<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1997
REGISTRATION NO. 333-33509
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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]
------------------------
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 OCTOBER 28, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
2,000,000 SHARES
[LOGO]
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 AND IMMEDIATE SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE 7 HEREIN AND UNDER "DILUTION."
------------------------
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 "Underwriