursuant to this Section
9(b) within six months after the effective date of a previous registration
statement prepared and filed in accordance with Sections 9(a) (in which
Registrable Securities could have been included) or 9(b). Within ten business
days after receiving any request contemplated by this Section 9(b), the Company
shall give written notice to all the other Eligible Holders, advising each of
them that the Company is proceeding with such registration and offering to
include therein all or any portion of any such other Eligible Holder's
Registrable Securities, provided that the Company receives a written request to
do so from such Eligible Holder within 30 days after receipt by him or it of the
Company's notice.
(c) In the event of a registration pursuant to the provisions
of this Section 9, the Company shall use its best efforts to cause the
Registrable Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Majority
Holders may reasonably request; provided, however, that the Company shall not by
reason of this Section 9(c) be required to qualify to do business in any state
in which it is not otherwise required to qualify to do business or to file a
general consent to service process.
(d) The Company shall keep effective any registration or
qualification contemplated by this Section 9 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication for such period of
time as shall be required to permit the Eligible Holders to complete the offer
and sale of the Registrable Securities covered thereby.
(e) In the event of a registration pursuant to the provisions
of this Section 9, the Company shall furnish to each Eligible Holder such number
of copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform
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to the requirements of the Act and the rules and regulations thereunder, and
such other documents, as any Eligible Holder may reasonably request to
facilitate the disposition of the Registrable Securities included in such
registration.
(f) In the event of a registration pursuant to the provisions
this Section 9, the Company shall, upon request, furnish each Eligible Holder of
any Registrable Securities so registered with an opinion of its counsel
(reasonably acceptable to the Eligible Holders) to the effect that (i) the
registration statement has become effective under the Act and no order
suspending the effectiveness of the registration statement, preventing or
suspending the use of the registration statement, any preliminary prospectus,
any final prospectus, or any amendment or supplement thereto has been issued,
nor to the best knowledge of such counsel has the Commission or any securities
or blue sky authority of any jurisdiction instituted or threatened to institute
any proceedings with respect to such an order, (ii) each document, if any,
incorporated by reference in the registration statement and the prospectus
included therein (except for financial statements and related schedules, as to
which such counsel need express no opinion) complied as to form when filed with
the Commission in all material respects with the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations of the
Commission thereunder, (iii) the registration statement and the prospectus
included therein and any supplements or amendments thereto (except for financial
statements and related schedules, as to which such counsel need express no
opinion) comply as to form in all material respects with the Act and the rules
and regulations of the Commission thereunder, and (iv) such counsel believes
that (except for financial statements and related schedules, as to which such
counsel need express no belief) such registration statement and the prospectus
included therein at the time such registration statement became effective did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading and the
prospectus, as amended or supplemented, if applicable, does not contain any
untrue statement of a material fact or omit 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. Such opinion shall also state the
jurisdictions in which the Registrable Securities have been registered or
qualified for sale pursuant to the provisions of section 9(c). The Company shall
also, upon request, furnish to each Eligible Holder a cold comfort letter from
the independent certified public accountants of the Company in customary form
and substance.
(g) In the event of a registration pursuant to the provision
of this Section 9, the Company shall enter into a cross-indemnity agreement and
a contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
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representations, warranties, allocation of expenses, and customary closing
conditions, including, without limitation, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Registrable
Securities.
(h) The Company agrees that, after the completion of such
public offering and until all the Registrable Securities have been sold under a
registration statement or pursuant to Rule 144 under the Act, it shall keep
current in filing all reports, statements and other materials required to be
filed with the Commission to permit holders of the Registrable Securities to
sell such securities under Rule 144.
(i) Notwithstanding anything to the contrary contained herein,
the Company shall have no obligation to register the Registrable Securities of
any Holder who does not, within 10 business days after a written request from
the Company therefor, provide the Company with such information as is reasonably
required in connection with such registration.
10. (a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless each Eligible Holder, its officers,
directors, partners, employees, agents, and counsel, and each person, if any,
who controls any such person within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, from and against any and all loss, liability,
charge, claim, damage, and expense whatsoever (which shall include, for all
purposes of this Section 10, without limitation, attorneys' fees and any and all
expense 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 (A) in any
registration statement, preliminary prospectus, or final prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
relating to the sale of any of the Registrable Securities, or (B) in any
application or other document or communication (in this Section 10 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 any of the Registrable Securities
under the securities or blue sky laws thereof or filed with the Commission or
any securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company with respect to
such Eligible Holder by or on behalf of such person expressly for inclusion in
any registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained
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<PAGE>
herein or in any of the Notes. The foregoing agreement to indemnify shall be in
addition to any liability the Company may otherwise have, including liabilities
arising under any of the Warrants.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (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 in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability under this Section 10(a) unless the Company shall
have been materially prejudiced by such failure or relieve the Company from any
liability other than pursuant to this Section 10(a)) and the Company 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 or parties shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of such action or the Company shall not have
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 the Company, in any of which events such
fees and expenses shall be borne by the Company and the Company shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties. Anything in this Section 10 to the contrary notwithstanding,
the Company shall not be liable for any settlement of any such claim or action
effected without its written consent, which shall not be unreasonably withheld.
The Company agrees promptly to notify the Eligible Holders of the commencement
of any litigation or proceedings against the Company or any of its officers or
directors in connection with the sale of any Registrable Securities or any
preliminary prospectus, prospectus, registration statement, or amendment or
supplement thereto, or any application relating to any sale of any Registrable
Securities.
(b) The Holder agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who shall
have signed any registration statement covering Registrable Securities held by
the Holder, 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, and its
or their respective counsel, to the same extent as the foregoing indemnity from
the Company to the Eligible Holders in Section 10(a), but only with respect to
statements or omissions, if any, made in any
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registration statement, preliminary prospectus, or final prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
or in any application, in reliance upon and in conformity with written
information furnished to the Company with respect to the Holder by or on behalf
of the Holder expressly for inclusion in any such registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be. If any action shall be
brought against the Company or any other person so indemnified based on any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, and in respect of which
indemnity may be sought against the Holder pursuant to this Section 10(b), the
Holder shall have the rights and duties given to the Company, and the Company
and each other person so indemnified shall have the rights and duties given to
the indemnified parties, by the provisions of Section 10(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof) 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 Warrant 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
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the Registrable
Securities included in such registration in the aggregate (including for this
purpose any contribution by or on behalf of an indemnified party), as a second
entity, shall contribute to the losses, liabilities, claims, damages, and
expenses whatsoever to which any of them may be subject, on the basis of
relevant equitable considerations such as the relative fault of the Company and
such Eligible Holders in connection with the facts which resulted in such
losses, liabilities, claims, damages, and expenses. 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 such Eligible Holders, 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
Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Eligible Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Eligible Holders and the
other indemnified parties were treated as one entity for such purpose) or by any
other method of allocation that does not reflect the equitable considerations
referred to in this Section 10(c). In no case shall any Eligible
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Holder be responsible for a portion of the contribution obligation imposed on
all Eligible Holders in excess of its pro rata share based on the number of
shares of Common Stock owned (or which would be owned upon exercise of all
Registrable Securities) by it and included in such registration as compared to
the number of shares of Common Stock owned (or which would be owned upon
exercise of all Registrable Securities) by all Eligible Holders and included in
such registration. 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 representation. For purposes of
this Section 10(c), each person, if any, who controls any Eligible Holder within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and
each officer, director, partner, employee, agent, and counsel of each such
Eligible Holder or control person shall have the same rights to contribution as
each Eligible Holder or control person 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, each officer of the Company who shall have signed any such
registration statement, each director of the Company, and its or their
respective counsel shall have the same rights to contribution as the Company,
subject in each case to the provisions of this Section 10(c). Anything in this
Section 10(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 10(c) is intended to supersede any
right to contribution under the Act, the Exchange Act or otherwise.
11. Unless registered pursuant to the provisions of Section 9
hereof, the Warrant Shares issued upon exercise of this Warrant shall be subject
to a stop transfer order and the certificate or certificates evidencing such
Warrant Shares shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY
BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES
MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS."
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12. Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of any Warrant (and upon surrender of
any Warrant if mutilated), the Company shall execute and deliver to the Holder
thereof a new Warrant of like date, tenor, and denomination.
13. The Holder of any Warrant shall not have solely on account of
such status, any rights of a stockholder of the Company, either at law or in
equity, or to any notice of meetings of stockholders or of any other proceedings
of the Company, except as provided in this Warrant.
14. As a condition precedent to registering the shares underlying
the Warrants, a Holder shall be required to execute a lock-up agreement the
terms of which shall require the Holder to refrain from offering for sale,
selling, soliciting an offer to buy, contracting to sell, granting any option
for the sale of or otherwise transferring or disposing of, directly or
indirectly, any shares of Common Stock underlying the Warrant for a period of 18
months from the date of Company's initial public offering.
15. This Warrant has been negotiated and consummated in the State of
New York and shall be construed in accordance with the laws of the State of New
York applicable to contracts made and performed within such State, without
regard to principles governing conflicts of law.
16. The Company irrevocably consents to the jurisdiction of the
courts of the State of New York and of any federal court located in such State
in connection with any action or proceeding arising out of or relating to this
Warrant, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Warrant, or a breach of this Warrant or any such
document or instrument. In any such action or proceeding, the Company waives
personal service of any summons, complaint or other process and agrees that
service thereof may be made in accordance with Section D(3) of the Subscription
Agreement. Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the attorneys for the parties to such action
or proceeding, the Company shall appear to answer such summons, complaint or
other process. Should the Company so served fail to appear or answer within such
30-day period or such extended period, as the case may be, the Company shall be
deemed in default and judgment may be entered against the Company for the amount
as demanded in any summons, complaint or other process so served.
Dated: , 1997
CELERITY SYSTEMS, INC.
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By:
-----------------------------------
Name:
Title:
[Seal]
- ------------------------------------
Secretary
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FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, _____________________ hereby sells, assigns, and
transfers unto _________________ a Warrant to purchase __________ shares of
Common Stock, par value $.001 per share, of Celerity Systems, Inc. (the
"Company"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint ______________________________
attorney to transfer such Warrant on the books of the Company, with full power
of substitution.
Dated: _________________
Signature:___________________________
NOTICE
The signature on the foregoing Assignment must correspond to the
name as written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
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To: Celerity Systems, Inc.
9501 Executive Park Drive
Knoxville, Tennessee 37923
CASH EXERCISE FORM
The undersigned hereby exercises his or its rights to purchase
_______ Warrant Shares covered by the within Warrant and tenders payment
herewith in the amount of $________ in accordance with the terms thereof, and
requests that certificates for such securities be issued in the name of, and
delivered to:
-----------------------------------------
-----------------------------------------
-----------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: Name:
-------------------------- ---------------------------------
(Print)
Address:
------------------------------
------------------------------
------------------------------
--------------------------------------
(Signature)
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To: Celerity Systems, Inc.
9501 Executive Park Drive
Knoxville, Tennessee 37923
CASHLESS EXERCISE FORM
(To be executed upon conversion of the attached Warrant)
The undersigned hereby irrevocably elects to surrender its Warrant for the
number of Warrant Shares as shall be issuable pursuant to the cashless exercise
provisions of Section 1 of the within Warrant, in respect of ___________________
Warrant Shares underlying the within Warrant, and requests that certificates for
such Warrant Shares be issued in the name of and delivered to:
-----------------------------------------
-----------------------------------------
-----------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the shares exchangeable
or purchasable under the within Warrant, that a new Warrant for the balance of
the Warrant Shares covered by the within Warrant be registered in the name of,
and delivered to, the undersigned at the address stated below.
Dated: Name:
-------------------------- ---------------------------------
(Print)
Address:
------------------------------
------------------------------
------------------------------
--------------------------------------
(Signature)
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Exhibit 4.8
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
No. RIGHT TO PURCHASE SHARES OF COMMON
STOCK OF CELERITY SYSTEMS, INC.
CELERITY SYSTEMS, INC.
Common Stock Purchase Warrant
CELERITY SYSTEMS, INC., a Tennessee corporation (the"Company"), hereby
certifies that, for value received ____________, is entitled, subject to the
terms set forth below, to purchase from the Company at any time or from time to
time before 5:00 P.M., New York City time on May 31, 1998, such number of fully
paid and nonassessable shares of the Common Stock, $.001 par value (the "Common
Stock"), of the Company as shall be determined by dividing the original
principal amount of the Short-Term Promissory Note issued by the Company to
____________ under date of November 30, 1995 ("Note") by $1.96 at a purchase
price of $1.96 per share, subject to adjustment as provided below (the "Exercise
Price"). No fractional shares of Common Stock will be issued. The Company will
promptly notify each holder of the Warrant of all adjustments to the Exercise
Price.
This Warrant is one of the Common Stock Purchase Warrants (the "Warrants")
evidencing the right to purchase shares of Common Stock of the Company, issued
by the Company to those persons to whom the Company has issued its Short-Term
Promissory Notes under date of November 30, 1995 ("Notes").
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" shall include Celerity Systems, Inc. and any
corporation which shall succeed or assume the obligations of the Company
hereunder.
(b) The term "Common Stock" includes (i) the Company's Common Stock, $.001
par value per share, as authorized on the date hereof, (ii) any other capital
stock of any class or classes (however designated) of the Company, authorized on
or after such date, the holders of which shall have the right, without
limitation as to amount, either to all or to a share of the balance of current
dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily, in the absence of contingencies, be entitled to vote for the
election of a majority of directors of the Company (even though the right so
<PAGE>
to vote has been suspended by the happening of such a contingency), and (iii)
any other securities into which or for which any of the securities described in
(i) or (ii) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
1. Exercise of Warrant.
1.1. Full Exercise. This Warrant may be exercised in full by the holder
hereof by surrender of this Warrant, with the form of subscription at the end
hereof duly executed by such holder, to the Company at its principal office,
accompanied by payment, in cash or by certified or official bank check payable
to the order of the Company, in the amount obtained by multiplying the number of
shares of common stock for which this Warrant is therein exercisable or
accompanied by tender to the Company of the Note marked paid in full, as the
case may be.
1.2. Partial Exercise. This Warrant may be exercised in part by surrender
of this Warrant in the manner and at the place provided in Section 1.1 except
that the amount payable by the holder on such partial exercise shall be the
amount obtained by dividing (a) the amount of principal and interest paid on the
Note which the holder designates to be applied to purchase Shares of Common
Stock under this Warrant by (b) the Exercise Price then in effect.
1.3. Trustee for Warrant Holders. In the event that a bank or trust
company shall have been appointed as trustee for the holder of the Warrant
pursuant to Section 3.2, such bank or trust company shall have all the powers
and duties of a warrant agent appointed pursuant to Section 11 and shall accept,
in its own name for the account of the Company or such successor person as may
be entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
2. Delivery of Share Certificates on Exercise. As soon as practicable
after the exercise of this Warrant in full or in part, and in any event within
30 days thereafter, the Company at its expense (including the payment by it of
any applicable issue taxes) will cause to be issued in the name of and delivered
to the holder hereof, or as such holder (upon payment by such holder of any
applicable transfer taxes) may direct, a certificate or certificates for the
number of fully paid and nonassessable shares of Common Stock to which such
holder shall be entitled on such exercise.
3. Adjustment for Reorganization, Consolidation or Merger.
3.1. Reorganization, Consolidation or Merger. In case at any time or from
time to time the Company shall (a) effect a reorganization, (b) consolidate with
or merge into any other person, or (c) transfer all or substantially all of its
properties or assets to any other person under any plan or arrangement
contemplating the dissolution of the Company, then, in each such case, the
holder of this Warrant, on the exercise hereof as provided in Section 1 at any
time after the consummation of such reorganization, consolidation or merger or
the effective date of such dissolution, as the case may be, shall receive, in
lieu of the Common Stock issuable on such exercise prior to such consummation or
such effective date, the shares and other securities and property (including
cash) to which such holder would have been entitled upon such consummation
<PAGE>
or in connection with such dissolution, as the case may be, if such holder had
so exercised this Warrant, immediately prior thereto, all subject to further
adjustment thereafter as provided in Section 4.
3.2. Dissolution. In the event of any dissolution of the Company following
the transfer of all or substantially all of its properties or assets, the
Company, prior to such dissolution, shall at its expense deliver or cause to be
delivered the shares and other securities and property (including cash, where
applicable) receivable by the holder of the Warrant after the effective date of
such dissolution pursuant to this Section 3 to a bank or trust company having
its principal office in New York City, New York, as trustee for the holder of
the Warrant and shall promptly notify each holder of the Warrants of the
occurrence of any of the events specified in this Section 3.
3.3. Continuation of Terms. Upon any reorganization, consolidation, merger
or transfer (and any dissolution following any transfer) referred to in this
Section 3, this Warrant shall continue in full force and effect and the terms
hereof shall be applicable to the shares of Common Stock and other securities
and property receivable on the exercise of this Warrant after the consummation
of such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such shares or other securities, including, in
the case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant.
4. Adjustments for Share Dividends and Share Splits. In the event that the
Company shall (i) issue additional shares of the Common Stock as a dividend or
other distribution, (ii) subdivide its outstanding shares of Common Stock, or
(iii) combine its outstanding shares of the Common Stock into a smaller number
of shares of the Common Stock, then, in each such event, the Exercise Price
shall, simultaneously with the happening of such event, be adjusted by
multiplying the then prevailing Exercise Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such event and the denominator of which shall be the number of shares
of Common Stock outstanding immediately after such event, and the product so
obtained shall thereafter be the Exercise Price then in effect. The Exercise
Price, as so adjusted, shall be readjusted in the same manner upon the happening
of any successive event or events described herein in this Section 4. The holder
of this Warrant shall thereafter, on the exercise hereof as provided in Section
1, be entitled to receive that number of shares of Common Stock determined by
multiplying the number of shares of Common Stock which would otherwise (but for
the provisions of this Section 4) be issuable on such exercise, by a fraction of
which (i) the numerator is the Exercise Price which would otherwise (but for the
provisions of this Section 4) be in effect, and (ii) the denominator is the
Exercise Price in effect on the date of such exercise. No adjustment shall be
made upon the conversion of any Series of Preferred Stock into Common Stock.
5. No Impairment. The Company will not, by amendment of its Restated
Charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of
<PAGE>
any of the terms of this Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the holder of this
Warrant. Without limiting the generality of the foregoing, the Company (a) will
not increase the par value of any shares of stock receivable on the exercise of
the Warrant above the amount payable therefor on such exercise, and (b) will
take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
stock on the exercise of this Warrant from time to time outstanding.
6. Certificate as to Adjustments. In each case of any adjustment or
readjustment in the shares of Common Stock issuable on the exercise of this
Warrant, the Company at its expense will compute such adjustment or readjustment
in accordance with the terms of this Warrant and prepare a certificate setting
forth such adjustment or readjustment and showing the facts upon which such
adjustment or readjustment is based. The Company will forthwith mail a copy of
each such certificate to any holder of this Warrant, and will, on the written
request at any time of any holder of this Warrant, furnish to such holder a like
certificate setting forth the Exercise Price at the time in effect and showing
how it was calculated.
7. Notices of Record Date. In the event of
(a) any taking by the Company of a record of the holders of any
class or securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company or any transfer of all
or substantially all the assets of the Company to or consolidation or merger of
the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or
(d) any proposed issue or grant by the Company of any shares of
stock of any class or any other securities, or any right or option to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities (other than the issue of Common Stock on the exercise of the
Warrants, issuance of Common Stock on the conversion of the Class A Preferred
Stock or Class B Preferred Stock or the issue of Common Stock or grant of
options to purchase Common Stock to employees of, or consultants to the Company
with the approval of a majority of the representatives of the holders of the
Series A Preferred Stock).
then and in each such event, the Company will promptly mail or cause to be
mailed to the holder of this Warrant a notice specifying (i) the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such
<PAGE>
dividend, distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock shall be entitled
to exchange their shares of Common Stock for securities or other property
deliverable on such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up, and
(iii) the amount and character of any shares or other securities, or rights or
options with respect thereto, proposed to be issued or granted, the date of such
proposed issue or grant and the persons or class of persons to whom such
proposed issue or grant is to be offered or made. Such notice shall be mailed at
least 20 days prior to the date specified in such notice on which any such
action is to be taken.
8. Reservation of Shares Issuable on Exercise of Warrant. The Company will
at all times reserve and keep available, solely for issuance and delivery on the
exercise of the Warrant, all shares of Common Stock from time to time issuable
on the exercise of the Warrant.
9. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such loss, theft or destruction of this Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, on surrender
and cancellation of such Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
10. Warrant Agent. The Company may, by written notice to each holder of a
Warrant, appoint an agent for the purpose of issuing Common Stock on the
exercise of the Warrant pursuant to Section 1 and replacing this Warrant
pursuant to Section 9, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such agent.
11. Remedies. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
12. Negotiability; Restrictions on Transfer; Warrant Holder Not Deemed
Shareholder. This Warrant is issued upon the following terms, to all of which
each holder or owner hereof by the taking hereof consents and agrees:
(a) No holder of this Warrant shall, as such, be entitled to vote or
to receive dividends or to be deemed the holder of Common Stock that may at any
time be issuable upon exercise of the Warrant for any purpose whatsoever, nor
shall anything contained herein be construed to confer upon such holder, as
such, any of the rights of a shareholder of the Company or any right to vote for
the election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any
<PAGE>
recapitalization, issue or reclassification of shares, change of par value or
change of shares to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
subscription rights, until such holder shall have exercised the Warrant and been
issued shares of Common Stock in accordance with the provisions hereof; or
(b) Neither this Warrant nor any shares of Common Stock purchased
pursuant to this Warrant shall be registered under the Securities Act of 1933.
The certificates evidencing the shares of Common Stock issued on the exercise of
the Warrant shall bear a legend to the effect that the shares evidenced by such
certificates have not been registered under the Securities Act of 1933.
13. Registration Rights. The holder of this Warrant is entitled to have
the Company's Common Stock, $.001 par value, registered as that term is defined
in, and pursuant to the provisions set forth in Section 6.1 of, the Preferred
Stock and Warrant Purchase Agreement between the Company and those Purchasers
named therein dated as of May 17, 1995.
14. Notices. All notices and other communications from the Company to the
holder of this Warrant shall be mailed by first class registered or certified
mail, postage prepaid, at such address as may have been furnished to the Company
in writing by such holder or, until any such holder furnishes to the Company an
address, then to, and at the address of, the last holder of this Warrant who has
so furnished an address to the Company.
15. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of the State of Tennessee applicable to agreements made and
to be performed therein. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect any of the terms hereof.
This Warrant is being executed as an instrument under seal. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforcability of any other provisions.
16. Expiration. The right to exercise this Warrant shall expire on the
first to occur of (a) 5:00 P.M., New York City time, May 31, 1998 or (b) the
issuance by the Company of shares of its Common Stock in a public offering at an
aggregate purchase price of $5,000,000 or more and at a Company valuation of at
least $10,000,000.
Dated: November 30, 1995 CELERITY SYSTEMS, INC.
By:___________________________
Title: President
<PAGE>
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO CELERITY SYSTEMS, INC.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, $5,000 shares
of Common Stock of CELERITY SYSTEMS, INC. and herewith makes payment of
$______________ therefor, and requests that the certificates for such shares be
issued in the name of, and delivered to, ____________, whose address is .
Dated:
--------------------------------------------
(Signature must conform to name of holder as
specified on the face of the Warrant)
--------------------------------------------
(Address)
<PAGE>
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For valued received, the undersigned hereby sells, assigns and transfers
unto _________________ the right represented by the within Warrant to purchase
$5,000 shares of Common Stock of CELERITY SYSTEMS, INC. to which the within
Warrant relates, and appoints Attorney to transfer such rights on the books of
CELERITY SYSTEMS, INC. with full power of substitution in the premises.
Dated:
--------------------------------------------
(Signature must conform to name of holder as
specified on the face of the Warrant)
--------------------------------------------
(Address)
Signed in the presence of:
- --------------------------
<PAGE>
EXHIBIT 4.9
CELERITY SYSTEMS, INC.
9051 EXECUTIVE PARK DRIVE
SUITE 302
KNOXVILLE, TENNESSEE 37923
July 15, 1997
Mahmoud Youssefi
1611 LeConte Drive
Maryville, TN 37801
Dear Mr. Youssefi:
We have agreed to purchase, and you have agreed to sell to us, 600,000
shares (the "Shares") of the common stock, $.001 par value per share ("Common
Stock"), of Celerity Systems, Inc., a Tennessee corporation (the "Company"),
owned by you for $.20 per share. Such transaction is being consummated in part,
to enable the Company to obtain additional financing. The Company is
contemplating a financing (the "Bridge Financing"), consisting of the sale of
notes and warrants, to be followed by a public offering (the "Contemplated
Public Offering") of Common Stock.
This is to confirm the agreement between us concerning the purchase and
sale of the Shares and the other matters referred to herein.
1. Sale and Purchase of the Shares; Other Transactions.
(a) Following the execution of this Agreement and within 24 hours
after the Company receives a copy, executed by you, of the agreement not to
dispose of Common Stock in the form attached as Annex I hereto (the "Lock-Up
Agreement"), which, except for the proviso at the end of the first paragraph
thereof, the Company represents is the same Lock-Up Agreement as the Company's
officers and directors will execute, the Company will (i) pay you $11,458.33 as
payment in full of all amounts allegedly due to you as of the date hereof under
the Termination Agreement (the "Termination Agreement"), dated as of April 5,
1997, between the Company and you, and (ii) as payment in full for all
unreimbursed business expenses, including without limitation the alleged use of
your credit card by the Company, the Company shall deliver to you a check for
$7,400, provided the Company will also, as of the closing of the Bridge
Financing, pay any amounts due on your Company American Express Card related to
valid business expenditures upon submission of appropriate documentation as to
the valid business purpose of such expenditures,
1
<PAGE>
provided, further, that if such documentation is not submitted by you by such
closing you shall be deemed to have agreed that no such amounts are outstanding.
(b) The Company will give you at least 24 hours notice of the
closing of the Bridge Financing. Concurrently with the closing of the Bridge
Financing, in accordance with the terms and conditions hereof and for the
consideration set forth herein, you shall sell, transfer, convey and assign to
the Company and the Company shall purchase from you, all of your right, title
and interest in the Shares;
(c) Concurrently with the closing of the Bridge Financing, against
delivery of the consideration provided for in subparagraph 1(d) below, you shall
deliver to the Company a stock certificate, or certificates, representing the
Shares duly endorsed in blank, or with stock powers annexed thereto duly
executed in blank, in proper form for transfer of the Shares to the Company upon
delivery;
(d) Concurrently with the closing of the Bridge Financing; (i) as
payment in full for the Shares, the Company shall deliver to you a check for
$120,000; and (ii) as payment in full for all its remaining obligations under
the Termination Agreement, the Company shall deliver to you a check for
$53,291.65, except for the $15,458.33 referred to in (e) below.
(e) Upon the earlier of 150 days after the closing of the Bridge
Financing or the closing of the Contemplated Public Offering, the Company shall
deliver to you a check for $15,458.33.
(f) If the Contemplated Public Offering is consummated, the Company
will, within 30 days after such consummation, pay off the remaining balance of
all amounts due under leases guaranteed by you and described on Annex II.
2. Representations and Warranties. In order to induce the Company to enter
into this Agreement and to purchase the Shares, you make the following
representations and warranties as of the date hereof, which representations and
warranties shall be true and correct as of the closing of the Bridge Financing
and shall survive the execution and delivery of this Agreement and the delivery
of the Shares at the closing of the Bridge Financing:
(a) The Shares are fully paid and nonassessable, and are owned by
you free and clear of any liens, claims or encumbrances of any kind; and
(b) There are no existing agreements, options, calls, commitments,
trusts, voting or otherwise, or any rights of any kind whatsoever, granting to
any person or entity, any interest in or rights as to, any of the Shares, or the
right to purchase any Common Stock from you at any time or upon the happening of
any event.
(c) You acknowledge that you have been advised that the Company is
currently
2
<PAGE>
contemplating, and has had discussions with an investment banking firm as to,
the Contemplated Public Offering of Common Stock expected to be at $7.50 per
share (after giving effect to a reverse split).
(d) By virtue of your position, you acknowledge you have access to
the same information as to the Company as would be in a Registration Statement
under the Securities Act of 1933.
3. This Agreement shall be construed by and interpreted and enforced in
accordance with the laws of the State of New York as applied to contracts made
and fully performed in such state. No modification or waiver of any of the terms
of this Agreement shall be effective unless in writing and signed by all parties
hereto.
4. This Agreement is the entire agreement between us and supersedes any
other agreement oral or written between us relating to the same subject matter,
except that, other than as set forth in Section 1(d), the Termination Agreement
shall remain in full force and effect.
5. This Agreement shall be null and void and of no further force or effect
if the closing of the Bridge Financing has not occurred by September 1, 1997.
If the foregoing correctly sets forth our agreement, please so
indicate in the space provided below for that purpose and sign the attached
Lock-Up Agreement, whereupon this letter shall constitute a binding agreement
between us.
Very truly yours,
/s/ Kenneth D. Van Meter
----------------------------------
Kenneth D. Van Meter,
Chief Executive Officer
Accepted and Agreed to
this 16th day of July 1997
/s/ Mahmoud Youssefi
- -----------------------------
Mahmoud Youssefi
3
<PAGE>
Annex I
August 6, 1997
Celerity Systems, Inc.
9051 Executive Park Drive
Suite 302
Knoxville, TN 37923
Hampshire Securities Corporation
640 Fifth Avenue
New York, New York 10019
Ladies and Gentlemen:
In order to induce Hampshire Securities Corporation (the "Underwriter") to
enter into an underwriting agreement with respect to the proposed public
offering (the "Offering") of shares (the "Shares") of common stock, par value
$.001 per share (the "Common Stock"), of Celerity Systems, Inc. (the "Company"),
pursuant to a registration statement on Form SB-2, as the same may be amended
from time to time (the "Registration Statement"), the undersigned agrees for the
benefit of the Company and the Underwriter that, for a period of twelve months
from the date (the "Effective Date") on which the Registration Statement shall
have become effective under the Securities Act of 1933, as amended, the
undersigned will not and will not cause any of its affiliates to, without the
prior written consent of the Underwriter, directly or indirectly, offer, sell,
contract to sell, pledge, grant any option for the sale of (including, without
limitation, any short sale), or otherwise dispose of or transfer any shares of
(a) Common Stock, (b) any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for the shares of Common
Stock, and/or (c) any securities referred to in clause (a) and/or (b) above
which may be deemed to be beneficially owned by the undersigned in accordance
with applicable rules and regulations of the Securities and Exchange Commission;
provided, however, that the undersigned shall be released from the foregoing
restrictions (i) on the date that is six months from the Effective Date, solely
with respect to one-third of the shares of Common Stock owned by the undersigned
and issued upon (A) the conversion of the shares of the Company's Series A
Preferred Stock and Series B Preferred Stock, each par value $.01 per share,
owned by the undersigned on the date hereof and (B) the exercise of Warrants
owned by the undersigned on the date hereof to purchase shares of Common Stock
(the shares of Common
4
<PAGE>
Stock referred to in clauses (A) and (B) being collectively defined as the
"Underlying Shares"); and (ii) on the date that is nine months from the
Effective Date, solely with respect to one-third of the Underlying Shares.
In order to enable you to enforce the aforesaid covenants, the undersigned
hereby consents to the placing of legends upon, and stop-transfer orders with
the transfer agent of the Company's securities with respect to, any shares of
Common Stock registered in the undersigned's name or beneficially owned by the
undersigned.
The Company agrees to, and to cause the transfer agent for the Common
Stock to, place such legends and stop-transfer orders and the Company shall not
authorize the transfer agent to transfer any shares without the consent of the
Underwriter as set forth herein.
The undersigned understands that the Company and the Underwriter will rely
upon this letter if they proceed with the Offering. This letter shall be void if
the Offering does not take place.
The provisions of this agreement shall be binding upon the undersigned and
its successors and assigns.
Very truly yours,
-------------------------
Accepted and agreed as of the date first above written:
CELERITY SYSTEMS, INC.
By:______________________________
Name:
Title:
HAMPSHIRE SECURITIES CORPORATION
By:______________________________
Name:
Title:
5
<PAGE>
Annex II
Celerity Systems, Inc. Leases with Mo Youssefi as Personal Guarantor
Lessor Description 11/1/97 Payoff
- ------ ----------- --------------
AT&T Capital Corp. Computer/Peripheral/Generic $ 2,953.22
AT&T Capital Corp. Injection Mold Machine* $ 12,759.29
AT&T Capital Corp. Macintosh Printer $ 2,264.96
American Business Credit Canon 7000 Fax Machine $ 2,667.60
-----------
Total $ 20,645.07
* This is the description on the lease invoice. This is a misnomer. In the lease
detail the correct description is 1 SSA Testers Platform, 1 SSA Emulator Card
Set, 2 SSA Allicat Hard Drives.
If the IPO proceeds are not released to Celerity Systems, Inc. prior to
11/30/97, then the payoff amounts will decrease.
6
<PAGE>
EXHIBIT 4.10
CELERITY SYSTEMS, INC.
9051 EXECUTIVE PARK DRIVE
SUITE 302
KNOXVILLE, TENNESSEE 37923
July 11, 1997
Dr. Fenton Scruggs
c/o Celerity Systems, Inc.
9051 Executive Park Drive
Suite 302
Knoxville, Tennessee 37923
Dear Mr. Scruggs:
We have agreed to purchase, and you have agreed to sell to us, 200,000
shares (the "Shares") of the common stock, $.001 par value per share ("Common
Stock"), of Celerity Systems, Inc., a Tennessee corporation (the "Company"),
owned by you for $.20 per share. Such transaction is being consummated in part,
to enable the Company to obtain additional financing. The Company is
contemplating a financing (the "Bridge Financing"), consisting of the sale of
notes and warrants, to be followed by a public offering of Common Stock.
This is to confirm the agreement between us concerning the purchase and
sale of the Shares.
1. Sale and Purchase of the Shares.
(a) The Company will give you at least 24 hours notice of the
closing of the Bridge Financing. Concurrently with the closing of the Bridge
Financing, in accordance with the terms and conditions hereof and for the
consideration set forth herein, you shall sell, transfer, convey and assign to
the Company and the Company shall purchase from you, all of your right, title
and interest in the Shares;
(b) Concurrently with the closing of the Bridge Financing, against
delivery of the consideration provided for in subparagraph 1(c) below, you shall
deliver to the Company a stock certificate, or certificates, representing the
Shares duly endorsed in blank, or with stock powers annexed thereto duly
executed in blank, in proper form for transfer of the Shares to the Company upon
delivery;
1
<PAGE>
(c) Concurrently with the closing of the Bridge Financing, as
payment in full for the Shares, the Company shall deliver to you a check for
$40,000.
2. Representations and Warranties. In order to induce the Company to enter
into this Agreement and to purchase the Shares, you make the following
representations and warranties as of the date hereof, which representations and
warranties shall be true and correct as of the closing of the Bridge Financing
and shall survive the execution and delivery of this Agreement and the delivery
of the Shares at the closing of the Bridge Financing:
(a) The Shares are fully paid and nonassessable, and are owned by
you free and clear of any liens, claims or encumbrances of any kind; and
(b) There are no existing agreements, options, calls, commitments,
trusts, voting or otherwise, or any rights of any kind whatsoever, granting to
any person or entity, any interest in or rights as to, any of the Shares, or the
right to purchase any Common Stock from you at any time or upon the happening of
any event.
(c) You acknowledge that you have been advised that the Company is
currently contemplating, and has had discussions with an investment banking firm
as to, a public offering of Common Stock expected to be at $7.50 per share
(after giving effect to a reverse split).
(d) By virtue of your position, you acknowledge you have access to
the same information as to the Company as would be in a Registration Statement
under the Securities Act of 1933.
3. This Agreement shall be construed by and interpreted and enforced in
accordance with the laws of the State of New York as applied to contracts made
and fully performed in such state. No modification or waiver of any of the terms
of this Agreement shall be effective unless in writing and signed by all parties
hereto.
4. This Agreement is the entire agreement between us and supersedes any
other agreement oral or written between us relating to the same subject matter.
5. This Agreement shall be null and void and of no further force or effect
if the closing of the Bridge Financing has not occurred by September 1, 1997.
2
<PAGE>
If the foregoing correctly sets forth our agreement, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement between us.
Very truly yours,
/s/ Kenneth D. Van Meter
---------------------------------
Kenneth D. Van Meter,
Chief Executive Officer
Accepted and Agreed to
this 11th day of July 1997
/s/ Dr. Fenton Scruggs
- ---------------------------
Dr. Fenton Scruggs
3
<PAGE>
Exhibit 10.2
EMPLOYMENT, NON-SOLICITATION, CONFIDENTIALITY
AND
NON-COMPETITION AGREEMENT
This Employment, Non-Solicitation, Confidentiality and Non-Competition
Agreement (the "Agreement") is entered into as of May 1, l995 (the "Effective
Date"), between Celerity Systems, Inc., a Tennessee corporation (the "Company"),
and Mr. Glenn West (the "Executive").
W I T N E S S E T H:
WHEREAS, during the period prior to the Effective Date the Executive has
been employed as a senior executive officer of the Company pursuant to written
or oral agreements (the "Prior Agreements"), with the Company; and
WHEREAS, the Company desires to continue to employ the Executive as Vice
President and Secretary of the Company, and the Executive desires to continue
his employment with the Company, and to serve the Company in the capacity of
Vice President and Secretary;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby mutually acknowledged, the Company and the
Executive hereby agree as follows:
1. Employment
1.1 The Executive shall continue to serve as Vice President and Secretary
of the Company; and the Executive shall continue as a Director of the Company.
The Executive shall have such duties, responsibilities and authority as are
consistent with those positions.
1.2 The Executive, so long as he is employed hereunder, shall devote his
full professional time and attention to the services required of him as an
employee and director of the Company, except for paid vacation time of four (4)
weeks during each calendar year, subject to the Company's existing carry-over
vacation policy, and any reasonable periods of absence not to exceed a total of
three months in any calendar year due to sickness, personal injury or other
disability, shall use his best efforts to promote the interests of the Company,
and shall discharge his responsibilities in a diligent and faithful manner,
consistent with sound business practices.
1.3 The Executive shall report to the Board of Directors of the Company.
2. Term
The term of the Executive's employment under this Agreement shall be for a
term of five (5) years from the Effective Date, unless terminated sooner as
hereinafter provided (the "Employment Term").
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3. Base Salary
The Company shall pay the Executive a salary during the Employment Term,
in equal installments no less frequently than monthly, in an annual amount equal
to not more than $125,000 (such amount as adjusted, from time to time, the
"Maximum Salary"). The Executive's Maximum Salary will be reviewed annually, and
shall be adjusted to reflect, among other things, cost of living, and be
increased to reflect achievement of performance criteria set by the Board of
Directors, all such adjustments and increases to be approved by the Board of
Directors of the Company, including the approval of at least one director who is
not an employee of, or a consultant to the Company.
4. Benefits
The Executive shall be entitled to participate in or receive benefits
under any employee benefit plan, arrangement or perquisite made available by the
Company now or in the future to its employees generally, or to its executives
and key management employees as a group. Nothing paid to the Executive under any
such plan, arrangement or perquisite presently in effect or made available in
the future shall be deemed to be in lieu of the Maximum Salary payable to the
Executive pursuant to this Agreement. Any payments or benefits payable to the
Executive hereunder in respect of any year during which the Executive is
employed by the Company for less than the entire such year shall, unless
otherwise provided in the applicable plan or arrangement, be prorated in
accordance with the number of days in such year during which he is so employed.
5. Business Expenses
The Executive shall be entitled to receive prompt reimbursement for all
reasonable and customary expenses incurred by him in performing services
hereunder during the Employment Term; provided that such expenses are incurred
and accounted for in accordance with the policies and procedures established by
the Company and approved by the Board of Directors of the Company.
6. Termination
6.1 The Company may, upon giving the Executive thirty (30) days' notice,
terminate the Executive's employment for Cause (as defined below) or for
Disability (as defined below), subject to all provisions of this Agreement.
6.2 If the Executive is terminated for Cause, then all of the benefits to
which he was entitled during the Employment Term shall cease upon the date of
termination of his employment. If the Executive is terminated for Disability,
then all of the benefits to which he was entitled during the Employment Term
shall cease 90 days following the date of termination of his employment.
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6.3 For the purposes of this Agreement,
(a) the term "Cause" shall mean any of the following:
(i) continued failure by the Executive to perform
substantially his duties on behalf of the Company (other than any such failure
resulting from incapacity due to physical or mental illness or death), if the
Executive fails to remedy that breach within thirty (30) days of Company's
notice to the Executive of such breach; or (ii) material breach of any other
provision of this Agreement by the Executive, if the Executive fails to remedy
that breach within thirty (30) days of Company's notice to the Executive of such
breach; or (iii) any act of fraud, misappropriation, dishonesty, embezzlement or
similar conduct against the Company or any affiliate, or conviction of the
Executive for a felony or any crime involving moral turpitude (which conviction,
due to the passage of time or otherwise, is not subject to further appeal).
(b) the term "Disability" shall mean such physical or mental
disability or incapacity of the Executive as, in the good faith determination of
the Board, has prevented him from performing substantially all of his duties
hereunder during any period of 60 consecutive days or 60 days in any six month
period.
6.4 Upon termination of the Executive's employment for any reason, the
Executive shall resign from the Board of Directors of the Company and of any
subsidiary; such resignations shall be effective not later than the effective
date of termination of his employment.
6.5 The failure of the Company to nominate the Executive for election to
its Board of Directors at any shareholder meeting following the Effective Date,
or the failure of the Executive to be elected by the Company's shareholders to
the Board of Directors of the Company, shall not, absent other action by the
Company, constitute a termination of the Executive's employment as an executive
officer of the Company.
7. No Solicitation; Confidentiality; Competition
7.1 During the Restricted Period (defined below), neither the Executive
nor any Executive-Controlled Person (defined below) will, without the prior
written consent of the Board of Directors of the Company, directly or indirectly
solicit for employment, employ in any capacity or make an unsolicited
recommendation to any other person that it employ or solicit for employment any
person who is or was, at any time during the 12-month period prior to the
Restricted Period or during the Restricted Period, an officer, executive or key
employee of the Company or of any affiliate of the Company (any such officer,
executive or key employee being referred to hereafter as a "Company
Professional"). As used in this Agreement, the term "Executive-Controlled
Person" shall mean any company, partnership, firm or other entity as to which
the Executive possesses, directly or indirectly, the power to direct or cause
the direction of the management and policies of such entity, whether through the
ownership of voting securities, by contract or otherwise.
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7.2 The Executive acknowledges that, through his status as President and
Chief Executive Officer of the Company and as a director of the Company, he has,
and will have, possession of important, confidential information and knowledge
as to the business of the Company and its affiliates, including, but not limited
to, knowledge of marketing and operating strategies, licensing and other
agreements, financial results and projections, future plans, the provisions of
other important contracts entered into by the Company and its affiliates,
possible acquisitions and similar information. The Executive agrees that all of
such knowledge and information constitute a vital part of the business of the
Company and its affiliates and are by their nature trade secrets and
confidential information proprietary to the Company and its affiliates
(collectively, "Confidential Information"). The Executive agrees that he shall
not, so long as the Company remains in existence, divulge, communicate, furnish
or make accessible (whether orally or in writing or in books, articles or any
other medium) to any individual, firm, partnership or corporation, any knowledge
or information with respect to Confidential Information directly or indirectly
useful in any aspect of the business of the Company or any of its affiliates. As
used in the preceding sentence, "Confidential Information" shall not include any
knowledge or information that: (a) is or becomes available to others, other than
as a result of breach by the Executive of this Section 7.2; (b) was available to
the Executive on a nonconfidential basis prior to its disclosure to the
Executive through his status as an officer or employee of the Company or any
affiliate; or (c) becomes available to the Executive on a nonconfidential basis
from a third party (other than the Company, any affiliate or any of its or their
representatives) who is not bound by any confidentiality obligation to the
Company or any affiliate.
7.3 During the Restricted Period, neither the Executive nor any
Executive-Controlled Person will render any services, directly or indirectly, as
an employee, officer, consultant or in any other capacity, to any individual,
firm, corporation or partnership engaged in the design, development, manufacture
or marketing of CD-WorkWare and VCD software, hardware or consulting services,
interactive video servers or related products and technology or similar
activities competitive with any activities in which the Company or any of its
affiliates is engaged at any time during the Restricted Period (such activities
being herein called the "Company Business"). During the Restricted Period, the
Executive shall not, without the prior written consent of the Company, hold an
equity interest in any firm, partnership or corporation which competes with the
Company Business, except that beneficial ownership by the Executive (including
ownership by any one or more members of his immediate family and any entity
under his direct or indirect control) of less than 2% of the outstanding shares
of capital stock of any corporation which may be engaged in any of the same
lines of business as the Company Business, if such stock is listed on a national
securities exchange or publicly traded in the over-the-counter market, shall not
constitute a breach of the covenants contained in this Section 7.3.
7.4 As used in this Agreement, "Restricted Period" shall mean the period
beginning on the date of the Executive's termination of employment for any
reason and ending on the date twenty-four (24) months thereafter.
7.5 The provisions contained in this Section 7 as to the time periods,
scope of activities,
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persons or entities affected, and territories restricted shall be deemed
divisible so that, if any provision contained in this Section 7 is determined to
be invalid or unenforceable, such provisions shall be deemed modified so as to
be valid and enforceable to the full extent lawfully permitted.
7.6 The Executive agrees that the provisions of this Section 7 are
reasonable and necessary for the protection of the Company and that they may not
be adequately enforced by an action for damages and that, in the event of a
breach thereof by the Executive or any Executive-Controlled Person, the Company
shall be entitled to apply for and obtain injunctive relief in any court of
competent jurisdiction to restrain the breach or threatened breach of such
violation or otherwise to enforce specifically such provisions against such
violation, without the necessity of the posting of any bond by the Company.
8. Amendments
This Agreement may not be altered, modified or amended except by a written
instrument signed by each of the parties hereto.
9. Assignment
Neither this Agreement nor any of the rights or obligations hereunder
shall be assigned or delegated by any party hereto without the prior written
consent of the other parties; provided, however, that any payments and benefits
owed to the Executive under this Agreement shall inure to the benefit of his
heirs and personal representatives.
10. Waiver
Waiver by any party hereto of any breach or default by any other party of
any of the terms of this Agreement shall not operate as a waiver of any other
breach or default, whether similar to or different from the breach or default
waived.
11. Severability
In the event that any one or more of the provisions of this Agreement
shall be or become invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not be affected thereby.
12. Entire Agreement
This Agreement contains the entire understanding of the parties with
respect to the employment of the Executive by the Company. There are no
restrictions, agreements, promises, warranties, covenants or undertakings other
than those expressly set forth herein. This Agreement supersedes and terminates
all prior agreements, arrangements and understandings between the
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parties, whether oral or written, with respect to the employment of the
Executive, including, without limitation, the Prior Agreements referred to below
in Section 16.
13. Notices
All notices and other communications provided for in this Agreement shall
be in writing and shall be deemed to have been duly given when personally
delivered or when mailed by United States registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive, to him as follows:
Mr. Glenn West
11701 Foxford Drive
Farragut, TN 37922
With a copy to:
-----------------
-----------------
If to the Company, to it as follows:
Celerity Systems, Inc.
9051 Executive Park Drive
Suite 400
Knoxville, TN 37923
Attention: Chairman of the Board
With a copy to:
Miller & Martin
Suite 1000, Volunteer Building
832 Georgia Avenue
Chattanooga, TN 37401
Attention: Joel W. Richardson, Jr., Esq.
or to such other address or such other person as the Executive or the Company
shall designate in writing in accordance with this Section 13, except that
notices regarding changes in notices shall be effective only upon receipt.
14. Headings
Headings to Sections in this Agreement are for the convenience of the
parties only and are
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not intended to be a part of, or to affect the meaning or interpretation of,
this Agreement.
15. Governing Law
This Agreement shall be governed by the laws of the State of Tennessee
without reference to the principles of conflict of laws. Each of the parties
hereto consents to the jurisdiction of the federal and state courts of the State
of Tennessee in connection with any claim or controversy arising out of or
connected with this Agreement. Service of process in any such proceeding may be
made upon each of the parties hereto at the address of such party as determined
in accordance with Section 13 of this Agreement, subject to the applicable rules
of the court in which such action is brought.
16. Termination of Prior Agreements; Release of Rights
Upon the Effective Date, all Prior Agreements shall be terminated and of
no further force and effect. In consideration of the execution and delivery by
the Company of this Agreement, the Executive waives any rights he may have
pursuant to the Prior Agreements.
IN WITNESS WHEREOF, the Company and the Executive have caused this
Agreement to be executed as of the date first above written.
/s/ Glenn West
------------------------------
Glenn West
CELERITY SYSTEMS, INC.
By: /s/ Mahmoud Youssefi
--------------------------
Name: Mahmoud Youssefi
Title:
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Exhibit 10.3
TERMINATION AGREEMENT
This Termination Agreement (the "Agreement") is entered into as of
April 5, 1997 (the "Effective Date"), by and between CELERITY SYSTEMS, INC., A
Tennessee corporation with a principal place of business in Knoxville, Tennessee
(the "Company"), and MAHMOUD YOUSSEFI, an individual who resides in Maryville,
Tennessee ("Youssefi").
WITNESSETH
WHEREAS, during the period prior to the Effective Date, Youssefi has
been employed as President of the Company and was previously employed as the
Company's Chief Executive Officer, pursuant to the terms of an Employment,
Non-Solicitation, Confidentiality and Non-Competition Agreement dated May 1,
1995 (the "Prior Agreement"); and
WHEREAS, during the period prior to the Effective Date, Youssefi has
been an officer and director of the Company; and
WHEREAS, the parties desire Youssefi to cease being employed by the
Company and desire that Youssefi cease being an employee, officer and director
of the Company; and
WHEREAS, the parties desire to terminate the Prior Agreement; and
WHEREAS, the parties desire the terms of this Agreement to govern
the continuing relations and obligations between the Company and Youssefi and
desire this Agreement to supersede all other prior agreements between the
parties, including but not limited to the Prior Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby mutually acknowledged, the Company and Youssefi
hereby agree as follows:
1. TERMINATION OF PRIOR AGREEMENT
The Prior Agreement, dated May 1, 1995, is hereby terminated,
cancelled, rescinded and of no further force or effect.
2. PAYMENTS BY COMPANY TO YOUSSEFI
2.1 Subject to the provisions contained in Section 2.2., the Company
agrees that it will make the following payments to Youssefi:
a) The Company will pay Four Thousand Dollars ($4,000.00)
to Youssefi on the Effective Date;
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b) Beginning on the first business day of May, 1997, and on
or before the first business day of each succeeding
month to and including April, 1998, the Company will
make monthly payments to Youssefi in the amount of
Eleven Thousand Four Hundred Fifty-Eight Dollars and
Thirty-Three cents ($11,458,33);
c) On or before the first business day of May, 1998, the
Company will pay Seven Thousand Four Hundred Fifty-Eight
Dollars and Thirty- Three cents ($7,458.33) to Youssefi;
d) On or before the first business day of June, 1998, and
on or before the first business day of May, 2000, the
Company will make monthly payments to Youssefi in the
amount of Eleven Thousand Four Hundred Fifty-Eight
Dollars and Thirty-Three cents ($11,458.33).
The amounts set forth above shall be reduced by the amount of income from all
non-passive activities received by Youssefi during the term of this Agreement.
2.2 The obligation of the Company to make those payments described
in Section 2.1. above shall terminate and cease upon the occurrence of the
earliest of the following:
a) the first business day of May, 2000;
b) the date on which the Company has a registration
statement for an initial public offering of its common
stock declared effective;
c) the date on which a person or entity not a party to this
AGREEMENT makes a bona fide offer to purchase all of
Youssefi's shares of stock in the Company for the fair
market value of such shares (which in no event shall be
less than $2.00 per share), which fair market shall be
determined by Coopers & Lybrand by reference to the
procedures used in calculating fair market value for
purposes of grants of options of the Company's common
stock pursuant to the Company's Stock Option Plan or
other plan;
d) the date on which the Company makes an offer to purchase
all of Youssefi's shares of stock in the Company for the
fair market value of such shares (which in no event
shall be less than $2.00 per share), which fair market
shall be determined by Coopers & Lybrand by reference to
the procedures used in calculating fair market value for
purposes of grants of options of the Company's common
stock pursuant to the Company's Stock Option Plan or
other plan;
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e) the date on which Youssefi breaches any term or
provision of this Agreement and the Company notifies
Youssefi of such breach; or
Notwithstanding anything in this Agreement to the contrary, the termination and
cessation of the Company's obligation to make those payments described in
Section 2.1. above shall NOT terminate or otherwise affect the rights and
obligations of the parties set forth in the other provisions of this Agreement.
2.3 The obligations of the Company to make those payments described
in Section 2.1 shall be reduced as described in Section 2.1 and shall be further
reduced or modified as follows:
a) If the Company has received no payments from En K
Telecom Co., Ltd. ("En K") pursuant to the Server
License Agreement dated February 21, 1997 (the "Server
License"), between the Effective Date and May 5, 1997,
the Company's payment obligations under Section 2.1.
shall cease and terminate on December 31, 1997; provided
that all other terms of this Agreement shall remain in
full force and effect.
b) If the Company has received less than $1,000,000 from En
K pursuant to the Server License between the Effective
Date and May 5, 1997, then the Company's payment
obligations under Section 2.1 shall be reduced to an
amount determined by multiplying the amount of each such
payment by a fraction, the numerator of which shall be
the amount actually received by the Company from En K
pursuant to the Server License between the Effective
Date and May 5, 1997, and the denominator of which shall
be $2,000,000; provided that all other terms of this
Agreement shall remain in full force and effect.
c) If the Company has received between $1,000,000 and
$1,999,999 from En K pursuant to the Server License
between the Effective Date and May 5, 1997, then each
payment to be made by the Company from and after May 5,
1997 shall be reduced by 50%, provided that all other
terms of this Agreement shall remain in full force and
effect.
d) If the Company has received at least $2,000,000 from En
K pursuant to the Server License between the Effective
Date and May 5, 1997, then the Company's payment
obligations pursuant to Section 2.1 and all other terms
of this Agreement shall remain in full force and effect.
3. WAIVER OF CLAIMS AND RIGHTS; SET OFF
Youssefi acknowledges that, as of the Effective Date, there are no
moneys owed to him by the Company. Except for those payments described in
Section 2 above, Youssefi waives any
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right or claim he may have to any payments of money, including without
limitation salary, reimbursements or other payments, from the Company. Except as
otherwise required by federal or state law, including the provisions of COBRA,
Youssefi also waives any right or claim he may have to any employee benefits or
other benefits from the Company, including without limitation health coverage,
dental coverage, life insurance and disability insurance. Further, by signing
below, Youssefi hereby releases the Company of and from any and all claims he
may have against the Company, including but not limited to, any claims relating
to the Prior Agreement. Further, the parties agree that in the event that the
Company is obligated to satisfy liabilities of any kind related to Youssefi's
conduct and/or actions as an employee, officer and/or director of the Company
(provided the Company is not actually aware of such conduct on the date of this
Agreement or as a result of written disclosures to it by Youssefi), or if the
Company is obligated to satisfy liabilities incurred by Youssefi which were not
disclosed by Youssefi to the Company on or before the Effective Date, the
Company shall have the right to set off the amount of such liabilities against
any amounts owed to Youssefi under Section 2.
4. RESIGNATION
Youssefi agrees that on or before the Effective Date he will execute and
deliver to the Company a letter of resignation whereby he resigns from his
position as a director, officer and employee of the Company, and if applicable,
from any similar positions held by him for any of the Company's affiliates.
5. AGREEMENT TO PROVIDE INFORMATION AND EXECUTE DOCUMENTS
5.1 In the event that the Company pursues an Initial Public
Offering, Youssefi agrees that, upon the request of the Company, he will
cooperate with the Company's efforts to bring such Initial Public Offering to
fruition, and further, Youssefi agrees that he will execute any and all
documents reasonably requested by the Company which concern, in any way, his
activities as a director, officer and/or employee of the Company and any and all
documents which are customarily required of a corporate insider. Furthermore,
Youssefi agrees that, upon the request of the Company, he will provide any and
all reasonable, necessary and customary information concerning, in any way, his
activities as a director, officer and/or employee of the Company.
5.2 Youssefi agrees that, upon the request of the Company, he will
execute any and all documents reasonably requested by the Company which relate
to any way to his activities as a director, officer and/or employee of the
Company.
6. NO SOLICITATION; CONFIDENTIALITY; NON-COMPETITION; NON-RAID;
NON-DISPARAGEMENT; NO CONTACT
6.1 During the three (3) year period of time beginning on the
Effective Date and ending on that date which is three (3) years from the
Effective Date (hereinafter, the "Three Year Period"), neither Youssefi nor any
Controlled Person (as defined below) will, without the prior
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written consent of the Chief Executive Officer of the Company, directly or
indirectly contact, solicit for employment, employ in any capacity or make an
unsolicited recommendation to any other person that it employ or solicit for
employment any person who is or was, at any time during the 12-month period
prior to the Effective Date, or during the Three Year Period, an officer, or
employee of the Company or any affiliate of the Company (any such officer, or
employee being referred to hereafter as a "Company Professional"). As used in
this Agreement, the term "Controlled Person" shall mean any company,
partnership, firm or other entity as to which Youssefi possesses, directly or
indirectly, the power to direct or cause, or actually causes the direction of
the management and policies of such entity, whether through ownership of voting
securities, by contract or otherwise. Notwithstanding the foregoing, Youssefi
may continue to maintain existing personal and social contacts with former or
current employees of the Company provided that the current or future business of
the Company, its customers and affiliates are not the subject of any discussions
with such employees. Youssefi also agrees he will not enter or attempt to enter
the offices of the Company or its affiliates without the prior consent of the
Chief Executive Officer.
6.2 Youssefi acknowledges that, through his status as President and
Chief Executive Officer of the Company and as a director of the Company, he has
possession of important and confidential information and knowledge as to the
business of the Company and its affiliates, including but not limited to,
knowledge of marketing and operating strategies, licensing and other agreements,
financial results and projections, future plans, the provisions of other
important contracts entered into by the Company and its affiliates, possible
acquisitions and similar information. Youssefi agrees that all of such knowledge
and information constitute a vital part of the business of the Company and its
affiliates and are by their nature trade secrets and confidential information
proprietary to the Company and its affiliates (collectively, "Confidential
Information"). Youssefi agrees that he shall not at any time following the date
of this Agreement, divulge, communicate, furnish or make accessible (whether
orally or in writing or in books, articles or any other medium) to any
individual, firm, partnership, corporation or other entity, any knowledge or
information with respect to Confidential Information directly or indirectly
useful in any aspect of the business of the Company or its affiliates. As used
in the preceding sentence, "Confidential Information" shall not include any
knowledge or information that: (a) is or becomes available to others, other than
as a result of breach by Youssefi of this Section 6.2; or (b) becomes available
generally to a recipient on a nonconfidential basis from a third party (other
than the Company, any present or former customer of the Company, any affiliate
or any of its or their representatives or Youssefi) who is not bound by any
confidentiality obligation to the Company or any affiliate of the Company.
6.3 During the Three Year Period, neither Youssefi nor any
Controlled Person will render any services, directly or indirectly, as an
employee, officer, consultant or in any other capacity, to any individual, firm,
corporation, partnership or similar entity engaged in the design, development,
manufacture or marketing of CD-WorkWare and VCD software, hardware or consulting
services, interactive video servers, set top boxes or related products and
technology or similar activities competitive with any activities in which the
Company or any of its affiliates is engaged at the Effective Date or at any time
during the Three Year Period (such activities being herein called the "Company
Business"). During the Three Year Period, Youssefi shall not, without the prior
written consent of
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the Company, hold an equity interest in any firm, partnership, corporation or
similar entity which competes with the Company Business, except that beneficial
ownership by Youssefi (including ownership by one or more members of his
immediate family and any entity under his direct or indirect control) of less
than 2% of the outstanding shares of capital stock of any corporation which may
be engaged in any of the same lines of business as the Company Business, if such
stock is listed on a national securities exchange or publicly traded in the
over-the-counter market, shall not constitute a breach of the covenants
contained in this Section 6.3.
6.4 During the Three Year Period and except as otherwise approved by
the Company's Chief Executive Officer, neither Youssefi nor any Controlled
Person will solicit or have any contact, whether directly or indirectly, with
any of the Company's current or former employees, or with any of its affiliates,
customers or suppliers. Furthermore, during the Three Year Period, neither
Youssefi nor any Controlled Person will solicit or have any contact, whether
directly or indirectly, with any potential customers of the Company or of any of
its affiliates, if such potential customers are or were identified through leads
developed during the period of Youssefi's employment with the Company, nor will
Youssefi nor any Controlled Person divert or attempt to divert any existing
business of the Company or of any of its affiliates.
6.5 During the Three Year Period, neither Youssefi nor any
Controlled Person will publish or communicate, or cause to be published or
communicated, any statement which disparages, in any way and to any degree, the
Company, its affiliates, the products or services of the Company or of its
affiliates, or any employee, director or officer of the Company or of its
affiliates.
6.6 The provision contained in this Section 6 as to the time
periods, scope of activities, persons or entities affected and territories
restricted shall be deemed divisible so that, if any provisions contained in
this Section 6 is determined to be invalid or unenforceable, such provisions
shall be deemed modified so as to be valid and enforceable to the full extent
lawfully permitted. The provisions of this Section 6 shall survive any
termination of this Agreement.
6.7 Youssefi agrees that the provisions of this Section 6 are
reasonable and necessary for the protection of the Company and that they may not
be adequately enforced by an action for damages and that, in the event of a
breach thereof by Youssefi or any Controlled Person, the Company shall be
entitled to apply for and obtain injunctive relief in any court of competent
jurisdiction to restrain the breach or threatened breach of such violation or
otherwise to enforce specifically such provisions against such violation,
without the necessity of the posting of any bond by the Company and without
waiver of any right to terminate payments, to seek damages or pursue any other
remedy provided for herein or otherwise available under applicable law.
7. AMENDMENTS
This Agreement may not be altered, modified or amended except by a written
instrument signed by each of the parties hereto.
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8. ASSIGNMENT
The duties and obligations, as well as the rights and benefits, of the
Agreement shall be binding upon, and inure to the benefit of, the successors,
assigns, and personal representatives of the parties hereto.
9. WAIVER
Waiver by any party hereto of any breach or default by any other party of
any of the terms of this Agreement shall not operate as a waiver of any other
breach or default, whether similar to or different from the breach or default
waived.
10. SEVERABILITY
In the event that any one or more provisions of this Agreement shall be or
become invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein shall not be
affected thereby.
11. ENTIRE AGREEMENT
This Agreement contains the entire understandings of the parties. There
are no restrictions, agreements, promises, warranties, covenants or undertakings
other than those expressly set forth herein. This Agreement supersedes and
terminates all prior agreements, arrangements and understandings between the
parties, whether oral or written, including but not limited to, the Prior
Agreement.
12. NOTICES
All notices and other communications provided for in this Agreement shall
be in writing and shall be deemed to have been duly given when personally
delivered or when mailed by United States registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to Youssefi: Mahmoud Youssefi
1611 LeConte Drive
Maryville, TN 37801
With a copy to: London, Amburn & Thomforde, P.C.
1815 Clinch Avenue
Knoxville, Tennessee 37915
Attn: Fredrich H. Thomforde, Jr.
If to the Company: Celerity Systems, Inc.
9051 Executive Park Drive
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Suite 400
Knoxville, TN 37923
Attn: Kenneth D. Van Meter,
Chief Executive Officer
With a copy to: Harter, Secrest & Emery
700 Midtown Tower
Rochester, New York 14604
Attn: Stuart B. Meisenzahl, Esq.
Or to such other address or such other person as Youssefi or the Company shall
designate in writing in accordance with this Section 12, except this notices
regarding changes in notices shall be effective only upon receipt.
13. HEADING
Headings to Sections in this Agreement are for the convenience of
the parties only and are not intended to be a part of, or to affect the meaning
or interpretation of, this Agreement.
14. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Tennessee
without reference to the principles of conflict of laws. Each of the parties
hereto consents to the jurisdiction of the federal and state courts of the State
of Tennessee in connection with any claim or controversy arising out of or
connected with this Agreement. Service of process in any such proceedings may be
made upon each of the parties hereto at the address of such party as determined
in accordance with Section 12 of this Agreement, subject to the applicable rules
of the court in which such action is brought.
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IN WITNESS WHEREOF, the Company and Youssefi have caused this
Agreement to be executed as of the date first above written.
/s/ Doyal H. Hodge /s/ Mahmoud Youssefi
- --------------------------- --------------------------------
Witness Mahmoud Youssefi
CELERITY SYSTEMS, INC.
/s/ Donald Peruski By: /s/ Kenneth D. Van Meter
- --------------------------- -----------------------------
Witness Print Name: Kenneth D. Van Meter
Its: Chief Executive Officer
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Agreement about Incidentals
The following has been agreed to as part of the termination agreement between
Mahmoud Youssefi and Celerity Systems, Inc.
Celerity Systems will pay up to 6 hours of Mr. Youssefi's Legal bill incurred
during these negotiations. To be paid promptly upon receipt.
Mr. Youssefi will be able to keep the Lap Top that he is presently using.
The following furniture will be given to Mr. Youssefi:
1) Wood credenza in his office,
2) The red leather couch,
3) 6 black cloth straight back chairs.
I Agree: /s/ Ken Van Meter I Agree: /s/ Mahmoud Youssefi
--------------------------- ----------------------
Ken Van Meter Mahmoud Youssefi
CEO
Celerity Systems, Inc.
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Exhibit 10.7
EXCLUSIVE OEM/DISTRIBUTORSHIP AGREEMENT
This Exclusive Distributorship Agreement ("Agreement"), made and effective this
March 10, 1995, by and between Celerity Systems, Inc., a Tennessee Corporation
("Manufacturer or "Manufacturer") and InterSystem Multimedia, Inc, Distributor,
a New Jersey Corporation ("Distributor").
Manufacturer desires to appoint Distributor, and Distributor desires to accept
appointment, as an exclusive distributor of Manufacturer's products within a
defined area as set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements and promises set forth
herein, the parties agree as follows:
1. Rights Granted.
Manufacturer hereby grants to Distributor, subject in all events to its
compliance with the other terms and conditions of this Agreement,
(i) the exclusive right to purchase, promote and sell Manufacturer's
products to Korea Telecom ("KT") for KT's use in the Republic of Korea (the
"Territory"), and
(ii) a co-exclusive right with Integrated Network Corp. to purchase,
promote and sell Manufacturer's products to other customers in the Territory for
their use in the Territory, and
(iii) a non-exclusive right to purchase, promote and sell Manufacturer's
products to customers in the rest of the world.
Each of the distributorships provided under (i), (ii) above shall be for
an initial term of three (3) years as provided for in Article 13. The
distributorship provided for under (iii) above respecting certain non-exclusive
worldwide rights shall be terminable by Manufacturer at any time by the giving
of a written notice which shall state a Date of Termination, which shall not be
any earlier than thirty (30) days after posting of such Notice in the U.S. Mail
by Manufacturer. On the Date of Termination all distributorship rights granted
under (iii) above shall forthwith terminate subject only to the continuing
obligation of the parties under Article 14A, B and C of this Agreement.
2. Products.
As used in this Agreement, the term "Manufacturer's Products" shall mean the
products, related service parts and accessories manufactured and/or sold by the
Manufacturer as follows:
<PAGE>
CTL8000 Video Server product line consisting of:
M821 Motherboard & Chassis
C805 5 Channel T1 Board
D801 Disk Management Module including the software
S801 Supervisory Module including the software
M801 NTSC Module including the software
R75 Video Raid Subsystem
3. Terms of Sale.
All sales of Manufacturer's Products to Distributor shall be made pursuant to
this Agreement at such prices and on such terms as Manufacturer shall establish
from time to time on at least thirty (30) days notice. All prices are FOB
Manufacturer's plant. All orders shall be placed with Manufacturer on a Purchase
Order, the form of which to be supplied to Manufacturer by Distributor, and are
subject to acceptance by Manufacturer at its plant in Tennessee. Manufacturer
agrees to properly pack all items for shipment at Distributor's expense.
Distributor shall purchase insurance for shipping purposes as it might require.
Risk of loss due to damage or destruction of Manufacturer's Products shall be
borne by Distributor after delivery to the carrier for shipment. The shipper
will be selected by Manufacturer unless Distributor requests a reasonable
alternative. However, for the account of Korea Telecom, the prices and delivery
commitment made in the bid to be supplied to Distributor by Manufacturer and
incorporated into this Agreement (and incorporated prior to Distributor's bid to
KT) will remain firm and binding unless mutually agreed to change. This
Agreement shall control all aspects of the dealings between Manufacturer and
Distributor with respect to the Manufacturer's Products and any additional or
different terms in any Distributor order are hereby rejected. Manufacturer will
relabel the external product labels to the extent permitted by law to conform to
Distributor specifications provided, however, Distributor may choose one, and
only one, company name for the product without payment of an additional fee.
4. Payment.
For the account of KT, Distributor shall pay the same pro rata amount of all
charges due hereunder within fifteen (15) days after the Distributor gets paid
pro rata by KT (the normal KT payment policy, eighty percent (80%) of the
invoice amount will be paid upon presentation of shipping documents upon
completion of shipping and the remaining twenty percent (20%) after sixty (60)
days of reliability period from the official cut-over date by KT). For other
accounts, Distributor shall
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pay all charges due hereunder within thirty (30) days after the date of
Manufacturer's invoice. All payments shall be made in U.S. Dollars irrespective
of the form of payment to Distributor and Distributor shall assume all
risk/benefit of exchange fluctuations. Since Distributor is not able to make any
prepayment to Manufacturer, Distributor agrees to use its best efforts to help
Manufacturer acquire financing required to provide the products to be supplied
to KT.
5. Marketing Policies.
A. Distributor will at all times promote the sale of Manufacturer's Products
through all channels of distribution prevailing in its Territory, in conformity
with Manufacturer's marketing policies and programs respecting sales, marketing
or service. Distributor will use its best efforts in the Territory (i) to sell
Manufacturer's Products to aggressive, reputable, and financially responsible
dealers and customers, and (ii) to provide satisfactory consumer service.
Distributor is authorized to enter into written agreements with its dealers in
the Territory relating to the purchase, resale and service of Manufacturer's
Products on forms approved by Manufacturer for this purpose.
B. Distributor will use its best efforts to sell and promote Manufacturer's
Products under its non-exclusive worldwide distributorship and undertake to
assure and provide customer service wherever such sales are made so as to
preserve, protect and enhance the customers' impression of the quality and
dependability of Manufacturer's Products.
C. Distributor agrees that it will take all action reasonable and necessary to
prevent its dealers from selling Manufacturer's Products outside the Territory.
D. Distributor shall maintain a place of business in the Territory through a
local agent in such Territory. Distributor shall provide maintenance service on
Manufacturer's Products sold in the Territory, using qualified personnel and
subject to service policies reasonably satisfactory to Manufacturer.
E. Distributor shall hire sales personnel or appoint representatives to
introduce, promote, market and sell Manufacturer's Products in its Territory.
Such personnel and/or representatives shall be adequately trained by
Distributor. Distributor shall employ sufficient numbers of sales personnel
and/or representatives properly to market Manufacturer's Products in the
Territory.
F. Distributor agrees not to engage in the distribution, promotion, marketing or
sale in its exclusive Territory of any goods or products that directly compete
or conflict with Manufacturer's Products.
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6. Sales Policies and Merchandising Policies.
A. Sales quotas, giving reasonable regard to past performance and market
potential of Manufacturer's Products, may be established by Manufacturer from
time to time.
B. From time to time Manufacturer may at its option provide, at Manufacturer's
cost, Distributor with merchandising assistance in the form of advertising
programs, product and sales training and sales promotions. Distributor agrees to
use and integrate such assistance in carrying out Manufacturer's merchandising,
general merchandise and sales promotion policies.
7. Advertising Policies.
Manufacturer will cooperate with Distributor and its dealers, at Manufacturer's
cost, in providing for advertising and promotion of Manufacturer's Products
throughout the Territory. Nothing herein shall prevent Distributor from
independently advertising and marketing the Manufacturer's Products within the
Territory, provided the form and content of the advertising or marketing
materials are approved by Manufacturer in advance.
8. Product Warranty Policies.
LIMITED WARRANTY
Manufacturer represents and warrants the Manufacturer's Products are free of
inherent defects at the time of delivery to the carrier for shipment to the
Distributor. In the event any such defect is discovered, Manufacturer's
liability for such defect shall be limited at the option of Manufacturer to (i)
repair of the subject Product or (ii) replacement provided that all such
obligation shall terminate at the earlier of sixty (60) days after
Manufacturer's Product is put into service or one-hundred eighty (180) days
after date of delivery of Product to carrier; and further provided that
Distributor gives Manufacturer prompt written notice of any such defect and
cooperates with Manufacturer's investigation and handling of the matter. In the
event Manufacturer elects to provide replacement, Manufacturer shall not be
obligated to make such replacement prior to the time the defective Product has
been returned to its Tennessee manufacturing plant, suitably packed and sent by
reputable carrier. Cost of return shall be borne by Manufacturer. No other
returns will be permitted, allowed or credited without the prior written consent
of Manufacturer.
EXCEPT FOR THE WARRANTIES SET FORTH IN THIS AGREEMENT, MANUFACTURER MAKES NO
WARRANTY TO DISTRIBUTOR WITH RESPECT TO THE PRODUCTS, EITHER EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
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For the account of Korea Telecom, the Manufacturer agrees to accept the same
terms and conditions of the warranty requirement as set forth in the KT Contract
(Article 12.1 under Section 12. WARRANTY of Part II. TERMS AND CONDITIONS FOR
CONTRACT and Section 1.12 Warranty in PART III SPECIFICATIONS on Pages 26-27.
KT's IFT NO.: 95-PSC-006 dated Feb. 22, 1995) awarded by KT to the Contractor
(Distributor); provided, however, in no event will the warranty of Manufacturer
contemplated by the bid to KT be longer than eighteen (18) months after the date
of the Final Acceptance Certificate.
9. Liabilities and Indemnification.
A. Manufacturer's sole liability for Manufacturer's Products shall be repair or
replacement as provided in its Limited Warranty. Manufacturer shall not
otherwise be liable for any act or omission of any party and in no event shall
Manufacturer be liable for any consequent damages.
B. Distributor agrees to protect Manufacturer and hold Manufacturer harmless
from any loss or claim arising out of the negligence of Distributor,
Distributor's agents, employees or representatives in the installation, sale or
servicing of Manufacturer's Products or arising out of any representation or
warranty made by Distributor, its agents, employees or representations with
respect to Manufacturer's Products that exceeds Manufacturer's Limited Warranty.
Further, in the event that any of Distributor's dealers shall, with respect to
any of Manufacturer's Products purchased from Distributor, fail to discharge the
dealer's obligations to the original consumer pursuant to the terms and
conditions of Manufacturer's product warranty and consumer service policies,
Distributor agrees to discharge promptly such unfulfilled obligations.
10. Order Processing and Returns.
A. Manufacturer shall fill Distributor's order for the account of the KT in
accordance with the request of Distributor. Manufacturer will employ its best
efforts to fill Distributor's other orders promptly on acceptance, but reserves
the right to allot available inventories among distributors at its discretion.
B. Except for Manufacturer's Products that are defective at the time of sale to
Distributor, Manufacturer shall not be obligated to accept any of Manufacturer's
Products that are returned. In the event Manufacturer agrees to accept the
return of any product not subject to the Limited Warranty, Manufacturer may
impose a reasonable restocking charge.
11. Financial Policies.
Distributor acknowledges the importance to Manufacturer of Distributor's sound
financial operation and Distributor expressly agrees that it will:
5
<PAGE>
A. Maintain and employ in connection with Distributor's business and operations
under this Assignment such working capital and net worth as may be required to
enable Distributor properly and fully to carry out and perform all of
Distributor's duties, obligations and responsibilities under this Agreement.
B. Pay promptly all amounts due Manufacturer in accordance with terms of sale
extended by Manufacturer from time to time.
C. Furnish, at Manufacturer's request, a detailed reconciliation of
Manufacturer's statements of account with Distributor's records, listing all
differences, and showing net amount Distributor acknowledges to be due
Manufacturer.
In addition to any other right or remedy to which Manufacturer may be entitled,
shipments may be suspended at Manufacturer's discretion in the event that
Distributor fails to promptly and faithfully discharge each and every obligation
in this Section.
12. Use of Manufacturer's Name.
Distributor will not use, authorize or permit the use of, the name "Celerity
Systems, Inc." or any other trademark or trade name owned by Manufacturer as
part of its firm, corporate or business name in any way. Distributor shall not
contest the right of Manufacturer to exclusive use of any such trademark or
trade name used or claimed by Manufacturer. Distributor may, subject to
Manufacturer's policies regarding reproduction of same, utilize Manufacturer's
name, trademarks or logos in advertising on stationery and business cards.
13. Term and Termination.
Unless earlier terminated as provided below, the term of this Agreement shall
commence January 16, 1995 and shall continue until January 16, 1998. At the end
of the term, the Agreement shall continue until terminated by either party on at
least ninety (90) days prior notice.
A. Manufacturer may terminate at any time by written notice given to Distributor
not less than ninety (90) days prior to the effective date of such notice in the
event Manufacturer decided to terminate all outstanding distributor agreements
for Manufacturer's Products and to offer a new or amended form of distributor
agreement with substantially equivalent or better terms and conditions for
distribution.
B. Manufacturer may terminate this Agreement upon notice to Distributor, upon
any of the following events: (1) failure of Distributor to fulfill or perform
any one of the material duties, obligations or responsibility of Distributor in
this Agreement, which failure is not cured to the reasonable satisfaction of
Manufacturer within thirty (30) days of notice from Manufacturer; (2) any
6
<PAGE>
assignment or attempted assignment by Distributor of any interest in this
Agreement or delegation of Distributor's obligations without Manufacturer's
written consent; (3) any sale, transfer or relinquishment, voluntary or
involuntary, by operation of law or otherwise, of any material interest in the
direct or indirect ownership or any change in the management of Distributor; (4)
failure of Distributor for any reason to function in the ordinary course of
business; (5) submission by Distributor to Manufacturer of false or fraudulent
reports or statements, including, without limitation, claims for any refund,
credit, rebate, incentive, allowance, discount, reimbursement or other payment
by Manufacturer.
C. Manufacturer may terminate this Agreement if Distributor or Bescom does not
sign a contract with KT based on the prior bid provided to Distributor by
Manufacturer by July 1, 1995 upon thirty (30) day written notice.
D. Notwithstanding any other provision of this Article 13, Manufacturer may at
its option terminate the non-exclusive distributorship granted under Article 1
(iii) as provided in such Article 1.
E. Manufacturer may terminate this Agreement if Distributor (1) becomes
insolvent, (2) voluntarily or involuntarily files chapter 11 or bankruptcy, or
makes an assignment for the benefit of creditors, or ( 3) ceases to be actively
engaged in the selling of products or manufactures products for a period of
ninety (90) days or more.
F. For the account of KT, if this Agreement is terminated after the submission
of bid on April 4, 1995, the commitment made by the Manufacturer in terms of
price, delivery and the warranty will survive the termination if Bescom is
awarded the Contract by KT to supply the Manufacturer's Products as a part of
the overall system.
14. Obligations on Termination.
On termination of this Agreement, Distributor shall cease to be an authorized
distributor of Manufacturer and:
A. All amounts owing by Distributor to Manufacturer on thirty (30) days term
shall, notwithstanding prior terms of sale, become immediately due and payable
and amounts owing by distributor with respect to the account of KT will be paid
in accordance with paragraph 4 of this Agreement.
B. Distributor will resell and deliver to Manufacturer on demand, free and clear
of liens and encumbrances, such of Manufacturer's Products and materials as
Manufacturer shall elect to repurchase at a mutually-agreed-upon price, but not
in excess of Manufacturer's current price to
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<PAGE>
distributors for such products and materials, provided that Manufacturer shall
not be obligated to pay Distributor for any item originally provided free of
charge.
C. Neither party shall be liable to the other because of such termination for
compensation, reimbursement or damages on account of the loss of prospective
profits or anticipated sales, or on account of expenditures, investments, lease
or commitments in connection with the business or goodwill of Manufacturer or
Distributor of for any other reason whatsoever growing out of such termination.
D. For the account of KT, if this Agreement is terminated after the submission
of bid on April 4, 1995, the commitment made by the Manufacturer in terms of the
price, delivery and the warranty will survive the termination if Bescom is
awarded the Contract by KT to supply the Manufacturer's Products.
15. Use of Name Prohibited.
On termination of this Agreement, Distributor will remove and not thereafter use
any sign containing any trade name, logo or trademark of Manufacturer including,
but not limited to, "Celerity Systems, Inc.", and will immediately destroy all
stationery, advertising matter and other printed matter in its possession or
under its control containing such name, or any of Manufacturer's trademarks,
trade names or logos. Distributor will not at any time after such termination
use or permit any such trademark, trade name or logo to be used in any manner in
connection with any business conducted by it or in which it may have an
interest, or otherwise whatsoever as descriptive of or referring to anything
other than merchandise or products of Manufacturer. Regardless of the cause of
termination, Distributor will immediately take all appropriate steps to remove
and cancel its listings in telephone books, and other directories, and public
records, or elsewhere that contain the Manufacturer's name, logo or trademark.
If Distributor fails to obtain such removals or cancellations promptly,
Manufacturer may make application for such removals or cancellations on behalf
of Distributor and in Distributor's name and in such event Distributor will
render every assistance.
16. Acknowledgments.
Each party acknowledges that no representation or statement, and no
understanding or agreement, has been made, or exists, and that in entering into
this Agreement each party has not relied on anything done or said or on any
presumption in fact or in law, (1) with respect to this Agreement, or to the
duration, termination or renewal of this Agreement, or with respect to the
relationship between the parties, other than as expressly set forth in this
Agreement; or (2) that in any way tends to change or modify the terms, or any of
them, of this Agreement or to prevent this Agreement from becoming effective; or
that in any way affects or relates to the subject matter hereof. Distributor
also acknowledges that the terms and conditions of this Agreement, and each of
them, are reasonable and fair and equitable.
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17. Final Agreement.
This Agreement terminates and supersedes all prior understandings or agreements
on the subject matter hereof. This Agreement may be modified only by a further
writing that is duly executed by both parties.
18. Assignment.
A. Distributor understands and agrees that Manufacturer may at its option cause
its obligations under this Agreement for supply to Distributor and KT, if the
bid is accepted, to be assumed and performed by one or more third parties whose
principal function will be to finance the necessary materials and assembly
needed by Manufacturer for this purpose.
B. Neither this Agreement nor any interest in this Agreement may be assigned by
Distributor without the prior express written approval of Manufacturer, which
may not be reasonably withheld by Manufacturer at Manufacturer's sole
discretion.
19. No Implied Waivers.
Except as expressly provided in this Agreement, waiver by either party, or
failure by either party to claim a default, of any provision of this Agreement
shall not be a waiver of any default or subsequent default.
20. Notices.
Any notice required by this Agreement or given in connection with it, shall be
in writing and shall be given to the appropriate party by personal delivery or
by certified mail, postage prepaid, or recognized overnight delivery services.
If to Manufacturer:
Celerity Systems, Inc.
9051 Executive Park Drive
Knoxville, TN 37923
If to Distributor:
[M]
300 Sylvan Avenue
Englewood Cliffs, NJ 07632
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21. Governing Law.
This Agreement shall be construed and enforced in accordance with the laws of
the State of Tennessee.
22. Severability.
If any term of this Agreement is held by a court of competent jurisdiction to be
invalid or unenforceable, then this Agreement, including all of the remaining
terms, will remain in full force and effect as if such invalid or unenforceable
term had never been included.
23. Headings.
Headings used in this Agreement are provided for convenience only and shall not
be used to construe meaning or intent.
24. Other Representations/Escrow.
1. Representations/Indemnity
a. Manufacturer hereby represents and warrants that to its knowledge,
after no inquiry, none of Manufacturer's Products violate or infringe upon any
United States Patents, Copyright or trade secret of any other person.
Distributor understands that Manufacturer has not undertaken or completed any
patent search of published U.S. Patents.
b. Distributor shall notify Manufacturer promptly of any claim, action, or
suit against Distributor arising out of the manufacture, sale or sublicensing of
the Products or the alleged infringement by the Manufacturer's Products of any
United States Patents, Copyright, or trade secrets or copyright of any third
party.
Manufacturer will indemnify Distributor against and hold Distributor
harmless from any and all loss, damage or liability assessed against
Distributor, or incurred by Distributor, arising out of or in connection with
any claim that:
(1) Manufacturer has breeched its representation under 24.1.a or
(2) or Manufacturer's Products incorporate one or more material
elements that constitute misappropriation of a trade secret
from a third party within the United States provided, however,
in any event that as a condition of such indemnity:
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(i) that Distributor notifies Manufacturer promptly and in
writing that any such claim is threatened or has been
brought and in no event more than twenty-one (21) days
after Distributor receives notice that such claim has
been brought,
(ii) that Manufacturer has the right to assume the defense of
such claim, with counsel selected by Manufacturer,
(iii) that Manufacturer receives Distributor's full and
complete cooperation at Manufacturer's expense in the
defense of such claim, and
(iv) that Manufacturer shall have the right to settle such
claim and/or procure the right to continue the
manufacture and sublicensing of the Product as
contemplated hereunder, and/or modify the Product in
such a fashion as to eliminate any infringement and
misappropriation (without effecting the capability or
performance) and thereby discharge its obligations
hereunder.
Manufacturer shall have no obligation hereunder with respect to any
proceeding or claim of infringement based on Distributor's modification of the
Products provided by Manufacturer hereunder or the combination, operation or use
of such Products with program(s) and procedures not furnished by Manufacturer,
if such infringement claim would have been avoided in the absence of such
modification, combination or operation or use with program(s) not furnished by
Manufacturer.
2. Escrow
a. Distributor acknowledges that the Source Code used in creating
Manufacturer's Products, together with the Object Code incorporated in such
Products, are the proprietary, confidential trade secrets of the Manufacturer.
The Source Code of the "Manufacturer's Products" will be kept by a reputable
Escrow agent to be appointed by Manufacturer and deemed acceptable by
Distributor. The Source Code in Escrow will be released to Distributor by the
Escrow agent if Manufacturer (1) becomes insolvent, (2) files chapter 11 or
bankruptcy, or (3) ceases to do business. Distributor shall receive the Source
Code in the event of delivery under Escrow as a "bailment" solely for the
purpose of maintaining the equipment sold to KT and will be strictly liable for
any other use or disclosure of the confidential information regarding such
Source Code.
25. Warranty Service for KT
For the account of KT the Contract with KT requires warranty service for twenty
(20) months from the date of official cut over of the system installed or
eighteen (18) months from the date of the
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issuance of the Final Acceptance Certificate by KT (Refer to the Article 12.1
under Section 12. WARRANTY of Part II: TERMS AND CONDITIONS FOR CONTRACT and
Section 1.12 Warranty in PART III: SPECIFICATIONS on Pages 26-27: KT's IFB NO. :
95-PSC-006 dated Feb. 22, 1995). Manufacturer agrees to provide or make
available such warranty service through Distributor at no extra cost to
Distributor.
During any installation of Manufacturer's Products at KT's Central Offices in
six cities and until successful official cut over of the system to KT,
Manufacturer will provide, at Manufacturer's cost and expense, all necessary and
appropriate on-site technical support to ensure successful installation.
Distributor agrees to cooperate will all reasonable requests of Manufacturer for
all on-site support, including personnel who can observe and learn how to
provide emergency on-site service in the future.
Manufacturer agrees to send two (2) expert engineers to KT for two (2) months to
be present at the Yoido installation site in Seoul during the sixty (60) day
reliability period as required by the terms and conditions of the Contract
(Article 1.11.14 under Section 1.11 Cut-Over and Acceptance Testing in PART III:
SPECIFICATIONS on Page 26: KT's IFB NO.: 95-PSC-006 dated Feb. 22, 1995) at
Manufacturer's own expense.
26. Schedule and Liquidated Damages for Korea Telecom Contract
As to the Manufacturer's Products for delivery to KT under the bid to be
submitted to KT by the Distributor (the "Bid"), the KT Bid document clearly
states (Article 11.1 under Section II, LIQUIDATED DAMAGES in PART II; TERMS AND
CONDITIONS FOR CONTRACT, KT's IFB NO.: 95-PSC-006 dated Feb. 22, 1995) that the
Contractor, in our case Distributor, will be subject to a penalty for (i) any
delay in delivery of the system to KT or (ii) failure to pass a required Systems
Acceptance Test. Both parties recognize and agree that Manufacturer's Product is
one of several components in the system subject to the KT Bid and that
Manufacturer's obligation to Distributor in regard to a failure to deliver or
meet the SAT by certain dates in the Bid should be limited to delays caused
solely by Manufacturer's failure in these matters. Accordingly, Manufacturer
agrees to pay its pro rata share of any penalty imposed by reason of a failure
to meet a delivery date or pass the SAT (as required in either case by the
accepted Bid), such pro rata share to be equal to the amount of delay or failure
to pass SAT attributable to Manufacturer's Product as compared to the total
delay or failure to pass SAT caused by all components of the system; provided,
however, in no event will Manufacturer be liable for an amount equal to more
than one-tenth of one percent (0.1%) per day of the amount of the KT contract
attributable to the system applied by Manufacturer. All such amounts shall be
payable by Manufacturer to Distributor only to the extent Distributor has
actually paid KT (as evidenced by documentation) and shall not constitute any
independent obligation to KT by Manufacturer to any party other than
Distributor.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Celerity Systems, Inc. InterSystem Multimedia, Inc.
By: /s/ Glenn West By: /s/ Hoon Yang
-------------------------------- ---------------------------
Glenn West Hoon Yang, Ph.D.
Director, Technical Operations President & CEO
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Exhibit 10.8
June 26, 1995
PURCHASE ORDER AGREEMENT
BETWEEN
Tadiran Telecommunications Ltd.
18 Hasivim St.
P.O Box 500 Petah Tikva 49104
ISRAEL
AND
CELERITY SYSTEMS, Inc.
9051 Executive Park Drive
Knoxville TN, 39723
FOR THE SUPPLY OF
Video On Demand (VOD) System For Bezeq/Tadiran Field Trial
<PAGE>
INDEX
ITEM TITLE
- ---- -----
Preamble
1 Scope of Agreement/Priority
2 Definitions
3 Seller's Declaration
4 Packing, Shipment and Delivery
5 Inspection and Acceptance
6 Title and Risk of Loss
7 Payments, Taxes, Price Representation
8 Changes, Amendments to Specifications
9 Limited Warranty
10 Patent Identity
11 Default
12 Liquidated Damages
13 Force Majeure
14 Termination for Convenience
15 Stop Work Orders
16 New Material
17 Subcontracting
2
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18 Quality Assurance
19 Items Furnished by Buyer
20 Approval of Design
21 Insurance
22 Post-Warranty Obligations
23 Long Term Sales Commitment
24 Proprietary Data
25 Procurement from Seller's Sources
26 Confidentiality, Advertising
27 Export Licenses
28 Compliance with Statutes and Regulations
29 Applicable Law; Disputes
30 Options
31 Notices
32 Miscellaneous
ANNEXES
I Statement of Work ("SOW")
II Prices and Terms of Payment
III Options
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AGREEMENT ("AGREEMENT")
BETWEEN
Tadiran Telecommunications Ltd.
18 Hasivim St.
P.O. Box 500 Petah Tikva 49104
ISRAEL
(hereinafter called "Buyer")
AND
Celerity Systems, Inc.
9051 Executive Park Drive
Knoxville TN, 39723
USA
(hereinafter called "Seller")
WHEREAS, Buyer is a company organized and existing under the laws of the
State of Israel, having its principal office at 18 Hasivim St., Petah
Tikva 49104,
AND WHEREAS, the Seller is a company organized and existing under the laws
of the State of Tennessee, United States of America, having its principal
office at 9051 Executive Park Drive, Knoxville TN 39723 and is engaged in
Interactive Video Systems,
AND WHEREAS, the Seller wishes to furnish and deliver supplies and/or
perform services
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for the VOD System for the Bezeq/Tadiran Field Trial as subcontractor to
Buyer as detailed hereunder, and Buyer wishes to receive said supplies
and/or services from Seller;
NOW, THEREFORE, IT IS HEREBY AGREED BETWEEN BUYER AND SELLER, AS FOLLOWS:
1. SCOPE OF AGREEMENT
a. The preamble and Annexes to this Agreement form an integral part
hereof.
b. Seller agrees to provide Buyer with supplies and services as
detailed in Annex 1, "Statement(s) of Work", attached hereto
(collectively the "Deliverable Items") in accordance with the terms
of this Agreement.
c. This Agreement contains the following Annexes:
Annex I Statement of Work ("SOW")
including: Technical Specification Program Schedule
Annex 11 Prices and Terms of Payment
Annex 111 Options
d. This Agreement will be implemented in whole or in part by Buyer
through the issuance to Seller of printed purchase order(s) (the
"Purchase Order(s)") which shall specify the items ordered and the
funding limitations, if any, and shall reference this Agreement.
Seller shall promptly acknowledge said Purchase Order in writing in
the space provided therefor and return an acknowledgment copy to
Buyer. The Purchase Order shall constitute a contractual document
for purposes of this Agreement, however, unless otherwise
specifically agreed in writing by the parties, the printed terms and
conditions appearing on the reverse side of the Purchase Order shall
have no force and effect.
e. In the event of conflict between the provisions of these Terms and
Conditions and the provisions of the Annexes hereto or the Purchase
Order, the provisions of specific applicable Annexes shall take
precedence over these Terms and Conditions to the extent necessary
to resolve a conflict.
f. Notwithstanding an other term, conditions or implication of this
Agreement and Annexes, Buyer acknowledges that the Deliverable Items
include certain operating software which is the proprietary property
of Seller, title to which remains in the Seller and as to which
Buyer is receiving no other interest other than a license to use
such software in the operation of its Deliverable Items and for no
other purpose. Buyer acknowledges and agrees that it is not entitled
to nor will it decompile, reverse
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engineer or otherwise use or permit the software to be used for this
purpose. Buyer acknowledges Seller's intent to utilize the
limitations of this license to preserve and defend its trade secrets
from disclosure to unauthorized parties and agrees not to allow
access to the software by any third party without Seller's written
consent.
2. DEFINITIONS
In addition to the terms defined elsewhere in this Agreement, for purposes
of this Agreement, the following terms shall have the meanings set forth
below:
a. ACCEPTANCE: "Acceptance" means either "Factory Acceptance" or "On
Site Acceptance" as the circumstances and time frame of the context
in which it is used shall reasonably require.
(1) "Factory Acceptance" means signature by Buyer's representative
on a Certificate of Acceptance or, where specifically
authorized, on a CoC (or by Seller upon successful completion
of the acceptance test in the event Buyer elects not to be
present provided that Buyer receives written notice from
Seller at least thirty (30) days in advance of the Acceptance
Test referenced in the Certificate of Compliance or CoC).
(2) "On-Site Acceptance" means any acceptance by Buyer of
Deliverable Items after installation, integration and
commissioning in accordance with Section 5 hereinafter.
b. "Acceptance Test" shall mean as the context requires either the
tests required / or Factory Acceptance / or "On-Site Acceptance."
c. "ARO" means after receipt of order(s).
d. "Certificate of Acceptance" means the certificate evidencing
successful completion of the Factory Acceptance Test, or On-Site
Acceptance Test for the Deliverable Items undergoing Acceptance, as
the context may require.
e. "COC" means Certificate of Compliance, evidencing compliance of the
Deliverable Items delivered with the Technical Specifications and
that they have successfully passed the Acceptance Test.
f. "Contract Price" means the aggregate price for the Deliverable Items
as set out in Annex 4 hereto, as from time to time adjusted under
articles 8 and 15 of this agreement.
g. "Delivery" means receipt of one or more of the Deliverable Items at
the Delivery Point, following Factory Acceptance of such items.
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h. "Delivery Point" means Ben-Gurion (Tel-Aviv) International Airport.
i. "Delivery Date" means a thirty (30) day period to be specified by
Buyer and agreed to by Seller during which any portion of the
previously undelivered Deliverable Items under the Program Schedule
will be subject to final Delivery at the Delivery Point.
3. SELLER'S DECLARATION
Seller declares that it has the skill, judgment, capability, means,
facilities and personnel to properly, timely and fully perform this
Agreement in accordance with all of its terms and conditions, and
acknowledges that the Buyer, in reliance upon such express declaration,
has entered into this Agreement.
4. PACKING, SHIPMENT AND DELIVERY
a. Unless otherwise specified in this Agreement, all Deliverable Items
shall be delivered CIF the Delivery Point. Buyer's Purchase Order
numbers and symbols, with prefix and Buyer's Part Number must be
plainly marked on all invoices, packages, bills of lading, airway
bills and packing lists. Packing lists must accompany each invoice.
Buyer's inspection shall be final and conclusive on shipments not
accompanied by packing lists.
b. Upon each shipment Seller shall notify Buyer immediately by fax of
the identity of the carrier and expected time of arrival to the
Delivery Point.
c. Not later than five (5) days prior to an intended shipment Seller
shall fax to Buyer the COC for each component of the Deliverable
Items to be sent under such shipment pursuant to the Program
Schedule. In the event Buyer did not sign the COC, than Seller shall
also concurrently supply the test data on which such COC is based
and Buyer shall have five days thereafter within which to notify
Seller that such test results are unacceptable. If the test results
are unacceptable, then the Program Schedule shall be modified to
reflect a new shipment date which in no event shall be later than
the Delivery Date and Seller shall retest the Deliverable Items in
question for the purpose of resubmission under this Article 4(c).
d. Acceptance of a late Delivery after the Delivery Date shall not be
deemed a waiver of Buyer's right to hold Seller liable for any loss
or damage resulting therefrom. Seller's liability in such case will
be limited to the total contract value.
e. Seller shall not be entitled to make Delivery on dates different
from those established herein unless Buyer, in its sole discretion,
consents thereto in writing on terms to be agreed between the
parties. In the absence of such consent and in the event of delay in
Delivery past the Delivery Date, then, in addition to any rights
Buyer may have, Buyer shall have the right to direct Seller to make
shipment to the Delivery Point set
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forth in this Agreement by the most expeditious means, and the total
cost of such expedited shipment and handling shall be borne by
Seller.
5. INSPECTION AND ACCEPTANCE
a. All Deliverable Items (which term throughout this Article includes
without limitation, raw materials, components, intermediate
assemblies, and end products) shall be subject to inspection and
test by Buyer, its authorized representatives to the extent
practicable at all times and places including the period of
manufacture, and in any event prior to On-site Acceptance. Unless
otherwise provided herein, final inspection and Factory Acceptance
shall take place at Seller's premises before Delivery. Seller shall
give Buyer at least fifteen (15) days prior written notice of the
commencement of the Acceptance Test for each article of Deliverable
Items to be delivered hereunder. Acceptance shall be performed in
accordance with the applicable provisions contained or referenced in
the SOW. Upon successful completion of the Acceptance Test for each
article of the Deliverable Items, Buyer will execute a Certificate
of Acceptance (or in the event that Buyer elects not to be present
for such Acceptance Test, Seller will sign Certificate of Compliance
therefor) which shall evidence Factory Acceptance.
b. All Deliverable Items for which there is a Factory Acceptance and
which Buyer shall not have rejected under Article 4(c) are deemed to
be prima facie in conformity with the requirements of the Agreement
subject to only to (i) rejection by Buyer because of shipping damage
and to (ii) the subsequent On-Site Acceptance. Inspection for
shipping damage shall be made and reported to seller within fifteen
days of delivery. In case any Deliverable Items or lots of
Deliverable items fail to obtain Factory Acceptance, Buyer shall
have the right either to reject them or to require their correction.
In the event of shipping damage, Deliverable Items or lots of
Deliverable Items which have been rejected or required to be
corrected, shall be shipped to the place of repair, to be corrected
or replaced and returned to Buyer at Seller's expense; or Seller may
at its option, cause such Deliverable Items to be corrected in
place. Such Deliverable Items which do not obtain Factory Acceptance
or incur shipping damage shall not thereafter be tendered for
Acceptance unless Buyer agrees thereto in writing or the former
rejection or requirement of correction is withdrawn by Buyer or its
authorized representative.
c. If Seller fails to act in commercially reasonable manner prior to
the Delivery Date to correct promptly materially defective
Deliverable Items or lots of Deliverable Items which are material to
overall performance and use required to be corrected in accordance
with sub- Article (b) above, or promptly replace such Deliverable
Items or lots of Deliverable Items, Buyer may:
(1) Delete the subject Deliverable Items from this Agreement and
replace or correct such Deliverable Item and charge to Seller
the net costs of such
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<PAGE>
correction or replacement but in no event more than 110% of
the stated value of the item under the terms of this
agreement; or
(2) Cancel this Agreement for default as provided in the Article
of this Agreement entitled "Default". Unless Seller corrects
or replaces such Deliverable Items by the Delivery Date, Buyer
may require the Delivery of such Deliverable Items at a
reduction in price which is equitable under the circumstances.
Failure to agree to such reduction will be a dispute
concerning a question of fact within the meaning of the
Article of this Agreement entitled "Disputes" without
derogation from the other rights of Buyer under this Agreement
or at law.
d. If any inspection or test is made by Buyer, on the premises of
Seller, then Seller, without additional charge shall provide all
reasonable facilities and assistance for the safety and convenience
of the inspectors in the performance of their duties. Buyer reserves
the right to charge to Seller any additional cost of inspection and
test when Deliverable Items are not ready at the time of such
inspection or test or when re-inspection or re-test is necessitated
by prior rejection. Seller reserves the right to charge Buyer any
costs incurred by Seller because of Buyer's failure to make an
inspection as and when agreed upon.
e. Inspection, test and Certificate of Compliance (COC) shall not
relieve Seller from properly fulfilling any and all contractual
responsibilities for defects in the Deliverable Items and other
contractual requirements otherwise required.
6. TITLE AND RISK OF LOSS
a. Unless this Agreement specifically provides for earlier passage of
title, title to Deliverable Items covered by this Agreement shall
pass to Buyer upon On-Site Acceptance.
b. Unless this Agreement specifically provides otherwise, risk of loss
of or damage to Deliverable Items shall remain with Seller until
passage to Buyer upon Delivery.
7. PAYMENTS, TAXES, PRICE REPRESENTATION
a. Buyer shall make payments due to Seller under this Agreement to
Seller's account No. 5605784 at Third National Bank of East
Tennessee, within thirty (30) days after Buyer's receipt of invoices
from Seller therefor, or within thirty (30) days following the
successful completion of the relevant payment milestones, whichever
is the later, in accordance with the payment schedule set out in
Annex II.
b. Any payments made for Deliverable Items delivered prior to Factory
Acceptance or On-Site Acceptance shall not constitute Acceptance of
said Deliverable Items for
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<PAGE>
those purposes.
c. Invoices shall be submitted by Seller in triplicate (original and
two copies) for each shipment. Delays in receiving invoices, as well
as errors and omissions thereon, will be considered just cause for
withholding payment without losing any discount privileges set forth
in this Agreement or creating any interest payment liability.
Invoices covering Deliverable Items shipped in advance of the
Delivery dates specified in this Agreement will not be paid nor
deemed received until their normal maturity after the specified
dates of Delivery, unless accelerated deliveries are specifically
agreed to by Buyer in writing.
d. In order to further secure the performance of Celerity hereunder:
(1) Celerity and Tadiran agree to cause an Escrow Fund to be
created equal to 25% of the Total Purchase Order, $261,001,
funded in two installments: (i)15% of the total Purchase Order
funded from the First Milestone Payment required under the
Purchase Order Agreement to be paid by Tadiran to Celerity
(when as and if such Milestone Payment is made), and (ii) 10%
of the Total Purchase Order funded from the Second Milestone
Payment required under the Purchase Order Agreement to be paid
by Tadiran to Celerity (when, as and if such milestone payment
is made). Such installments shall be in the form of retention
by Tadiran in an Escrow Fund held by Tadiran.
(2) Tadiran agrees to invest the Escrow Fund monies in short-term
US Treasury Bonds (or in other investment that will yield same
interest) having maturities approximating the anticipated date
of completion of final "on-site acceptance" under the Purchase
Order for Milestone #4 in the SOW/Exhibit 1 (the completion of
the on site acceptance for Milestone No. 4 is referred to as
Escrow Termination).
(3) At the Escrow Termination, all amounts then held therein,
including accrued interest shall be paid over to Celerity.
(4) In the event that any time prior to the Escrow Termination,
Tadiran shall deliver to Celerity a written statement to the
effect that Celerity has engaged in material breach of the
terms and conditions of the Purchase Order Agreement which has
(have) not been cured to Tadiran's satisfaction (hereinafter
the "Notice to Pay"), then on the third business day following
Celerity's Receipt of Notice to Pay, Tadiran shall pay over to
itself from the Escrow Fund so much of the Escrow Fund as the
amount set forth in its Notice to Pay states is needed to
compensate itself for such breach.
(5) In the event that prior to the Escrow Termination Celerity
becomes (i) insolvent, (ii) has filed voluntary petition of
bankruptcy, or reorganization, or
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for the appointment of a receiver, or (iii) there has been an
involuntary petition to have Celerity declare bankruptcy or
subject to receivership which has not been vacated within 30
days of its original filing, or (iv) Celerity has executed for
the benefit of creditors, Tadiran may pay over to itself all
of the sums, including interest, then on deposit in the Escrow
Fund.
(6) In the event Tadiran receives from Celerity or Tadiran a Final
Order from an Arbitration Panel established by Article 29 of
the Purchase Order Agreement directing the payment of any sum
in the Escrow Fund to either of them or to any third party, it
shall promptly make such payments as directed therein and
otherwise comply with such Final Order to its best ability.
8. CHANGES, AMENDMENTS TO SPECIFICATIONS
a. Buyer may at any time, by a written order, make changes within the
general scope hereof in any one or more of the following: (i)
quantities; (ii) method of shipment or packing; and/or (iii) place
and/or time of delivery, which requests Seller shall not
unreasonably reject taking into account its other commitments and
financial status. If any such change causes an increase or decrease
in the cost of or the time required for performance of this
Agreement, whether changed or not by any such order, an equitable
adjustment shall be made in the Agreement Price or Program Schedule,
or both, and the Agreement shall be modified accordingly. Any claim
by Seller for adjustment under this Article must be asserted within
thirty (30) days from the date of notification of the change;
provided, however, that Buyer, if it decides that the facts justify
such action, may receive and act upon any such claim asserted at any
time prior to final payment under this Agreement. Where the cost of
Deliverable Items made obsolete or excess as a result of a change is
included in Seller's claim or adjustment, Buyer shall have the right
to prescribe the manner of disposition of such Deliverable Items.
Failure to agree to any adjustment which Seller claims or asserts
which is less than 5% of the Contract Price shall not excuse Seller
from proceeding with this Agreement as changed.
b. Whether made pursuant to this Article or by mutual agreement,
changes shall not be binding upon Buyer, until agreed in writing by
Buyer. The issuance of information, advice, approval or instructions
by Buyer's technical personnel or other representative shall be
deemed expressions of personal opinions only and shall not affect
Buyer's and Seller's rights and obligations hereunder unless the
same is in writing expressly stating that it constitutes an
amendment or change to this Agreement. Any changes or modifications
to this Agreement shall not become effective until duly signed by
Buyer's and Seller's authorized representatives.
c. Seller shall notify Buyer immediately of any amendments to
specifications of the Deliverable Items which Seller wishes to
implement thereto. Such implementation shall not take place without
having first received Buyer's written approval which shall
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not be unreasonably withheld.
9. LIMITED WARRANTY
a. Seller, notwithstanding the Article of this Agreement entitled
"Inspection and Acceptance", warrants that all items of Deliverable
Items to be delivered thereunder, shall be fit for the intended use,
free from defects in and malfunctions arising from workmanship,
material and design and shall conform to the requirements of this
Agreement. If Buyer shall give Seller notice of any defect,
deficiency or non-conformance within 360 days from the date of
On-Site Acceptance of such item under this Agreement, Seller shall,
at no cost to Buyer and within the "Turn-Around Time" as defined
below, repair or furnish replacements for all such defective,
deficient or non-conforming items or parts thereof.
b. "Turn-Around Time" for the purposes of this Article means 15 days
from the date on which such defective item, or defective, deficient
or non-conforming part thereof, is furnished to Seller at port of
entry for repair or replacement until the date on which such
replaced or repaired item is returned to the Delivery Point or to
such other location as will be specified by Buyer. Seller will
provide "Hot Line" technical support 5 days a week, 24 Hours a day
for the duration of the Warranty period provided for 9.a above.
c. Seller shall bear shipment costs of the deficient, repaired or
replaced item as well as the risk or loss or damage to the item or
its replacement throughout the period between the shipment of the
defective item and the receipt by Buyer of the repaired or replaced
item. Repaired or replaced items shall be fully warranted in
accordance with this Article for the remainder of original warranty
period or 6 months, whichever is longer.
d. Seller will send replacement part as soon as possible after faxed
notification of failure of part, buyer is expected to ship
replacement part back to Seller immediately after notification. If
failed part is not resumed within 15 days, then Seller has the right
to bill buyer for the then current sales price of the item. This
item is intended to promote fast replacement, and to encourage
concurrent shipment of both the failed part by the buyer, and the
replacement part by the seller.
e. The above warranties shall be in addition to any other rights,
remedies or warranties available to Buyer under contract or at law.
10. PATENT INDEMNITY
a. Seller agrees to indemnify and hold harmless Buyer, against any
claims, demands, liability or suit of any nature, including costs
and expenses for or by reason of any actual or alleged patent,
trademark, or copyright infringement arising out of the
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design, development, manufacture, use, sale or disposal of any item
of the Deliverable Items furnished hereunder in Israel provided,
however, in no event shall Seller's obligation under this indemnity
or other indemnity exceed the total contract value.
b. Should Buyer be prevented as a result of such claims, actions, or
suits regarding infringement from utilizing the item of Deliverable
Items in question, then Seller shall, at Seller's sole option and
expense, either substitute a fully-equivalent non-infringing item,
or modify the item so that same no longer infringes but remains
equivalent, or obtain for Buyer the right to continue use of the
item in accordance with the terms of this Agreement or refund full
or, with consent of Buyer for appropriate part of contract value.
c. In the event of Buyer being obliged to defend any litigation arising
under or in connection with an actual or alleged infringement as
aforesaid, Seller will defend such action in Buyer's name, at
Seller's expense, and will bear all damages, under any judgment
whether final, appealable or not, awarded against Buyer, provided
that in no event shall seller be liable for or required to expand
under this article 10c. and 10d. below more than the total value of
the contract. Seller will obtain Buyer's advance written approval
with respect to the identity of all counsel appointed to represent
Buyer, and with respect to any public disclosures or notices issued
by Seller or on its behalf concerning the litigation and all and any
settlements reached with the plaintiff.
d. Seller shall have no obligation hereunder with respect to any
proceeding or claim of infringement based on Buyer's modification of
the Deliverable Items or the combination, operation or use of such
Deliverable Items with program(s) and products not furnished by
seller if such infringement claim would have been avoided in the
absence of such modification, combination or operation or use with
program(s) not furnished by Seller.
11. DEFAULT
a. Buyer may cancel for Seller's default all or any part of the
undelivered portion of this Agreement if Seller breaches any one or
more of the material terms hereof, including, but not limited to,
Seller's failure to make Delivery within the time specified herein
and/or Seller's failure to comply with Acceptance requirements as
set out in Annex I. Buyer shall also have the right to cancel this
Agreement or any part hereof for default in the event of the
occurrence of any of the following:
(1) Insolvency of Seller;
(2) Seller's filing of a voluntary petition in bankruptcy, or
reorganization, or for the appointment of a receiver;
(3) Filing of an involuntary petition to have Seller declared
bankrupt, or subject
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to receivership, provided it is not vacated within thirty (30)
days from the date of filing; or
(4) The execution by Seller of any assignment for the benefit of
creditors.
(5) In the event of defaults as aforesaid Buyer shall have the
right to return any part of Deliverable Items, and be entitled
to an immediate refund of all amounts paid therefor and/or to
collection of funds from the Escrow account per Article 7d. in
the event of default other than I to IV above Seller shall
have 30 days from the receipt of notice of default provided
for in subarticle (e) below to effect a cure to the
satisfaction of Buyer.
b. If this Agreement is canceled in whole or in part pursuant to this
Article, Buyer, in addition to any other rights provided by law or
in this Agreement, may require Seller to transfer title and deliver
to Buyer, in the manner and to the extent directed by Buyer (1) any
completed Deliverable Items, and (2) such partially completed
Deliverable Items specifically acquired for the performance of such
part of this Agreement as has been terminated; and Seller shall
protect and preserve property in its possession in which Buyer has
an interest. Payment for completed Deliverable Items delivered to
and accepted by Buyer shall be at the Contract Price therefor.
Payment for partially completed deliverables delivered to and
accepted by Buyer and for the protection and preservation of
property shall be in an amount agreed upon by Seller and Buyer.
Failure to agree to such amount shall be a dispute concerning a
question of fact within the meaning of the Article of this Agreement
entitled "Disputes".
c. In the event of Default Buyer may withhold from amounts otherwise
due to the Seller for such completed Deliverable Items or partially
completed deliverables such sum as Buyer determines to be necessary
to protect Buyer against loss because of outstanding liens or claims
of former lien holders on the Deliverable Items and/or partially
completed deliverables as aforesaid.
d. Buyer has a right of lien over all such Deliverable Items or
partially completed deliverables as aforesaid, and the provisions of
this Article shall not prejudice and shall not be prejudiced by the
Buyer's right of lien or its exercise thereof where the items have
been paid for, no lien for items not yet paid for will be accepted.
e. Cancellation for Seller's default shall be effected by delivery of
written notice thereof to Seller, and after the expiration of the
"cure period" during which no cure satisfactory to the Buyer was
effectuated. Buyer shall have no obligation with respect to the
incomplete portion of this Agreement. If after notice of
cancellation of this Agreement for default and expiration of the
cure period it is determined for any reason that Seller was not in
actual default, such notice shall be deemed to have been issued
pursuant to the Article hereof entitled "Termination for
Convenience".
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f. The rights and remedies of Buyer provided in this Article shall not
be exclusive and are in addition to any other rights and remedies
provide in law, equity, or under this Agreement.
12. LIQUIDATED DAMAGES
[intentionally left blank]
13. FORCE MAJEURE
a. Neither party shall be in default on account of the interruption of
its performance under this Agreement by extraordinary natural
disturbances, acts of God, acts of a government in its sovereign
capacity, any civil commotion, riot, insurrection or hostilities, or
any other causes beyond the reasonable control of such party, that
arise without the fault or negligence of such party, and that result
in delay of performance hereunder. Any such delay resulting from
such events shall be referred to herein as a "Force Majeure" and
shall entitled the delayed party to a corresponding extension of the
Program Schedule. The party whose performance will be delayed by
such events will use its best efforts to notify the other within
three (3) days after the occurrence of such an event, as well as the
cessation thereof.
b. With respect to delays in performance of Seller's subcontractors or
suppliers, such delays shall be deemed excusable delays with respect
to Seller only if such subcontractor's performance is prevented by a
cause set forth in sub-Article a. above, and when Seller could not
have obtained the supplies or services from other sources in
sufficient time to prevent interruption of its performance of this
Agreement.
c. If a Force Majeure results in the extending of any delivery under
this Agreement by more than sixty (60) days, Buyer may terminate
this Agreement in whole or in part on account of such excusable
delay, in accordance with the Article hereof entitled Termination
for Convenience, except that Seller shall not be entitled to any
profit.
14. TERMINATION FOR CONVENIENCE
a. The performance of work under this Agreement may be terminated, in
whole, or from time to time in part, by Buyer in accordance with
this Article. Termination of work hereunder shall be effected by
delivery to Seller of a notice of termination in writing specifying
the extent to which performance of work under the Agreement is
terminated, and the date upon which such termination becomes
effective (hereinafter "Notice of Termination").
b. After receipt of a Notice of Termination and except as otherwise
directed by Buyer, Seller shall promptly do all of the following:
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(1) stop work under the Agreement on the date and to the extent
specified in the Notice of Termination;
(2) place no further orders or subcontracts for materials,
services, or facilities except as may by necessary for
completion of such portions of the work under the Agreement as
may not be terminated;
(3) terminate all orders and subcontracts to the extent that they
relate to the performance of any work terminated by the Notice
of Termination;
(4) assign to Buyer in the manner, and to the extent directed by
Buyer all of the rights, title and interests of Seller under
the orders or subcontracts so terminated after Seller received
the applicable payment.
(5) settle all outstanding liabilities and all claims arising out
of such termination of orders and subcontracts subject to the
approval or ratification of Buyer, to the extent Buyer may
require, which approval or ratification shall be final for all
the purposes of this Article.
(6) Subject in any event to the final Payment and the provision of
Article 14.e; transfer title and deliver to Buyer in the
manner, to the extent, and at the times directed by Buyer (i)
the fabricated or unfabricated parts, work in progress,
completed work, Deliverable Items and other material produced
as a part of, or acquired in connection with the performance
of the work terminated by the Notice of Termination; and (ii)
the completed or partially completed plans, drawings, which if
the Agreement had been completed, would be required to be
furnished to Buyer;
(7) if Buyer should so direct, Seller shall use its best efforts
to sell in the manner, to the extent at the time, and at the
price or prices directed or authorized by Buyer any tangible
used in Fabricating the Deliverable Items which was acquired
for this Agreement and which does not require it to license
the incorporated software and further; provided, however, that
(i) Seller shall not be required to extend credit to any
purchaser, (ii) may acquire any such property under the
conditions prescribed by and at a price or prices approved by
Buyer, and (iii) the proceeds of any such transfer of
disposition shall be applied in reduction of any payment to be
made by Buyer to Seller under this Agreement or shall
otherwise be credited to the price or cost of the work covered
by this Agreement or paid in such other manner as Buyer may
direct;
(8) complete performance of such part of the work as shall not
have been terminated by the Notice of Termination; and
(9) take such action as may be necessary or as Buyer may direct
for protection
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and preservation of the property related to this Agreement
which is in the possession of Seller and in which Buyer has or
may acquire an interest.
c. Pay all milestones to date, plus:
d. a prorata portion of the next milestone equal to the % of the work
completed which is subject to such next milestone, plus:
e. all termination costs and penalties payable by seller to third
parties as a result of cancellation, net of any credits which might
be secured, plus:
f. a penalty equal to 25% of all of the above or 25% of the entire
contract, whichever is greater.
15. STOP WORK ORDERS
a. Buyer may, at any time, by written order to Seller, require Seller
to stop all, or any part of the work called for by this Agreement
(the "Stop Work Order") for periods of up to thirty-five (35) days
after the Stop Work Order is delivered to Seller, not to exceed an
aggregate of more than one hundred (100) days per annum and for any
further period to which the parties may agree. Any such order shall
be specifically identified as a Stop Work Order issued pursuant to
this Article. Upon receipt of such an order, Seller shall forthwith
comply with its terms and take all reasonable steps to minimize the
incurrence of costs allocable to the work covered by the order
during the period of work stoppage. Within a period of up to
thirty-five (35) days after a Stop Work Order is delivered to
Seller, or within any extension of that period to which the parties
shall have agreed, Buyer shall either -
(1) cancel the Stop Work Order, or
(2) terminate the work covered by such order by reason of Seller's
default or as provided in the Article hereof entitled
"Termination for Convenience", as appropriate.
b. If a Stop Work Order issued under this Article is canceled or the
period of the order or any extension thereof expires, and Buyer has
not terminated this Agreement pursuant to sub-Article a. above,
Seller shall promptly resume work. An equitable adjustment shall be
made in the Program Schedule Delivery Date or Contract Price, or all
of these and the Agreement shall be modified in writing accordingly,
if
(1) the Stop Work Order results in an increase in the time
required for, or in Seller's cost in the performance of any
part of this Agreement, and
(2) Seller asserts a claim for such adjustment within thirty (30)
days after the end
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of the period of work stoppage; provided that Buyer shall
promptly review in good faith the facts which Seller asserts
justify such claim and promptly act upon such claim prior to
final payment under this Agreement.
(3) Buyer understands and agrees that this Agreement causes Seller
to make a substantial commitment of resources and capacity and
that a Stop Work Order may cause a substantial dislocation and
out-of-pocket expense which will be taken into account in
determining an equitable adjustment. If the parties fail to
reach agreement on such adjustment within sixty (60) days, it
shall be a Dispute subject to Article 29 of this Agreement
with respect to any sums in excess of those Buyer proposes to
pay in good faith but shall not operate to defer Buyers time
to pay the amount it has in the interim determined to be
appropriate.
16. NEW MATERIAL
Except as to any Deliverable Items and components which the Technical
Specifications or the SOW(s) specifically provides need not be new, Seller
represents that the Deliverable Items and components thereof to be
provided under this Agreement are new (not used or reconditioned, and not
of such age or so deteriorated as to impair their usefulness or safety).
If at any time during the performance of this Agreement Seller believes
that the furnishing of Deliverable Items or components thereof which are
not new is necessary or desirable, it shall notify Buyer immediately in
writing including the reasons therefor and proposing any consideration
which will flow to Buyer if authorization to use such Deliverable Items is
granted.
17. SUBCONTRACTING
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18. QUALITY ASSURANCE
a. Seller shall provide a Quality Control System acceptable to Buyer
and Buyer's Customer for the Deliverable Items covered herein. The
Quality Control System shall be in accordance with acceptable
industrial quality standards and procedures applicable MIL-Q-9858A
(or equivalent commercial standard), and shall be maintained by the
development implementation of a Buyer approved program which
periodically and systematically audits all quality aspects of the
Deliverable Items.
b. Seller shall provide with each Delivery a copy of final
inspection/test results, and a COC endorsed by a designated
representative of Seller's organization.
c. Seller shall prepare and submit a detailed Quality Assurance Plan to
Buyer not later than one (1) month ARO, that includes all applicable
elements of applicable quality
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specifications imposed by this Agreement. The plan shall be based on
the technical and manufacturing aspects required as a result of the
engineering design and the materials and production requirements for
the Deliverable Items to be furnished.
d. The Quality Assurance Plan shall be maintained to reflect current
Quality Assurance policies, practices and procedures throughout the
life of the Agreement. All changes shall be submitted to Buyer for
approval prior to implementation.
19. ITEMS FURNISHED BY BUYER (If applicable)
a. If Buyer furnishes to Seller any material for use in connection with
and under the terms of this Agreement, Seller agrees (i) not to
substitute any other material in such use without Buyer's prior
written consent; (ii) that title to such materials shall be deemed
to remain with Buyer and shall not be affected by incorporation in
or attachment to any other property; and (iii) that all such
material (except that which becomes normal industrial waste or is
replaced at Seller's expense) will be returned in the form of end
items or used material.
b. Seller shall not be required to use any materials provided by Buyer
that does not comply with system requirements as set in the
applicable specifications, if such material would impair the
operation and reliability of the Deliverable Items.
c. Seller agrees that Seller will use all designs, tooling, patterns,
drawings, information and equipment, title to which is with Buyer as
provided in sub-Article a. above or otherwise, including, without
limitation, Deliverable Items in the possession of Seller or its
appointees for repair at any time following Delivery, only in the
performance of this Agreement and not otherwise unless Buyer's prior
written consent has been obtained. Seller assumes all risk of loss
of or damage to such property while in the custody or control of
Seller or its appointees and will immediately notify Buyer of loss
of or damage to such property. Upon completion or termination of
this Agreement, Seller shall receive from Buyer shipping
instructions or other authorized disposal instructions prior to the
return of any such items furnished by Buyer under this Agreement,
and shall immediately act in accordance with such instructions.
d. Seller shall maintain and administer in accordance with sound
industrial practice a program for the maintenance, protection and
preservation of the property so as to assure its full availability
and usefulness for the performance of this Agreement.
e. Buyer and/or any person designated by Buyer shall at all reasonable
times have access to the premises wherein any Buyer furnished items
within the meaning of this Article is located, for the purpose of
inspection of the property.
f. If Buyer is required to provide services to Seller hereunder, Seller
shall assist Buyer in obtaining all necessary permits and security
clearances to enable Buyer's employees
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to perform any work or services required under this Agreement in
Seller's country.
20. APPROVAL OF DESIGN
When the Deliverable Items to be furnished hereunder are to be fabricated
or when services to be furnished hereunder are to be provided in
accordance with Seller's design, plans or drawings, or when a
preproduction or pilot production sample is required to be submitted to
Buyer for approval by Buyer of such design, plans, drawings or samples,
this shall in no way relieve Seller from the obligation of complying with
the specifications and other requirements incorporated herein, and Buyer
by such approval, in no way assumes any part of Seller's responsibility
for the satisfactory operation of the Deliverable Items to be delivered
for the purposes intended.
21. INSURANCE
a. Indemnification and Insurance
1. Indemnification:
Seller shall save and keep harmless and indemnify the Buyer,
its officers, agents and employees against liability claims
and the costs of whatsoever kind and nature arising or alleged
to arise for injury including personal injury to or death of
any person or persons, and for loss or damage to any property,
occurring in connection with or in any way incident to or
arising out of the occupancy, use, service, operation or
performance or work in connection with this Agreement
resulting in whole or in part from the acts, errors or
omissions of the Seller, any subcontractor, or any employee,
agent or representative of the Seller or subcontractors.
In addition, the Seller shall be liable for and hold the buyer
harmless against loss of or damage to the Deliverable Items,
Sellers Own Equipment, Property Constructed or otherwise
handled by the Seller in terms of this agreement and Work
carried out by the Seller, until Delivery (see article 6). The
term "Buyer" shall include any SubContractor or Agent of the
Buyer.
2. For the avoidance of doubt neither the procurement nor the
maintenance of any type of insurance by the Buyer, Seller or
any other party shall in any way be construed or be deemed to
limit, discharge, waive or release the Seller from any of the
obligations and risks assumed or accepted by the Seller by the
Agreement or at law to be a limitation on the nature of extent
of said obligations and risks.
20
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22. POST WARRANTY OBLIGATIONS
a. Seller agrees that after the expiration of the warranty period
provided in Article 9 for a period of five years thereafter, Seller
will provide, at Buyers expense, support and maintenance services
for the Deliverable Items as specified in Annex I to the Agreement
(The Maintenance Period). In addition, it will retain at its offices
as designated to Buyer from time to time, a staff of technical
personnel who are expert in the design, manufacture and
troubleshooting of Seller's Deliverable Items supplied under this
Agreement. This staff will be available to render assistance to
Buyer upon request and will respond to Buyer's need for special
technical assistance regarding the Deliverable terms. This technical
service, which will be limited to assistance by telecopier or
correspondence, shall be supplied to Buyer at no charge and shall be
available during Seller's normal business hours.
b. Furthermore, Seller undertakes to repair the Deliverable Items, or
any part thereof, during five year Maintenance Period.. Seller will
perform such repairs on terms to be agreed but which in any event
shall be no higher than 30% than the prices set out in Annex "2" to
this Agreement. Seller will maintain the capability to perform such
repairs throughout the aforesaid period.
c. During the Maintenance Period, Seller will notify Buyer, at least
six months ahead of implementation, of any significant improvements
or innovations which Seller shall make or cause to be made to the
Deliverable Items and which affect form, fit or function and shall
make such improvements or innovations available to Buyer at terms no
less favorable than those granted to its favored clients. In the
event that Buyer decides not to purchase such improvement or
innovation, Seller shall continue to provide the support,
maintenance and repair services set out in Annex I.
d. During the Maintenance Period, Seller undertakes to supply Buyer
with spare parts for the Deliverable Items as Buyer may from time to
time require during said five (5) year period, at prices which are
fair and reasonable considering prevailing market prices at the time
said Items are ordered and which in no event exceed the prices
charged by Seller to its most-favored customers purchasing the same
or similar items in like or similar quantities. Seller further
undertakes that the total prices for all spare parts which together
comprise a complete deliverable unit shall never exceed the
then-current price to Buyer for production units of such complete
deliverable unit. All spare parts ordered by Buyer shall be
delivered to Buyer in accordance with the provisions of the Article
hereof entitled "Delivery, Packing and Shipment", and shall be
accompanied by a serviceable tag or other suitable marking
indicating that same have successfully passed Seller's acceptance
tests for said parts.
23. LONG TERM SALES COMMITMENT
a. For a period of one ) year after Delivery of the first production
items hereunder,
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subject to existing capacity and taking in account all existing
orders and commitments, Seller hereby agrees to supply to Buyer any
and all quantities of said item of the Deliverable Items, beyond the
quantities provided for in this Agreement at a price which shall not
exceed the prices set forth in Annex II hereof. Notwithstanding the
above, in the event of significant number price reductions, the
price of such Deliverable Items shall be reduced accordingly.
b. If Seller elects not to continue the production line for the items
mentioned in sub-paragraph a. above at any time after the expiration
of the aforesaid five (5) year period, Seller shall notify Buyer at
least six (6) months prior to the date upon which Seller seeks to
stop work and shall offer a "last time to purchase" for all items in
the system, in order for the buyer to purchase needed spare parts to
continue the use of the system for the desired period of time. The
pricing will be as set forth in paragraph a above.
c. Any items purchased by Buyer pursuant to this Article shall be
subject to all of the other terms and conditions set forth in this
Agreement.
24. PROPRIETARY DATA
a. All specifications, technical data and information furnished by one
party to the other in writing prior to or during the course of this
Agreement shall be deemed proprietary data of the disclosing party
and will not be disclosed by recipient to third parties. Recipient
shall not be liable for disclosure of such data which: (1) is or
becomes available to the public from a source other than recipient
before or curing the period of this Agreement, (2) is released in
writing by disclosing party without restriction as to its use or
disclosure, (3) is lawfully obtained by recipient from a third party
or parties, or (4) recipient proves to disclosing party's reasonable
satisfaction was known by recipient prior to such disclosure.
b. Buyer and Seller shall not disclose to any third party any
information, data, know-how or specifications with which it is
furnished by one to the other under this Agreement or which it
develops with the other's assistance without the other's prior
written approval.
c. All data specifically generated by Seller for the purpose of
performing this Agreement shall remain seller's property but shall
be deemed licensed to Buyer in accordance with Article 1.f.
d. Buyer and Seller agree to return to each other upon conclusion or
termination of this Agreement all proprietary data and material
which may have been exchanged between them.
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26. CONFIDENTIALITY, ADVERTISING
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27. EXPORT LICENSE
Buyer's and Seller's obligations are conditional upon Seller obtaining
valid Export License(s) from its government for shipment of the
Deliverable Items to Israel. If such licenses are not obtained within
sixty (60) days ARE, or revoked prior to Delivery, Buyer or Seller has the
right to terminate this Agreement and all advance or progress payments
will be refunded within thirty (30) days together with interest thereon
from the date each such payment was made until the date of its repayment
in full. Buyer shall, if requested by Seller, reasonably cooperate in
efforts to obtain such export license(s).
28. COMPLIANCE WITH STATUTES AND REGULATIONS
Seller warrants and certifies that, in the performance of its obligations
under this Agreement, Seller will comply with all applicable statutes,
rules, regulations, orders and other instruments, statutory or otherwise,
having the force of law, of Seller's country, and, of the State of Israel
which are known to Seller, and agrees to indemnify Buyer against any loss,
cost, damage, or liability by reason of Seller's knowing violation of such
statutes, rules, regulations and/or orders and/or other instruments,
statutory or otherwise, having the force of law.
29. APPLICABLE LAW; DISPUTES
a. The parties agree that any dispute or claim arising out of or
relating to this Agreement shall be submitted in good faith to
mediation in the City of London, England, in accordance with the
Rules and Procedures of the International Chamber of Commerce. Fees
for the mediation will be shared equally by the parties to the
mediation or otherwise as the parties agree. Settlement reaches in
mediation are not binding until the parties signed a written
settlement agreement. If an agreement is not signed within ten (10)
days of mediation, or if no agreement is reached in mediation, the
parties shall, on demand of either party, submit their disputes or
claim to arbitration in the City of London, England. One arbitrator
shall be appointed: one arbitrator shall be appointed by Buyer, one
arbitrator shall be appointed by Seller, and one shall be appointed
by the two so appointed. The determination in writing of such
arbitrators, signed by at least two (2) of them, shall be final and
finding on the parties. Such determination shall be made as soon
practicable after the reference of the claim to arbitration. The
arbitrators shall be governed by the rules of the London Court of
Arbitration then in effect and which have full power to make such
regulation (including without limitation choice of law) and to give
such orders and direction in all respects as they hall deem
expedient, as well as in respect to the claim and differences
referred to them, and also with respect to the mode and times of
executing and performing any of the acts or things which may be
awarded or directed to be
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done, Buyer and Seller shall each bear the fees and expenses of the
arbitrators appointed by it, and one-half of the fees and expenses
of any arbitrator jointly appointed. The parties agree that the
decision of the arbitrators shall be enforceable by the court of any
jurisdiction in the United States and Israel and hereby waive the
benefit of any law or regulation which would otherwise prevent or
impede such enforcement.
b. Buyer, Seller each hereby nominates the address appears on the title
page of this Agreement as its address for the purpose of service of
court documents: for the purpose of enforcing the determination of
the arbitrators.
c. Pending final decision of a dispute hereunder, Seller and Buyer
shall proceed diligently with the performance of the Agreement in
accordance with its terms.
30. OPTIONS
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31. NOTICES
All notices and other communications required or authorized hereunder
shall be given in writing by personal delivery, registered air mail,
telecopier, or cable, and shall be addressed to the respective party as
follows, unless such address is changed by written notice to the other
party:
To Seller: 9051 Executive Park Drive To Buyer: 18 Hasivim St
Knoxville TN 37923 Petah-Tikua
Israel
Telecopier No: (615) 539-5390 Telecopier No. 972-3-926148
Attention: Mahmoud Youssefi Attention: Michael Leviuik
32. MISCELLANEOUS
a. Assignment
(1) Seller may not assign this Agreement in whole or in part, or
any rights thereunder, except that claims for money due or to
become due hereunder may be assigned by Seller to a bank,
trust company or other financial institution. Seller shall
supply Buyer immediately with two (2) copies of such
assignment and shall indicate on each invoice to whom payment
is to be made.
(2) Buyer is entitled to freely assign all or any part of this
Agreement to any parent, subsidiary or associated company,
provided that it furnishes Seller with written notice thereof
and Buyer remains a Guarantor of payments due
24
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to Seller hereunder.
b. Nature of Agreement
Nothing in this Agreement shall be construed as creating a
relationship of principal and agent or of employer and employee
between Buyer and Seller. Furthermore, nothing in this Agreement is
intended to constitute, create, give effect to or otherwise
contemplate a joint venture, partnership, or formal business entity
of any kind and the rights and obligations of a party shall not be
construed as providing for a sharing of profits or losses arising
out of the efforts of either of the parties except as may be
provided for in any future contracts. The parties shall not incur
any liability on behalf of the other.
c. Waiver
No waiver by either party of any breach of this Agreement shall be
held to be a waiver of any other or subsequent breach. No waiver or
time extension given by either party shall have effect unless made
expressly and in writing.
d. Entire Agreement
This Agreement constitutes the entire agreement between the parties,
supersedes and cancels any previous understandings or agreements
between both parties relating to the provisions hereof, and
expresses the complete and final understanding of the parties in
respect thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
at Knoxville, Tennessee, USA and at Tel Aviv, Israel, by their duly authorized
representatives, as of this 26 day of June, 1995.
BUYER SELLER
By(Name): By(Name): Mahmoud Youssefi
Title: President Title: President
Signature: /s/ Michael Leviuik Signature: /s/ Mahmoud Youssefi
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Exhibit 10.9
LICENSE AGREEMENT
This LICENSE AGREEMENT (this "Agreement") is made and entered into as of
the 26th day of September, 1996, by and among CELERITY SYSTEMS, INC., a
corporation organized and existing under the laws of the State of Tennessee,
United States of America ("Licensor") and ENKAY TELECOM CO., LTD, a corporation
organized and existing under the laws of the Republic of Korea ("Licensee").
WHEREAS, Licensor is engaged in the development, manufacture and licensing
of hardware, software, systems and equipment used in the interactive digital
cable television business, including its next generation set-top box unit called
the "Topper 4000" (the "Product"); and
WHEREAS, Licensee is in the business of manufacturing and selling various
types of consumer electronic equipment and desires to manufacture and distribute
the Product in the Republic of Korea and elsewhere; and
WHEREAS, the parties executed a Memorandum of Understanding dated June 14,
1996 (the "Memorandum"), evidencing their intention to enter into a definitive
Agreement granting license rights to Licensee as described herein.
NOW, THEREFORE, in consideration of the terms, covenants and conditions
contained herein, the parties hereto mutually agree as follows:
1. Manufacture and Distribution Rights.
(a) Licensor hereby grants to Licensee, and Licensee hereby
accepts, the right and license to manufacture and sell the
Product on the terms and conditions set forth herein. Licensor
hereby grants to Licensee, and Licensee hereby accepts, a
license, in and to technology, know-how and intellectual
property rights related to the Product (the "Technology")
necessary to and solely for the purpose of manufacture and
sale of the Product.
(b) The license granted hereby may not be transferred or
sublicensed by Licensee, but shall extend to any wholly-owned
subsidiaries and divisions of Licensee. Licensee shall be
responsible for the compliance by each such subsidiary and
division with the terms and provisions of this Agreement, and
agrees to report and pay royalties to Licensor in accordance
with Section 3 hereof with respect to production of the
Product by each such subsidiary or division. Any such
affiliate shall agree in advance in writing to be bound by all
the terms of this Agreement, and Licensee shall agree to
guarantee the obligations of such assignee hereunder.
(c) The license granted hereby conveys no right to Licensee to use
or register any trademark or trade name of Licensor, or to use
the name of Licensor or any trademark or trade name in any
manner whatsoever in connection with the sale of the Product
hereunder. Nothing in this Agreement shall be construed as
conveying, expressly or by implication, any right under any of
Licensor's know-how except in connection with the manufacture
and sale of the Product
<PAGE>
hereunder.
(d) Licensee shall not have the Product manufactured for it by any
third party without the prior written consent of Licensor,
except where such third party has been licensed by Licensor to
manufacture the Product.
(e) Upon the termination of this license for any reason, Licensee
shall return the Technology, including but not limited to the
source codes, and any and all copies thereof, to Licensor.
(f) Nothing contained herein shall prohibit Licensor from using
the Technology for its own purposes, nor from licensing the
Product and the Technology to others, provided that such usage
or licensing by Licensor is not in competition with the sale
of the Product by Licensee in the Republic of Korea in
connection with or as a part of the SWAN II Interactive
Digital CATV project for Korea Telecom. Nothing contained
herein shall prohibit Licensor from using the Technology for
the development, sale and distribution of its server products
for use with set-top boxes manufactured by others which may be
competitive with Licensee.
2. Territory. The license to manufacture and sell the Product granted
hereby shall be exclusive as to sales for delivery within the
Republic of Korea. Licensee may from time to time request the right
to sell the Product in other areas. If Licensor has not at the time
granted to anyone else the right to sell the Product in such other
areas, Licensor will grant to Licensee the non exclusive right to
manufacture and sell the Product in such other areas on
substantially the same terms as are set forth in this Agreement,
provided that such right shall exist only until such time as
Licensor grants to Licensee or someone else an exclusive right to
sell in any such area.
3. Royalties.
(a) In consideration of the Technology to be provided to Licensee
by Licensor under this Agreement, Licensee shall pay to
Licensor the sum of one million two hundred thousand dollars
($1,200,000), in addition to periodic royalties as hereinafter
provided, payable by Licensee to Licensor as follows:
(i) one hundred thousand dollars (U.S. $100,000) within
three (3) weeks after execution of the Memorandum,
nonrefundable, such payment to be in consideration of
Licensor's agreement herein to undertake development of
the Topper 4000;
(ii) five hundred thousand dollars (U.S. $500,000) upon the
execution of this Agreement, nonrefundable; and
(iii) six hundred thousand dollars (U.S. $600,000), as a
fixed, up front license fee, upon Licensor's
demonstration of the proper functioning
2
<PAGE>
of the Product according to the specifications set forth
in Exhibit A attached hereto for the SWAN II Interactive
Digital CATV project for Korea Telecom or Licensee's
first sale of any Product utilizing the Technology,
whichever occurs first.
(b) The initial one hundred thousand dollars (U.S. $100,000) and
five hundred thousand dollars (U.S. $500,000) payments
provided for above shall be made before Licensor provides any
technical know-how, information or data to Licensee.
(c) In consideration of the license herein granted, and in
addition to the fixed payments provided for in Section 3(a)
above, Licensee shall pay to Licensor periodic royalties at
the rate of ten dollars (U.S. $10) for each unit of the
Product sold by Licensee. Such periodic royalties shall be
paid by Licensee to Licensor within thirty (30) days following
the end of each fiscal quarter of this Agreement, beginning
with the end of the third full month following the execution
of this Agreement.
(d) Licensee will furnish to Licensor within thirty (30) days
following the end of each such quarter a written statement
certified by the Chief Financial Officer of Licensee showing
the number of units of the Product sold by Licensee during
such quarter, including customer names and selling prices, and
the amount of periodic royalties due for the corresponding
period, together with payment of the royalties due.
(e) Licensee will at all times during the term of this Agreement
keep accurate books of account and other records reflecting
all sales of the Product, and will carefully prepare and
maintain such books and records for at least five (5) years
following the termination of this Agreement. Licensee hereby
grants to Licensor or its duly accredited representative the
right to inspect and make copies of such books and records for
the purpose of ascertaining or confirming the accuracy of
statements rendered hereunder, such inspection and copying to
be at the expense of Licensor.
(f) All payments provided for in this Agreement shall be made to
Licensor in Knoxville, Tennessee in United States currency.
All payments shall be net to Licensor, without deduction for
taxes, assessments, or other charges which may be imposed on
Licensor by the Government of the Republic of Korea or any
political subdivision thereof with respect to any amounts
payable to Licensor pursuant to this Agreement, and without
deduction for banking or wire transfer fees. Such taxes,
assessments or other charges, and fees shall be paid by
Licensee.
4. Term. The term of this Agreement, and the duration of the license
granted hereby, shall be three (3) years from the date of this
Agreement. This Agreement shall be subject to renewal on terms to be
agreed upon by the parties. Either party intending
3
<PAGE>
to seek renewal of this Agreement shall give notice thereof to the
other party at least one hundred eighty (180) days prior to the
expiration hereof.
5. Delivery of Technology. Following the Licensor's receipt of fee
payments provided for in Sections 3(a)(i) and 3(a)(ii) above in the
aggregate amount of six hundred thousand dollars (U.S. $600,000),
Licensor will supply to Licensee technical information necessary for
the production of the Product, pursuant to Technology Transfer
Agreement between Licensor and Licensee in the form of Exhibit B
attached hereto.
6. Additional Licensee Responsibilities.
(a) Licensee agrees to actively develop the market and to promote
the sale of the Product in the Republic of Korea, including
marketing, distribution, installation and service of the
Product.
(b) Licensee will maintain a marketing, sales and service
organization properly trained to market the Product and to
insure proper installation and servicing thereof.
(c) Licensee will provide to Licensor on at least a quarterly
basis information and analysis of marketing and sales of the
Product in the Republic of Korea and professional support for
future development and sales of the Product in the Republic of
Korea.
(d) Licensee will be solely responsible for providing service and
support for the Products. Licensor shall have no Product
service or support responsibilities.
7. Additional Licensor Responsibilities. Licensor will sell to
Licensee, and Licensee will purchase from Licensor, the proprietary
gate arrays referred to as TOP4B. The part numbers will be disclosed
to Licensee as deemed appropriate by Licensor. Licensor reserves the
right to change the proprietary gate arrays as it deems appropriate.
Licensor will sell to Licensee nonproprietary parts for the Product
as mutually agreed. In all cases, prices will include a reasonable
markup above Licensor's cost.
8. No Patent Warranty. Licensor makes no representation or warranty
that the Product is free from any infringement of any patent or
proprietary rights of others, except that Licensor is aware of no
claim or charge of any such infringement.
9. Indemnification. Licensee agrees to indemnify, to defend and to hold
harmless Licensor from claims of third persons either:
(a) proximately caused by the fault or negligence of Licensee, its
officers, employees or agents; or
(b) which relates to any customer disputes or claims relating to
the marketing,
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sale, distribution, installation, training or service of any
Product or the performance thereof, whether arising out of
express or implied warranty; or
(c) which relates to any other failure by Licensee to comply with
any terms of this Agreement; or
(d) which relates to any failure by Licensee to comply with
applicable laws and/or regulations in accordance with Section
13 hereof.
10. Insurance. Licensee agrees to maintain during the term hereof
liability insurance for personal injury and property damage,
including products liability and contractual coverage, as set forth
herein. Coverage for personal injury shall be not less than one
million dollars (U.S. $1,000,000) annual aggregate liability.
Coverage for property damage shall be not less than five hundred
thousand dollars (U.S. $500,000) per occurrence. Such liability
insurance obtained by Licensee shall include Licensor as a named
insured. Licensee shall supply Licensor with a Certificate of
Insurance upon written request by Licensor.
11. Force Majeure. Neither party hereto shall be liable for any delay
arising from circumstances beyond its control including (but not
limited to) acts of God, war, riot or civil commotion, industrial
dispute, fire, flood, drought, shortage of material or labor or act
of government, provided that the party seeking to be excused shall
make every reasonable effort to minimize the delay resulting
therefrom. Each party shall keep the other fully informed of any
such circumstances.
12. Government Regulations.
(a) Licensee shall comply with all laws and regulations of all
applicable jurisdictions relating to the manufacture, sale and
distribution of the Products.
(b) This Agreement shall be subject to all United States laws and
regulations now or hereafter in effect applicable to the
subject matter hereof. The Export Administration Regulations
of the United States Department of Commerce prohibit, except
under an individual validated license, the exportation from
the United States of technical data relating to certain
commodities (listed in the Export Administration Regulations,
unless the exporter (under this Agreement, Licensor) has
received certain assurances from the foreign importer.
Licensee acknowledges that it has received a copy of the
current Export Administration Regulations of the United States
Department of Commerce and has access to Supplementary
Bulletins from the United States Department of Commerce.
Licensee agrees to comply with all applicable Export
Administration Regulations of the United States Department of
Commerce, and hereby gives to Licensor the assurances called
for in Part 779.4 of such Export Administration Regulations.
(c) If the terms of this Agreement are such as to require or make
it appropriate
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that this Agreement or any part of it be registered with or
reported to any national or supranational agency in any area
in which Licensee will do business hereunder, Licensee will,
at its expense, promptly undertake such registration or
report. Licensee will supply prompt notice and appropriate
verification of any such registration or report and any agency
ruling resulting therefrom.
(d) Licensee will, at its expense, carry out any formal
recordation of this Agreement required by the law of the
Republic of Korea as a prerequisite to enforceability of this
Agreement in the Republic of Korea or for any other reason,
and promptly supply verified proof of such recordation to
Licensor.
13. Termination.
(a) If either party hereto shall breach this Agreement, the other
party may give the defaulting party written notice of such
default. If the defaulting party shall fail or refuse to
remedy such default within thirty (30) days from the date of
said notice, this Agreement may be terminated by a second
written notice and said termination shall be effective as of
the date of the second notice of default. Such termination
shall be without prejudice to any other rights or claims the
aggrieved party may have against the defaulting party.
Defaults under this Agreement shall be deemed to include, but
shall not be limited to:
(i) material failure by either party to fulfill any of its
obligations under this Agreement;
(ii) an adjudication of bankruptcy of either party under any
bankruptcy or insolvency law;
(iii) the commission by either party of a receiver for
business or property, or the meaning of any general
assignment for the benefit of creditors; or
(iv) without the prior consent of Licensor, sale by Licensee
of substantially all of its assets or sale or other
transfer of controlling interest in the ownership of
Licensee.
(b) In addition, either party may, immediately upon notice,
terminate this Agreement in its entirety or with respect to
any particular license or right granted hereunder if:
(i) Such termination is necessary to comply with an order or
official request of the government of the terminating
party, or
(ii) Normal conduct of the business of the other party as a
private enterprise ceases or is substantially altered as
a consequence of action
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taken by governmental or other authority.
(c) Licensor may, immediately upon notice, terminate this
Agreement in its entirety or with respect to any particular
license or right granted by it hereunder if by law or
regulation of the government of the Republic of Korea,
Licensee is disabled from making the payments to Licensor
which it is required to make under this Agreement, and such
disability continues for more than thirty (30) days.
14. Amendments. No provision of this Agreement may be amended, revoked
or waived except by a writing signed by a duly authorized
representative of each of the parties hereto.
15. Assignment. Except as otherwise provided herein, this Agreement
shall not be assignable. Licensee shall have the right to transfer
all or any part of its rights and obligations hereunder to any
wholly-owned affiliate of Licensee, provided, however, that such
affiliate shall agree in advance in writing to be bound by all the
terms of this Agreement and that Licensee agrees to guarantee the
obligations hereunder of such assignee.
16. Notices. Any notice required to be given hereunder shall be deemed
sufficient and delivery shall be deemed complete if sent by
registered Air Mail or confirmed telex to the following addresses:
To Licensor: Celerity, Systems, Inc.
9051 Executive Park Drive
Suite 400
Knoxville, Tennessee 37923
Attention: President
To Licensee: Enkay Telecom Co., LTD.
Enkay Building, 115, Samsung-Dong
Kangnam-Ku, Seoul, Korea 135-090
Attention: President
17. Governing Law. This Agreement and the relationship of the parties
hereto shall be governed in all respects by the laws of the State of
Tennessee, United States of America, except that questions affecting
the validity, construction and effect of any patent shall be
determined by the law of the country in which the patent has been
granted. In the event of any controversy between the parties
respecting the interpretation or application of the terms of this
Agreement, the English language version of this Agreement shall be
controlling.
18. Resolution of Disputes.
(a) All disputes and controversies between the parties hereto of
every kind and
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nature arising out of or in connection with this Agreement as
to the existence, construction, validity, interpretation or
meaning, performance, nonperformance, enforcement, operation,
breach, continuation, or termination of this Agreement shall
be resolved as set forth in this Section 18.
(b) Either party to this Agreement may within fifteen (15) days
after a dispute or controversy arises submit any dispute or
controversy hereunder in writing for resolution by a senior
executive officer of the highest executive level for each of
the parties. If such persons cannot resolve the dispute or
controversy within thirty (30) days, then the dispute or
controversy shall be submitted to binding arbitration pursuant
to the following procedure.
(c) The dispute or controversy shall be submitted to a single
arbitrator with experience in international high technology
commercial matters to be chosen by the senior executive
officers at the highest executive level for each of the
parties within thirty (30) days after the conclusion of the
mediation provided for above. If senior executive
representatives of the disputing parties cannot within such
time agree on an arbitrator, the arbitrator shall be chosen
under International Chamber of Commerce procedures from its
panels of arbitrators with international high technology
commercial experience.
(d) The arbitration hearing shall be held in New York, New York,
United States of America, or at such other place as the
parties and the arbitrator agree, within thirty (30) days
after the dispute is submitted to an arbitrator. The
Arbitration Rules of the International Chamber of Commerce, or
such other rules and procedures as the arbitrator may
determine, shall be utilized in the arbitration proceedings.
The arbitration hearing shall be conducted in the English
language.
(e) The arbitration hearing shall be concluded in not more than
three (3) days unless otherwise ordered by the arbitrator. The
award on the hearing shall be made within thirty (30) days
after the close of the submission of evidence at or in
connection with the hearing.
(f) An award rendered by the arbitrator appointed pursuant to this
Agreement shall be final and binding on the parties to such
proceeding. The award shall be enforceable under the June 10,
1958 Convention on the Recognition and Enforcement of Foreign
Arbitral Awards. Judgment on such award may be entered by any
of the disputing parties in the highest court having
jurisdiction in any country.
(g) The provisions of this Section 18 of this Agreement shall be a
complete bar and defense to any suit, action or proceeding
instituted in any court or before any administrative tribunal
with respect to any dispute or controversy arising out of or
in connection with this Agreement. The arbitration provisions
of this Agreement shall, with respect to any such dispute or
controversy, survive
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the termination or expiration of this Agreement.
(h) Nothing contained in this Section 18 shall give the arbitrator
selected hereunder any authority, power or right to alter,
change, amend, modify, add to, or subtract from the provisions
of this Agreement. Rather, the arbitrator shall endeavor to
interpret the provisions of this Agreement so as to carry out
its terms with reference to any dispute submitted for
arbitration.
(i) The parties shall each bear all of their respective
arbitration costs and expenses, provided, however, that the
parties shall share equally the costs and expenses of the
arbitrator.
(j) The failure or refusal of any party hereto to submit to
arbitration in accordance with this Agreement shall be deemed
a breach of this Agreement.
19. Entire Agreement. This Agreement, including the Technology Transfer
Agreement attached hereto as Exhibit A, represents the entire
agreement and understanding of the parties hereto with respect to
the subject matter hereof and supersedes all other prior agreements,
understandings and communications, whether oral or written,
including the Memorandum.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the day and year first herein written.
CELERITY SYSTEMS, INC.
By: /s/ M. R. Youssefi
----------------------------------
M. R. Youssefi
President
ENKAY TELECOM CO., LTD.
/s/ Choi. Hyun Yui
-------------------------------------
By: Choi. Hyun Yui
Title: Chairman
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Exhibit 10.10
LICENSE AGREEMENT
This LICENSE AGREEMENT (this "Agreement") is made and entered into as of
the 21st day of February, 1997 by and among CELERITY SYSTEMS, INC., a
corporation organized and existing under the laws of the State of Tennessee,
United States of America ("Licensor") and ENKAY TELECOM CO., LTD, a corporation
organized and existing under the laws of the Republic of Korea ("Licensee").
WHEREAS, Licensor is engaged in the development, manufacture and licensing
of hardware, software, systems and equipment used in the interactive digital
cable television business, including a CTL 9000 Fiber to the Neighborhood
("FTTN") Video Server per specifications attached as Section 4 of Exhibit 1
(Preliminary Draft Subject to Change) and a CTL 8500 MediaJet Baseband Server
per specifications attached as Exhibit 2 (Preliminary Draft Subject to Change);
and
WHEREAS, Licensor and Licensee wish to set forth in this Agreement terms
and conditions of Licensor's License to Licensee to purchase, manufacture, and
sell certain technology related to certain software and firmware as set forth on
Schedule A (Preliminary Draft Subject to Change) (the "Software Products") and
certain Proprietary Celerity Boards and Off-The-Shelf items set forth on
Schedule A (the "Hardware Products") (collectively the "Software Products" and
"Hardware Products" are referred to herein as the "Products"; it being
understood that the definition of "Products" shall specifically exclude all
technology, products, parts or services associated with the Ivision project);
and
WHEREAS, Licensee is in the business of selling various types of consumer
electronic equipment and desires to purchase, manufacture and sell the Products
in the Republic of Korea and elsewhere; and
WHEREAS, the parties executed a Memorandum of Understanding dated December
3, 1996 (the "Memorandum"), evidencing their general intention to enter into a
definitive Agreement granting license rights to Licensee as described herein.
NOW THEREFORE, in consideration of the terms, covenants and conditions
contained herein, the parties hereto mutually agree as follows:
1. Manufacturing and Distribution Rights.
a. Licensor hereby grants to Licensee, and Licensee hereby
accepts, the right and license to manufacture and sell the
Products to its customers
<PAGE>
("end Users") in the Territory (as herein after defined) on
the terms and conditions set forth herein. Licensor hereby
grants to Licensee, and Licensee hereby accepts, a license, in
and to technology, know-how and intellectual property rights
related to the Products (the "Technology") necessary to and
solely for the purpose of manufacture and sale of the
Products.
b. When and as required by the License Agreement, Licensor will
provide to Licensee bills of materials, schematic diagrams and
drawings, board layouts, design and prototype delivery
schedules, test equipment recommendations, test procedure
recommendations and other technology and know-how (the
"Technology") sufficient, in Licensor's reasonable judgment,
to enable Licensee to Manufacture the Product. Licensor will
make available Licensor's engineers and other technical
personnel to support the transfer of the Technology, and will
provide reasonable training to Licensee's engineers and
technical personnel at Licensor's Knoxville, Tennessee, United
States of America facility. All travel, housing and other
expenses of Licensee's personnel in connection with such
training shall be borne by Licensee. In the event that
Licensor's personnel provide such training at Licensee's
facility, Licensee will pay all travel, housing and other
expenses of Licensor's personnel as well as Licensor's normal
hourly service rate for such personnel. Licensor will provide
one (1) on-site training session of up to 40 hours at no
charge to licensee, including travel and housing expenses,
provided that the date of such training is at the discretion
of Licensor. If the first 40 hours of training is at a date
selected by Licensee, the first 40 hours may be in more than
one session, and will still be free of hourly service charge,
but the travel, housing and related expenses will be paid by
Licensee.
c. The license granted hereby may not be transferred or
sublicensed by Licensee, but shall extend to any wholly-owned
subsidiaries and divisions of Licensee. Licensee shall be
responsible for the compliance by each such subsidiary and
division with the terms and provisions of this Agreement, and
agrees to report and pay royalties to Licensor in accordance
with Section 6 hereof with respect to production of the
Products by each such subsidiary or division. Any such
affiliate shall agree in advance in writing to be bound by all
the terms of this Agreement, and Licensee shall agree to
guarantee the
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obligations of such assignee hereunder.
d. The license granted hereby conveys no right to Licensee to use
or register any trademark or trade name of Licensor, or to use
the name of Licensor or any trademark or trade name in any
manner whatsoever in connection with the sale of the Products
hereunder. Nothing in this Agreement shall be construed as
conveying, expressly or by implication, any right under any of
Licensor's know-how except in connection with the manufacture
and sale of the Products hereunder nor shall Licensee have the
right to modify any of the Products without the written
consent of Licensor.
e. Licensee shall not have the Products manufactured for it by
any third party without the prior written consent of Licensor,
except where such third party has been licensed by Licensor to
manufacture the Products.
f. Upon the termination of this License for any reason, Licensee
shall return the Technology, including but not limited to the
object codes, and any and all copies thereof, to Licensor.
g. Nothing contained herein shall prohibit Licensor from using
the Technology for its own purposes, nor from licensing the
Products and the Technology to others, provided that such
usage or licensing by Licensor is not in competition with the
sale of the Products by Licensee in the Republic of Korea.
Nothing contained herein shall prohibit Licensor from using
the Technology for the development, sale and distribution of
Products for use with Products manufactured by others which
may be competitive with Licensee outside of the exclusive
items within this Agreement.
h. In order for Licensee to ensure the timely and accurate
completion of the product, Licensor will provide, at no
charge, two completed samples of each proprietary item, and a
list of these items to be included as an attachment to this
agreement. Any additional samples required by Licensee will be
available at the then current list price for each such item.
2. Software Products Purchases.
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a. Licensee shall purchase all of its requirements in the
Territory for the Software Products from Licensor for prices
as shown on Schedule A (Preliminary Draft Subject to Change)
(EnKay Cost) and on terms and conditions as shown on Schedule
B. It is understood and agreed that prices set forth in
Schedule A are subject to periodic revision by Licensor and
all orders for Software Products shall be billed at prices in
effect on the date of receipt of an order.
b. The Software Products to be sold to Licensee for resale under
this Agreement consist of software and firmware either in
proprietary chip sets or in object code as in existence for
the CTL 8500 and CTL 9000 on the date of execution of this
Agreement. Licensor agrees to make available to Licensee the
generic improvements made to this family of servers based on
this architecture. However, other customers of Licensor may
request development of custom features or functions for the
CTL 8500 and CTL 9000 which are paid for by those customers
and which, therefore, may not be covered by the generic
improvements covered by this license. The decision to include
these customer paid improvements in the generic improvements
to this license will be at the sole discretion of the
Licensor. Additionally, Licensor may from time to time
introduce other products including servers, based on
substantially different technology or architecture, and
Licensor agrees to discuss with Licensee any new technology or
architecture which it might develop during the term of this
Agreement. Any new technology or architecture offered to
Licensee shall be on a right of first refusal basis, and will
be subject to negotiated new payments for such new technology
or architecture by Licensee as well as new pricing
determinations and a new Schedule A will be created to reflect
such new payments and new pricing offerings.
c. Licensee agrees that it will not decompile any software of any
type incorporated in the Software Products or provided by
Licensor to Licensee (whether in the operating system of the
Software Products or otherwise) or otherwise re-engineer,
duplicate or otherwise develop an independent manufacturing
capability for the Software Products or any component thereof
nor will it permit access to any third party for any of such
purposes or for any other purpose other than the intended use
of the Software Products. Licensee agrees that it will take
all necessary steps to protect all of the Technology and
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trade secrets of License embedded in the Software Products
from disclosure to any third party, including but not limited
to all necessary supervision of its employees and the
employees of any of its subsidiaries and division for this
purpose.
d. All changes to Software Products which Licensee may wish to
make, including without limitation, any improvements to such
Software Products which Licensee might wish to implement,
shall be first disclosed to and approved in writing by
Licensor.
e. Title to all Software Products shall pass from Licensor to
Licensee with delivery in Knoxville. Risk of loss and/or
damage shall be borne by the party holding title. Licensee
shall be responsible for all insurance after the passage
title.
f. All purchases of Software Products shall be made by Purchase
Order in a form acceptable to Licensor. All purchase orders
are subject to availability and will be filled in the order
received, including orders from other customers. All prices
are FOB Licensor's delivery dock in Knoxville. Licensee shall
schedule all shipping and notify Licensor of the identity of
the carrier and expected pick up date.
g. Invoices will be submitted by Licensor in triplicate original
and two copies for each shipment and will be subject to the
terms and conditions as set forth on Schedule B.
h. Licensor warrants that all Software Products to be delivered
hereunder, shall conform to the Software Products
Specifications as set forth on Exhibit 1 and Exhibit 2 and be
free from defects at the time of delivery. If Licensee shall
give Licensor notice of any defect, deficiency or
non-conformance within 60 days after the delivery date, then
Licensor shall, at no cost to Licensee repair or furnish
replacements for all such defective, deficient or
non-conforming items or parts thereof. Licensor's sole
obligation to Licensee on account of defects shall be repair
or replacement and shall not be liable for any consequential
damages.
LICENSOR MAKES NO OTHER WARRANTY (EXPRESS OR IMPLIED) WITH
RESPECT TO THE SOPTWARE PRODUCTS, INCLUDING FITNESS FOR USE AS
INTENDED BY LICENSEE.
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3. Product Prices to End Users.
a. All Hardware Products Prices for which Licensee intends to
charge End Users are attached hereto as Schedule A.
b. All Software Products Prices for which Licensee intends to
charge End Users is attached hereto as Schedule A.
c. All End User Products pricing set forth on Schedule A shall be
subject to an increase or reduction of 15% (in the aggregate),
at Licensee's discretion.
4. Territory/Exclusivity. The territory subject to the several licenses
granted under this Agreement shall be:
a. Republic of Korea: The license to resell the Products granted
hereby shall be exclusive as to sales for delivery within the
Republic of Korea as presently constituted; provided however,
if during any calendar year Licensee shall fail to purchase
and pay for at least $2,000,000 on account of all of its
purchases of Products from Licensor for resale in the Republic
of Korea, then the exclusivity of the license granted for that
part of the Territory shall in all respects become
non-exclusive for the remaining term of the Agreement and any
renewal thereof.
b. Pacific Rim: Licensee shall also have a non-exclusive right to
resell the Products in certain other countries consisting of
Australia, New Zealand, Indonesia, Thailand, Singapore,
Vietnam, Cambodia and Japan (Referred to hereinafter as the
Pacific Rim) at prices for such Products and at "End User
Prices" used to compute royalties all as established from time
to time by Licensor in Schedule A; provided, however, that (i)
Licensor may cancel this non-exclusive right for all or any
designated country in the Pacific Rim on 60 days written
notice to Licensee and (ii) Licensee shall not be entitled to
supply any country in the Pacific Rim with any materials
purchased from Licensor for use under the license to be
granted for the Republic of Korea as outlined above.
c. Licensee shall have the option to obtain a right of first
refusal (the "Right of First Refusal Option") for the
exclusive right to resell the
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products in certain other Countries consisting of Australia,
New Zealand, Indonesia, Thailand, Singapore, Vietnam, Cambodia
and Japan (referred to hereinafter as the "Pacific Rim") at
prices for such products and at end user prices used to
compute royalties that have been delivered to Licensor
pursuant to a bona fide third-party offer. The Right of first
Refusal Option shall be exercisable within ten (10) days of
receipt of notification by Licensee of a bona fide third-party
offer to Licensor for the exclusive rights to any Country
within the Pacific Rim, at which time Licensee shall deliver
$300,000 (the "Option Exercise Price") in immediately
available funds to Licensor for the purposes of securing its
right of first refusal. The Option Exercise Price shall be
applied to the License Fee to be paid by Licensee if it
exercises its right of first refusal or, if Licensee shall
determine not to proceed with its right of first refusal, the
Option Exercise Price shall be surrendered to Licensor. Such
Right of First Refusal Option will be offered to Licensee once
for each country within the Pacific Rim.
5. Term. The term of this Agreement, and the duration of the server
license granted hereby, shall be five (5) years from the date of
this Agreement except that the term of the license granted for the
Pacific Rim under Article 4(b)(c) shall be governed by such Article
4(b)(c). This Agreement shall be subject to renewal on terms to be
agreed upon by the parties. Either party intending to seek renewal
of this Agreement shall give notice thereof to the other party at
least one hundred eighty (180) days prior to the expiration hereof.
6. License Fee, Royalty, Maintenance Fee.
a. Licensee Fee: In consideration of the licenses provided to
Licensee by Licensor under this Agreement, Licensee shall pay
to Licensor the nonrefundable sum of Six Million Dollars
($6,000,000) which shall be paid as follows:
(i) One Million Dollars ($1,000,000) payable immediately
upon signing of the Agreement in immediately available
funds;
(ii) One Million Dollars ($1,000,000) payable in immediately
available funds on May 1, 1997; and
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(iii) an aggregate of Four Million Dollars ($4,000,000)
through hardware royalty premium earn outs and software
purchase price premium earn outs as set forth in
Schedule A hereto (the "Royalty Premium").
b. Royalty Premium and Royalties: Licensee shall have paid a
Royalty Premium equal to or greater than Two Million Dollars
($2,000,000) by July 1, 1998, or the difference between the
amount paid by the Licensee and Two Million Dollars
($2,000,000) shall be paid in immediately available funds to
Licensor on that date. Licensee shall have paid an additional
Royalty Premium equal to or greater than Two Million Dollars
($2,000,000) between July 2, 1998 and January 1, 1999, or the
difference between the amount paid by the Licensee and Two
Million Dollars ($2,000,000) shall be paid in immediately
available funds to Licensor on that date. Once Licensee has
paid Royalty Premium equal to Four Million Dollars
($4,000,000) royalties for hardware as set forth in Schedule A
hereof shall immediately be reduced to 7 % from 35 % of the
End-User Price for each unit of the Hardware Products sold by
Licensee based on the End User Price set forth as part of
Schedule A and software purchases set forth in Schedule A
hereto shall be reduced to a purchase price discount of 50%
from 35%. All royalty payments shall be paid by Licensee to
Licensor within thirty (30) days following the end of each
fiscal quarter of this Agreement, beginning with the end of
the third full month following the execution of this
Agreement.
c. Prepayments: Licensee shall be entitled to prepay the balance
of the Royalty Premium at any time prior to January 1, 1999.
d. Support Services/Maintenance Fee: Licensee agrees to provide
first line support service to customers. Warranty claims for
Hardware and Software, replacement of warranted parts and
Products, local set up, installation and any locally required
integration of products or systems are the responsibility of
the Licensee. Licensor agrees to provide second line support
service. Software revisions, updates, debugging via remote
diagnostics and other functions, which can be accomplished via
long distance telecommunications will be provided by Licensor.
In consideration thereof, Licensee agrees to pay to Licensor
an annual Maintenance Fee equal to 4% of the aggregate sum of
the End User Sale Price for all Products sold to date,
adjusted
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quarterly to include any additional sales in the prior
quarter. The Maintenance Fee will itself be paid in quarterly
installments due 30 days after to close of every quarter. In
addition, Licensee shall pay all reasonable out of pocket
travel related expenses when and as incurred by Licensor in
the delivery of such support service. It is understood and
agreed that such support service does not include any
replacement Products or parts for Products except as provided
in Section 2(h).
e. Sample Systems: Licensee agrees to provide to Licensor,
without charge, one complete system application which is
representative of each such application as sold from time to
time by Licensee to its customers. It is understood and agreed
that trivial variations on applications shall not be deemed a
new application for the purpose of this paragraph.
f. Licensee will furnish to Licensor within thirty (30) days
following the end of each quarter a written statement
certified by the Chief Financial Officer of Licensee showing
the number of units of each of the Products sold by Licensee
during such quarter, including customer names and selling
prices, the identity of the country in the Territory where the
units were sold and delivered and the amount of periodic
royalties and maintenance fees due for the corresponding
period, together with evidence of the payment of the royalties
and maintenance fees due by wire transfer.
g. Licensee will at all times during the term of this Agreement
keep accurate books of account and other records reflecting
all sales of the Products, and will carefully prepare and
maintain such books and records for at least five (5) years
following the termination of this Agreement. Licensee hereby
grants to Licensor or its duly accredited representative the
right to inspect and make copies of such books and records for
the purpose of ascertaining or confirming the accuracy of
statements rendered hereunder, such inspection and copying to
be at the expense of Licensor, provided that if a discrepancy
of more than 5% is found, then all costs of such inspection
activity shall be paid by Licensee.
h. All payments provided for in this Agreement shall be made to
Licensor in Knoxville, Tennessee in United States currency by
wire
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transfer to Licensor's designated account. All payments shall
be net to Licensor, without deduction for taxes, assessments,
or other charges which may be imposed on Licensor or Licensee
by the Government of the Republic of Korea or any political
subdivision thereof with respect to any amounts payable to
Licensor pursuant to this Agreement, and without deduction for
banking or wire transfer fees. Such taxes, assessments or
other charges and fees, if any, shall be paid by Licensee
without diminution of any amounts otherwise provided for under
this Agreement to be paid to Licensor.
i. Licensee will provide, at no charge, whatever documentation
and certification is reasonably required to support the timely
processing of governmental requirements, including high
technology status.
7. Additional Licensee Responsibilities.
a. Licensee agrees to actively develop the market and to promote
the sale of the Products in the Republic of Korea, including
marketing, distribution, installation and service of the
Products.
b. Licensee will maintain a marketing, sales and service
organization properly trained to market the Products and to
insure proper installation and servicing thereof in every
country in the Territory for which Licensee has exclusive
rights.
c. In addition to any required royalty report, Licensee will
provide to Licensor on at least a quarterly basis information
and analysis of marketing and sales of the Products in all of
the Territories and professional support for future
development and sales of the Products in all of the
Territories.
d. Licensee will be solely responsible for providing all
installation, integration service and support for the Products
and all other customer relationship issues in the Territory.
Licensor shall have no Products service or support
responsibilities, except as set forth in Section 6 above.
8. No Patent Warranty. Licensor makes no representation or warranty
that the Products are free from any infringement of any patent or
proprietary rights of others except that Licensor is not now aware
of any claim or charge
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of any such infringement.
9. Indemnification. Licensee agrees to indemnify, to defend and to hold
harmless Licensor from claims of third persons either:
a. proximately caused by the fault or negligence of Licensee, its
officers, employees or agents; or
b. which relates to any customer disputes or claims relating to
the marketing, sale, distribution, installation, training or
service of any Products or the performance thereof, whether
arising out of express or implied warranty; or
c. which relates to any other failure by Licensee to comply with
any terms of this Agreement; or
d. which relates to any failure by Licensee to comply with
applicable laws and/or regulations in accordance with Section
13 hereof.
10. Insurance. Licensee agrees to maintain during the term hereof
liability insurance for personal injury and property damage,
including products liability and contractual coverage, as set forth
herein. Coverage for personal injury shall be not less than one
million dollars (U.S. $1,000,000) annual aggregate liability.
Coverage for property damage shall be not less than five hundred
thousand dollars (U.S. $500,000) per occurrence. Such liability
insurance obtained by Licensee shall include Licensor as a named
insured. Licensee shall supply Licensor with a Certificate of
Insurance upon written request by Licensor.
11. Force Majeure. Neither party hereto shall be liable for any delay
arising from circumstances beyond its control including (but not
limited to) acts of God, war, riot or civil commotion, industrial
dispute, fire, flood, drought, shortage of material or labor or act
of government, provided that the party seeking to be excused shall
make every reasonable effort to minimize the delay resulting
therefrom. Each party shall keep the other fully informed of any
such circumstances.
12. Government Regulations.
a. Licensee shall comply with all laws and regulations of all
applicable
11
<PAGE>
jurisdictions relating to the manufacture, sale and
distribution of the Products.
b. This Agreement shall be subject to all United States laws and
regulations now or hereafter in effect applicable to the
subject matter hereof. The Export Administration Regulations
of the United States Department of Commerce prohibit, except
under an individual validated license, the exportation from
the United States of technical data relating to certain
commodities (listed in the Export Administration Regulations),
unless the exporter (under this Agreement, Licensor) has
received certain assurances from the foreign importer.
Licensee acknowledges that it has received a copy of the
current Export Administration Regulations of the United States
Department of Commerce and has access to Supplementary
Bulletins from the United States Department of Commerce.
Licensee agrees to comply with all applicable Export
Administration Regulations of the United States Department of
Commerce, and hereby gives to Licensor the assurances called
for in Part 779.4 of such Export Administration Regulation.
c. If the terms of this Agreement are such as to require or make
it appropriate that this Agreement or any part of it be
registered with or reported to any national or supranational
agency in any area in which Licensee will do business
hereunder, Licensee will, at its expense, promptly undertake
such registration or report. Licensee will supply prompt
notice and appropriate verification of any such registration
or report and any agency ruling resulting therefrom.
d. Licensee will, at its expense, carry out any formal
recordation of this Agreement required by the law of the
Republic of Korea and each country in the Pacific Rim in which
it makes sales as a prerequisite to enforceability of this
Agreement in any such country or for any other reason, and
promptly supply verified proof of such recordation to
Licensor.
13. Termination.
a. If either party hereto shall breach this Agreement, the other
party may give the defaulting party written notice of such
default. If the defaulting party shall fail or refuse to
remedy such default within
12
<PAGE>
thirty (30) days from the date of said notice, this Agreement
may be terminated by a second written notice and said
termination shall be effective as of the date of the second
notice of default. Such termination shall be without prejudice
to any other rights or claims the aggrieved party may have
against the defaulting party. Defaults under this Agreement
shall be deemed to include, but shall not be limited to:
(i) material failure by either party to fulfill any of its
obligations under this Agreement;
(ii) an adjudication of bankruptcy of either party under any
bankruptcy or insolvency law;
(iii) the commission by either party of a receiver for
business or property, or the making of any general
assignment for the benefit of creditors; or
(iv) without the prior consent of Licensor, sale by Licensee
of substantially all of its assets or sale or other
transfer of controlling interest in the ownership of
Licensee or any merger, consolidation or other act
whether or not in accordance with applicable law if the
result is a transfer of control of Licensee or its
assets.
b. In addition, either party may, immediately upon notice,
terminate this Agreement in its entirety or with respect to
any particular license or right granted hereunder if:
(i) Such termination is necessary to comply with an order or
official request of the government of the terminating
party, or
(ii) Normal conduct of the business of the other party as a
private enterprise ceases or is substantially altered as
a consequence of action taken by governmental or other
authority.
c. Licensor may, immediately upon notice, terminate this
Agreement in its entirety or with respect to any particular
license or right granted by it hereunder if by law or
regulation of the government of any country in the Territory,
Licensee is disabled from making the payments to
13
<PAGE>
Licensor which it is required to make under this Agreement,
and such disability continues for more than thirty (30) days.
14. Amendments. No provision of this Agreement may be amended, revoked
or waived except by a writing signed by a duly authorized
representative of each of the parties hereto.
15. Assignment. Except as otherwise provided herein, this Agreement
shall not be assignable. Licensee shall have the right to transfer
all or any part of its rights and obligations hereunder to any
wholly-owned affiliate of Licensee, provided, however, that such
affiliate shall agree in advance in writing to be bound by all the
terms of this Agreement and that Licensee agrees to guarantee the
obligations hereunder of such assignee.
16. Notices. Any notice required to be given hereunder shall be deemed
sufficient and delivery shall be deemed complete if sent by
registered Air Mail or confirmed telex to the following addresses:
To Licensor: Celerity Systems, Inc.
9051 Executive Park Drive
Suite 400
Knoxville, Tennessee 37923
Attention: President
To Licensee: EnKay Telecom Co., Ltd.
Enkay Building, 115, Samsung-Dong
Kangnam-Ku, Seoul, Korea 135-090
Attention: President
17. Governing Law. This Agreement and the relationship of the parties
hereto shall be governed in all respects by the laws of the State of
Tennessee, United States of America, except that questions affecting
the validity, construction and effect of any patent shall be
determined by the law of the country in which the patent has been
granted. In the event of any controversy between the parties
respecting the interpretation or application of the terms of this
Agreement, the English language version of this Agreement shall be
controlling.
18. Resolution of Disputes.
14
<PAGE>
a. All disputes and controversies between the parties hereto of
every kind and nature arising out of or in connection with
this Agreement as to the existence, construction, validity,
interpretation or meaning, performance, nonperformance,
enforcement, operation, breach, continuation, or termination
of this Agreement shall be resolved as set forth in this
Section 18.
b. Either party to this Agreement may within fifteen (15) days
after a dispute or controversy arises submit any dispute or
controversy hereunder in writing for resolution by a senior
executive officer of the highest executive level for each of
the parties. If such persons cannot resolve the dispute or
controversy within thirty (30) days, then the dispute or
controversy shall be submitted to binding arbitration pursuant
to the following procedure.
c. The dispute or controversy shall be submitted to a single
arbitrator with experience in international high technology
commercial matters to be chosen by the senior executive
officers at the highest executive level for each of the
parties within thirty (30) days after the conclusion of the
mediation provided for above. If senior executive
representatives of the disputing parties cannot within such
time agree on an arbitrator, the arbitrator shall be chosen
under International Chamber of Commerce procedures from its
panels of arbitrators with international high tecnnology
commercial experience.
d. The arbitration hearing shall be held in New York, New York,
United States of America, or at such other place as the
parties and the arbitrator agree, within thirty (30) days
after the dispute is submitted to an arbitrator. The
Arbitration Rules of the International Chamber of Commerce, or
such other rules and procedures as the arbitrator may
determine, shall be utilized in the arbitration proceedings.
The arbitration hearing shall be conducted in the English
language.
e. The arbitration hearing shall be concluded in not more than
three (3) days unless otherwise ordered by the arbitrator. The
award on the hearing shall be made within thirty (30) days
after the close of the submission of evidence at or in
connection with the hearing.
f. An award rendered by the arbitrator appointed pursuant to this
Agreement shall be final and binding on the parties to such
proceeding.
15
<PAGE>
The award shall be enforceable under the June 10, l958
Convention on the Recognition and Enforcement of Foreign
Arbitral Awards. Judgment on such award may be entered by any
of the disputing parties in the highest court having
jurisdiction in any country.
g. The provisions of this Section 17 of this Agreement shall be a
complete bar and defense to any suit, action or proceeding
instituted in any court or before any administrative tribunal
with respect to any dispute or controversy arising out of or
in connection with this Agreement. The arbitration provisions
of this Agreement shall, with respect to any such dispute or
controversy, survive the termination or expiration of this
Agreement.
h. Nothing contained in this Section 17 shall give the arbitrator
selected hereunder any authority, power or right to alter,
change, amend, modify, add to, or subtract from the provisions
of this Agreement. Rather, the arbitrator shall endeavor to
interpret the provisions of this Agreement so as to carry out
its terms with reference to any dispute submitted for
arbitration.
i. The parties shall each bear all of their respective
arbitration costs and expenses, provided, however, that the
parties shall share equally the costs and expenses of the
arbitrator.
j. The failure or refusal of any party hereto to submit to
arbitration in accordance with this Agreement shall be deemed
a breach of this Agreement.
19. Entire Agreement. This Agreement, together with the schedules
attached hereto which may be amended by Licensor from time to time
in accordance with its existing business practice, represents the
entire agreement and understanding of the parties hereto with
respect to the subject matter hereof and supersedes all other prior
agreements with respect to the subject matter hereof, understandings
and communications, whether oral or written, including the
Memorandum. Notwithstanding anything to the contrary contained
herein, the parties hereby acknowledge and agree that this Agreement
does not supersede a License Agreement between the parties for the
manufacture and distribution of Set Top Boxes executed as of
September 26, 1996.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by
16
<PAGE>
their duly authorized officers as of the day and year first herein written.
CELERITY SYSTEMS, INC.
By: /s/ Mahmoud Youssefi
--------------------------------
M.R. Youssefi
President
ATTEST:
/s/ Kenneth D. Van Meter
-----------------------------------
Secretary
ENKAY TELECOM CO., LTD.
By: /s/ Authorized Officer
--------------------------------
Title:
-----------------------------
ATTEST:
/s/ J. S. Hong
-----------------------------------
Secretary
17
<PAGE>
AMENDMENT
1. 4-c is removed
2. 6-b in the agreement,
Every "thirty(30)days" changes to "forty-five days(45)days" and "quarter"
changes to "half"
3. 6-d Add,
If EnK sells equipment without Celerity providing Maintenance Service,
that equipment is not subject to the 4% Maintenance Fee until the first of
either of the following events occurs;
- the customer signs up for Maintenance
- the customer calls Celerity for Maintenance
4. 13a - iv Add after "consent",
Such consent not to be unreasonably withheld
5. change the title of the agreement to "License and Technology Transfer"
CELERITY SYSTEMS, INC.
By: /s/ Mahmoud Youssefi
--------------------------------
M.R. Youssefi
President
ATTEST:
/s/ Kenneth D. Van Meter
-----------------------------------
Secretary
ENKAY TELECOM CO., LTD.
By: /s/ Authorized Officer
--------------------------------
Title:
-----------------------------
ATTEST:
/s/ J.S. Hong
-----------------------------------
Secretary
18
<PAGE>
Schedule A
After Royalty Premium
<TABLE>
<CAPTION>
Description Part EnKay Celerity End Est. EnKay Margin %
Number Cost Royalty Users Margin
equals 7% Price
Hardware Products:
Proprietary Celerity Boards
<S> <C> <C> <C> <C> <C> <C>
CHASSIS & MOTHERBOARD M821 $ 1,377 $ 145 $ 2,065 $ 544 26%
MediaJet SUPERVISOR w I/O S801 $ 2,914 $ 306 $ 4,370 $ 1,151 26%
CTL 9000 SUPERVISOR w I/O S902 $ 3,010 $ 316 $ 4,515 $ 1,189 26%
MPEG 2-CHANNEL MODULE I/O C802 $ 1,980 $ 208 $ 2,971 $ 782 26%
ATM OC3 MODULE w I/O C950 $ 5,894 $ 619 $ 8,841 $ 2,328 26%
MediaJet SCSI-II MODULE w I/O D801 $ 1,628 $ 171 $ 2,442 $ 643 26%
CTL 9000 SCSI-II MODULE w I/O D902 $ 1,750 $ 184 $ 2,625 $ 691 26%
Off the Shelf Items
STORAGE CABINET M800 $ 2,023 $ 184 $ 2,630 $ 423 16%
816W -48 VOLT POWER SUPPLY 48PWR-81 $ 1,517 $ 138 $ 1,972 $ 317 16%
650W -48 VOLT POWER SUPPLY 48PWR-65 $ 724 $ 66 $ 941 $ 151 16%
10-BASE-T CABLES - 15ft 10BTCBL $ 3 $ 0 $ 4 $ 1 16%
CSB CABLE CSBCBL $ 28 $ 3 $ 36 $ 6 16%
POWER CABLE PWRCBL $ 2 $ 0 $ 3 $ 1 16%
CATV MODULATOR MOD $ 350 $ 32 $ 455 $ 73 16%
POWER STRIP (CABINET MOUNT) PWRSTR $ 32 $ 3 $ 42 $ 7 16%
9GN HARD DRIVE SYSTEM 9GBSUB $ 1,900 $ 173 2,470 397 16%
R60 3/4 RAID SYSTEM R60-3/4 $ 27,000 $ 2,457 $ 35,100 $ 5,643 16%
R92 3/6 RAID SYSTEM R92/3-6 $ 41,000 $ 3,731 53,300 $ 8,569 16%
SCSI CABLE SCSICBL $ 42 $ 4 $ 54 $ 9 16%
MAMMOTH TAPE DRIVE $ 10,000 $ 910 $ 13,000 $ 2,090 16%
FORE SYSTEM ASX1000 SWITCH $103,990 $ 9,463 $135,187 $21,734 16%
24-PORT 10BASE-T-E-NET HUB 24HUB $ 2,500 $ 228 $ 3,250 $ 523 16%
SUPERVISORY REMOTE TERM XTERM $ 3,450 $ 314 $ 4,485 $ 721 16%
</TABLE>
Confidential Subject To Change
<PAGE>
<TABLE>
<CAPTION>
Description Part EnKay Celerity End Est. EnKay Margin %
Number Cost Royalty Users Margin
equals 7% Price
<S> <C> <C> <C> <C> <C> <C>
KEYBOARD + TERMINAL $ 300 $ 27 $ 390 $ 63 16%
SYSTEM CONTROLLER w/4P ALR4160 $ 70,000 $ 6,370 $ 91,000 $14,630 16%
REVOLUTION Q-SMP CNTRL ALRREV $ 3,916 $ 356 $ 5,091 $ 818 16%
OS-9000 SERVER LICENSE $ 1,500 $ 137 $ 1,950 $ 314 16%
Software Products
Discount equals 50%
Celerity Firmware
CHASSIS & MOTHERBOARD M821 $ 1,722 $ -- $ 3,444 $ 1,722 50%
MediaJet SUPERVISOR w/I/O S801 $ 3,788 $ -- $ 7,576 $ 3,788 50%
CTL 9000 SUPERVISOR w/I/O S902 $ 3,909 $ -- $ 7,817 $ 3,909 50%
MPEG 2-CHANNEL MODULE w/I/O C02 $ 2,547 $ -- $ 5,094 $ 2,547 50%
ATM OC3 MODULE w/I/O C950 $ 7,561 $ -- $ 15,122 $ 7,561 50%
MediaJet SCSI-II MODULE w/I/O D801 $ 2,077 $ -- $ 4,154 $ 2,077 50%
CTL 9000 SCSI-II MODULE w/I D902 $ 2,230 $ -- $ 4,459 $ 2,230 50%
Software
MIX LICENSE, First 25 STREAMS $ 12,500 $ -- $ 25,000 $12,500 50%
MIX LICENSE, (Per Stream)
26-100 STREAMS $ 250 $ -- $ 500 $ 250 50%
MIX LICENSE, (Per Stream)
101-1000 STREAMS $ 125 $ -- $ 250 $ 125 50%
ETHERNET API INTERFACE $ 750 $ -- $ 1,500 $ 750 50%
NAV/APP, NAV/VOD $ 17,500 $ -- $ 35,000 $17,500 50%
NAV RT $ 32,500 $ -- $ 65,000 $32,500 50%
TAR Servr Software License $ 2,000 $ -- $ 4,000 $ 2,000 50%
</TABLE>
Confidential Subject To Change
<PAGE>
Schedule A
Royalty Premium
<TABLE>
<CAPTION>
Description Part EnKay Celerity End Est. EnKay Margin %
Number Cost Royalty Users Margin
equals 7% Price
Hardware Products:
Proprietary Celerity Boards
<S> <C> <C> <C> <C> <C> <C>
CHASSIS & MOTHERBOARD M821 $ 1,377 $ 723 $ 2,065 $ (34) -2%
MediaJet SUPERVISOR w I/O S801 $ 2,914 $ 1,530 $ 4,370 $ (73) -2%
CTL 9000 SUPERVISOR w I/O S902 $ 3,010 $ 1,580 $ 4,515 0%
MPEG 2-CHANNEL MODULE I/O C802 $ 1,980 $ 1,040 $ 2,971 $ (50) -2%
ATM OC3 MODULE w I/O C950 $ 5,894 $ 3,094 $ 8,841 $ (147) -2%
MediaJet SCSI-II MODULE w I/O D801 $ 1,628 $ 855 $ 2,442 $ (41) -2%
CTL 9000 SCSI-II MODULE w I/O D902 $ 1,750 $ 919 $ 2,625 $ (44) -2%
Off the Shelf Items
STORAGE CABINET M800 $ 2,023 $ 920 $ 2,630 $ (314) -12%
816W -48 VOLT POWER SUPPLY 48PWR-81 $ 1,517 $ 690 $ 1,972 $ (235) -12%
650W -48 VOLT POWER SUPPLY 48PWR-65 $ 724 $ 329 $ 941 $ (112) -12%
10-BASE-T CABLES - 15ft 10BTCBL $ 3 $ 2 $ 4 $ (1) -12%
CSB CABLE CSBCBL $ 28 $ 13 $ 36 $ (4) -12%
POWER CABLE PWRCBL $ 2 $ 1 $ 3 $ (0) -12%
CATV MODULATOR MOD $ 350 $ 159 $ 455 $ (54) -12%
POWER STRIP (CABINET MOUNT) PWRSTR $ 32 $ 15 $ 42 $ (5) -12%
9GN HARD DRIVE SYSTEM 9GBSUB $ 1,900 $ 865 2,470 $ 295 -12%
R60 3/4 RAID SYSTEM R60-3/4 $ 27,000 $ 12,285 $ 35,100 $ (4,185) -12%
R92 3/6 RAID SYSTEM R92/3-6 $ 41,000 $ 18,655 53,300 $ (6,355) -12%
SCSI CABLE SCSICBL $ 42 $ 19 $ 54 $ (6) -12%
MAMMOTH TAPE DRIVE $ 10,000 $ 4,550 $ 13,000 $ (1,550) -12%
FORE SYSTEM ASX1000 SWITCH $103,990 $ 47,315 $135,187 $(16,118) -12%
24-PORT 10BASE-T-E-NET HUB 24HUB $ 2,500 $ 1,138 $ 3,250 $ (388) -12%
SUPERVISORY REMOTE TERM XTERM $ 3,450 $ 1,570 $ 4,485 $ (535) -12%
KEYBOARD + TERMINAL $ 300 $ 137 $ 390 $ (47) -12%
</TABLE>
Confidential Subject To Change
<PAGE>
<TABLE>
<CAPTION>
Description Part EnKay Celerity End Est. EnKay Margin %
Number Cost Royalty Users Margin
equals 7% Price
<S> <C> <C> <C> <C> <C> <C>
SYSTEM CONTROLLER w/4P ALR4160 $ 70,000 $ 31,850 $ 91,000 $(10,850) -12%
REVOLUTION Q-SMP CNTRL ALRREV $ 3,916 $ 1,782 $ 5,091 $ (607) -12%
OS-9000 SERVER LICENSE $ 1,500 $ 683 $ 1,950 $ 233 -12%
Software Products
Discount equals 35%
Celerity Firmware
CHASSIS & MOTHERBOARD M821 $ 1,722 $ -- $ 3,444 $ 1,206 35%
MediaJet SUPERVISOR w/I/O S801 $ 3,788 $ -- $ 7,576 $ 2,652 35%
CTL 9000 SUPERVISOR w/I/O S902 $ 3,909 $ -- $ 7,817 $ 2,736 35%
MPEG 2-CHANNEL MODULE w/I/O C02 $ 2,547 $ -- $ 5,094 $ 1,783 35%
ATM OC3 MODULE w/I/O C950 $ 7,561 $ -- $ 15,122 $ 5,293 35%
MediaJet SCSI-II MODULE w/I/O D801 $ 2,077 $ -- $ 4,154 $ 1,454 35%
CTL 9000 SCSI-II MODULE w/I/O D902 $ 2,230 $ -- $ 4,459 $ 1,561 35%
Software
MIX LICENSE, First 25 STREAMS $ 12,500 $ -- $ 25,000 $ 8,750 35%
MIX LICENSE, (Per Stream)
26-100 STREAMS $ 250 $ -- $ 500 $ 175 35%
MIX LICENSE, (Per Stream)
101-1000 STREAMS $ 125 $ -- $ 250 $ 88 35%
ETHERNET API INTERFACE $ 750 $ -- $ 1,500 $ 525 35%
NAV/APP, NAV/VOD $ 17,500 $ -- $ 35,000 $ 12,250 35%
NAV RT $ 32,500 $ -- $ 65,000 $ 22,750 35%
TAR Servr Software License $ 2,000 $ -- $ 4,000 $ 1,400 35%
</TABLE>
Confidential Subject To Change
<PAGE>
Exhibit 10.11
Remarketer Agreement
THIS AGREEMENT is effective as of the 15th day of June, 1997 (the
"Effective Date"), by and between Minerva Systems, Inc. (hereinafter "Minerva"),
a video products manufacturer having its principal offices at 3801 Zanker Road,
San Jose, CA 95134 and Celerity Systems Inc. (hereinafter "Remarketer"), a video
products/services supplier having principal office at 9051 Executive Park Drive,
Knoxville, TN 37923.
WITNESSETH:
WHEREAS, Minerva manufactures certain compression equipment and produces
certain computer software programs compatible with such compression equipment,
which Minerva is willing to provide to Remarketer on the terms and conditions
set forth herein; and
WHEREAS, Remarketer has an established channel of distribution to market
such compression equipment and computer programs to end-users and/or systems
integrators;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 "Agreement." This Remarketer Agreement, including any and all Exhibits
attached hereto.
1.2 "Compression Equipment." The computer hardware products (including all
models, conversions, elements, and accessories) listed in the attached Exhibit A
as amended from time to time to include new products.
1.3 "Customer." A customer of Remarketer for Products.
1.4 "Documentation." The documentation provided to Remarketer for
Remarketer's use in creating an End-User Installation and Operations Guide.
1.5 "End-User License Agreement." The agreement under which Remarketer
grants an end-user Customer the right and license to use Licensed Programs as
part of an OEM Product. The End-User License Agreement shall contain, at a
minimum, terms and conditions substantially similar to those set forth in
Exhibit B hereto.
1.6 "Upgrade(s)." Computer program modifications or additions, other than
Maintenance Modifications, that provide new functions or alterations of
functionality of the Licensed Programs.
<PAGE>
1.7 "Licensed Programs." The computer software programs, in Object Code
format, listed in the attached Exhibit A, and any and all Maintenance
Modifications and Upgrades thereto to the extent the same are provided by
Minerva under the terms of this Agreement.
1.8 "Maintenance Modification(s)." Computer software changes integrated
with the Licensed Programs to correct any Program Errors therein, but which do
not materially alter the functionality of the Licensed Programs or add
significant new functions thereto.
1.9 "Minerva's Products." The Encoding System(s) set forth in Exhibit A
hereto.
1.10 "Object Code." Computer software programs assembled or compiled in
magnetic or electronic binary form which are readable and usable by machines,
but are not generally readable by humans without reverse assembly, reverse
compiling, or reverse engineering.
1.11 "Products." The combination of Compression Equipment and Licensed
Programs as sold by Remarketer.
1.12 "Program Error." A defect that prevents the Licensed Programs from
performing in accordance with the published specifications or user manuals
pertaining thereto.
1.13 "Blocking Error" shall mean a major Program Error which prevents the
use of the Licensed Programs or impairs material functionality.
1.14 "Severe Error" shall mean a major Program Error which makes the
Licensed Programs or part of them usable only by means of software bypasses or
patches.
1.15 "Sub distributor License Agreement." The agreement under which OEM
distributes the Licensed Programs as part of an OEM Product to third party
system integrators ("Sub distributors"), not for their own use as an end-user
but for resale. The Sub distributor License Agreement shall contain, at a
minimum, terms and conditions substantially similar to those set forth in
Exhibit D hereto.
1.16 "Territory." The world.
SECTION 2
REMARKETER CERTIFICATION
2.1 Remarketer hereby certifies and agrees that, in consideration of the
benefits of this Agreement, Remarketer will use reasonable efforts to promote
and market the Compression Equipment and Licensed Programs to its end-user
customers and/or systems integrators under the Minerva or such other label as
the parties may mutually approve, and shall offer such products along with its
video server and related products and services, including (without limitation)
training, installation assistance, and other forms of customer support. In the
event that any of the foregoing representations and undertakings prove untrue at
any time during the term of this Agreement,
2
<PAGE>
Minerva shall have the right to terminate this Agreement as to any or all
further shipments to Remarketer or which termination shall be in the manner
prescribed in Section 16 hereof.
SECTION 3
LICENSES GRANTED
3.1 Licensed Programs. Subject to the terms and conditions of this
Agreement, Minerva hereby grants to Remarketer a non-exclusive, nontransferable
right (except pursuant to Section 21) and license, without right of sublicense,
to (i) distribute Licensed Programs on serially numbered diskettes in the
Territory, and (ii) to perform and display Licensed Programs in the Territory
solely for marketing and demonstration purposes and for the training of
Customers. Notwithstanding anything contained herein, Minerva reserves the right
to market the Minerva Products on its own or through other resellers or
distributors; provided that Minerva shall make a good faith effort not to market
to Remarketer's Customers for same application.
Remarketer shall have no rights to the source code of the Licensed Program
and shall not modify or prepare derivative works of the Licensed Program.
Remarketer shall not reverse engineer, reverse assemble, decompile or otherwise
attempt to derive source code from the Licensed Programs. Remarketer shall
maintain records of the location and customer of each serially numbered
diskette, and shall provide a copy of such records to Minerva promptly upon
Minerva's request; provided that Minerva shall not request that such records be
provided more than once within a calendar quarter.
3.2 Compression Equipment. Subject to the terms and conditions of this
Agreement, Minerva hereby grants to Remarketer a non-exclusive, nontransferable
(except pursuant to Section 21) right to obtain Compression Equipment from
Minerva and to market and distribute such Compression Equipment in the
Territory.
3.3 Documentation. Subject to the terms and conditions of this Agreement,
including without limitation Remarketer's confidentiality obligations of Section
14.1 hereof, Minerva hereby grants to Remarketer a non-exclusive, right and
license to use the Documentation for its internal use in understanding the
operation of Minerva's Product and in creating Remarketer's End User
Installation and Operations Guide. In addition, Remarketer may copy the
Documentation for distribution to its customers and Remarketer may incorporate
portions of the Documentation in any end user documentation created by
Remarketer for distribution in connection with Products. Minerva shall ship the
Documentation to Remarketer within ten (10) days of its completion by Minerva,
and will reasonably cooperate to make substantially completed and accurate
drafts thereof available for Remarketer's internal use.
3.4 Distribution of Licensed Programs. Distribution of the Licensed
Programs to end-user Customers shall in all cases be subject to an End-User
License Agreement signed by the end-user Customer or, where signing is not
commercially feasible, subject to (i) a "shrink-wrap" or "break-the-seal"
End-User License Agreement packaged with the Licensed Program (ii) the inclusion
of a postcard in such package which prompts the end-user Customer to provide its
name, address, telephone number, and date of purchase; and (iii) Remarketer's
acceptance of purchase orders or other offers to purchase by end-user Customers
being expressly conditioned on the inclusion of the
3
<PAGE>
terms of the End-User License Agreement. Remarketer shall promptly provide
Minerva with a copy of all End-User License Agreements.
SECTION 4
ORDER, DELIVERY, AND ADMINISTRATION
4.1 The terms and conditions of this Agreement, and Minerva's warranty set
forth in Section 12, shall control any and all procurement of Compression
Equipment and Licensed Programs by or on behalf of Remarketer hereunder and
shall supersede the terms of any purchase orders or like documents for
Compression Equipment and/or Licensed Programs submitted by Remarketer at any
time.
4.2 Remarketer shall place periodic orders for Minerva's Products during
the term of this Agreement. Remarketer shall submit purchase orders to Minerva
at least thirty (30) days prior to the date of shipment requested by Remarketer.
All orders must be for delivery to one location in one shipment unless otherwise
agreed to in writing. Order revisions or cancellations of which Minerva receives
written notice at least one (1) month prior to order shipment are permitted.
Minerva and Remarketer will cooperate in good faith to accommodate purchase
orders with a lead time of less than 30 days and cancellations and/or order
deferrals requested less than one month prior to shipment. If an order is
canceled less than 30 days before a scheduled shipment date, the following
schedule sets forth Remarketer obligation on such canceled orders:
Days Prior to Scheduled Shipment Percentage of Price
- -------------------------------- -------------------
More than 30 days 0%
15 - 30 days 5%
Less than 15 days 10%
4.3 All orders submitted by Remarketer are subject to acceptance by
Minerva, which acceptance will not be unreasonably withheld. Minerva shall ship
Minerva's Products subject to the constraints of Minerva's available production
volume and established shipping priorities; provided, so long as Remarketer is,
in the discretion of Minerva, providing competent training and technical support
to Customers, Maintenance Modifications, and maintenance training, etc. to
customers, and meeting its Section 7.1 requirements, then Minerva shall ship
Minerva Product at a similar level of preference as other purchasers of similar
products and volumes.
4.4 The price to Remarketer for Minerva's Product is set forth in the
attached Exhibit A. Minerva shall have the right at any time to revise the
prices in Exhibit A upon thirty (30) days' advance written notice to Remarketer,
and such revisions shall apply to all orders received after the effective date
of revision. Price increases shall not affect unfulfilled purchase orders
accepted by Minerva prior to the effective date of the price increase. Price
decreases shall apply to pending purchase orders accepted by Minerva prior to
the effective date of the decrease but not yet shipped.
4.5 Remarketer's purchase prices are payable in full to Minerva without
deduction and are net of taxes (including any withholding tax) and customs
duties. In addition to such amounts, Remarketer shall pay sums equal to taxes
(including, without limitation, sales, value-added and similar
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taxes) and customs duties paid or payable, however designated, levied, or based
on amounts payable to Minerva hereunder, but exclusive of United States federal,
state, and local taxes based on Minerva's net income.
4.6 All amounts are stated in U.S. dollars and shall be paid in that
currency.
4.7 All prices are F.O.B. Minerva's plant or warehouse. Remarketer is
responsible for all freight, insurance and other shipping expenses and
import/export and any other customs duties or taxes associated with the shipment
of Minerva's Products. Minerva will upon Remarketer specific request, arrange
insurance for Remarketer at Remarketer expense. Remarketer shall have the option
of specifying its own carrier or freight forwarder in the USA. However, if in
Minerva's discretion, the Remarketer-designated carrier is not available for
pick-up within a reasonable period, Minerva shall have the option to select the
carrier provided that Minerva provides Remarketer prior notice of such selection
and allows Remarketer to select an alternative carrier.
4.8 Title to and risk of loss or damage of the Minerva's Products (except
title to the Licensed Programs) purchased under this Agreement shall pass to
Remarketer upon shipment of such Minerva's Products to Remarketer from Minerva's
plant or warehouse. Minerva shall use reasonable care in packaging of Product
for shipment to Remarketer.
4.9 Remarketer agrees that acceptance of Minerva's Products shall be
accomplished by Minerva's performance of established test procedures with
respect to such products at Minerva's facility, prior to their shipment to
Remarketer. Acceptance shall be deemed to occur at the time of completion of
final tests at Minerva's facility. If Remarketer has provided Minerva with a
written request to allow Remarketer to witness the performance of final tests on
Remarketer's order, Minerva shall give Remarketer prior notice of such tests and
allow Remarketer to witness such tests. Remarketer shall be responsible for its
expenses incurred in witnessing such tests. In the event that any Minerva's
Products fail the acceptance tests, Minerva shall, at its option, repair or
replace the affected Minerva's Product or part thereof. Nothing in this Section
4.9 shall affect Minerva's warranty obligations as specified in Section 12 and
as otherwise required by applicable law.
SECTION 5
PAYMENT
5.1 All sales of Minerva's Products will be on a cash-in-advance of
shipment basis or on credit in Minerva's sole discretion. In the event of a sale
on credit, Minerva shall submit an invoice to Remarketer upon each shipment to
Remarketer. Minerva reserves the right to halt shipments to Remarketer or to
make only partial shipments of Remarketer's orders in the event of any
delinquency in payment for any prior order or shipment; provided, however that
Minerva will notify Remarketer of any intent to halt or change a shipment and
provide Remarketer with a reasonable opportunity to cure any such delinquency
prior to shipment.
5.2 Minerva's terms are net thirty (30) days from the date of invoice. An
interest charge of one and one-half percent (1.5%) per month, prorated on the
basis of a thirty (30) day month, will be assessed on all delinquent payments.
Any change in payment terms must be pre-approved by Minerva in writing.
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SECTION 6
SECURITY INTEREST
6.1 Remarketer hereby grants to Minerva, and Minerva hereby reserves, a
purchase money security interest in and to all Minerva's Products delivered to
Remarketer under this Agreement from time to time, and all proceeds from the
disposition thereof, as security for the payment by Remarketer of the purchase
price therefor under this Agreement. Remarketer agrees to assist and cooperate
fully with Minerva in the perfection and enforcement of such security interest.
Such security interest will be released on a Product by Product basis as payment
is made for the related invoice.
SECTION 7
EXHIBIT C AMOUNTS
7.1 This section is not applicable.
SECTION 8
RESELLER EXEMPTION CERTIFICATION
8.1 Remarketer hereby certifies that it either holds or will acquire,
prior to providing Products to Customers, a valid Reseller Exemption Certificate
issued by each taxing jurisdiction or entity in the Territory where such
certificate is required as a condition for the avoidance of applicable sales or
use taxes, covering any Compression Equipment to be resold and any Licensed
Programs to be licensed or sublicensed under this Agreement. Prior to any
shipment of Products under this Agreement, Remarketer will provide Minerva with
a copy of each such certificate, thereby entitling Remarketer to be treated by
Minerva as exempt from collection of tax on such Products in each jurisdiction
or entity from which a certificate is obtained. Remarketer shall promptly notify
Minerva of any additions, deletions, or changes to such certificates. Remarketer
shall indemnify and hold harmless Minerva from and against any taxes, duties,
tariffs, or other assessments levied by or on behalf of any taxing jurisdiction
or entity arising out of the failure to obtain or a dispute concerning the
validity or coverage of, any such exemption certificates.
SECTION 9
EXPENSES
9.1 It is expressly understood and agreed that Minerva is under no
obligation or requirement to reimburse Remarketer for any expenses or costs
incurred by Remarketer in the performance of its responsibilities under this
Agreement. Any costs or expenses incurred by Remarketer, shall be at
Remarketer's sole risk and upon its independent business judgment that such
costs and expenses are appropriate.
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SECTION 10
ADDITIONAL OBLIGATIONS OF REMARKETER
10.1 Remarketer shall submit, quarterly within the last five (5) days of
each quarter (upon receipt of notice from Minerva), a nonbinding six (6) month
forecast for the ensuing six (6) months, showing each order by number of
Minerva's Products and intended submission date.
SECTION 11
TECHNICAL SUPPORT
11.1 By Minerva: Minerva shall provide Remarketer with the following
maintenance, technical support, and training with respect to Compression
Equipment and Licensed Programs: Minerva shall provide a reasonable amount of
initial technical support and training to technical personnel, with respect to
the operation and specifications of Minerva's Product. Such training shall not
exceed three (3) person-days by Minerva's personnel during the six (6) month
period following the Effective Date. As used herein, a "person-day" shall be
equivalent to one person working eight hours. All such training and support
shall be performed at Minerva's facility in San Jose, CA, USA unless another
site is mutually agreed upon. Remarketer shall pay all expenses of its
personnel, including travel, food, and lodging, incident to their attendance at
such training. In addition, Minerva shall, during the term of this Agreement,
provide Remarketer with a reasonable amount of technical support over the
telephone (utilizing an 800 number provided by Minerva) during Minerva's regular
business hours (Monday - Friday; 9:00am-5:00pm California time), with respect to
the operation of Minerva's Products or Remarketer's development efforts for the
Products. Remarketer's shall be entitled to one person-day of free technical
training per major software release conditioned upon Remarketer's continued
qualification for no-charge support set forth in Section 7.1 herein. Upon
Remarketer's reasonable request, Minerva shall provide Additional training at
its then-current published rates.
11.2 Remarketer shall provide its Customers with all maintenance,
training, and support.
SECTION 12
PRODUCT WARRANTY
12.1 Minerva warrants to Remarketer that (i) the Compression Equipment
will conform in all material respects to Minerva's published specifications
pertaining to the Compression Equipment, respectively and (ii) the Compression
Equipment will be free from material operating defects under normal and
anticipated use in the operating environment as specified in the published
specifications (the "Hardware Warranty"), commencing on the Effective Date and
ending ninety (90) days from the date of shipment by Minerva to Remarketer.
12.2 Minerva warrants to Remarketer that the Licensed Programs will
conform to Minerva's published specifications (the "Software Warranty"),
commencing on the Effective Date and ending ninety (90) days from the date of
shipment by Minerva to Remarketer. Minerva does not warrant that the functions
contained in the Licensed Programs will meet a Customer's requirements, or that
the operation of the Licensed Programs will be uninterrupted or error-free, or
that all defects in the Licensed Programs will be corrected. Repaired or
replaced Product shall be warranted against defects for a period of 90 days from
shipment.
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12.3 Minerva's sole and exclusive liability, and Remarketer's sole and
exclusive remedy for a breach of the Software Warranty, shall be for Minerva to
provide Remarketer with Maintenance Modifications and Upgrades (for the purpose
of correcting program errors) during the Software Warranty Period. Minerva's
sole and exclusive liability, and Remarketer's sole and exclusive remedy for a
breach of the Hardware Warranty, shall be for Minerva to use reasonable efforts
to, at its option, repair or replace the Compression Equipment within ten (10)
days of Minerva's receipt of the Compression Equipment or Replacements Parts
from Remarketer. If Minerva is unable, for any reason, to so repair or replace
any Compression Equipment, then Minerva shall refund to Remarketer the price
paid by Remarketer (less a reasonable amount for the use of defective hardware
or media) for such equipment, upon return of such equipment to Minerva.
12.4 To obtain repair or replacement of the Compression Equipment,
Remarketer shall, during the Hardware Warranty Period, return the defective
product, freight prepaid, in either the original carton or a similar package
affording an equal degree of protection, to Minerva or to a facility designated
by Minerva, for examination and testing. A Return Merchandise Authorization
(RMA) number must be obtained from Minerva prior to, and must be included with,
the shipment. In the event Minerva's examination and testing discloses a defect,
Minerva will return the replaced or repaired Compression Equipment or
Replacement Part freight prepaid to Remarketer. Minerva is not obligated to
provide Remarketer with a substitute unit during the Hardware Warranty Period or
at any time.
12.5 In all cases, Minerva's liability under this warranty is subject to
the following additional conditions:
(i) Minerva shall not be liable under this warranty if its testing and
examination by Minerva disclose that Compression Equipment have been modified or
altered in any material manner after shipment by Minerva;
(ii) Minerva shall not be liable under this warranty if its testing and
examination disclose that the alleged defect in the Compression Equipment does
not exist, or was caused by Remarketer or any third party's misuse, neglect,
improper installation or testing or unauthorized attempts to repair the
Compression Equipment or the Replacement Part, or the subjection of the
Compression Equipment or Replacement Part to unusual physical or electrical
stress, or any other cause beyond the range of its intended use;
(iii) Minerva shall not be liable under any warranty under this agreement
with respect to any Compression Equipment that are not returned in their
original shipping container or a functionally equivalent container;
(iv) If Minerva's testing and examination do not disclose a defect ("NTF"-
no trouble found) warranted under this agreement, then Minerva shall so advise
Remarketer and shall return such Compression Equipment to Remarketer in
accordance with Remarketer's instructions and at Remarketer's cost, and
Remarketer shall reimburse Minerva for its expenses in testing and examining the
Compression Equipment, calculated at Minerva's then-current published rates,
currently at $100 per hour as of date of execution of this agreement. If, in its
reasonable discretion Minerva determines
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that such NTF is isolated in nature or otherwise not due to lack of Remarketer
diligence, then Minerva may waive assessments under this clause on a
case-by-case basis.
12.6 At the time of submitting a purchase order to Minerva hereunder for
Licensed Programs or Compression Equipment, Remarketer shall have the option to
purchase for resale to any Customer, an extension to Minerva's warranty. This
extension will extend both the Hardware Warranty Period and the Software
Warranty Period to cover the twelve (12) months following the date of shipment
from Minerva to Remarketer. The price to Remarketer for such extended warranty
shall be ten percent (10%) of Remarketer's then-current purchase price of
Minerva's Product. Following the expiration of any such extended warranty,
Remarketer's customer shall be entitled to purchase a service contract on
Minerva's then current terms and conditions. Attached hereto as Exhibit D are
Minerva's service terms and prices as of the Effective Date.
12.7 In the event that a Customer's Licensed Program is no longer within
the Software Warranty Period, but such Customer desires to upgrade its Licensed
Program(s), Minerva shall provide the latest upgrade of such Licensed Program(s)
to such Customer at a price equal to eighty percent (80%) of Minerva's
then-current price for its extended warranty described in Section 12.6 above.
12.8 Except for the warranties set forth in Sections 12.1 and 12.2 above,
MINERVA MAKES, AND REMARKETER, ITS SUBDISTRIBUTORS AND END USERS RECEIVE, NO
WARRANTIES, EXPRESS, IMPLIED, STATUTORY, IN ANY COMMUNICATION WITH MINERVA OR
OTHERWISE, WITH RESPECT TO MINERVA'S PRODUCTS, AND MINERVA SPECIFICALLY
DISCLAIMS ANY IMPLIED WARRANTIES OF NONINFRINGEMENT, MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
SECTION 13
TITLE
13.1 Title to all Licensed Programs shall at all times remain and vest
solely with Minerva and its licensers. Remarketer agrees that it will not claim
or assert title to any such materials or attempt to transfer any title to
Customers or any third parties, except to the extent that Remarketer is a
licenser of Minerva.
SECTION 14
CONFIDENTIALITY OF INFORMATION; PROTECTION AND SECURITY
14.1 Remarketer agrees that as between Remarketer and Minerva, Minerva
owns all right, title, and interest in the product line that includes Minerva's
Products and in all Minerva's patents, inventions, trademarks, trade names,
copyrights, know-how, and trade secrets relating to the design, development,
manufacture, operation, marketing or service of Minerva's Products.
14.2 Remarketer shall use all reasonable efforts to protect the
proprietary nature of the Licensed Programs. Except as expressly provided
otherwise in this Agreement, Remarketer shall not copy, modify, transcribe,
store, translate, sell, lease, or otherwise transfer or distribute any of the
Licensed Programs, in whole or in part, without prior authorization in writing
from Minerva.
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14.3 Remarketer shall mark (or shall not remove) all Minerva's Products
incorporated into Products with (i) Minerva's copyright, patent and other
proprietary notices, except Minerva's trademarks and trade names, in the same
manner in which Minerva incorporates such notices on the Minerva's Products and
(ii) such other proprietary notices as Minerva may reasonably require.
14.4 Each party acknowledges that by reason of its relationship to the
other party hereunder it will have access to certain information and materials
concerning business, plans, customers, technology, and products that are
confidential and of substantial value to each party, which value would be
impaired if such information were disclosed to third parties. Each party agrees
that it shall not use in any way for its own account (except for the purposes
hereof or as may be expressly permitted herein) or the account of any third
party, nor disclose to any third party, any such confidential information
revealed to it by the other party so long as such information remain legally
protectable as a trade secret. Each party shall take every reasonable precaution
to protect the confidentiality of such information. Upon request by a party, the
other party shall advise whether or not it considers any particular information
or materials to be confidential. A party shall not publish any technical
description of the other party's Products beyond the description already
published.
SECTION 15
INDEMNIFICATION
15.1 By Minerva: Minerva hereby agrees to indemnify, defend and hold
harmless Remarketer from and against any claims, actions, or demands alleging
that any Minerva's Product, Replacement Part, trademark or trade name (where
such trademark and trade name are associated with Product and Replacement Part)
infringes any copyright, trademark, patent, trade secret or other proprietary
rights of any third party. Remarketer shall permit Minerva, at Minerva's option,
to replace or modify any affected Compression Equipment or Licensed Program or
Replacement Part so as to avoid infringement, or to procure the right for
Remarketer to continue its distribution of such items. If neither of such
alternatives is reasonably possible, the infringing items shall be returned to
Minerva, and Minerva shall refund amounts paid therefor by Remarketer. Minerva
shall not thereby be relieved of its obligations under the first sentence of
this section to pay any judgments or settlements resulting from the alleged
infringements. Minerva shall have no obligation hereunder for or with respect to
claims, actions, or demands alleging infringement which arise by reason of (i)
the combination of any Minerva's Product with any items not supplied by Minerva
or (ii) Minerva's compliance with Remarketer's specifications.
The foregoing provision states the entire liability and obligation of
Minerva and the sole and exclusive remedy of Remarketer and its Customers with
respect to any alleged infringement of any patent, copyright, trademark, trade
secret or other intellectual property rights by any product of Minerva.
15.2 By Remarketer: Remarketer hereby indemnifies and holds harmless
Minerva from and against any and all claims, actions, or demands arising with
respect to the use or distribution of any Products, with the sole exceptions of
those matters for which Minerva bears responsibility under Section 15.1 and
matters arising solely out of breach of this agreement by Minerva.
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15.3 The foregoing obligations of each party are conditioned on (i) prompt
written notice of any claim, action, or demand for which indemnity is claimed to
the extent that failure to provide such prompt notice is materially
disadvantageous to the indemnifying party and, with respect to any obligation to
defend, (ii) complete control in the indemnifying party of the defense and
settlement thereof (provided that no settlement admitting Remarketer's liability
that does not also admit Minerva liability will be entered into without the
consent of the indemnified party (such consent may not be unreasonably withheld)
and (iii) cooperation of the indemnified party in such defense.
SECTION 16
TERM AND TERMINATION
16.1 This Agreement will commence on the Effective Date and, unless
earlier terminated as provided for below, will remain in effect until December
31st, 1998, and shall automatically renew for successive one year periods unless
either party shall give written notice at least 90 day prior to such renewal
dates notice of its intent to terminate.
16.2 Minerva may terminate this Agreement upon written notice to
Remarketer if Remarketer at any time fails to comply with the certification
required under Section 2 hereof.
16.3 Should either party commit a material breach of its obligations
hereunder, the other party may, at its option, terminate this Agreement by
giving at least thirty (30) days' prior written notice of termination, which
notice shall identify and describe the basis for such termination. If, prior to
the expiration of such period, the defaulting party cures such default,
termination shall not take place.
16.4 Should either party admit in writing its inability to pay its debts
generally as they become due, or make a general assignment for the benefit of
creditors, or institute proceedings to be adjudicated a voluntary bankrupt, or
consent to the filing of a petition of bankruptcy against it, or be adjudicated
by a court of competent jurisdiction as bankrupt or insolvent; or should either
party seek reorganization under any bankruptcy act, or consent to the filing of
a petition seeking such reorganization; or should either party have a decree
entered against it by a court of competent jurisdiction appointing a receiver,
liquidator, trustee, or assignee in bankruptcy or in insolvency covering all or
substantially all of such party's property or providing for the liquidation of
such party's property or business affairs; then the other party may, at its
option and without notice, terminate this Agreement, effective immediately.
16.5 Sections 3.4, 6.1, 12, 13, 14, 15, 16.6, 18 and 19 through 30 hereof
shall survive any expiration or termination of this Agreement. Any such
expiration or termination will not affect the rights of Customers to continue to
use the Products.
16.6 Upon any expiration or termination of this Agreement, Minerva shall
have no obligation to ship Compression Equipment or Licensed Programs to
Remarketer and Remarketer's rights and licenses granted hereunder shall
terminate. Remarketer shall promptly provide Minerva with a statement indicating
the number of Minerva's Products in its inventory. Remarketer shall, at
Minerva's option (i) except as provided in (ii) below, return to Minerva all
Compression Equipment in Remarketer's inventory as Minerva may direct at its
sole discretion (excepting that Minerva may only direct the return of complete
systems) whereupon Minerva shall refund to Remarketer the
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purchase price paid by Remarketer with respect thereto; or (ii) ship Computer
Equipment and Licenses Programs in its existing inventory in order to fulfill
any Customer purchase order therefore accepted by Remarketer prior to the
effective date of such termination, provided that Remarketer provides Minerva
with copies of such purchase orders and acceptances prior to such shipment. In
addition, Remarketer shall return to Minerva any and all tangible embodiments of
Minerva's confidential information in its possession.
SECTION 17
LIMITATION OF REPRESENTATIONS AND USE OF NAME BY REMARKETER
17.1 Remarketer shall make no representations concerning Minerva, the
Compression Equipment, or the Licensed Programs, except as set forth in
published specification or in the Documentation.
17.2 Remarketer shall not reproduce, reference, distribute or utilize any
trade name or trademark of Minerva, except solely for purposes of indicating to
the public in advertisements, promotions or publicity that it has incorporated
Minerva's Products into the Products. Without limiting the foregoing, in no
event shall Remarketer apply any trade name or trademark of Minerva to any OEM
Product. Remarketer shall submit to Minerva, for its approval, any and all
advertising, promotion, or publicity in which the trade names or trademarks of
the Minerva are used, or which is otherwise undertaken pursuant to this
Agreement, prior to any use, distribution, or disclosure of such advertising,
promotion or publicity; provided, however, that the foregoing shall not require
Remarketer to obtain prior approval for the use of Minerva's trade name or
trademarks for the purpose of specifying Minerva products in proposals or
providing standard Minerva product literature to Customers or potential
Customers. Minerva shall have the right to require, at its discretion, the
correction or deletion of any misleading, false, or reasonably objectionable
material or its trade names or trademarks from any such advertising, promotion,
or publicity.
17.3 Minerva and Remarketer will cooperate to determine specific
co-marketing items that will benefit both parties. A joint marketing plan will
be developed and reviewed on an annual basis.
SECTION 18
LIMITATION OF LIABILITY
18.1 EXCEPT FOR OBLIGATIONS ARISING UNDER SECTION 15.1, MINERVA'S
LIABILITY UNDER OR ARISING OUT OF THIS AGREEMENT SHALL BE LIMITED TO THE AMOUNTS
PAID BY REMARKETER HEREUNDER. IN NO EVENT SHALL MINERVA BE LIABLE TO REMARKETER
OR ANY OTHER PERSON OR ENTITY FOR DAMAGES FOR LOST PROFITS, COSTS OF PROCUREMENT
OF SUBSTITUTE COMPRESSION EQUIPMENT OR SERVICES, OR ANY SPECIAL, CONSEQUENTIAL,
INCIDENTAL, PUNITIVE, OR INDIRECT DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF
LIABILITY, WHETHER CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, UNDER OR
ARISING OUT OF THIS AGREEMENT, REGARDLESS OF WHETHER MINERVA KNOWS OR HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THESE LIMITATIONS SHALL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED
FOR HEREIN.
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SECTION 19
INDEPENDENT CONTRACTOR STATUS
19.1 Remarketer is an independent contractor under this Agreement, and
nothing herein shall be construed to create a partnership, joint venture, or
agency relationship between the parties hereto, with the sole exception that
Remarketer acts as a licensing agent of Minerva with respect to Licensed
Programs as provided herein. Remarketer shall have no authority to bind or
obligate Minerva in any manner to any third party.
SECTION 20
COMPLIANCE WITH LAW
20.1 Remarketer shall comply with all applicable laws and regulations of
governmental bodies or agencies in its performance under this Agreement.
SECTION 21
NO ASSIGNMENT
21.1 Remarketer represents that it is acting on its own behalf and is not
acting as an agent for or on behalf of any third party, and further agrees that
it may not assign its rights or delegate its obligations under this Agreement
without the prior written consent of Minerva, except that Remarketer may assign
its rights and delegate its obligations hereunder in the event of a transfer of
ownership or control of substantially all of its assets, provided that such
assignee has assumed in writing or by operation of law Remarketer's obligations
hereunder.
SECTION 22
NOTICES
22.1 All notices and other communications required or permitted to be
given under this Agreement shall be in writing and shall be considered effective
when deposited in the U.S. mail as registered mail, return receipt requested,
postage prepaid, and addressed to the party at the address noted above, unless
by such notice a different address shall have been designated in writing.
SECTION 23
GOVERNING LAW
23.1 All questions concerning the validity, operation, interpretation, and
construction of this Agreement will be governed by and determined in accordance
with the laws of the State of California, U.S.A., without giving effect to its
conflict of laws provisions. Remarketer hereby expressly consents to service of
process being effected upon it by registered mail sent to the address(es) set
forth at the beginning of this Agreement.
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SECTION 24
NO WAIVER
24.1 Neither party shall by mere lapse of time without giving notice or
taking other action hereunder be deemed to have waived any breach by the other
party of any of the provisions of this Agreement. Further, the waiver by either
party of a breach of this Agreement by the other party shall not be construed
as, or constitute, a continuing waiver of such breach, or of other breaches of
the same or other provisions of this Agreement.
SECTION 25
FORCE MAJEURE
25.1 Neither party shall be in default if its failure to perform any
obligation hereunder, except any and all of Remarketer's payment obligations
hereunder, is caused solely by supervening conditions beyond that party's
control, including acts of God, civil commotion, strikes, labor disputes, and
governmental demands or requirements.
SECTION 26
SEVERABILITY
26.1 If any provision of this Agreement shall be found or be held to be
invalid, illegal or unenforceable in any jurisdiction in which this Agreement is
being performed, then the meaning of such provision shall be construed, to the
extent feasible, so as to render the provision enforceable, and if no feasible
interpretation would render it enforceable, such provision shall be severed from
the remainder of this Agreement, and the remainder of this Agreement shall
remain in full force and effect. In such event, the parties shall promptly
commence negotiations, in good faith, towards creating a substitute, valid and
enforceable provision which most nearly effects the parties' intent in entering
into this Agreement. In the event that the parties have not so agreed in writing
on a substitute provision within ninety (90) days of the finding or holding
which rendered the severed provision invalid, illegal or unenforceable, then
this Agreement shall immediately terminate without notice.
SECTION 27
SCOPE OF AGREEMENT
27.1 Each of the parties hereto acknowledges that it has read this
Agreement, understands it, and agrees to be bound by its terms. The parties
further agree that this Agreement is the complete and exclusive statement of
their agreement with respect to the subject matter hereof and supersedes all
proposals (oral or written), understandings, representations, conditions,
warranties, covenants, and all other communications between the parties relating
thereto. This Agreement may be amended only by a writing that refers to this
Agreement and is signed by both parties.
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SECTION 28
LIMITATION OF ACTIONS
28.1 Remarketer agrees that all claims against Minerva shall expire and be
barred forever unless an action thereon is commenced in a court of competent
jurisdiction within eighteen (18) months following Remarketer's discovery of the
facts indicating to Remarketer that a cause of action on such claims may exist
against the Minerva.
SECTION 29
EXPORT CONTROLS
29.1 Remarketer understands and acknowledges that Minerva is subject to
regulation by agencies of the U.S. government, including, but not limited to,
the U.S. Department of Commerce, which prohibit export or diversion of certain
products and technology to certain countries. Any and all obligations of Minerva
to provide the Minerva's Products, any documentation pertaining thereto, or any
media in which any of the foregoing is contained, as well as any technical
assistance, shall be subject in all respects to such United States laws and
regulations as shall from time to time govern the license and delivery of
technology and products abroad by persons subject to the jurisdiction of the
United States, including the Export Administration Act of 1979, as amended, any
successor legislation, and the Export Administration Regulations issued by the
Department of Commerce, Bureau of Export Administration. Remarketer agrees to
cooperate with Minerva, including, without limitation, providing required
documentation, in order to obtain export licenses or exemptions therefrom.
29.2 Without in any way limiting the provisions of this Agreement,
Remarketer agrees that unless prior written authorization is obtained from the
Bureau of Export Administration or the Export Administration Regulations
explicitly permit the reexport without such written authorization, it will not
export, reexport, or transship, directly or indirectly, the Minerva's Products
or any technical data disclosed or provided to Remarketer, or the direct product
of such technical data, to country groups Q, S, W, Y, or Z, or to any other
country as to which the U.S. Government has placed an embargo against the
shipment of products, which is in effect during the term of this Agreement.
SECTION 30
ARBITRATION
30.1 Any dispute which arises between the parties which pertains in any
manner to this Agreement, except disputes arising under Sections 3, 13, 14, 15
or 17.2 hereof, shall be resolved through binding arbitration by one arbitrator
in Santa Clara County, California, pursuant to the then-existing rules of the
American Arbitration Association. Judgment upon any award by such arbitrator
shall be binding and may be entered by any state or federal court having proper
jurisdiction. The parties hereto irrevocably submit to the jurisdiction of said
courts and waive any rights to object to or challenge the appropriateness of
said forums.
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused the Agreement to be duly
executed as of the Effective Date by their authorized representatives as set
forth below:
MINERVA SYSTEMS, INC. Celerity Systems, Inc.
By: /s/ Authorized Officer By: s/s William R. Chambers
--------------------------- -------------------------------
Name: Name: William R. Chambers
------------------------- -----------------------------
Title: Title: Vice President
-----------------------
16
<PAGE>
EXHIBIT A
Products and Pricing
Compression Equipment
The OEM discount applied by Minerva increases as additional systems are
purchased. The additional discount only applies to individual units, and does
not apply retroactively to previous purchases.
The Compressionist products are complete turnkey MPEG encoding systems which
include: 19" rackmountable chassis; host computer with 4GB hard drive; monitor,
keyboard and mouse; MPEG 1 & MPEG 2 encoder and decoder; Exabyte tape drive;
picture resampling system, Component YUV, S-Video and Composite input; RGB,
S-Video or Composite Video output, and AES/EBU Digital or Balanced Analog Audio.
The Minerva Publisher product provides a desktop encoding system which includes:
the desktop chassis; MPEG 1 & MPEG 2 encoder and decoder; Component YUV, S-Video
and Composite input; RGB, S-Video or Composite Video output, and AES/EBU Digital
or Balanced Analog Audio.
Compressionist(R) Products:
Product Unit. Celerity
Name Purchased SRP Discount Price
- ---- --------- --- -------- -----
Compressionist 1 - 3 $65,000 25% $48,750
200 (MPEG 1&2) 4 - 10 30% 45,500
11 plus 35% 42,250
Advanced Video
Pre-Processing 1 - 3 $25,000 25% $18,750
Module 4 - 10 30% 17,500
11 plus 35% 16,250
D1 Video Capture 1 - 3 $10,000 25% $ 7,500
Input Module 4 - 10 30% 7,000
11 plus 35% 6,500
A-1
<PAGE>
Minerva Publisher(TM) Products:
Product Unit. Celerity
Name Purchased SRP Discount Price
- ---- --------- --- -------- -----
MP-200 1 - 10 $29,995 25% $22,500
11 plus 30% 20,995
Desktop Pre- 1 - 10 $5,995 25% $ 4,400
11 plus 30% 4,195
Licensed Programs
Minerva Studio(TM) is included in system prices listed above.
REMARKETER ANNUAL SERVICE CONTRACT
(Terms and conditions as of June 15, 1997)
Product Celerity
Name SRP Price
- ---- --- -----
Compressionist $9,995 $6,000
200 (includes
all optional
features)
Minerva Publisher $4,500 $2,750
(MP200: includes
all optional features)
A-2
<PAGE>
EXHIBIT B
Minerva Systems, Inc.
TERMS OF END-USER LICENSE AGREEMENT
Only a personal, nontransferable, and non-exclusive right to use the Licensed
Program is granted to such Customer;
Minerva retains all title to the Licensed Programs and all copies thereof, and
no title to the Licensed Programs, or any intellectual property in the Licensed
Programs, is transferred to such End-User;
The Customer may not copy (i) the Licensed Programs, except for one (1) copy for
backup or archival purposes only and only as necessary to use the Licensed
Programs and (ii) the Documentation, and all such copies are the proprietary
information of Remarketer and its licensers and suppliers and are subject to
their copyrights;
The Customer agrees not to reverse engineer, decompile, or otherwise attempt to
derive source code from the Licensed Programs. The Customer shall not modify or
prepare derivative works of the Licensed Programs;
Minerva Systems, Inc. is an intended third party beneficiary of the Customer
sublicense and is entitled to enforce it in its own name directly against the
End-User;
MINERVA WILL NOT BE LIABLE TO THE CUSTOMER OR ANY OTHER PERSON OR ENTITY FOR ANY
GENERAL, SPECIAL, DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, OR OTHER DAMAGES
ARISING OUT OF THE SUBLICENSE OF THE LICENSED PROGRAMS OR THE PROVISION OF THE
COMPRESSION EQUIPMENT;
Upon termination of the End-User License Agreement, the Customer will return all
copies of the Licensed Programs to Remarketer or Minerva;
Use, duplication or disclosure of the Licensed Programs by the U.S. Government
is subject to "Restricted Rights", as that term is defined in the Department of
Defense ("DOD") Supplement to the Federal Acquisition Regulations ("DFARS") in
paragraph 252.227-7013(c)(1) if to the DOD, or, if the Licensed Programs are
supplied to any unit or agency of the U.S. Government other than DOD, the
Government's rights in Licensed Programs will be as defined in paragraph
52.227-19(c)(2) of the Federal Acquisition Regulations ("FAR"). Contractor:
Minerva Systems, Inc., 2933 Bunker Hill Lane, Santa Clara, CA 95054.
[Where packaged as a "shrink-wrap" or "break-the-seal" agreement]:
Customer shall, promptly after purchase, complete and mail the enclosed
postcard. Customer's failure to do so shall be a material breach of this
end-user license agreement.
<PAGE>
EXHIBIT C
Minerva Systems, Inc.
MINIMUM AMOUNTS
This exhibit does not apply.
<PAGE>
EXHIBIT D
Minerva Systems, Inc.
TERMS OF SUB DISTRIBUTOR LICENSE AGREEMENT
Each agreement between OEM and a Sub distributor will contain at a minimum the
following terms:
Sub distributor shall distribute the OEM Product to end users pursuant to
End-User License Agreements which (i) at a minimum contain the terms listed in
Exhibit B and (ii) are signed by such end users or, where signing is not
commercially feasible, subject to (a) a "shrink-wrap" or "break-the-seal"
End-User License Agreement packaged with the Licensed Program (b) the inclusion
of a postcard in such package which prompts the end-user Customer to provide its
name, address, telephone number, date of purchase and from whom the end-users
purchased Manufacturer's Product; and (c) OEM's acceptance of purchase orders or
other offers to purchase by end-user Customers being expressly conditioned on
the inclusion of the terms of the End-User License Agreement.
Sub distributor shall not remove, alter or cover the proprietary notices which
appear on and in the Licensed Program when shipped from OEM;
The Sub distributor will not export or re-export the Compression Equipment or
the Licensed Programs without the appropriate United States or foreign
government licenses;
Minerva is an intended third party beneficiary of the Sub distributor agreement
and is entitled to enforce the Sub distributor agreement in its own name
directly against the Sub distributor.
The Sub distributor agreement will be governed by the laws of the State of
California without giving effect to its choice of law provisions;
The following will appear in upper case letters:
OEM'S LICENSERS AND SUPPLIERS WILL NOT BE LIABLE FOR ANY DAMAGES SUFFERED
OR INCURRED BY SUB DISTRIBUTOR INCLUDING, BUT NOT LIMITED TO, GENERAL,
SPECIAL, DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM OR IN CONNECTION WITH THE DELIVERY, USE, OR PERFORMANCE OF THE
LICENSED PROGRAM OR COMPRESSION EQUIPMENT;
The Sub distributor will not copy all or any part of the Licensed Program,
and on termination of the Sub distributor agreement, the Sub distributor will
discontinue distribution and destroy its inventory of the Licensed Program;
<PAGE>
No title to the intellectual property contained in the Licensed Program is
transferred to Sub distributor and title to the Licensed Program is retained by
Minerva and its licensers;
Sub distributors may not decompile, reverse engineer or otherwise attempt
to derive source code from the Licensed Program and may not prepare derivative
works of the Licensed Program;
A term protecting the Licensed Program from governmental abuse. In the
United States, a statement similar to the following is acceptable:
United States Government Restricted Rights. Use, duplication or disclosure
of the Software by the U.S. Government is subject to "Restricted Rights",
as that term is defined in the DOD Supplement to the Federal Acquisition
Regulations ("DFARS") in paragraph 252.227-7013(c)(1)(ii) if to the
Department of Defense (DOD), or, if the Software is supplied to any unit
or agency of the U.S. Government other than DOD, the Government's rights
in Software will be as defined in paragraph 52.227-19(c)(2) of the Federal
Acquisition Regulations ("FAR"). Contractor: Minerva Systems, Inc., 3801
Zanker Road, San Jose, CA 95134.
D-2
<PAGE>
Exhibit 10.12
Memorandum of Understanding
between
Integrated Network Corporation
and Celerity Systems, Inc.
April 25, 1996
This Memorandum of Understanding (hereinafter referred to as "MOU") by and
between:
INTEGRATED NETWORK CORPORATION, a company incorporated under the laws of the
state of Delaware USA and having its registered office at 757 Route 202/206,
Bridgewater, N.J. 08807, USA (hereinafter referred to as INC).
And:
CELERITY SYSTEMS, INC., a company incorporated under the laws of the state of
Tennessee and having its registered office at 9051 Executive Park Drive, Suite
400, Knoxville, TN 37923 USA (hereinafter referred to as "Celerity").
Is for the Taiwan Corporation (hereinafter referred to as "IBM Taiwan"),
Computer & Communications Research Laboratories/Industrial Technology Research
Institute (hereinafter referred to as "CCL") Video On Demand Trial, to be
deployed in Taiwan during 1996.
1. Supporting Documentation
This memorandum of understanding incorporates by reference the following
sections of "Statement of Work: IBM Taiwan, Computer & Communications Research
Laboratories/Industrial Technology Research Institute Video On Demand Trial"
dated April 11, 1996 (hereinafter referred to as "SOW"). The following
referenced sections of the SOW apply to this MOU:
Section 2.5 Change Control Procedure
Section 3. Acceptance Criteria
2. Deliverable Items
2.1. All Deliverable Items
The following is a list of all Deliverable Items to be supplied by Celerity to
INC:
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Qty Deliverable Item Description US$ Unit US$ Price
Price
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
1 Video Server Includes hardware, software N/A 450,000
license and documentation (see
Note a. below). Services include
system integration support. (see
Note b below)
- ---------------------------------------------------------------------------------------------------
200 Topper 3000 Set-top Includes hardware, software 1,500 300,000
Box license, and documentation (see
Note a. below). Services include
system integration support. (see
Note b below).
- ---------------------------------------------------------------------------------------------------
1 Year One Year Warranty Extended one year warranty from N/A 75,000
the date of acceptance for all the
equipment described above.
- ---------------------------------------------------------------------------------------------------
1 wk Training Training on the video server at 8,000 8,000
Celerity's facilities in Knoxville
(see Note b below)
- ---------------------------------------------------------------------------------------------------
</TABLE>
Table 1: Celerity Deliverables to INC
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Qty Deliverable Item Description US$ Unit US$ Price
(Loaned) Price
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
10 Topper 3000 Set-top Loaned to INC for integration 1,500 (Price 15,000
Box and testing at INC on or prior to if INC (Price if
sixty (60) days after system cut keeps item INC keeps
over. INC must return these beyond 60 item beyond
Topper 3000s in good working days after 60 days
condition or purchase them at the system after system
indicated price. cutover.) cutover.)
- ---------------------------------------------------------------------------------------------------
</TABLE>
Table 2: Celerity Loaned Items to INC
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Qty Deliverable Item Description US$ Unit US$ Price
(Custom) Price
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
1 C-gate Board Custom engineering to bring C- 60/Man Hr 40,000
Engineering gate hardware to OS/9 boot and (estimated)
provide documentation. (see Note (See Note c.
c. below) Services include system below).
integration support. (see Note b
below).
- ---------------------------------------------------------------------------------------------------
6 C-gate Board 6 C-gate hardware boards Celerity's 7,000 est.
Hardware (populated and tested) cost
- ---------------------------------------------------------------------------------------------------
1 ATM Drivers ATM driver source code and N/A 27,000
documentation. Services include
system integration support. (see
Note b. below).
- ---------------------------------------------------------------------------------------------------
</TABLE>
Table 3. Celerity Custom Items Delivered to INC
2.2. Changes to Deliverable Items
INC shall notify Celerity in writing of any changes to Celerity Deliverable
Items required. Changes to material or software include, but are not limited to,
changes in quantity, features, functionality, or deployment. Celerity will
advise INC in writing of any costs to INC required to make these changes before
actually making these changes.
2.3. Notes to Section 2 Deliverable Items
a. The software referred to in Table 1. above includes MIX, NAV APP, NAV VOD,
and the supporting software platforms for which Celerity owns source code or is
authorized to transfer license to INC. Celerity assumes responsibility for any
Microware software licenses required for any Celerity Deliverable item.
b. INC agrees to reimburse Celerity for all travel, lodging and per diem
expenses for integration, installation, and /or training services conducted
outside of the United States.
c. The rights and ownership of the C-gate hardware and software are owned free
and clear by both INC and Celerity. No warranty is provided by Celerity for
C-gate hardware and software. As of April 22, 1996 Celerity has devoted 448
hours to C-gate engineering. The estimated April 30, 1996 billing for
engineering time will be 488 hours @ $60/hr = $29,280. The estimated C-gate
hardware cost is $7000. See Section 3. Payment Schedule below.
d. INC assumes full responsibility for payment of any penalties assessed or owed
to any party due to failure of INC or Celerity to meet schedule or delivery
dates. Celerity is in no way responsible
<PAGE>
for any penalties due to the failure by Celerity or INC to meet schedule or
delivery dates for this project.
3. Payment Terms
INC will pay Celerity US$ for the Deliverable Items according to the schedule
listed below. For the Topper 3000 Payment listed below, Celerity will be paid
through the documentary transferable irrevocable letter of credit issued by IBM
Taiwan to INC. For the final project payment Celerity will be paid immediately
upon receipt of payment by IBM Taiwan to INC.**
<TABLE>
<CAPTION>
Item Description US$ Amount Due Date
<S> <C> <C> <C>
Project 15% of the total of Deliverable $151,950 Net due immediately after
Prepayment Items listed in Table 1. above INC is paid by IBM Taiwan
plus $27,000 for ATM driver
source code.
Topper 3000 200 Topper 3000 Set-top boxes. $300,000 Net due immediately after
Payment Shipment of these set-top boxes INC is paid by IBM Taiwan
to INC is to occur 30 days after
INC issues an INC certificate of
acceptance.
Final Project Balance of the total of $408,050 Net due immediately after
Payment Deliverable items listed in INC is paid by IBM Taiwan
Table 1. above.
</TABLE>
In addition to the above listed Deliverable Items, the following Custom
Deliverable Items will be delivered to INC under the terms and conditions listed
below:
<TABLE>
<CAPTION>
Item Description US$ Amount Due Date
<S> <C> <C> <C>
3rd Party ATM driver source code $27,000 Included in Project
Software prepayment above.
Custom C-gate Board Engineering $60 per Man Billed to INC monthly as
Engineering Hr. $40,000 service is rendered. (Net due
Services estimated within 30 days of monthly
total invoice to INC).
Custom C-gate Hardware (6 populated Celerity's cost Prepayment of $6,000 when
Hardware and tested boards) (Approximately boards are ordered on or
$7000) about April 30, 1996, balance
due within 30 days of
shipment of $7000) boards
from Celerity to INC.
</TABLE>
<PAGE>
**INC will provide Celerity with an acceptable "Assignment of Funds" instrument
drawn on INC's bank (responsible for collections under the letter of credit from
IBM/Taiwan relating to this contract).
4. Delivery Schedule
Deliverable Item and/or Milestone Delivery Date
NAV APP, NAV VOD Training April 25-26, 1996
Ship Development Station to CCL April 30, 1996
Receive ATM Driver Source Code May 1, 1996 (Assumes payment
by INC no later than April 27,
1996. Any delay in payment
will result in a day-for-day
delay in delivery of the Video
Server).
Ship OS/9 bootable C-gate hardware to INC May 31, 1996 (Assumes receipt of
ATM Driver Source Code -- see
above)
Ship Video Server to INC May 31, 1996 - July 15, 1996 **
Stream data cells from C850 ATM emulator May 31, 1996
memory
Provide 2 loaner Topper 3000 STB hardware May 31, 1996 (See Note 1 below)
only platforms to INC for development
Stream video from C850 ATM emulator memory June 15, 1996
Deliver Site Verification checklist to INC June 18, 1996
Stream video through C850 ATM Module from June 30, 1996
disk
Provide 8 loaner Topper 3000 STBs to INC for June 30, 1996 (See Note 2 below)
integration
Implement alpha VCR control on C850 ATM July 31, 1996
Module
Verify MPEG2 Transport Stream content Estimated date is August 15,
encoding from CCL (see Note 3 below) 1996. (See Note 3 below)
<PAGE>
Ship 10 Topper 3000 STBs to INC for testing August 15, 1996 (See Note 2
below)
Ship 180 Topper 3000 STBs to INC No later than 20 weeks from
receipt of Project Prepayment
** Celerity will stage shipments of the Video Server to INC beginning with one
shelf subsystem for integration and the remaining components for integraton by
July 15, 1996.
4.1. Notes to Section 4. Delivery Schedule:
Note 1: These Topper 3000 are hardware only platforms loaned to INC for
development purposes. The Topper 3000 as required for the Taiwan project
requires the ability to connect to the communications gateway C-Gate via
Ethernet and receive 1 process application and program streams. INC will provide
development of the additional below specified items by an INC assigned
developer:
o Ethernet driver instead of E1 for MPEG streaming
o Serial back channel set-top command protocol (SCP) (See Section 6, Note 4)
o Virtual serial port and SCP-Mon for encapsulating DAVID UpLink protocols
to tunnel through Allendale switch.
o Port Graphics APIs to Topper
Note 2: Early release Topper 3000 hardware platform will support program stream
decode function only.
Note 3: Expected content is MPEG-2 Transport encapsulated Program Stream.
Celerity recommends that content be verified by streaming through the entire
system from Server to STB. Though it is possible to demonstrate decoding at the
component level, such as by decoding MPEG program stream out of memory, Celerity
does not recommend this procedure nor can Celerity guarantee the validity of
content tested with this procedure.
5. Project Management and Quality Assurance
Celerity will designate an individual who will be the contact point for this
project. This designated individual will participate in project review and
reporting.
INC will designate an individual who will be the contact point for this project
and will have the authority to enter into agreements that effect the project.
This designated individual will participate in project review and reporting.
6. Special Notes and Changes to SOW of April 11, 1996
Note 1: Delete reference to "Content Loading Device" in Section 1.3.2.1 Video
Server because the 8mm Tape Drive is included in the System Controller.
Note 2: In Section 1.3.2.1 Video Server change "System Controller...SCO UNIX..."
to "System Controller...Solaris."
Note 3: In Section 1.3.2.1 Video Server change CSB Cable quantities from "3" to
"4" and SCSI
<PAGE>
Cable quantities from "3" to "9."
Note 4: In Section 3.5.3 Level 1 Gateway, add that the Level 1 Gateway will be
duplicated from Korea Telecom Phase II. All messages will comply with INC
Compatibility Bulletin AL94-003 Issue 2 dated March 29, 1995.
7. Representation/Indemnity
a. Celerity hereby warrants that to its knowledge, after no inquiry, no
Deliverable Items violate or infringe upon any United States or Taiwan Patents,
Copyright or trade secret or any person.
b. INC shall notify Celerity promptly of any claim, action, or suit
against INC arising out of the manufacture, sale, or sublicensing of the
Deliverable items or the alleged infringement by Deliverable Items of any Taiwan
or United States Patents, Copyright, or trade secrets or Copyright of any third
party.
c. Celerity will indemnify INC against and hold INC harmless from any and
all loss, costs damage or liability assessed against INC, or incurred by INC,
arising out of or in connection with any claim that:
(1) Celerity has breached its warrant under section 5 or
(2) Celerity's products incorporate one or more material elements that
constitutes misappropriation of a trade secret from a third party within the
United States or Taiwan provided however, in any event that as a condition of
such indemnity:
(i) that INC notifies Celerity promptly and in writing that any such claim
is threatened or has been brought and in no event more than twenty-one (21) days
after INC receives notice that such claim has been brought,
(ii) that Celerity has the right to assume the defense of such claim, with
counsel selected by Celerity,
(iii) that Celerity shall have the right to settle such claim and/or
procure the right to continue to manufacture and sublicensing of the Deliverable
Items as contemplated hereunder, and/or modify the Deliverable Items in such a
fashion as to eliminate any infringement and misappropriation (without affecting
the capability or performance) and thereby discharge it's obligations hereunder,
(iv) Celerity shall have no obligation hereunder with respect to any
proceeding or claim of infringement based on IBM Taiwan's or INC's modification
of the Deliverable Items provided by Celerity hereunder or the combination,
operation, or use of such Deliverable Items with program(s) and procedures not
furnished by Celerity.
8. Warranty
8.1. Limited Warranty of CELERITY
<PAGE>
CELERITY warrants that, after the Acceptance Date and during the Warranty Period
as to each Celerity Deliverable Item, such Celerity Deliverable Item will
conform to the specifications and the documentation in all material respects.
CELERITY does not warrant that use of the Software will be error-free or
uninterrupted or that the Software will meet the needs of INC's Customers. This
warranty does not extend to Deliverable Items or any portion thereof which (i)
has been subject to misuse, accidental or improper installation, maintenance or
application, or (ii) has been modified by persons other than CELERITY. THE
LIMITED WARRANTY SET FORTH IN THIS PARAGRAPH IS IN LIEU OF ALL OTHER WARRANTIES,
WHETHER EXPRESS OR IMPLIED, WITH RESPECT TO THE DELIVERABLE ITEMS, INCLUDING ANY
IMPLIED WARRANTIES OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.
8.2. Limited Remedy
Upon INC's determination that a Deliverable item is not performing in accordance
with the specifications (a "Defect" or "Defects"), INC will provide CELERITY
with an Engineering Notification ("EN") that defines the Defect and contains
sufficient data in a mutually-agreeable form to demonstrate that Defect. Upon
receipt of an EN, CELERITY will at its sole discretion, repair the Deliverable
Item or replace it provided that all such obligation shall terminate at the
earlier of twelve (12) months after Acceptance Date of CELERITY's product or
eighteen (18) months after the date of delivery of Deliverable Items to carrier;
and further provided that INC gives CELERITY prompt written notice of any such
defect and cooperates with CELERITY's investigation and handling of the matter.
In the event CELERITY elects to provide replacement, CELERITY shall not be
obligated to make such replacement prior to the time the defective product has
been returned to its Knoxville manufacturing plant, suitably packed and sent by
reputable carrier. No other returns will be permitted, allowed or credited
without the prior written consent of CELERITY. THE REMEDY DESCRIBED IN THIS
SECTION SHALL BE INC'S SOLE REMEDY FOR ANY PERFORMANCE FAILURE OF THE
DELIVERABLE ITEM. NEITHER CELERITY NOR ITS SUPPLIERS SHALL BE LIABLE FOR ANY
LOSS OF PROFITS, LOSS OF BUSINESS OR GOODWILL, LOSS OF DATA OR USE OF DATA,
INTERRUPTION OF BUSINESS NOR FOR ANY OTHER INDIRECT, SPECIAL, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES OF ANY KIND UNDER OR ARISING OUT OF, OR IN ANY WAY RELATED
TO THIS AGREEMENT, HOWEVER CAUSED, WHETHER FOR BREACH OF WARRANTY, BREACH OR
REPUDIATION OF CONTRACT, TORT, NEGLIGENCE, OR OTHERWISE, EVEN IF CELERITY OR ITS
REPRESENTATIVES HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS. NO ACTION,
REGARDLESS OF FORM, ARISING OUT OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT MAY BE BROUGHT BY EITHER PARTY MORE THAN TWO (2) YEARS AFTER SUCH
PARTY KNEW OR SHOULD HAVE KNOWN OF THE OCCURRENCE OF THE EVENT(S) WHICH GAVE
RISE TO SUCH ACTION.
9. Warranty Maintenance Service
During installation of the Celerity Deliverable Items and until successful
official cut over of the system, Celerity will provide, at Celerity's cost and
expense, all necessary and appropriate co-active technical support of these
aforementioned Celerity Deliverable Items via telephone as needed to ensure
successful installation. INC agrees to cooperate with all reasonable requests of
Celerity for all on-site support including personnel who can provide on-site
assembly, installation
<PAGE>
and service.
Celerity agrees to make available through INC, maintenance service for Celerity
Deliverable Items excluding C-gate Deliverable Items for a total of twelve (12)
months from the date of final acceptance. During such period, Celerity shall
provide maintenance service for Celerity Deliverable Items consisting of
telephone support and dispatching of qualified technical staff upon a reasonable
request by INC as often as reasonably necessary.
In no way will Celerity warrant or provide maintenance service for non-Celerity
Deliverable Items or for C-Gate Deliverable Items.
Following expiration of the Warranty period described in Section 8 of this MOU,
Celerity will make available to IBM Taiwan or INC a Maintenance Service program
consisting of unlimited telephone support during Celerity's normal business
hours and the dispatching of qualified technical staff to customer's site upon a
reasonable request by IBM Taiwan or INC as often as reasonably necessary. For
this maintenance service IBM Taiwan or INC agrees to pay Celerity's reasonable
and customary charges for such service and reasonable out of pocket expenses as
incurred including travel and hotel accommodation for the trips to the
customer's site. The services offered and the charges for this Maintenance
Service program will be determined by Celerity at a later date.
10. Confidential Non-Disclosure Agreement
INC agrees to abide by any previous Non-Disclosure Agreements made with or on
the behalf of Celerity, and in addition agrees to disclose no confidential or
proprietary information pertaining to Celerity and its hardware, software, and
services, including but not limited to customer lists, business relationships,
hardware configurations, architectures, and designs, software and firmware
functions and source code, etc. IBM Taiwan, CCL, or other individual or
organization without prior written permission. All communications from Celerity
to INC by whatever means will be regarded as confidential and proprietary unless
expressly designated non-confidential or non-proprietary by Celerity. INC agrees
to compensate Celerity for any damages, lost revenue, or other injury or
liabilities to Celerity, other companies, organizations, or individuals due to
the transfer by whatever means and for whatever reason to IBM Taiwan or CCL of
any confidential or proprietary information pertaining to Celerity and its
hardware, software, and services.
IN WITNESS WHEREOF, the parties have executed this Memorandum of Understanding
as of the date first above written.
Celerity Systems, Inc. Integrated Network Corporation
By: /s/ James Hudson By: /s/ Gregory P. More
-------------------------------- --------------------------------
James Hudson 5/2/96 Gregory P. More 26 April 1996
Vice President, Sales and Marketing Director, Product Line Management
<PAGE>
Addendum to the DRAFT
Memorandum of Understanding
between
Integrated Network Corporation
and Celerity Systems, Inc.
April 25, 1996
11. Performance by Celerity
Celerity agrees to provide all Deliverables Items listed in Section 2 of the MOU
no later than April 1, 1997 with exception of Training. These Items will
function as described below:
11.1 Functionality of Deliverable Items
These Deliverable Items will function as described in the table below:
- --------------------------------------------------------------------------------
Deliverable Item Functionality
- --------------------------------------------------------------------------------
Video Server A) Band width: support for 50 streams @ 3 Mb/s per
stream.
B) Data Transport: ATM virtual channel transport with
single MPEG1 System Stream or MPEG2 Program
Stream.
C) Data Storage: support a hierarchical file system
with network accessibility implemented using RAID
technology.
D) Network interface: ATM-based switch network.
E) Scalability: ability to increase the number of
clients or to change the number of servers.
F) Support virtual VCR functions such as fast
forward, rewind, pause, and play.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Topper 3000 Set-top A) The basic format of the audio presented to the
Boxes set-top box is to be MPEG 1 or MPEG 2 level 1 or
2, no free format or level 3 support.
B) The set-top box must accept and correctly process
MPEG 2 (ISO/IEC 13818-2) Program Stream video
stream data.
C) Synchronization of the audio and video should be
done through MPEG2 Program Stream syntax as
specified in (ISO/IEC 13818-1).
D) There should be at least one graphics plane,
supporting a minimum display resolution of 720
horizontal and 480 vertical (for NTSC). Simple
on/off transparency control must be provided to
allow the combination of graphics data with motion
video (MPEG) data. There should be at least 4
bits/pixel depth (16 colors).
- --------------------------------------------------------------------------------
C-gate Board Hardware A) The C-gate hardware board will be OS/9000
bootable.
- --------------------------------------------------------------------------------
11.2 Penalties for Failure to Deliver
11.2.1. Penalty Conditions
If Celerity fails to deliver the above listed Deliverable Items functioning as
described above by April 1, 1997, Celerity will pay to INC the Penalty Fee
described in Section 11.2.2 Penalty Fee below. However, Celerity will not be
obligated to pay any Penalty Fees for any delays due to changes in the MOU or
this Addendum to the MOU imposed by INC including, but not limited to,
Deliverable Items, Delivery Schedule, or Functionality of Deliverable Items. In
addition, Celerity will not be obligated to pay any Penalty Fees for any delays
due to weather, acts of God, fire or arson, war or civil disturbance.
11.2.2. Penalty Fee
The penalty fee will equal one hundred twenty-four thousand nine hundred and
fifty US dollars ($124,950), equal to the Project Prepayment less the ATM Driver
source code and documentation.
Page 2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Addendum to the Memorandum of
Understanding as of May 17, 1996,
Celerity Systems, Inc. Integrated Network Corporation
By: /s/ James Hudson By: /s/ Gregory P. More
-------------------------------- ------------------------------
James Hudson Gregory P. More
Vice President, Sales and Marketing Director, Product Line Management
Page 3
<PAGE>
Addendum to the
Memorandum of Understanding
between
Integrated Network Corporation
and Celerity Systems, Inc.
Amendment Date: December 12, 1996
1. Deliverable Items
1.1 All Deliverable Items
The following is a list of all Deliverable Items to be supplied by Celerity to
INC for the IBM Taiwan/CCL Project:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Qty Deliverable Item Description US$ Unit US$ Price
Price
- -----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
1 Video Server Includes hardware, software license N/A 455,025
and documentation (see Note a.
below). Services include system
integration support. (see Note b below)
- -----------------------------------------------------------------------------------------------------
200 Topper 3000 Set-top Box This Deliverable Item will no longer be N/A -0-
provided by Celerity.
- -----------------------------------------------------------------------------------------------------
1 Year One Year Warranty Extended one year warranty from the N/A 62,445
date of acceptance for all the equipment
described above.
- -----------------------------------------------------------------------------------------------------
1 wk Training Training on the video server at 8,000 8,000
Celerity's facilities in Knoxville
(see Note b below)
- -----------------------------------------------------------------------------------------------------
</TABLE>
Table 1: Celerity Deliverables to INC
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Qty Deliverable Item Description US$ Unit US$ Price
(Loaned) Price
- -----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
10 Topper 3000 Set-top Box This Deliverable Item will no longer be N/A -0-
provided by Celerity.
- -----------------------------------------------------------------------------------------------------
</TABLE>
Table 2: Celerity Loaned Items to INC
Page 4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Qty Deliverable Item Description US$ Unit US$ Price
(Custom) Price
- ------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
1 NAV-RT Development Environment and Port to 22,000 22,000
- ------------------------------------------------------------------------------------------------------------
1 C-gate Board Custom engineering to bring C-gate 60/Man Hr 66,500 [40,000
Engineering hardware to OS/9 boot and provide (See Note c. Est + 26,500.]
documentation. (see Note c. below). Below).
Services include system integration
support (see Note b below).
- ------------------------------------------------------------------------------------------------------------
6 C-gate Board Hardware 6 C-gate hardware boards (populated and Celerity's 7,000 est.
tested) [Note: Ethernet problems to be cost
fixed. INC now requires only four C-gate
hardware boards.]
- ------------------------------------------------------------------------------------------------------------
1 ATM Drivers ATM driver source code and N/A 27,000 [Paid
documentation. Services include system with
integration support. (see Note b. below). prepayment]
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Table 3. Celerity Custom Items Delivered to INC
1.2. Notes to Section 2 Delivered Items
a. The software referred to in Table 1. above includes MIX, NAV, APP, NAV VOD,
and the supporting software platforms for which Celerity owns source code or it
authorized to transfer license to INC Celerity assumes responsibility for any
Microwave software licenses required for any Celerity Deliverable item.
b. INC agrees to reimburse Celerity for all travel, lodging and per diem
expenses for integration, installation, and/or training services conducted
outside of the United States.
c. The rights and ownership of the C-gate hardware and software are owned free
and clear by both INC and Celerity. No warranty is provided by Celerity for
C-gate hardware and software. The estimated C-gate hardware cost is $7000. See
Section 3. Payment Schedule below.
d. INC assumes full responsibility for payment of any penalties assessed or
owned to any party due to failure of INC or Celerity to meet schedule or
delivery dates. Celerity is in no way responsible for any penalties due to the
failure by Celerity or INC to meet schedule or delivery dates for this project.
Page 5
<PAGE>
2. Payment Terms
INC will pay Celerity US$525,470 for the Deliverable Items according to the
schedule listed below. The Topper3000 Payment will no longer apply. Celerity
agrees to cooperate with INC to revise the documentary transferable irrevocable
letter of credit issued by IBM Taiwan to INC to reflect the fact that Celerity
will not be supplying nor will Celerity be paid for Topper3000 set-top boxes.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Item Description US$ Amount Date Due
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Project 15% of $833,000 (prior total of $151,950 Previously paid by INC. [Note: 24% of
Prepayment Deliverable Items) plus $27,000 for $525,470, new Deliverable Items total.]
ATM driver source code.
- ----------------------------------------------------------------------------------------------------------------------
Topper 3000 This Deliverable Item will no longer be -0- N/A
Payment provided by Celerity.
- ----------------------------------------------------------------------------------------------------------------------
Final Project Balance of the total of Deliverable $373,520 Net due immediately after INC is paid
Payment Items listed in table 1. above. by IBM Taiwan.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to the above listed Deliverable Items, the following Custom
Deliverable Items will be delivered to INC under the terms and conditions listed
below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Item Description US$ Amount Date Due
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3rd Party ATM driver source code. $27,000 Included in Project prepayment above.
Software
-------------------------------------------------------------------------------------------------------
Ethernet Driver: INC did not request or -0- N/A
authorize this engineering. Celerity will
provide to INC as is.
-------------------------------------------------------------------------------------------------------
C-gate Engineering $66,500 INC paid $48,840. Add'l $9,010
payable upon receipt of 4 functional
boards, $9,010 payable after integration.
- ----------------------------------------------------------------------------------------------------------------------
NAV-RT $22,000 Paid Within 30 Days of INC receiving
final IBM Taiwan payment.
- ----------------------------------------------------------------------------------------------------------------------
C-gate Hardware $7,000 INC paid $3,478 for 2 boards, bal of
$3,522 upon receipt of 4 functional
boards. Boards currently in INC's
possession will be returned.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 6
<PAGE>
3. Delivery Schedule
- --------------------------------------------------------------------------------
Deliverable Item and/or Milestone Delivery Date
- --------------------------------------------------------------------------------
NAVRT development environment for CCL December 13, 1996
- --------------------------------------------------------------------------------
Celerity server to arrive at INC November 18, 1996
- --------------------------------------------------------------------------------
Celerity to port NAVRT to Tatung a STB December 31, 1996
- --------------------------------------------------------------------------------
Celerity to provide sample of menu application December 31, 1996
- --------------------------------------------------------------------------------
Celerity server with full VCR functionality December 16, 1996
- --------------------------------------------------------------------------------
Freeze hardware and software December 16, 1996
- --------------------------------------------------------------------------------
End-to-end system integration at INC November 29 - December 22, 1996
- --------------------------------------------------------------------------------
In-house acceptance test (20 STBs, Server) December 20, 1996
- --------------------------------------------------------------------------------
Pack and ship 200 STBs and server December 23 - 24, 1996
- --------------------------------------------------------------------------------
Installation and integration at NCHC (Taiwan) January 4 - 31, 1997
- --------------------------------------------------------------------------------
System acceptance and inspection February 1 - 20, 1997
- --------------------------------------------------------------------------------
3.1. Notes to Delivery Schedule:
The delivery schedule and related technical commitments will be amended to
reflect the various interfaces and processes each party will support. These
commitments, taken as a whole, will provide an end to end solution which meets
the requirements described in "Statement of Work: IBM Taiwan, Computer &
Communication Research Laboratories/Industrial Technology Research Institute
Video on Demand Trial" dated April 26, 1996.
Note 3: Expected content is MPEG-2 Transport encapsulated Program Stream.
Celerity recommends that content be verified by streaming through the entire
system from Server to STB. Though it is possible to demonstrate decoding at the
component level, such as by decoding MPEG program stream out of memory, Celerity
does not recommend this procedure nor can Celerity guarantee the validity of
content tested with this procedure.
IN WITNESS WHEREOF, the parties have executed this Memorandum of Understanding
as of the date first above written.
Celerity Systems, Inc. Integrated Network Corporation
By: /s/ Mahmoud Youssefi Date: By: /s/ Authorized Officer Date:
--------------------- -------- ---------------------- --------
Mahmoud Youssefi [Dev Gupta]
Page 7
<PAGE>
Exhibit 10.13
[Letterhead of Celerity Systems]
3/31/93
Letter of Agreement
Celerity Systems, Inc. is hereby contracted by Herzog, Heine, and Geduld, Inc.
to develop the Back Office System Proposal of January 21, 1993.
The overall scope of the project is provided in the aforementioned proposal. The
first step of the project will provide detailed specifications of the project.
A timeline will be developed as a part of the first step, which will show the
chronology of the steps and related deliverables. Each step of the overall
project will be considered complete upon approval of Herzog, Heine, and Geduld.
/s/ Mahmoud Youssefi /s/ Herzog, Heine, and Geduld, Inc.
- -------------------- -----------------------------------
Mahmoud Youssefi Herzog, Heine, and Geduld, Inc
Managing Director
Celerity Systems, Inc.
<PAGE>
DEVELOPMENT AGREEMENT
TABLE OF CONTENTS
PAGE
----
1.0 DEFINITIONS.......................................................... 1
2.0 STATEMENT OF WORK.................................................... 3
3.0 MAINTENANCE SERVICES................................................. 3
4.0 OWNERSHIP OF MATERIALS............................................... 4
5.0 PRICE AND PAYMENT.................................................... 4
6.0 ACCEPTANCE........................................................... 5
7.0 CHANGES.............................................................. 7
8.0 COPYRIGHT............................................................ 8
9.0 WARRANTY............................................................. 8
10.0 INDEMNIFICATION...................................................... 9
11.0 TERM AND TERMINATION................................................. 10
12.0 CONFIDENTIAL INFORMATION............................................. 11
13.0 COMPLIANCE WITH LAWS................................................. 12
14.0 GENERAL.............................................................. 12
ATTACHMENTS
Attachment I -- REQUIREMENTS ANALYSIS
Attachment II -- SCHEDULE
Attachment III -- DOCUMENTATION
Attachment IV -- MAINTENANCE AGREEMENT
<PAGE>
SOFTWARE-DEVELOPMENT AGREEMENT
This Development Agreement (hereinafter "Agreement") is made effective as of the
____ day of ______________, ____, by and between Celerity Systems, Inc.,
incorporated under the laws of the State of Tennessee, U.S.A., having an office
for the transaction of business at 9051 Executive Park Drive, Knoxville,
Tennessee 37923 (hereinafter referred to as "CSI"), and Herzog Heine Geduld,
Inc., organized under the laws of the State of __________, having an office for
the transaction of business at _________________ (hereinafter referred to as
"Herzog").
1.0 DEFINITIONS
The definitions set forth in this Section shall apply to the following
capitalized words and terms when used in this Agreement.
1.1 "Code" shall mean that computer program code, in source, object and
load executable form, licensed to Herzog, and more fully described
in Attachment III, and Support thereof, and any additional computer
program code provided by CSI to Herzog hereunder. Code shall include
newly created sounds and visuals, including screens music and
characters, displayed or heard as a result of the execution of the
Code.
1.2 "Documentation" shall mean written materials itemized in Attachment
III, and Support thereof, furnished hereunder to Herzog by CSI.
1.3 "Derivative Work" shall mean a work which is based upon one or more
preexisting work(s), such as a revision, modification, translation,
abridgement, condensation, expansion, collection, compilation or any
other form in which such preexisting works may be recast,
transformed or adapted, and which, if prepared without authorization
by the owner of the preexisting work, would constitute a copyright
infringement.
1.4 "Error" shall mean any one or more of the following conditions:
(a) a function described in Attachment I which is omitted from the
Code; or
(b) a function of the Code which does not operate or gives
incorrect results; or
(c) a function or user interface in the Code which does not
operate satisfactorily in the environment for which it was
designed; or
(d) a failure of the Documentation to accurately describe a
function contained in Attachment III; or
(e) a failure of the Documentation to enable the intended user to
correctly operate Code.
<PAGE>
1.5 "Maintenance" shall mean modifications, revisions or additions which
provide Error corrections for Code or Documentation.
1.6 "Modifications" shall mean modifications, revisions or additions
made to the Code or Documentation other than Maintenance.
1.7 "Work" shall mean the goods, products, services, supplies,
performance, documents, software, data, drawings or other items
constituting the subject matter of this Agreement which are
furnished by CSI to Herzog.
1.8 "Object Code" shall mean the machine-readable form of computer
program code.
1.9 "Source Code" shall mean the human-readable form of computer program
code and related system documentation, including all comments and
any procedural code such as job control language.
1.10 "Subsidiary" shall mean a corporation, company or other entity: 1)
more than (50%) of whose outstanding shares or securities
(representing the right, other than as affected by events or
default, to vote for the election of directors or other managing
authority) are; or 2) which does not have outstanding shares or
securities, as may be the case in a partnership, joint venture or
unincorporated association, but more than (50%) of the ownership
interest representing the right to make the decisions for such
corporation, company or other entity is; now or hereafter, owned or
controlled, directly or indirectly, by a party hereto; but such
corporation, company or other entity shall be deemed to be a
Subsidiary only so long as such ownership or control exists.
2.0 STATEMENT OF WORK
CSI agrees to perform the Work set forth in this Section, only pursuant to
Herzog Purchase Orders issued hereunder for the compensation specified in
Section 5.0.
CSI shall design, develop, code, integrate and test the Code in accordance
with the specifications of the approved Requirements Analysis.
CSI shall deliver one (1) copy of the Object Code and Source Code of the
Code to Herzog for Herzog's testing and approval.
CSI shall deliver Documentation as set forth in Attachment III in
preliminary form sufficient for Herzog's verification of the Code design,
and then in final form after Herzog's approval. Such information shall be
in a format suitable for Herzog's preparation of an End User's Manual.
CSI shall provide technical assistance to Herzog during Code verification
testing. CSI shall debug the Code as required in order to pass these
tests, and revise the design documentation accordingly.
2
<PAGE>
Within ten (10) days of Herzog's request, and at no additional charge, CSI
shall deliver to Herzog such data necessary to maintain and operate the
Code delivered hereunder or to conduct further development efforts with
respect to the Code.
CSI shall integrate and test additional specific software, as indicated in
Attachment I, along with the Code.
3.0 MAINTENANCE SERVICES
3.1 CSI agrees to maintain the ability to provide Maintenance to Herzog,
and agrees to provide such Maintenance at terms, conditions and
prices substantially as set forth in Attachment V. Herzog is under
no obligation to utilize or purchase such Maintenance from CSI.
4.0 OWNERSHIP OF MATERIALS
4.1 All Code and Documentation delivered to Herzog hereunder, shall
belong exclusively to CSI.
4.2 CSI hereby grants Herzog an irrevocable, nonexclusive, royalty-free,
paid-up license to use, execute, reproduce, display, distribute
internally and prepare Derivative Works of the Code and
Documentation.
5.0 PRICE AND PAYMENT
5.1 Price
Subject to the terms and conditions of this Agreement, and in
consideration for the rights and licenses granted to Herzog herein,
Herzog will pay to CSI the fixed price of Two Hundred Twenty-Five
Thousand Dollars ($210,000.00).
5.2 Payment
Without limiting the obligation of CSI to comply with all the
requirements of this Agreement, CSI will submit invoices and Herzog
will pay for Work completed according to this Agreement on the
following schedule:
DATE DESCRIPTION AMOUNT PERCENT
---- ----------- ------ -------
6/13/93 Requirements Analysis $ 15,000 7.14%
7/19/93 LAN/HUB 3270 $ 35,000 16.67
Connectivity
8/26/93 Phase 1 Prototype 45,000 21.43
9/20/93 Phase 1 Completion 55,000 26.19
12/16/93 Phase 2 $ 60,000 28.57
-------- ------
Total $210,000 100.00%
======== ======
3
<PAGE>
All payments are exclusive of any tariffs, duties, or taxes imposed or
levied by any government or governmental agency. Herzog shall be
responsible for payment of all such taxes, however designated, levied, or
based upon Herzog's possession or use of the Code and the Documentation,
or in this Agreement, including without limitation, state or local sales,
use and personal property taxes.
5.3 Herzog shall reimburse CSI for actual and reasonable travel and
living expenses incurred by CSI employees while performing Work at
Herzog facilities. Such Work shall be authorized by Herzog prior to
CSI incurring any expenses. CSI shall invoice such authorized travel
and living expenses at cost. Copies of all receipts shall accompany
any invoice submitted to Herzog.
5.4 Herzog shall pay to CSI the applicable amount within fifteen (15)
days net after receipt of an invoice in which CSI has certified that
the Work that is the subject of the invoice has been completed in
accordance with the requirements of this Agreement, and that all
conditions established by this Agreement as prerequisite to payment
of the invoice have been fulfilled.
6.0 ACCEPTANCE
6.1 CSI shall deliver to Herzog the Code and Documentation in accordance
with the schedule in Attachment II. Herzog will promptly notify CSI
of any Errors which it identifies prior to final delivery.
CSI shall promptly correct all Errors so identified by Herzog prior
to CSI's final delivery of the Code and Documentation.
6.2 After final delivery of all installments of the Code and
Documentation, Herzog may perform evaluation and test for a period
of thirty (30) days after receipt (hereinafter called "Evaluation
Period"). During the Evaluation Period, Herzog shall promptly notify
CSI of Errors identified by Herzog. CSI shall promptly correct all
Errors and deliver the corrected items to Herzog.
6.3 Within ten (10) days after the end of the Evaluation Period, CSI
shall provide to Herzog corrections for all Errors found during the
Evaluation Period and/or a statement identifying those Errors CSI
has been unable to correct, together with a schedule for delivering
the corrected items to Herzog.
6.4 Herzog shall furnish written notice to CSI within thirty (30) days
after receipt of the corrected Code and Documentation of acceptance
or rejection. Herzog may reject the Code and Documentation, if any
one or more Errors are not corrected and CSI's schedule for
correcting Errors is unacceptable to Herzog; Herzog may treat such
rejection as a material breach by CSI and terminate this Agreement
in accordance with the Section entitled "TERM AND TERMINATION."
4
<PAGE>
6.5 CSI recognizes that Herzog relies on CSI to fully test and correct
all Errors in the Code and Documentation. Accordingly, should Herzog
elect to accept the Code and Documentation with any one or more
System Critical Error(s), Herzog may withhold all payment due upon
or after their acceptance, as provided in the Section entitled
"PRICE AND PAYMENT" until all such Error(s) are corrected. Should
Herzog elect to accept the Code and Documentation with any one or
more Conditional Error(s), Herzog may withhold forty percent (40%)
of any such payments until all such Error(s) are corrected.
"Error Severity Level" as used herein shall mean classifications of
Errors as assigned by Herzog according to the following definitions:
(a) "System Critical Error" shall mean an emergency condition
which causes critical impact or significantly affects a Herzog
schedule or which makes the performance or continued
performance of any one or more functions difficult or
impossible.
(b) "Conditional Error" shall mean a condition which is not
critical in that no loss of data occurs and which may be
circumvented or avoided on a temporary basis by the intended
user.
6.6 If no written notice of acceptance or rejection is furnished to CSI
by Herzog within the time period set forth in Subsection 6.4, CSI
shall provide Herzog with written notice stating that if Herzog does
not accept or reject within five (5) days after Herzog's receipt of
such notice, Herzog shall be deemed to have accepted the Code and
Documentation. Herzog's failure to accept or reject within five (5)
days after receipt of such notice shall be deemed to be acceptance.
6.7 If any one (1) item is rejected by Herzog pursuant to this Section,
Herzog may, at its option, reject all items regardless of whether or
not any of those items were previously accepted by Herzog.
7.0 CHANGES
7.1 Herzog may, by written change order, make reasonable changes within
the general scope of this Agreement in drawings, designs,
specifications, procedures, quantities, or time or place of
delivery; require additional Work; or direct the omission of Work
and CSI shall promptly proceed with the change(s). All change orders
will be specifically identified as a change order to this Agreement
and will be signed by the Herzog Contract Administrator. If any such
change causes an increase or decrease in the cost of, or the time
required for performance of the Work, an equitable adjustment shall
be made in the price(s), or delivery date(s), or both; and this
Agreement shall be amended in writing accordingly. Any claim for
adjustment by CSI shall be deemed waived unless asserted in writing
within ten (10) days from the date of receipt by CSI of the Herzog
written change order. The amount of claim shall be stated when it is
submitted.
5
<PAGE>
7.2 If CSI or Herzog claims a right to adjustment pursuant to this
Section, CSI shall prepare and furnish to Herzog the evidence
necessary to establish the amount of any increase or decrease in the
cost of, or the time required for, Work affected by the change
order. The amount of any cost increase or decrease shall be
determined in accordance with CSI's regularly established accounting
practices and shall, if requested by Herzog, be verified by an
independent Certified Public Accounting firm.
7.3 Herzog technical personnel may from time to time render technical
assistance or give advice to, or effect an exchange of information
with CSI personnel concerning the Work to be furnished hereunder.
Such advice, assistance or exchange of information shall not be
deemed to be a change order requiring deviation from the Work
described in this Agreement, unless submitted to CSI in writing
pursuant to Subsection 7.1.
8.0 COPYRIGHT
All Code, Documentation, or Derivative Works thereof, developed or
produced by CSI shall contain an appropriate copyright notice in the name
of CSI, or other author in a manner to be determined by CSI.
9.0 WARRANTY
CSI represents and warrants to Herzog that the Code shall be fit for its
intended use, conforming to the Documentation and Requirements Analysis
attached to this Agreement and:
9.1 that CSI shall endeavor to eliminate Errors in the Code and
Documentation, but CSI does not warrant that these items shall be
delivered to Herzog Error free; and
9.2 that if within a period of six (6) months from the date of
installation, Herzog notifies CSI of any Error in the Code or
Documentation, CSI agrees to use its best efforts to correct the
Error(s) on a timely basis at no charge to Herzog. Herzog agrees to
use proper skill and care to follow the fault-finding procedures
specified by CSI and will cooperate with CSI in diagnosing the
Error; and
9.3 that CSI is or will be the author of, or has or will have exclusive
right, title and interest (including the right to grant licenses and
other rights granted herein) in the Code and Documentation; and
9.4 that to the best of CSI's knowledge, the Code and Documentation do
not infringe any copyright or other non-patent intellectual property
right (including trade secret), privacy or similar right, of any
third party; and
9.5 that to the best of its knowledge no claim, whether or not embodied
in any action past or present, of infringement of any copyright,
patent, or other intellectual property right, privacy or similar
right, has been made or is pending against CSI relative to the Code
6
<PAGE>
or Documentation. Each party shall promptly notify the other in the
event it becomes aware of such a claim.
The warranties contained in this Section are in lieu of all other
warranties express or implied, including, but not limited to the implied
warranties of merchantability and fitness for a particular purpose.
10.0 INDEMNIFICATION
10.1 CSI agrees to protect, defend, hold harmless and indemnify Herzog
and/or Herzog Subsidiaries from and against any and all suits,
claims, losses and the like, arising out of any alleged or actual:
(a) infringement by Code or Documentation of a patent, copyright,
trademark, trade name, product name, or other intellectual
property right, privacy or similar right of any third party in
any country of the world;
(b) breach of CSI's warranties under this Agreement;
(c) damage to property, personal injury, death, resulting or
claimed to result, in whole or in part, from any actual or
alleged defect(s) in the Code or Documentation;
(d) failure of CSI to comply with any governmental law, statute,
ordinance, administrative order, rule or regulation including
those related to unfair competition.
10.2 CSI shall pay all damages, expenses and costs, including but not
limited to, attorneys' fees, resulting from such suits, claims,
losses and the like against Herzog and/or Herzog Subsidiaries,
provided that either Herzog and/or Herzog Subsidiaries:
(a) notify CSI in writing of any such claim, suit, loss or the
like;
(b) cooperate with CSI, at CSI's expense, in defending such claim,
suit, loss or the like;
(c) allow CSI to control the litigation; and
(d) obtain CSI's prior written approval of any settlement, which
approval CSI agrees not to unreasonably withhold.
10.3 Notwithstanding the foregoing, CSI shall have no obligation to
defend Herzog and/or Herzog Subsidiaries, or to pay costs, damages,
or attorneys' fees for any infringement claim based upon the
combination, operation, or use of the Code or Documentation, with
programs or data not supplied by CSI if such infringement would have
been avoided but for the combination, operation, or use of the Code
or Documentation with other programs or data.
7
<PAGE>
10.4 If any suits, claims, losses or the like arise and require
indemnification under this Section, CSI may, at its own expense,
either procure the right for Herzog and/or Herzog Subsidiaries, to
continue using the Code and Documentation, trademarks, trade names
or product names, or replace or modify the same so they become
non-infringing without impairment of function.
11.0 TERM AND TERMINATION
11.1 This Agreement shall be effective upon execution by both parties and
shall have full force and effect for the term of performance of the
Work required hereunder and any extension thereof.
11.2 CSI shall have the right to terminate this Agreement at any time in
the event of a material breach by Herzog of its obligations under
this Agreement. Termination shall be made by written notice to
Herzog and shall be specific, and become effective ninety (90) days
after the giving of such notice, unless Herzog shall have corrected
the breach.
11.3 Herzog shall have the right to terminate this Agreement, in whole or
in part, without cause, at any time prior to Herzog's acceptance of
the Code and Documentation. In the event of termination pursuant to
this Subsection, Herzog's sole liability shall be to pay CSI one
hundred percent (100%) of its actual, reasonable and verifiable
expenses incurred prior to the effective date of termination, and
one hundred percent (100%) of its actual, reasonable and verifiable
costs associated with close-out of the Work for a period of time not
to exceed thirty (30) calendar days after notice of termination. Any
Herzog payment hereunder shall be less the amount already paid to
CSI by Herzog under this Agreement; provided, however, that in no
event shall such amount exceed the total amount payable by Herzog in
accordance with the Section entitled "PRICE AND PAYMENT." CSI agrees
to take steps to minimize termination costs for Work terminated
hereunder, to the extent reasonable and practical, including, prompt
discontinuation of Work and prompt cancellation of purchased
services and material.
11.4 In the event of any expiration or termination of this Agreement:
(a) the representations, rights, warranties and obligations in the
Sections entitled "OWNERSHIP OF MATERIALS," "COPYRIGHT,"
"WARRANTY," "INDEMNIFICATION," "CONFIDENTIAL INFORMATION," AND
"GENERAL" shall survive and continue and shall bind the
parties and their legal representatives, successors and
assigns; and
(b) Herzog and/or its Subsidiaries shall have no obligation to
return to CSI any copies of the Code, Documentation or
Derivative Works thereof then in the possession of Herzog
and/or its Subsidiaries, or any sublicensee or purchaser; and
(c) CSI shall deliver to Herzog, copies of Code and Documentation,
developed as of the effective date of termination, whether
completed or in progress, and Herzog
8
<PAGE>
shall have a paid-up license to such Code and Documentation as
provided in paragraph 4.3 of the Section entitled "OWNERSHIP
OF MATERIALS."
12.0 CONFIDENTIAL INFORMATION
12.1 Confidential information disclosed to CSI by Herzog hereunder is
subject to the terms of the Confidential Disclosure Agreement dated
___________ between the parties.
12.2 Confidential information disclosed to Herzog by CSI hereunder is
subject to the terms of the Confidential Disclosure Agreement dated
___________ between the parties.
13.0 COMPLIANCE WITH LAWS
Both parties agree to comply and do all things necessary to enable the
other party to comply with all applicable federal, state and local laws,
regulations and ordinances including but not limited to the regulations of
the United States Government as they relate to this Agreement and the
services provided hereunder.
14.0 GENERAL
14.1 CSI and Herzog shall participate at Herzog's request in monthly
meetings, prior to acceptance by Herzog of the Code and
Documentation, to review the status of Work performed under this
Agreement. Such meetings shall be held at Herzog and CSI facilities.
Herzog will reimburse CSI's travel and related expenses to attend
such meetings as it may schedule.
14.2 Nothing contained herein shall be deemed to authorize or empower
either party to act as agent for the other party or to conduct
business in the name of the other party. No agency, partnership,
joint venture or other joint relationship is created by this
Agreement.
14.3 Neither party shall be liable to the other for any lost revenue,
lost profits, special, indirect, incidental, consequential, or
punitive damages, even if advised of the possibility of such
damages, by reason of any performance or non-performance under this
Agreement. The responsibilities of both parties for any delays,
losses or other damages which may result from the furnishing of
equipment, programs, publications, information, or services under
this Agreement shall be limited to the remedies specified in this
Agreement.
14.4 Each party's liability to the other arising out of the claims
arising from breach of contract shall not exceed the total value of
this Agreement.
14.5 Disputes arising under this Agreement shall be referred immediately
to, and settled by, binding arbitration. The arbitration panel shall
consist of three persons. Each of the parties hereto shall appoint
one arbitrator and two arbitrators thereby appointed shall elect a
third arbitrator. The arbitration shall be conducted in New York
City in
9
<PAGE>
accordance with the rules of the American Arbitration Association.
The costs of arbitration shall be borne equally by CSI and Herzog.
Judgment upon the award rendered may be entered in any Court having
jurisdiction thereof.
14.6 Except as expressly provided herein, Herzog may in its sole
discretion assign any of its rights hereunder to a Subsidiary. The
rights and privileges of Herzog under this Agreement shall also
inure to the benefit of any successor in interest to Herzog by
acquisition or merger. Otherwise, neither party shall sell,
transfer, assign or subcontract any right or obligation hereunder,
without the prior written consent of the other party. Any act in
derogation of the foregoing shall be null and avoid.
14.7 CSI may use the services of consultants or other third parties who
are not employees of CSI in the performance of this Agreement.
14.8 CSI will have an appropriate agreement with each of its employees or
others whose services CSI may require sufficient to enable it to
comply with all of the terms of this Agreement.
14.9 CSI, all subcontractors of CSI, and their employees, agents or
servants shall not be considered to be employees, agents or servants
of Herzog, and they will in no way represent themselves as agents,
servants or employees of Herzog.
14.10 CSI shall maintain comprehensive general liability insurance for
claims for damages because of bodily injury (inclusive of death) and
property damage caused by, or arising out of, acts or omissions of
its employees. The minimum limits of such insurance shall be three
hundred thousand dollars ($300,000.00) for each individual; and five
hundred thousand dollars ($500,000.00) for each accident because of
bodily injury, and one million dollars ($1,000,000.00) because of
property damage for each accident. Certificates of such insurance
shall be furnished to Herzog at the commencement of this Agreement
and at the renewal date of such insurance policy until this
Agreement is terminated or has expired, whichever occurs first. In
no event shall insurance be canceled during such period without
thirty (30) days prior written notice to Herzog.
14.11 Any notice required or permitted to be made or given to either party
hereto pursuant to this Agreement shall be sufficiently made or
given on the date of mailing, if sent to such party by certified
mail, postage prepaid, addressed to it at its address set forth
below, or to such other address as it shall designate by written
notice given to the other party:
For Herzog: For CSI:
Herzog Heine Geduld, Inc. Celerity Systems, Inc.
26 Broadway 9051 Executive Park Drive
New York, New York 10004 Knoxville, TN 37923
Attn: Andrew DaPonte Attn: Mahmoud Youssefi
10
<PAGE>
14.12 CSI shall promptly provide Herzog written notification of, including
a description of, the impending and/or actual occurrence of any of
the following events:
(a) Changes in the assignment of key employees working on the Code
and Documentation
(b) Changes in the designated place(s) of performance of the Work
contemplated by this Agreement
(c) Insolvency proceedings
(d) Labor disputes involving employees of CSI or other parties
which may adversely affect CSI's performance under this
Agreement.
(e) Any other factor or event which may detrimentally affect CSI's
ability to meet the requirements of this Agreement.
14.13 Neither party hereto shall be in default by reason of any failure in
the performance of this Agreement in accordance with its terms if
such failure is due to acts of God or of the public enemy, acts of
the government in either its sovereign or contractual capacity,
fires, floods, epidemics, quarantine restrictions, freight
embargoes, or for unavailability of transportation of materials or
similar reasons beyond such party's control.
14.14 No amendment or modification of any provision of this Agreement
shall be effective unless it is in a document which refers to this
Agreement and is signed by both parties. No waiver of any provision
of this Agreement will be effective unless it is in writing signed
by the party waiving its rights hereunder. No failure or delay by
either party in exercising any right, power or remedy under this
Agreement, except as specifically provided herein, will operate as a
waiver of any such right, power or remedy.
14.15 If any provision or provisions of this Agreement shall be held to be
illegal, invalid or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
14.16 The headings of the Sections are inserted for convenience and
reference only and are not intended to be part of or to affect the
meaning or interpretation of this Agreement.
14.17 In the event of any ambiguity and/or inconsistency in this
Agreement, the ambiguity and/or inconsistency shall be resolved by
giving precedence in the following order:
1. Terms and Conditions of this Agreement
2. Attachments I through V to this Agreement
3. Purchase Orders issued hereunder.
11
<PAGE>
14.18 This Agreement is deemed to be made under and shall be construed in
accordance with the laws of the State of Tennessee and constitutes
the entire understanding between the parties hereto with respect to
the subject matter of this Agreement.
14.19 This Agreement supersedes all previous communications,
representations, and understandings between the parties with respect
to the subject matter of this Agreement.
12
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representations.
HERZOG HEINE GEDULD, INC. CELERITY SYSTEMS, INC.
By: By:
--------------------------------- ---------------------------------
Title: Title:
------------------------------ ------------------------------
Date: Date:
------------------------------- -------------------------------
13
<PAGE>
ATTACHMENT I
REQUIREMENTS ANALYSIS
14
<PAGE>
ATTACHMENT II
SCHEDULE
CSI and Herzog agree that the Work called for under this Agreement shall be
completed in accordance with the following schedule:
MILESTONE DESCRIPTION DATE
- --------- ----------- ----
[ATTACH GANNT CHART]
15
<PAGE>
ATTACHMENT III
DOCUMENTATION
Open Fiche User Manual
Open Fiche Administrator's Manual
Herzog Heine Geduld Back Office
System Configuration Manual
16
<PAGE>
ATTACHMENT IV
CELERITY SYSTEMS, INC.
AGREEMENT FOR MAINTENANCE SERVICES
This Agreement is entered into effective the ____ day of ___________________,
1993, by and between Celerity Systems, Inc., a Tennessee corporation with its
principal place of business at 9051 Executive Park Drive, Knoxville, Tennessee
37923 (hereinafter "CSI"), and ___________, a ___________ corporation with its
principal place of business in ________________ (hereinafter "Customer").
1. Definitions. As used in this Agreement, the listed terms are
defined as follows:
a. "Regular Business Hours" shall mean from 8:00 a.m. to 4:00
p.m. Monday through Friday, except for the following holidays:
New Years Day
Memorial Day
Independence Day
Labor Day
Thanksgiving Day
Day After Thanksgiving
Christmas Day
b. "Covered Software" shall mean all CSI software covered by
Full Service Program maintenance under this Agreement. A listing of
covered software is attached on Exhibit A to this Agreement.
c. "Full Service Program" maintenance shall provide phone
contact and problem isolation within four (4) regular business hours of a
customer service request, and for a system critical malfunction shall
provide CSI technical personnel on-site at the Customer location if
necessary within eight (8) regular business hours, and shall provide an
operational solution to the service request in no more than sixteen (16)
regular business hours; for other than system critical service requests,
CSI service personnel shall appear on-site if necessary within twenty-four
(24) regular business hours, and shall resolve the service request in no
more than forty (40) regular business hours.
d. "Systems Integration" maintenance shall provide Full
Service Program maintenance for any of Customers hardware and/or software
installed by CSI. Systems Integration maintenance is optional and must be
designated on Exhibit C. Systems Integration maintenance does not preclude
the Customer from obtaining maintenance from other sources, and third
party maintenance programs may be required by some vendors.
17
<PAGE>
e. "System Critical" malfunctions shall mean conditions which
significantly affect a Customer schedule or which makes the performance or
continued performance of any one or more functions of the Covered Software
impossible.
2. Maintenance Service.
a. During the term of this Agreement, CSI agrees to provide
Customer with the following maintenance services and materials:
(i) Full Service Program maintenance for the Covered
Software;
(ii) updates and improvements to Customer's version of
the Covered Software including new releases, when
and if developed;
(iii) written, telephone, and on-site consultations
reasonably necessary to resolve or correct any
errors in the software; and
(iv) reasonable efforts to remedy deficiencies in the
Covered Software.
However, Customer agrees that maintenance service does not require CSI to
correct any and every perceived deficiency Customer may identify with the
Covered Software.
b. The Maintenance Service provided in subpart a. does not
include the following:
(i) the addition of new functionality which Customer
may wish to add to the Covered Software;
(ii) maintenance and support of any software which has
been modified without CSI's written permission.
c. If elected by Customer, CSI will also provide Systems
Integration maintenance for the entire hardware and software system, or
any designated subsystem, installed by CSI and designated in Exhibit C.
Systems Integration maintenance is provided on a time and materials basis
with a minimum quarterly retainer. Charges for time are first billed
against the quarterly retainer. Charges for materials, travel expense and
other out-of-pocket costs are billed in addition to the quarterly
retainer.
Systems Integration maintenance is a cooperative
maintenance plan focused on providing timely service and answer to all
questions related to all systems hardware and software whether purchased
directly from CSI or from third party vendors and integrated by CSI. Under
Systems Integration maintenance, CSI will:
o Provide unlimited phone support either with Customer or
with the manufacture of the product in question.
18
<PAGE>
o Stay current on the present version and future versions
of the products listed in Exhibit C. On certain
occasions when the product in use is no longer the best
option, CSI will also be required to make
recommendations on other as yet specified products.
o Supervise the installation of upgrades or "fixes" as the
case may be of the listed products.
o Provide on-site support under the following schedule of
costs set forth on Exhibit B.
o Upon request of Customer, write simple work orders
detailing any features Customer may wish to add to the
system. The work order will identify the objective,
approach, and cost of the addition.
3. Pricing Changes. Rates as set forth in Exhibits A and B will be
fixed for the first twelve (12) months of this maintenance Agreement.
Thereafter, if CSI finds it necessary to revise the rates on Exhibits A or B for
the services provided herein, CSI will provide Customer with written notice
thereof at least sixty (60) days prior to the effective date for such revised
rates. In the event that the revised rates are not acceptable to Customer,
Customer may terminate this contract and receive a full pro rata refund of any
payments for future services.
4. Payment Terms.
a. CSI shall invoice Customer quarterly, in advance, for
maintenance charges, and monthly for any other charges payable to CSI
under this Agreement. Such invoices shall itemize charges by dates that
service was provided and shall be due net fifteen (15) days from the date
of invoice.
b. Customer shall be responsible for the payment of any
federal, state or local tax, other than a tax on net income now or
hereafter in effect, which is or becomes applicable to any payment due
under this Agreement.
5. Term. This Agreement shall commence on the date stated on the
face of this Agreement and shall continue for an initial term of three (3)
years. Thereafter, the Agreement shall renew automatically for successive
one-year terms unless either party shall give written notice of intent not to
renew at least sixty (60) days in advance of the current term.
6. Termination. In the event either party shall neglect or fail to
perform any of its obligations under this Agreement, the other party shall have
the right to institute the following resolution or termination procedure:
a. The aggrieved or concerned party shall provide written
notice of its grievance or concerns to the other;
19
<PAGE>
b. A meeting shall be scheduled within two (2) weeks of such
written notice between the Customer's information services manager and the
CSI manager of customer service in an attempt to reach resolution;
c. If no resolution is reached, the aggrieved party may
terminate this Agreement in its sole discretion upon thirty (30) days'
written notice.
d. In the event of termination, Customer's sole liability
shall be to pay CSI all maintenance charges and any other charges payable
under this Agreement which have accrued through the effective date of
termination. CSI's sole liability shall be to refund any maintenance or
other charges paid in advance, as of the effective date of termination.
7. Limitation of Liability.
a. CSI shall indemnify and hold harmless Customer, its
divisions and subsidiaries, agents, representatives and employees from and
defend at CSI's expense against every claim, damage, loss, liability and
suit (including interest, reasonable attorneys' fees and cost), arising
out of any injury (including death) to persons and damage to tangible
property caused or alleged to have been caused by any breach of warranty
or by negligent acts or omissions of CSI.
b. CSI's liability for actual damages from any cause
whatsoever will be limited to the greater of 1) $40,000 or 2) an amount
equal to twelve (12) months' maintenance charges for the individual
software that caused the damage or that is the subject matter of, or is
directly related to, the cause of action. Such charges will be those in
effect for such software when the cause of action arose. This limitation
will apply, except as otherwise stated in this Section, regardless of the
form of action, whether in contract or in tort including negligence. This
limitation will not apply to claims by or against Customer for bodily
injury or damage to real property or tangible personal property for which
CSI is legally liable, or to a claim for infringement of any U.S. patent,
copyright, or other intellectual property right.
c. Customer agrees that CSI will not be liable for any
special, incidental, indirect, or consequential damages hereunder,
including the loss of data or information of any kind and loss of profits.
8. Confidentiality. CSI acknowledges that in the course of providing
services under this Agreement, its employees and agents may be exposed to
confidential information of Customer. CSI will implement reasonable security and
confidentiality procedures to see that no such confidential information is
disclosed or misused by its employees and agents. In the event of the expiration
or termination of this Agreement, the obligations of this paragraph shall
continue and bind CSI and its legal representatives, successors and assigns.
9. Notices. Any notice required or permitted to be made or given to
either party hereto pursuant to this Agreement shall be sufficiently made or
given on the date of mailing, if sent to such party by certified mail, postage
prepaid, addressed to the address set forth below, or to such other address as
shall be designated by written notice provided to the other party:
20
<PAGE>
For Customer: For CSI:
_______________________________ Customer Service Manager
_______________________________ Celerity Systems, Inc.
_______________________________ 9051 Executive Park Drive
_______________________________ Knoxville, Tennessee 37923
Attn: ______________________
10. Governing Law. This Agreement will be construed in accordance
with the laws of the State of Tennessee, U.S.A.
11. Disputes. Disputes arising under this Agreement shall be
referred immediately to, and settled by, binding arbitration. The arbitration
panel shall consist of three persons. Each of the parties hereto shall appoint
one arbitrator and two arbitrators thereby appointed shall elect a third
arbitrator. The arbitration shall be conducted in a city and place mutually
agreed to by the parties (or, if there is no agreement, by the arbitration
panel) in accordance with the rules of the American Arbitration Association. The
costs of arbitration shall be borne jointly by CSI and Customer. Judgment upon
the award rendered may be entered in any Court having jurisdiction thereof.
12. Force Majeure. Neither party hereto shall be in default by
reason of any failure in the performance of this Agreement in accordance with
its terms if such failure is due to acts of God or of the public enemy, acts of
the government in either its sovereign or contractual capacity, fires, floods,
epidemics, quarantine restrictions, freight embargoes, or similar reasons beyond
such party's control.
13. Severable. If any provision or provisions of this Agreement
shall be held to be illegal, invalid or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
14. Amendments in Writing. No amendment or modification of any
provision of this Agreement shall be effective unless it is in a document which
refers to this Agreement and is signed by both parties. No waiver of any
provision of this Agreement will be effective unless it is in writing signed by
the party waiving its rights hereunder. No failure or delay by either party in
exercising any right, power or remedy under this Agreement, except as
specifically provided herein, will operate as a waiver of any such right, power
or remedy.
15. No Agency. Nothing contained herein shall be deemed to authorize
or empower either party to act as agent for the other party or to conduct
business in the name of the other and CSI, subcontractors of CSI, and their
employees, agents or servants shall not be considered to be employees, agents or
servants of Customer and they will in no way represent themselves as agents,
servants or employees of Customer.
16. Compliance with Laws. Both parties agree to comply and do all
things necessary to enable the other party to comply with all applicable
federal, state and local laws, regulations and
21
<PAGE>
ordinances including but not limited to the regulations of the United States
Government as they relate to this Agreement and the services provided hereunder.
CELERITY SYSTEMS, INC.
BY:
---------------------------------
ITS:
---------------------------------
[CUSTOMER]
BY:
---------------------------------
ITS:
---------------------------------
22
<PAGE>
EXHIBIT A
ANNUAL
COVERED CSI SOFTWARE LIST PRICE MAINTENANCE
- -------------------- ---------- -----------
Open Fiche $40,995.00 $ 4,099.50
Automatic Report Download 21,000.00 2,100.00
Jukebox Software 40,000.00 4,000.00
----------
$10,199.50
==========
Full Service Maintenance for Covered Software:
$2,549.88 per quarter
<PAGE>
EXHIBIT B
Systems Integration Maintenance for Software
and Hardware on Exhibit C:
Retainer $2,500.00 per quarter.
Labor rates (1 hour minimum) -- $125.00 per hour plus travel charges of $75.00
per hour, if necessary.
Labor charges each quarter will first be offset against the retainer, and in the
event CSI's labor charges should exceed the retainer amount, CSI will bill
Customer for the excess.
Any travel expenses, materials or other out-of-pocket expenses will be billed
monthly in addition to the quarterly retainer.
<PAGE>
EXHIBIT C
Hardware and/or Software Covered by Systems
Integration Maintenance
The Herzog Heine Geduld back office system as described in the Back Office
System Requirements Analysis of May 27, 1993
CELERITY SYSTEMS, INC.
BY:
---------------------------------
ITS:
---------------------------------
[CUSTOMER]
BY:
---------------------------------
ITS:
---------------------------------
<PAGE>
Exhibit 10.14
Agreement No.________
Non-Disclosure Agreement
This Agreement is made between CELERITY SYSTEMS, INC., ("CELERITY") and UNISYS
Corporation - Federal Systems Division. ("UNISYS") and concerns the handling,
safeguarding and exchange of sensitive, proprietary or confidential information
(collectively "Proprietary Information"). It is agreed and understood that any
exchange of such Proprietary Information is expressly for the sole purpose of
CELERITY and UNISYS evaluating a possible business arrangement involving an
existing UNISYS contract with a federal government agency.
1. For the purposes hereof, Proprietary Information shall be any documents,
materials or information that (i) is in tangible form and clearly marked as
being proprietary, confidential or sensitive and (ii) is received by one
party to this Agreement ("Recipient") from the other party to this
Agreement ("Transmitter").
2. The Recipient agrees to safeguard, protect and handle all Proprietary
Information made available under this Agreement with the same degree of
care and procedures as Recipient applies to its own confidential or
proprietary information. Without the written consent of the Transmitter,
the Recipient of Proprietary Information agrees (i) not to disclose,
disseminate, reproduce or otherwise distribute such information and
materials to any third party, except a governmental judicial authority's
issued order and (ii) not to use such information for any other purposes
beyond that expressly set forth in this Agreement.
3. All Proprietary Information disclosed under this Agreement shall remain the
property of the Transmitter. It is agreed that the Recipient does not
obtain any title or license rights to the Proprietary Information furnished
under this Agreement.
4. All Proprietary Information exchanged under this Agreement shall be
returned or destroyed in accordance with written instructions upon the
earlier of a written request from the Transmitter or termination of this
Agreement. Either party may terminate this Agreement, at any time, by
providing written notice to the receiving party. Termination of this
Agreement shall not be construed as relieving the Recipient of its
obligations to safeguard, protect and dispose of the Proprietary
Information as set forth in this Agreement.
5. The Recipient's obligations to protect, safeguard and handle Proprietary
Information received hereunder shall not be binding if such Proprietary
Information (i) is in the public domain through no fault of the Recipient,
(ii) is known to the Recipient prior to disclosure hereunder, (iii) is
lawfully disclosed to Recipient by a third party. The Recipient's
obligations shall survive until the Proprietary Information has been
returned, destroyed in accordance with written instructions or covered by a
subsequent agreement between CELERITY and UNISYS for the contemplated
services.
This represents the entire agreement of the parties relative to the subject
matter and shall be governed and construed under the laws of the Commonwealth of
Virginia.
Accepted by:
UNISYS Corporation CELERITY SYSTEMS, INC.
By: /s/ Dennis A. Chaloux By: /s/ William R. Chambers
---------------------------------- ----------------------------
Name: Dennis A. Chaloux Name: William R. Chambers
--------------------------
Title: Sr. Subcontract Administrator Title: Vice President
-------------------------
Date: 6/30/97 Date: 6/26/97
<PAGE>
SUBCONTRACT BETWEEN
UNISYS CORPORATION
8008 Westpark Drive
McLean, Virginia 22102
AND
CELERITY SYSTEMS, INC.
9051 Executive Park Drive, Suite 400
Knoxville, Tennessee 37923
SUBCONTRACT NUMBER: 97-IW0324-CELERITY
PRIME CONTRACT NUMBER: 263-96-D-0324
PERIOD OF PERFORMANCE: (Reference Section 2.0)
SUBCONTRACT TYPE: Firm-Fixed-Price (FFP)
Time & Material (T&M)
Purchase Orders
SUBCONTRACT AMOUNT: (Reference Section 1.0)
PAYMENT TERMS: Payment shall be made
upon receipt of proper
invoice, Net (30) days
(Reference Section 13.)
PRIORITY RATING: N/A
SECURITY CLASSIFICATION: None
UNISYS SUBCONTRACT ADMINISTRATOR: Dennis A. Chaloux
<PAGE>
TABLE OF CONTENTS
ARTICLE PAGE
1.0 Supplies/Services and Prices..........................................3
2.0 Period of Performance.................................................5
3.0 Packaging Labeling and Shipping.......................................5
4.0 Inspection and Acceptance
5.0 Assignment
6.0 Changes
7.0 Disputes Involving the Government
8.0 Binding Arbitration...................................................6
9.0 Delays
10. Default
11. Notices
12. Invoices/Payments
13. Patent Indemnity......................................................7
14. Risk of Loss
15. Termination
16. Title.................................................................8
17. Warranty
18. Limitation of Liability
19. Compliance With Laws
20. Relationship of the Parties..........................................12
21. Indemnification
22. Limitation of Obligation
23. Release of News Information
24. Non-Waiver Rights
25. Representations and Certifications...................................13
26. Ethical Conduct
27. Severability
28. Applicable State Law
29. Attachments/Exhibits
30. Statement of Work
31. Complete Agreement...................................................14
2
<PAGE>
RECITALS
This Agreement is entered into by and between Unisys Corporation,
Federal Systems Division, a Delaware corporation, with its principal offices
located at 8008 Westpark Drive, McLean, Virginia 22102 (hereinafter referred to
as the "BUYER"), and Celerity Systems, Inc. (hereinafter referred to as the
"SELLER") with offices located at 9051 Executive Park Drive, Suite 400,
Knoxville, Tennessee 37923.
WlTNESSETH THAT
In consideration of mutual promises, covenants, and agreements herein
set forth, the Parties agree that the SELLER shall furnish and deliver to the
BUYER all of the supplies, and perform all of the services set forth herein, for
the consideration stated therein. The rights and obligations of the Parties to
this Agreement shall be subject to and governed by the terms of this Agreement
and other documents or specifications attached hereto or Referenced herein.
This Agreement shall not be varied in its terms or conditions by any
oral Agreement or representation, or otherwise than by an instrument in writing,
unless executed by both SELLER and BUYER.
The section titles used herein are for convenience only and shall in no
way be construed as part of this Subcontract or as an indication of the meaning
of the particular section.
1.0 SUPPLIES/SERVICES AND PRICES
SELLER shall provide the necessary personnel and facilities to furnish
the supplies/services as determined by or specified in individual Purchase
Orders issued to the SELLER by the BUYER. All purchase orders shall be issued
pursuant to and in accordance with this Agreement. Prices set forth in this
Agreement include taxes, duties, similar charges and include shipping charges.
All charges for deliveries to the Washington, D.C. Metropolitan Area are
included in the item prices. Transportation charges for deliveries outside the
Washington, D.C., Metropolitan Area will be negotiated on an individual Purchase
Order basis.
Unless otherwise provided in writing by the Subcontract Administrator, the costs
of the following items or activities shall be unallowable as a direct cost:
1. Special rearrangement or alteration of facilities
2. Purchase or lease of any item of general purpose office furniture,
office equipment or FIP equipment regardless of dollar value. (General
purpose equipment is defined as any items of personal property which
are usable for purposes other than research, such as office equipment
and furnishings, pocket calculators, etc.);
3. Travel to attend meetings unless specified in the purchase order
issued by the Unisys Subcontract Administrator
4. Capitalized nonexpendable equipment (defined as having an
acquisition cost of $1,000 or more and a life expectancy of more than
two years).
3
<PAGE>
5. Travel Costs unless specified in the specific Purchase Order. When
authorized, expenditures for domestic travel (transportation, lodging,
subsistence, and incidental expenses) incurred in direct performance of the
resultant subcontract shall be subject to the provisions of Section 24 of Public
Law 99-234 which amends the Office of Federal Procurement Policy Act to provide
that Subcontractor costs for travel, including lodging, other subsistence, and
incidental expenses, shall be allowable only to the extent that they do not
exceed the amount allowed for federal employees. The Subcontractor, therefore,
shall invoice and be reimbursed for all Travel costs in accordance with
guidelines published in the Federal Register, Vol. 58, No. 42, Friday March 5,
1993.
6. Postage shall be unallowable unless specifically stated in the
Purchase Order.
7. If appropriate, any and all Other Direct Costs (ODC's) shall be
specified in the individual Purchase Orders.
TRAVEL AND PER DIEM
(a) Outside the Washington, D.C. Metropolitan Area:
Travel by air will be reimbursed at actual not to exceed coach fare.
Travel subsistence reimbursement will be authorized under the rates and
conditions of the Federal Travel Regulations and if applicable, an
Agency's Department Travel Manual. Per Diem will be reimbursed at
actual, not to exceed the Per Diem rates set forth in Federal Property
Management Regulations (FPMR) 41 CFR Chapter 101, Chapter 7, GSA
Bulletin FPMR A-40 Supplement (in effect at time of travel). Travel of
more than 10 hours, but less than 24 hours, when no lodging is
required, Per Diem shall be one-half of the Meals and Incidental
Expenses (M&IE) rate prescribed for the location where the majority of
the time is spent performing official business. The Per Diem allowance
shall not be allowed when the period of official travel is 10 hours or
less during the same calendar day. Travel by privately owned vehicle
will be reimbursed at the current GSA approved mileage rate. If the
Subcontractor incurs travel costs in excess of the amount show in each
Purchase Order, it is at its own expense.
(b) Inside the Washington, D.C. Metropolitan Area:
(1) Travel will be reimbursed based on the policies stated in
paragraph (a) above.
(2) Normal commuting expenses are not allowed.
(c) Travel will be reimbursed on a cost basis only. Any burden added
to the travel costs will be allowed only as defined in the
Subcontractor's standard accounting practice or disclosure statement.
The prices for the supplies/services to be provided by the SELLER are as
follows:
CLIN SUPPLIES/SERVICES QTY. UNIT PRICE NET PRICE
- ---- ----------------- ---- ---------- ---------
**To be determined on an individual Purchase Order Proposal Basis.**
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2.0 PERIOD OF PERFORMANCE
The term of this Agreement shall be from the date of execution through
14 August 1997. The Agreement term may be extended four (4) additional
twelve-month periods upon the BUYER's prior written notice of each such
twelve-month extension period; provided, however, that this Agreement is not
otherwise terminated pursuant to the Termination clause herein.
3.0 PACKAGING LABELING AND SHIPPING
BUYER shall provide SELLER with packaging, labeling and shipping
instructions with each purchase order issued pursuant to this Agreement. SELLER
agrees to ship products ordered by BUYER in accordance with such instructions.
4.0 INSPECTION AND ACCEPTANCE
SELLER shall only tender for acceptance those items that conform to the
requirements of this Agreement. Unisys reserves the right to inspect or test any
supplies or services that have been tendered for acceptance. Unisys may require
repair or replacement of nonconforming supplies or reperformance of
nonperforming services at no additional cost. Unisys agrees to exercise its post
acceptance rights (1) within a reasonable time after the defect was discovered
or should have been discovered; and (2) before any substantial change occurs in
the condition of the item, unless the change is due to the defect in the item.
The Unisys approving and accepting authority for inspection and acceptance of
CLIN's will be the Program Manager or his designated representative. The Program
Manager's designated representative will be identified on each individual P.O.
issued pursuant to any resulting subcontract agreement.
Unless advised otherwise in individual Purchase Orders, inspection and
acceptance of all CLIN's hereunder shall take place at the Government
installation site. The installation site location shall be set forth in
individual Purchase Orders.
5.0 ASSIGNMENT
SELLER may assign it's rights to be paid amounts due as a result of
performance under this contract, to a bank, trust company or other financing
institution, including any Federal lending agency in accordance with the
Assignment of Claims Act (31 U.S.C. 3727)
6.0 CHANGES
Changes in the terms and condition of this Agreement may be made only
by written agreement of the parties hereto.
7.0 DISPUTES INVOLVING THE GOVERNMENT
This Agreement is subject to the Contract Disputes Act of 1978, as
amended (41 U.S.C. 601-613). Failure of the parties to reach agreement on any
request for equitable adjustment, claim, appeal or action arising under or
relating to this Agreement shall be a dispute to be resolved in accordance with
the clause at FAR 52.233-1 Disputes, which is incorporated herein by reference.
SELLER shall proceed diligently with performance of this Agreement, pending
final resolution of any dispute arising under this Agreement.
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Any decision on appeal, or any other decision of the Government under the Prime
Contract which cannot be appealed under the "Disputes" clause of the Prime
Contract, if binding on the BUYER shall also bind the SELLER to the extent that
it relates to this Agreement, provided the BUYER shall have promptly notified
the SELLER of such decision and, if requested by SELLER, shall have brought suit
or filed claim, as appropriate against the Government. A final judgment in any
such suit or final disposition of such claim shall be conclusive upon the BUYER
and the SELLER.
For any action brought by the BUYER on behalf of the SELLER pursuant to this
clause, the SELLER agrees to indemnify and hold the BUYER harmless from all
costs and expenses incurred by the BUYER in prosecuting any such appeal
initiated by the BUYER at the Seller's request. All costs and expenses incurred
by the BUYER shall be paid by the SELLER and shall not be reimbursed or
compensable as a cost under the Agreement, unless recovered by the BUYER under
the Prime Contract or as part of an award of damages to the BUYER based on such
a claim.
8.0 BINDING ARBITRATION
Any dispute or controversy between the BUYER and SELLER which concerns
only the BUYER and the SELLER or which does not involve a final decision of the
Government Contracting Officer, and which cannot be resolved by mutual agreement
of the parties hereto, shall be settled by arbitration in accordance with the
commercial rules then in effect of the American Arbitration Association. The
place of such arbitration shall be Washington, D.C. Each party shall select one
arbitrator and the two arbitrators so selected shall select the third
arbitrator. The arbitrators shall be knowledgeable in Government procurement
matters related to the types of supplies and services provided pursuant to this
Agreement. The arbitration decision and award shall be binding on the parties,
and judgment thereon may be entered in any court of competent jurisdiction.
9.0 DELAYS
SELLER shall be liable for default unless nonperformance is caused by
an occurrence beyond the reasonable control of the SELLER and without its fault
or negligence. SELLER shall notify the BUYER in writing as soon as it is
reasonably possible after the commencement of any excusable delay, setting forth
the full particulars in connection therewith, shall remedy such occurrence with
all reasonable dispatch, and shall promptly give written notice to the BUYER of
the cessation of such occurrence.
10. DEFAULT
If either party hereto fails to perform an obligation under this
Agreement, the other party, may issue a default termination letter to the party
in default of an obligation under this Agreement to cure the default condition.
If the default condition is not remedied within ten (10) calendar days from the
day of receipt of such letter, the issuer of the default termination letter may
the without the necessity of any further notice, discontinue performance and
terminate this Agreement for default and pursue any other remedies available at
law or in equity. Any failure to exercise rights under this Article shall not
constitute a waiver of any past, present or future right or remedy.
11. NOTICES
All correspondence or notifications required under this Agreement shall
be addressed as follows:
UNISYS Corporation Celerity Systems, Inc.
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Attention: Dennis A. Chaloux
8008 Westpark Drive, Mail Stop W5A12
McLean, Virginia 22102
Phone: (703) 556-5578 Fax: (703) 556-5283
Attention: Bill Chambers
9051 Executive Park Drive, Suite 400
Knoxville, Tennessee 37923
Phone: (423) 539-5300 Fax: (423) 539-5390
12. INVOICES/PAYMENTS
SELLER shall submit an original invoice and two (2) copies to:
UNISYS Corporation
Attention: Frederick W. Garner III
8008 Westpark Drive, Mail Stop W5F39
McLean, Virginia 22102
SELLER's invoice must include:
(l) Name and address of the SELLER,
(2) Invoice Date
(3) Prime Contract Number, contract line item number and purchase
order number
(4) Description, quantity, unit of measure, unit price and extended
price of the items delivered.
(5) Shipping number and date of shipment including the bill of lading
number and weight of shipment. Shipping charges shall be itemized
separately.
(6) Terms of any prompt payment discount if offered.
(7) Name and address of official to whom payment is to be sent; and
(8) Name, title and phone number of person to be notified in event of
defective invoice.
SELLER shall submit invoices for payment for the Products and Services
accepted under this Agreement. Invoices for Products and Services may be
submitted after the date of delivery of such Products and/or Services to the
F.O.B. destination site. Upon receipt of a proper invoice, BUYER agrees to pay
SELLER for accepted Products and Services net forty-five (45) days.
13. PATENT INDEMNITY
SELLER agrees to indemnify BUYER, the United States Government and
their respective officers, employees and agents against liability, including
costs, for actual or alleged direct or contributory infringement of, or
inducement to infringe, any United States or foreign patent, trademark or
copyright, arising out of performance under this Agreement.
14. RISK OF LOSS
Unless the Agreement specifically provides otherwise, risk of loss of
damage to the supplies
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provided hereunder shall remain with the SELLER until, and shall pass to the
BUYER upon; (1) delivery of the supplies to a carrier, if transportation is
f.o.b. origin; or (2) delivery of the supplies to the BUYER at the destination
specified in the Purchase Order, if transportation is f.o.b. destination.
15. TERMINATION
(a ) Insolvency Termination - Unless otherwise waived by BUYER in writing, this
Agreement shall automatically terminate if SELLER(i) becomes insolvent, (ii)
suffers the appointment of receiver or trustee to manage its business
operations, (iii) attempts an assignment or transfer of this Agreement or any
rights conferred under this Agreement without BUYER's consent, (iv) commences
any bankruptcy, reorganization or liquidation action or (v) admits in writing
that it is unable to perform its obligations under this Agreement.
(b ) Government Contract Termination - In the event the Government Agency (i)
terminates the Government Contract, (ii) fails to renew or continue the
Government Contract, (iii) directs or requests that UNISYS remove or cease use
of Government Contract line items that are associated with the products and
services covered by this Agreement or (iv) restructures or changes the
requirements and/or substance of the Government Contract in a manner that serves
to either generally or specifically eliminate the requirement for the products
and services set forth in this Agreement, UNISYS may terminate this Agreement,
in whole or in part with written notice to SELLER. In the event of any such
termination, UNISYS shall not be liable to SELLER beyond payment for products
and services ordered and received by UNISYS or the Government Agency, as
applicable, prior to the effective termination date.
(c.) Ethics Non-Compliance Termination - This Agreement may be terminated by
UNISYS with written notice if SELLER or an affiliated company is determined to
be in violation of federal law, executive order, judicial order or the ethical
provisions of Article 27 (Ethical Conduct) of this Agreement.
(d.) Termination Affects - Termination of this Agreement applies to business
arrangement between SELLER and BUYER whereby covered products and services may
be ordered by BUYER from SELLER. Any termination of this Agreement does not
affect any granted software license rights which shall survive any such
termination.
16. TITLE
Unless specified elsewhere in this Agreement or individual Purchase
Orders issued hereunder, title to items furnished under this Agreement shall
pass to the BUYER upon acceptance, regardless of when or where BUYER takes
physical possession.
17. WARRANTY
SELLER warrants and implies that the items delivered hereunder are
merchantable and fit for use for the particular purpose described in this
Agreement.
18. LIMITATION OF LIABILITY
Except as otherwise provided by an express or implied warranty, SELLER
will not be liable to BUYER for consequential, incidental, special, punitive,
exemplary or similar damages resulting from any defect or deficiencies in
accepted items. In no event shall BUYER be liable to SELLER, or any third party
to this Agreement, for any consequential, incidental, special, punitive, loss of
profit or revenue, exemplary
8
<PAGE>
or similar damages incurred or suffered, regardless of any notification of the
possibility of such damages.
19. COMPLIANCE WITH LAWS
SELLER agrees to comply with all applicable Federal, State and local
laws, executive orders, rules and regulations applicable to its performance
under this Agreement. SELLER agrees to comply with the following Federal
Acquisition Regulation clauses, which shall be deemed incorporated by reference:
The following clauses, as amended and modified below, are applicable to this
order/subcontract. Without limiting any other provisions of the
order/subcontract, the clauses are incorporated by reference into this
order/subcontract with the same force and effect as though set forth in full
text. The dates of the clauses incorporated by reference are the same as the
corresponding clause in the prime contract or higher tier subcontract. The
following definitions shall apply to this order/subcontract except as otherwise
specifically provided.
"BUYER" - Means legal entity issuing this Order/Subcontract.
"CONTRACTING OFFICER" - Means Buyer's authorized representative who
signed this Order/Subcontract or is identified elsewhere in this
Order/Subcontract and will mean Contracting Officer, whenever
appropriate, where indicated elsewhere in these terms and conditions.
"CONTRACTOR" - Means Seller.
"SELLER" - Means legal entity which contracts with the Buyer.
"CONTRACT" or "SCHEDULE" - Means this Order Subcontract.
"SUBCONTRACTOR" - Means Seller's subcontractors.
"GOVERNMENT" - Means Buyer and will mean Government, whenever
appropriate, where indicated elsewhere in these terms and conditions.
CLAUSE TITLE
------ -----
52.202-1 DEFINITIONS (OCT 1995)
52.203-3 GRATUITIES (APR 1995)
52.203-5 COVENANT AGAINST CONTINGENT FEE (APR 1984)
52.203-6 RESTRICTIONS ON SUBCONTRACTOR SALES TO THE
GOVERNMENT (JUL 1995)
52.203-7 ANTI-KICKBACK PROCEDURES (JUL 1995)
52.203-10 PRICE OR FEE ADJUSTMENT FOR ILLEGAL OR IMPROPER
ACTIVITY (SEP 1990)
52.203-12 LIMITATION ON PAYMENTS TO INFLUENCE CERTAIN FEDERAL
TRANSACTIONS
(JAN 1990)
52.203-13 PROCUREMENT INTEGRITY -- SERVICE CONTRACTING
(APR 1984)
52.204-2 SECURITY REQUIREMENTS (APR 1984)
52.209-6 PROTECTING THE GOVERNMENT'S INTEREST WHEN
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SUBCONTRACTING WITH CONTRACTORS DEBARRED,
SUSPENDED, OR PROPOSED FOR DEBARMENT
(JUL 1995)
52.210-5 NEW MATERIAL (APR 1984)
52.210-7 USED OR RECONDITIONED MATERIAL, RESIDUAL INVENTORY, AND
FORMER GOVERNMENT SURPLUS PROPERTY (APR 1984)
52.212-13 STOP-WORK ORDER (AUG 1989)
52.212-15 GOVERNMENT DELAY (AUG 1984)
52.215-1 EXAMINATION OF RECORDS BY COMPTROLLER GENERAL (FEB 1993)
52.215-2 AUDIT AND RECORDS - NEGOTIATION (OCT 1995)
52.215-22 PRICE REDUCTION FOR DEFECTIVE COST OR PRICING DATA (OCT
1995)
52.215-23 PRICE REDUCTION FOR DEFECTIVE COST OR PRICING DATA -
MODIFICATIONS (DEC 1994)
52.215-24 SUBCONTRACTOR COST OR PRICING DATA (OCT 1995)
52.215-26 INTEGRITY OF UNIT PRICES (OCT 1995)
52.215-27 TERMINATION OF DEFINED BENEFIT PENSION PLANS (MAR 1996)
52.215-31 WAIVER OF FACILITIES CAPITAL COST OF MONEY (SEP 1987)
52.215-33 ORDER OF PRECEDENCE (JAN 1986)
52.215-39 REVERSION OR ADJUSTMENT OF PLANS FOR POST-RETIREMENT
BENEFITS OTHER THAN PENSIONS (MAR 1996)
52.215-40 NOTIFICATION OF OWNERSHIP CHANGES (FEB 1995)
52.215-42 REQUIREMENTS FOR COST OR PRICING DATA OR INFORMATION
OTHER THAN COST OR PRICING DATA MODIFICATIONS (OCT 1995)
52.216-22 INDEFINITE QUANTITY (APR 1984)
52.219-8 UTILIZATION OF SMALL, SMALL DISADVANTAGED AND WOMEN-OWNED
SMALL BUSINESS CONCERNS (OCT 1995)
52.219-9 SMALL, SMALL DISADVANTAGED, AND WOMEN-OWNED SMALL
BUSINESS SUBCONTRACTING PLAN (OCT 1995)
52.222-1 NOTICE TO THE GOVERNMENT OF LABOR DISPUTES (APR 1984)
52.222-2 PAYMENT FOR OVERTIME PREMIUMS (APR 1984)
52.222-3 CONVICT LABOR (APR 1984)
52.222-20 WALSH-HEALY PUBLIC CONTRACTS ACT (APR 1984)
52.222-24 PREAWARD ON-SITE EQUAL OPPORTUNITY COMPLIANCE REVIEW (APR
1984) CLAUSE TITLE
CLAUSE TITLE
------ -----
52.222-26 EQUAL OPPORTUNITY (APR 1984)
52.222-28 EQUAL OPPORTUNITY PREAWARD CLEARANCE OF SUBCONTRACTS
(OVER $ 1,000,000) (APR 1984)
52.222-35 AFFIRMATIVE ACTION FOR SPECIAL DISABLED AND VIETNAM ERA
VETERANS (APR 1984)
52.222-36 AFFIRMATIVE ACTION FOR HANDICAPPED WORKERS (APR 1984)
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52.222-37 EMPLOYMENT REPORTS ON SPECIAL DISABLED VETERANS AND
VETERANS OF THE VIETNAM ERA (JAN 1988)
52.223-2 CLEAN AIR AND WATER (OVER $ 100,000) (APR 1984)
52.223-6 DRUG FREE WORKPLACE (JUL 1990)
52.223-14 TOXIC CHEMICAL RELEASE REPORTING (OCT 1995)
52.225-3 BUY-AMERICAN ACT - SUPPLIES (JAN 1994)
52.225-11 RESTRICTIONS ON CERTAIN FOREIGN PURCHASES (MAY 1992)
52.227-1 AUTHORIZATION AND CONSENT (OVER $50,000) (JUL 1995)
52.227-2 NOTICE AND ASSISTANCE REGARDING PATENT AND COPYRIGHT
INFRINGEMENT (OVER $100,000) (APR 1984)
52.227-3 PATENT INDEMNITY (APR 1984)
52.229-3 FEDERAL, STATE, AND LOCAL TAXES (OVER $ 100,000)
(JAN 1991)
52.229-5 TAXES - CONTRACTS PERFORMED IN U.S. POSSESSIONS OR PUERTO
RICO (APR 1984)
52.232-1 PAYMENTS (APR 1984)
52.232-7 PAYMENTS UNDER TIME-AND-MATERIALS AND LABOR-HOUR
CONTRACTS (APR 1984)
52.232-8 DISCOUNTS FOR PROMPT PAYMENT (APR 1989)
52.232-9 LIMITATION ON WITHHOLDING OF PAYMENTS (APR 1984)
52.232-11 EXTRAS (APR 1984)
52.232-17 INTEREST (OVER $100,000) (JAN 1991)
52.232-25 PROMPT PAYMENT (MAR 1994)
52.232-28 ELECTRONIC FUNDS TRANSFER PAYMENT METHODS (APR 1989)
52.233-1 DISPUTES (OCT 1995)
52.233-3 PROTEST AFTER AWARD (OCT 1995)
52.237-2 PROTECTION OF GOVERNMENT BUILDINGS, EQUIPMENT AND
VEGETATION (APR 1984)
52.242-13 BANKRUPTCY (OVER $100,000) (JUL 1995)
52.243-1 CHANGES - FIXED PRICE (AUG 1987)
52.243-3 CHANGES - TIME-AND-MATERIALS OR LABOR-HOURS (AUG 1987)
52.244-1 SUBCONTRACTS (FIXED PRICE CONTRACTS) (FEB 1995)
52.244-3 SUBCONTRACTS (TIME-AND-MATERIALS AND LABOR-HOUR
CONTRACTS) (APR 1985)
52.245-2 GOVERNMENT PROPERTY (FIXED-PRICE CONTRACTS) (DEC 1989)
52.246-2 INSPECTION OF SUPPLIES -- FIXED PRICE (JUL 1985)
52.246-4 INSPECTION OF SERVICES --FIXED PRICE (FEB 1992)
52.246-16 RESPONSIBILITY FOR SUPPLIES (APR 1984)
52.246-25 LIMITATION OF LIABILITY - SERVICES (APR 1984)
S2.247-3S FOB DESTINATION WITHIN CONSIGNEE'S PREMISES (APR 1984)
52.249-2 TERMINATION FOR CONVENIENCE OF THE GOVERNMENT
(FIXED-PRICE) (APR 1984)
52.249-4 TERMINATION FOR CONVENIENCE OF THE GOVERNMENT (SERVICES)
(FIXED-PRICE) (APR 1984)
52.249-8 DEFAULT (FIXED-PRICE SUPPLY AND SERVICE) (OVER $100,000)
(APR 1984)
52.253-1 COMPUTER GENERATED FORMS (JAN 1991)
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1-2 DEPARTMENT OF HEALTH AND HUMAN SERVICES ACQUISITION (HSAR) (48 CFR CHAPTER
3) CLAUSES.
CLAUSE TITLE
- ------ -----
352.202-1 DEFINITIONS (APR 1984)
352.232-9 WITHHOLDING OF CONTRACT PAYMENTS (APR 1984)
352.270-4 PRICING OF ADJUSTMENTS (APR 1984)
352.270-6 PUBLICATION AND PUBLICITY (JUL 1991)
352.270-7 PAPERWORK REDUCTION ACT (APR 1984)
20. RELATIONSHIP OF THE PARTIES
The relationship of the parties to this Agreement is that of a prime
contractor and a subcontractor, and nothing herein shall be deemed or construed
to create a joint venture, partnership or agency relationship between the
parties for any purpose. It is further understood that each party is an
independent contractor and as such shall have no authority to bind or commit the
other.
SELLER is expressly prohibited from communicating with Government
personnel with respect to any aspect of the Project under this Agreement without
the prior consent of the BUYER, or as otherwise agreed by the parties. Any
authorized communications between SELLER's personnel and Government personnel
shall be conducted in the presence of the BUYER's Project Manager or other
authorized representative unless otherwise agreed by the parties.
21. INDEMNIFICATION
The employees of SELLER and the BUYER engaged in performance under this
Agreement shall at all times be deemed to be performing as independent
contractors and not as agents or employees of the other and the acts and
omission of such employees shall be deemed to be those of their respective
employers. SELLER shall indemnify and hold harmless the BUYER and its employees
from and against any and all losses, claims, demands, judgments, costs, and
expenses, of every nature and kind, arising out of or incidental to, or in any
way resulting from the acts or omission of SELLER or SELLER's employees while
acting within the scope of their employment.
22. LIMITATION OF OBLIGATION
Nothing contained herein shall be deemed as obligating the BUYER to
order any of the services described herein; however, when and if services are
ordered by BUYER hereunder, such orders shall be subject to the terms and
conditions of this Agreement.
23. RELEASE OF NEWS INFORMATION
In the event the SELLER desires to issue a news release, public
announcement, advertisement, or other form of publicity concerning their efforts
in connection with this Agreement, then the SELLER, shall obtain the written
approval of the BUYER prior to the release of said information and shall give
full consideration to the role and contribution of the BUYER. Written approval
shall not be unreasonably withheld by BUYER and shall be in accordance with the
requirements of the Prime Contract.
24. NON-WAIVER OF RIGHTS
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The failure of BUYER to insist upon strict performance of the terms and
conditions of this Agreement or to exercise any rights or remedies, shall not be
construed as a waiver of its rights to assert any of same rights or to rely on
any such terms or conditions at any time thereafter.
25. REPRESENTATIONS AND CERTIFICATIONS
All representations and certifications which have been submitted to the
BUYER in connection with the award of this Agreement are incorporated herein and
made a part hereof and such have been relied upon by the BUYER in issuing this
Agreement. SELLER agrees to promptly advise the BUYER should there be any change
in status with respect to the matters covered by such representations and
certifications.
26. ETHICAL CONDUCT
SELLER agrees not to engage in any association, activity, work or
undertaking which constitutes an unethical action, business operation or conduct
in the furtherance of SELLER's production, distribution, marketing and sale of
the products and services covered by this Agreement. SELLER shall promptly
notify BUYER in writing, in the event (i) SELLER, SELLER's parent company or any
company affiliated with SELLER or its parent company is debarred, suspended,
proposed for debarment or suspension, or otherwise excluded from federal
procurement and nonprocurement programs (ii) operation of segregated facilities,
(iii) use of gratuities, kickback arrangements or bribes with federal agencies
or officials or (iv) noncompliance with federal laws, executive orders, judicial
orders or federal regulations concerning affirmative action or equal employment
opportunity.
27. SEVERABILITY
If any term or provision of this Agreement shall be found by a court of
competent jurisdiction to be illegal or otherwise unenforceable, the same shall
not invalidate the whole of this Agreement, but such term or provision shall be
deemed modified to the extent necessary in the court's opinion to render such
term or provision enforceable, and the rights and obligations of the parties
shall be construed and enforced accordingly, preserving to the fullest
permissible extent the intent and agreements of the parties herein set forth.
28. APPLICABLE STATE LAW
This Agreement shall be deemed to have been entered into in the
Commonwealth of Virginia, United States of America, and shall for all purposes,
be governed by and construed under the laws thereof regardless of where any
court action or legal proceeding is brought in connection with this Agreement.
29. ATTACHMENTS/EXHIBITS
The exhibits and attachments referred to in this Agreement are
incorporated by reference and made a part of this Agreement. This Agreement and
the exhibits and attachments hereto set forth the entire agreement between the
parties.
Attachment A- Special Subcontract Flow-Down Provisions
Attachment B - Representations and Certifications
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30. STATEMENT OF WORK
SELLER shall provide the necessary personnel, material and facilities
to deliver to the BUYER the supplies and services set forth in each Purchase
Order. The individual Purchase Order(s) shall have a Statement of Work
(Attachment C) which will give the SELLER guidance to the scope of work where
support is being requested. SELLER services shall be ordered pursuant to
Purchase Order(s) issued by the BUYER, and all such services shall be performed
in accordance with the specific terms and conditions of each Purchase Order.
A. Work will be performed under this Subcontract only in
pursuance of written Purchase Orders approved by the BUYER's
Subcontract Administrator.
B. SELLER's proposed pricing shall be in accordance with
Sections B, D, and G of this subcontract. The agreement of
the parties as to the labor mix to be used and other
allowable direct costs shall also be incorporated into the
Purchase Order.
C. If the SELLER disputes the Purchase Order as issued, it
shall notify the BUYER's Subcontract Administrator in
writing within five (5) working days. Notwithstanding this
notification, me SELLER shall commence work, without delay,
to provide the services and deliverables as ordered.
31. COMPLETE AGREEMENT
This Agreement contains the entire agreement between the parties hereto
with respect to the matters covered herein. No other agreements,
representations, warranties or other matters, oral or written, shall be deemed
to bind the parties hereto with respect to the subject matter hereof. Any
changes or amendments to this Agreement may be made only in writing and signed
by the parties to be bound thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their
officers "hereunto duly authorized as of the date first written above.
UNISYS CORPORATION CELERITY SYSTEMS, INC.
BY: BY:
--------------------------------- -----------------------------
TYPED NAME: Dennis A. Chaloux TYPED NAME: William Chambers
TITLE: Sr. Subcontract Administrator TITLE: Vice President
Business Development
DATE: DATE:
------------------------------- ---------------------------
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ATTACHMENT A
H.1 ORDERING PROVISION
The following ordering procedures shall apply to all Purchase Orders issued
under any resultant Subcontract. Any supplies and/or services to be furnished
under any resulting Subcontract will be ordered by issuance of a written
Purchase Order. Purchase Orders shall be issued in accordance with the terms and
conditions of the Subcontract Agreement.
H.2 PROCUREMENT INTEGRITY - SPECIAL PROVISIONS ON EACH PURCHASE ORDER
All Subcontractor personnel who will be personally and substantially involved in
the performance of any Purchase Order issued under this contract which requires
the Subcontractor to act on behalf of, or provide advice with respect to any
phase of an agency procurement, as defined in FAR 3.104-4, shall execute and
submit a "Employee/Contractor Non-Disclosure Agreement" Form (See Attachment in
Section J). This is required prior to the commencement of any work on such
Purchase Order and whenever replacement personnel are proposed under an ongoing
Purchase Order.
H.3 OBSERVANCE OF LEGAL HOLIDAYS AND EXCUSED ABSENCE
The Government observes the following listed days as holidays:
New Years Day
Martin Luther King's Birthday
President's Day
Memorial Day
Independence Day
Labor Day
Columbus Day
Veteran's Day
Thanksgiving Day
Christmas
In addition to the days designated as holidays, the Government observes the
following days:
Any other day designated by Federal Statute
Any other day designated by Executive Order
Any other day designated by the President's Proclamation
It is understood and agreed between the parties that the observance of such days
by Government personnel shall not be a reason for an additional period of
performance, or entitlement of compensation except as set forth within the
Subcontract Agreement. No form of holiday or other premium compensation will be
reimbursed either as a direct or indirect cost, other than normal compensation
for time worked.
H.4 INSURANCE
The Subcontractor shall secure, pay the premiums for and keep in force until the
expiration of the
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resulting Subcontract, and any renewal thereof, adequate insurance as provided
below, such insurance to specifically include liability assumed by the
Subcontractor under this contract.
a. Workman's Compensation insurance as required by law of the
State.
b. Comprehensive bodily injury liability insurance with limits of
not less than $500,000 for each accident
c. Property damage liability with a limit of not less than
$100,000 for each accident.
d. Automotive bodily injury liability insurance with limits of
not less than $200,000 for each person and $500,000 for each
accident, and property damage liability insurance, with a limit
of not less than $40,000 for each accident.
Each policy of insurance shall contain an endorsement that any cancellation or
material change in the coverage adversely affecting the Government's interest
shall not be effective unless the insurer or the Subcontractor gives written
notice of cancellation or change, as required by the Subcontract Administrator.
When the coverage is provided by self-insurance, the Subcontractor shall not
change or decrease the coverage without the Subcontract Administrator's prior
approval.
A certificate of each policy of insurance shall be furnished to the Subcontract
Administrator within ten (10) days after notice of award certifying, among other
things, that the policy contains the aforementioned endorsement. The insurance
company providing the above insurance shall be satisfactory to the Government.
Notice of policy changes shall be furnished to the Subcontract Administrator.
The substance of this clause shall be made to flow down to any lower tier
subcontractors.
H.5 IDENTIFICATION OF CONTRACTOR EMPLOYEES
During the period of any resulting subcontract, the rights of ingress
and egress to and from any office for subcontractor representatives shall be
made available as required. All Subcontractor employees whose duties under the
resulting subcontract requires their presence at any Government facility shall
be clearly identifiable by a distinctive badge furnished by the Government. In
addition, corporate identification badges will be worn on the outer garment at
all times. The obtaining of the corporate identification badge is the sole
responsibility of the subcontractor. All prescribed information shall
immediately be delivered to the Government Security Office for cancellation or
disposition upon the termination of the employment of any subcontractor
personnel. All on-site subcontractor personnel shall abide by security
regulations, applicable to that site.
H.6 GOVERNMENT FURNISHED ITEMS
All Government furnished items will be identified in the appropriate
Purchase Order. If any given Purchase Order issued under this contract requires
work to be performed on the Government's site, the Government will provide
office work space, office automation equipment and furniture for Subcontractor
personnel.
H.7 NON-PERSONAL SERVICES
16
<PAGE>
(a) As stated in the Federal Register, Volume 57, No. 190, page 45096,
dated September 30, 1992, Policy Letter on Inherently Governmental Functions, no
personal services shall be performed under this contract. No Subcontractor
employee will be directly supervised by the Government. All individual employee
assignments, and daily work direction, shall be given by the applicable employee
supervisor. If the Subcontractor believes any Government action or communication
has been given that would create a personal services relationship between the
Government and any Subcontractor employee, the Subcontractor shall promptly
notify the Subcontract Administrator of this communication or action.
(b) The Subcontractor shall not perform any inherently Governmental
actions under this subcontract. No Subcontractor employee shall hold him or
herself out to be a Government employee, agent, or representative. No
Subcontractor employee shall state orally or in writing at any time that he or
she is acting on behalf of the Government. In all communications with third
parties in connection with this subcontract, Subcontractor employees shall
identify themselves as Subcontractor employees and specify the name of the
company for which they work.
(c) The Subcontractor shall insure that all of its employees working on
this subcontract are informed of the substance of this clause. Nothing in this
clause shall limit Unisys' rights in any way under any other provision of the
Subcontract, including those related to Unisys' right to inspect and accept the
services to be performed under this subcontract. The substance of this clause
shall be included in all subcontracts at any tier.
H.8 ORGANIZATIONAL CONFLICTS OF INTEREST
(a) The Subcontractor warrants that, to the best of the Subcontractor's
knowledge and belief, there are no relevant facts or circumstances which could
give rise to an organizational conflict of interest (OCI), as defined in FAR
9.5, Organizational and Consultants Conflicts of Interest, or that the
Subcontractor has disclosed all such relevant information.
(b) The Subcontractor agrees that if an actual or potential OCI is
discovered after award, the Subcontractor shall make a full disclosure in
writing to the Subcontract Administrator. This disclosure shall include a
description of actions which the Subcontractor has taken or proposes to take,
after consultation with the Subcontract Administrator, to avoid, mitigate, or
neutralize the actual or potential conflict.
(c) The Subcontract Administrator may terminate this contract for
convenience, in whole or in part, if it deems such termination necessary to
avoid OCI. If the Subcontractor was aware of a potential OCI prior to award or
discovered an actual or potential conflict after award and did not disclose or
misrepresented relevant information to the Subcontract Administrator, Unisys may
terminate the contract for default, advise the Government Contract Office, or
pursue other remedies as may be permitted by law or this contract.
(d) The Subcontractor shall include this clause in all subcontracts
and in lower tier subcontracts unless a waiver is requested from, and
granted by, the Subcontract Administrator.
(e) In the event that a Purchase Order is issued to the Subcontractor
that would require activity that would create a potential conflict of
interest, the Subcontractor shall:
(1) Notify the Subcontract Administrator of a potential conflict,
and;
17
<PAGE>
(2) Recommend to the Subcontract Administrator an alternate
tasking approach which would avoid the potential conflict, or
(3) Present for approval a conflict of interest mitigation plan
that will:
18
<PAGE>
(a) Describe in detail the Purchase Order requirement that
creates the potential conflict of interest; and
(b) Outline in detail the actions to be taken by the
Subcontractor or Unisys in the performance of the task to
mitigate the conflict, division of subcontractor effort, and
limited access to information, or other acceptable means.
(4) The Subcontractor shall not commence work on a Purchase Order
related to a potential conflict of interest until specifically
notified by the Subcontract Administrator to proceed.
(5) If the Subcontract Administrator determines that it is in the
best interest of the Government to issue a Purchase Order,
notwithstanding a conflict of interest, a request for waiver
shall be submitted in accordance with FAR 9.503.
19
<PAGE>
ATTACHMENT B
REPRESENTATIONS AND CERTIFICATIONS
TAXPAYER IDENTIFICATION
(FAR 52.204-3) (MAR 1994)
(a) Definitions.
"Common parent" as used in this solicitation provision, means that
corporate entity that owns or controls an affiliated group of corporations that
files its Federal income tax returns on a consolidated basis, and of which the
offeror is a member.
"Corporate status" as used in this solicitation provision, means a
designation as to whether the offeror is a corporate entity, an unincorporated
entity (e.g., sole proprietorship or partnership), or a corporation providing
medical and health care services.
"Taxpayer Identification Number (TIN)" as used in this solicitation
provision, means the number required by the IRS to be used by the offeror in
reporting income tax and other returns.
(b) All offerors are required to submit the information required in
paragraphs (c) through (e) of this solicitation provision in order to comply
with reporting requirements of 26 U.S.C. 6041, 6041A, and 6050M and implementing
regulations issued by the Internal Revenue Service (IRS). If the resulting
contract is subject to reporting requirements described in 4.903, the failure or
refusal by the offeror to furnish the information may result in a 31 percent
reduction of payments otherwise due under the contract.
(c) Taxpayer Identification Number (TIN).
(/) [TIN: 101556194
( ) TIN has been applied for.
( ) TIN is not required because:
( ) Offeror is a nonresident alien, foreign corporation, or
foreign partnership that does not have income
effectively connected with the conduct of a trade or
business in the U.S. and does not have an office or
place of business or a fiscal paying agent in the U.S.;
( ) Offeror is an agency or instrumentality of a foreign
government;
( ) Offeror is an agency or instrumentality of a Federal,
state, or local government;
( ) Other. State basis. ______________________________.
(d) Corporate Status.
( ) Corporation providing medical and health care services,
or engaged in the billing and collecting of payments
for such services;
(?) Other corporate entity;
( ) Not a corporate entity;
( ) Sole proprietorship
20
<PAGE>
( ) Partnership
( ) Hospital or extended care facility described in 26 CFR
501(c)(3) that is exempt from taxation under 26 CFR 501
(a).
(e) Common Parent.
(/) Offeror is not owned or controlled by a common parent
as defined in paragraph (a) of this clause.
( ) Name and TIN of common parent:
Name
TIN_________________________________
Offerors must complete the following representations when the resulting contract
is to be performed inside the United States its territories or possessions
Puerto Rico, the Trust Territory of the Pacific Islands or the District of
Columbia.
SMALL BUSINESS CONCERN REPRESENTATION
(FAR 52.219-1 ) (FEB 1990)
(a) Representation. The offeror represents and certifies as part of its
offer that it (/) is, ( ) is not a small business concern and that (/) all, ( )
not all end items to be furnished will be manufactured or produced by a small
business concern in the United States, its territories or possessions, Puerto
Rico, or the Trust Territory of the Pacific Islands.
(b) Definition.
Small business concern, as used in this provision, means a concern,
including its affiliates, that is independently owned and operated, not dominant
in the field of operation in which it is bidding on Government contracts, and
qualified as a small business under the criteria and size standards in this
solicitation.
(c) Notice. Under 15 U.S.C. 645(d), any person who misrepresents a
firm's status as a small business concern in paragraph (a) of this clause in
order to obtain a contract to be awarded under the preference programs
established pursuant to sections 8(a), 8(d), 9, or 15 of the Small Business Act
or any other provision of Federal law that specifically references section 8(d)
for a definition of program eligibility, shall (1) be punished by imposition of
a fine, imprisonment, or both (2) be subject to administrative remedies; and (3)
be ineligible for participation in programs conducted under the authority of the
Act.
SMALL DISADVANTAGED BUSINESS CONCERN
REPRESENTATION (FAR 52.219-2) (FEB 1990)
(a) Representation. The offeror represents that it ( ) is, (/) is not a
small disadvantaged business concern.
(b) Definitions.
Asian Pacific Americans, as used in this provision, means United States
citizens whose origins are in Japan, China, the Philippines, Vietnam, Korea,
Samoa, Guam, the U.S. Trust Territory of the
21
<PAGE>
Pacific Islands (Republic of Palau), the Northern Mariana Islands, Laos,
Kampuchea (Cambodia), Taiwan, Burma, Thailand, Malaysia, Indonesia, Singapore,
Brunei, Republic of the Marshal Islands, or the Federated States of Micronesia.
Indian tribe, as used in this provision, means any Indian tribe, band,
nation, or other organized group or community of Indians, including any Alaska
Native Corporation as defined in 13 CFR 124.1000 which is recognized as such by
the State in which such tribe, band, nation, group or community resides.
Native Americans, as used in this provision, means American Indians,
Eskimos, Aleuts, and native Hawaiians.
Native Hawaiian Organization, as used in this provision, means any
community service organization serving Native Hawaiians in, and chartered as a
not-for-profit organization by, the State of Hawaii, which is controlled by
Native Hawaiians, and whose business activities will principally benefit such
Native Hawaiians.
Small business concern, as used in this provision, means a concern,
including its affiliates, that is independently owned and operated, not dominant
in the field of operation in which it is bidding on Government contracts, and
qualified as a small business under the criteria and size standards in 13 CFR
part 121.
Small disadvantaged business concern, as used in this provision, means
a small business concern that (a) is at least 51 percent owned by one or more
individuals who are both socially and economically disadvantaged, or a publicly
owned business having at least 51 percent of its stock unconditionally owned by
one or more socially and economically disadvantaged individuals and (b) has its
management and daily business controlled by one or more such individuals. This
term also means a small business concern that is at least 51 percent
unconditionally owned by an economically disadvantaged Indian tribe or Native
Hawaiian Organization, or a publicly owned business having at least 51 percent
of its stock unconditionally owned by one of these entities which has its
management and daily business controlled by members of an economically
disadvantaged Indian tribe or Native Hawaiian Organization, and which meets the
requirements of 13 CFR part 124.
Subcontinent Asian Americans, as used in this provision, means United
States citizens whose origins are in India, Pakistan, Bangladesh, Sri Lanka,
Bhutan, or Nepal.
(c) Qualified groups. The offeror shall presume that socially and
economically disadvantaged individuals include Black Americans, Hispanic
Americans, Native Americans, Asian-Pacific Americans, Subcontinent Asian
Americans, and other individuals found to be qualified by SBA under 13 CFR 124.
The offeror shall presume that socially and economically disadvantaged entities
also include Indian tribes and Native Hawaiian Organizations.
WOMEN-OWNED SMALL BUSINESS REPRESENTATION
(FAR 52.219-3) (APR 1984)
(a) Representation. The offeror represents that it ( ) is, (/) is not a
women-owned small business concern.
(b) Definitions.
22
<PAGE>
"Small business concern", as used in this provision, means a concern,
including its affiliates, that is independently owned and operated, not dominate
in the field of operation in which it is bidding on Government contracts, and
qualified as a small business under the criteria and size standards in 13 CFR
121.
"Women-owned", as used in this provision, means a small business that
is at least 51 percent owned by a woman or women who are U.S. citizens and who
also control and operate the business.
WOMEN-OWNED BUSINESS
(FAR 52.204-5) (OCT 1995)
(SOLICITATIONS ANTICIPATED TO EXCEED $100,000)
As prescribed in FAR 4.603(b): /
(a) Representation. The offeror represents that it ( ) is, (/); not a
women-owned business concern.
(b) Definition. Women-owned business concern, as used in this provision
means a concern which is at least 51 percent owned by one or more women; or in
the case of any publicly owned business at least 51 percent of the stock of
which is owned by one or more women; whose management and daily business
operations are controlled by one or more women.
The following certifications and representations are required to implement
provisions of Executive Order 11246 and must be completed by all Offerors.
CERTIFICATION OF NONSEGREGATED FACILITIES
(FAR 52.222-21) (APR 1984)
(a) Segregated facilities, as used in this provision, means any waiting
rooms, work areas, rest rooms and wash rooms, restaurants and other eating
areas, time clocks, locker rooms and other storage or dressing areas, parking
lots, drinking fountains, recreation or entertainment areas, transportation, and
housing facilities provided for employees, that are segregated by explicit
directive or are in fact segregated on the basis of race, color, religion, or
national origin because of habit, local custom, or otherwise.
(b) By the submission of this offer, the offeror certifies that it does
not and will not maintain or provide for its employees any segregated facilities
at any of its establishments, and that it does not and will not permit its
employees to perform their services at any location under its control where
segregated facilities are maintained. The offeror agrees that a breach of this
certification is a violation of the Equal Opportunity clause in the contract.
(c) The offeror further agrees that (except where it has obtained
identical certifications from proposed subcontractors for specific time periods)
it will--
(1 ) Obtain identical certifications from proposed subcontractors
before the award of subcontracts under which the subcontractor will be subject
to the Equal Opportunity clause:
(2) Retain the certifications in the files; and
(3) Forward the following notice to the proposed subcontractors
(except if the
23
<PAGE>
proposed subcontractors have submitted identical certifications for specific
time periods):
NOTICE TO PROSPECTIVE SUBCONTRACTORS OF REQUIREMENT FOR
CERTIFICATIONS OF NONSEGREGATED FACILITIES
A Certification of Nonsegregated Facilities must be submitted before
the award of a subcontract under which the subcontractor will be subject to the
Equal Opportunity clause. The certification may be submitted either for each
subcontract or for all subcontracts during a period (i.e., quarterly,
semiannually, or annually). NOTE: The penalty for making false statements in
offers is prescribed in 18 U.S.C. 1001.
PREVIOUS CONTRACTS AND COMPLIANCE REPORTS
(FAR 52.222-22) (APR 1984)
The offeror represents that--
(a) It ( ) has, (/) has not participated in a previous contract or
subcontract subject either to the Equal Opportunity clause of this solicitation,
the clause originally contained in Section 310 of Executive Order No. 10925, or
the clause contained in Section 201 of Executive Order No. 11114;
(b) It ( ) has, (/) has not filed all required compliance reports; and
(c) Representations indicating submission of required compliance
reports, signed by proposed subcontractors, will be obtained before subcontract
awards.
AFFIRMATIVE ACTION COMPLIANCE
(FAR 52.222-25) (APR 1984)
The offeror represents that--
(a) It ( ) has developed and has on file, (/) has not developed and
does not have on file, at each establishment, affirmative action programs
required by the rules and regulations of the Secretary of Labor (41 CFR 60-1 and
60-2), or
(b) It (/) has not previously had contracts subject to the written
affirmative action programs requirement of the rules and regulations of the
Secretary of Labor.
CERTIFICATION AND DISCLOSURE REGARDING PAYMENTS TO INFLUENCE CERTAIN FEDERAL
TRANSACTIONS (FAR 52.203.11 )(JAN 1990) (SOLICITATIONS EXPECTED TO EXCEED
$100,000)
(a) The definitions and prohibitions contained in the clause, at FAR
52.203-12, Limitation on Payments to Influence Certain Federal Transactions,
included in this solicitation, are hereby incorporated by reference in paragraph
(b) of this certification.
(b) The offeror, by signing its offer, hereby certifies to the best of
his or her knowledge and belief as of December 12, 1989, that--
24
<PAGE>
(1) No Federal appropriated funds have been paid or will be paid
to any person for influencing or attempting to influence an officer or employee
of any agency, a Member of Congress, an officer or employee of Congress, or an
employee of a Member of Congress on his or her behalf in connection with the
awarding of any Federal contract, the making of any Federal grant, the making of
any Federal loan, the entering into of any cooperative agreement, and the
extension, continuation, renewal, amendment or modification of any Federal
contract, grant, loan, or cooperative agreement;
(2) If any funds other than Federal appropriated funds (including
profit or fee received under a covered Federal transaction) have been paid, or
will be paid, to any person for influencing or attempting to influence an
officer or employee of any agency, a Member of Congress, an officer or employee
of Congress, or an employee of a Member of Congress on his or her behalf in
connection with this solicitation, the offeror shall complete and submit, with
its offer, OMB standard form LLL, Disclosure of Lobbying Activities. to the
Contracting Officer; and
(3) He or she will include the language of this certification in
all subcontract awards at any tier and require that all recipients of
subcontract awards in excess of $100,000 shall certify and disclose accordingly.
(c) Submission of this certification and disclosure is a prerequisite
for making or entering into this contract imposed by section 1352, title 31,
United States Code. Any person who makes an expenditure prohibited under this
provision or who fails to file or amend the disclosure form to be filed or
amended by this provision, shall be subject to a civil penalty of not less than
$10,000, and not more than $100,000, for each such failure.
BUY AMERICAN ACT-TRADE AGREEMENTS-BALANCE OF PAYMENTS PROGRAM CERTIFICATE
(52.225-8) (JAN 1994)
As prescribed in FAR 25.408(a)(1)
(a) The offeror hereby certifies that each end product, except those
listed in paragraph (b) of this provision, is a domestic end product (as defined
in the clause entitled "Buy American Act" - Trade Agreements Balance of Payments
Program) and that components of unknown origin have been mined, produced, or
manufactured outside the United States, a designated country, a North American
Free Trade Agreement (NAFTA) Country, or a Caribbean Basin country, as defined
in section 25.401 of the Federal Acquisition Regulation.
(b) Excluded End Products:
Line Item Number Country of Origin
___________________________________________________
___________________________________________________
___________________________________________________
(List as necessary)
(c) Offers will be evaluated by giving certain preferences to domestic
end products, designated country end products, NAFTA country end products, and
Caribbean Basin country end products over other end products. In order to obtain
these preferences in the evaluation of each excluded end product
25
<PAGE>
listed in paragraph (b) of this provision, offerors must identify and certify
below those excluded end products that are designated or NAFTA country end
products, or Caribbean Basin country end products. Products that are not
identified and certified below will not be deemed designated country end
products, NAFTA country end products, or Caribbean Basin country end products.
Offerors must certify by inserting the applicable line item numbers in the
following:
(1) The offeror certifies that the following supplies qualify as
"designated or NAFTA country end products" as those terms are defined in the
clause entitled "Buy American Act - Trade Agreements Act - Balance of Payments
Program":
_______________________________________________
(Insert Line item numbers)
(2) The offeror certifies that the following supplies qualify as
"Caribbean Basin country end products" as that term is defined in the clause
entitled "Buy American Act -Trade Agreements - Balance of Payments Program":
_______________________________________________
(Insert Line item numbers)
(d) Offers will be evaluated in accordance with Part 25 of the Federal
Acquisition Regulation.
BUY AMERICAN ACT-NORTH-AMERICAN FREE TRADE AGREEMENT IMPLEMENTATION ACT-BALANCE
OF PAYMENTS PROGRAM CERTIFICATE
(52.225-20) (JAN 1997)
(a) The offeror certifies that each end product, except those listed in
paragraph (g)(2) of this provision, is a domestic end product (as defined in the
clause entitled "Buy American Act-North American Free Trade Agreement
Implementation Act-Balance of Payments Program") and that components of unknown
origin have been considered to have been mined, produced, or manufactured
outside the United States.
(b) Excluded End Products:
_______________________________________________
Line Item No. Country of Origin
_______________________________________________
(List as necessary)
_______________________________________________
(c) Offers will be evaluated by giving certain preferences to domestic end
products or NAFTA country end products over other end products. In order to
obtain these preferences in the evaluation of each excluded end product listed
in paragraph (b) of this provision, offerors must identify and certify below
those excluded end products that are NAFTA country end products. Products that
are not
26
<PAGE>
identified and certified below will not be deemed NAFTA country end products.
The offeror certifies that the following supplies qualify as "NAFTA country end
products" as that term is defined in the clause entitled "Buy American Act-North
American Free Trade Agreement Implementation Act-Balance of Payments Program."
_______________________________________________
Line Item No.-- Country of Origin
_______________________________________________
(List as necessary)
(d) Offers will be evaluated in accordance with Part 25 of the Federal
Acquisition Regulations.
(End of provision)
The following certification and representations is required to implement
provisions of Executive Order 12549 and must be completed by all Offerors.
CERTIFICATION REGARDING DEBARMENT, SUSPENSION, PROPOSED DEBARMENT, AND OTHER
RESPONSIBILITY MATTERS (FAR 52.209-5) (MAY 1989)
(a) (1) The Offeror certifies, to the best of its knowledge and
belief, that-
(i) The offeror and/or any of its Principals --
(A) Are ( ) are not (/) presently debarred,
suspended, proposed for debarment, or declared ineligible for the award of
contracts by any Federal agency;
(B) Have ( ) have not (/) within a 3-year period
preceding this offer, been convicted of or had a civil judgment rendered against
them for: commission of fraud or a criminal offense in connection with
obtaining, attempting to obtain, or performing a public (Federal, state, or
local) contract or subcontract; violation of Federal or state antitrust statutes
relating to the submission of offers; or commission of embezzlement, theft,
forgery, bribery, falsification or destruction of records, making false
statements, or receiving stolen property; and
(C) Are ( ) are not (/) presently indicted for, or
otherwise criminally or civilly charged by a governmental entity with,
commission of any of the offenses enumerated in subdivision (A)(1)(i)(B) of this
provision.
(ii) The Offeror has ( ) has not (/) within a 3-year period
preceding this offer, had one or more contracts terminated for default by any
Federal agency.
(2) "Principals", for the purposes of this certification, means
officers; directors; owners, partners; and, persons having primary management or
supervisory responsibilities within a business entity (e.g., general manager;
plant manager; head of a subsidiary, division or business segment, and similar
positions).
27
<PAGE>
THIS CERTIFICATION CONCERNS A MATTER WITHIN THE JURISDICTION OF AN
AGENCY OF THE UNITED STATES AND THE MAKING OF A FALSE, FICTITIOUS, OR FRAUDULENT
CERTIFICATION MAY RENDER THE MAKER SUBJECT TO PROSECUTION UNDER SECTION 1001,
TITLE 18, UNITED STATES CODE.
(b) The Offeror shall provide immediate written notice to the
Contracting Officer if, at any time prior to contract award, the Offeror learns
that its certification was erroneous when submitted or has become erroneous by
reasons of changed circumstances.
(c) A certification that any of the items in paragraph (a) of this
provision exists will not necessarily result in withholding of an award under
this solicitation. However, the certification will be considered in connection
with a determination of the Offeror's responsibility. Failure of the Offeror to
furnish a certification or provide such additional information as requested by
the Contracting Officer may render the Offeror nonresponsible.
(d) Nothing contained in the foregoing shall be construed to require
establishment of a system of records in order to render, in good faith, the
certification required by paragraph (a) of this provision. The knowledge and
information of an Offeror is not required to exceed that which is normally
possessed by a prudent person in the ordinary course of business dealings.
(e) The certification in paragraph (a) of this provision is a material
representation of fact upon which reliance was placed when making award. If it
is later determined that the Offeror knowingly rendered an erroneous
certification, in addition to other remedies available to the Government, the
Contracting Officer may terminate the contract resulting from this solicitation
for default.
CERTIFICATION:
The undersigned certifies under penalty of law that the information provided
above to the best of his/her knowledge is true and correct. I have executed this
certification as of the day and year stated below.
- ---------------------------------------
Signature of authorized representative
William Chambers
- ---------------------------------------
Typed name of authorized representative
Vice President Business Development
- ---------------------------------------
Title of authorized representative
6/26/97
- ----------------------------------------
Date
28
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED DECEMBER 31, 1995
Weighted average shares outstanding 1,188,424
Common equivalent shares 560,821 (1)
-------
1,749,245 (2)
---------
Net income $9,892
------
Common and common equivalent shares 1,749,245 $0.01
-----
YEAR ENDED DECEMBER 31, 1996
Weighted average shares outstanding 1,445,761
Common equivalent shares 560,821 (1)
-------
2,006,582 (3)
---------
Net loss ($5,512,113)
----------
Common and common equivalent shares 2,006,582 ($2.75)
-----
SIX MONTHS ENDED JUNE 30, 1996
Common Shares:
Weighted average shares outstanding 1,200,552
Common equivalent shares 560,821 (1)
-------
1,761,373 (3)
---------
Net loss ($1,783,601)
----------
Common and common equivalent shares 1,761,373 ($1.01)
-----
Six months ended June 30, 1997
Weighted average shares outstanding 1,819,113
Common equivalent shares 560,821 (1)
-------
2,379,934 (3)
---------
Net loss ($3,825,115)
----------
Common and common equivalent shares 2,379,934 ($1.61)
-----
(1) Common equivalent shares include equivalent shares
related to the options, warrants and stock issued within the
one year period prior to the filing of the registration statement.
(2) Options and warrants issued in 1995 are not included for purposes
of the calculation because the related exercise prices were either in
excess of or equal to the fair market value of the Company's common
stock.
(3) Options and warrants issued in the periods preceding the
one year prior to filing the registration statement are not included
for purposes of the calculation because they are antidilutive.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of
our report dated March 7, 1997, except for Notes 1, 7, 11 and 16, for which the
date is August 8, 1997, which report includes an explanatory paragraph relating
to the removal of a going concern explanatory paragraph included in a previously
issued report, on our audit of the financial statements of Celerity Systems,
Inc. as of December 31, 1996 and for each of the two years in the period ended
December 31, 1996. We also consent to the references of our firm under the
captions "Experts", "Summary Financial Data" and "Selected Financial Data".
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
August 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE AUDITED FINANCIAL STATEMENTS FOR THE TWO YEARS IN THE PERIOD ENDED DECEMBER
31, 1996 AND THE ACCOMPANYING FOOTNOTES; THE UNAUDITED INTERIM FINANCIAL
INFORMATION FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997, AND THE ACCOMPANYING
FOOTNOTES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 2,345 461
<SECURITIES> 0 0
<RECEIVABLES> 1,268 2,197
<ALLOWANCES> 555 570
<INVENTORY> 1,326 1,315
<CURRENT-ASSETS> 4,572 3,465
<PP&E> 1,182 1,385
<DEPRECIATION> 368 499
<TOTAL-ASSETS> 5,650 4,531
<CURRENT-LIABILITIES> 2,466 3,632
<BONDS> 3,000 3,000
0 0
2,746 2,885
<COMMON> 2 2
<OTHER-SE> (2,584) (5,007)
<TOTAL-LIABILITY-AND-EQUITY> 5,650 4,531
<SALES> 2,530 1,255
<TOTAL-REVENUES> 2,530 1,255
<CGS> 3,513 1,170
<TOTAL-COSTS> 8,004 4,948
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 555 15
<INTEREST-EXPENSE> 150 153
<INCOME-PRETAX> (5,528) (3,825)
<INCOME-TAX> (15) 0
<INCOME-CONTINUING> (5,512) (3,825)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,512) (3,825)
<EPS-PRIMARY> (2.75) (1.61)
<EPS-DILUTED> (2.75) (1.61)
</TABLE>
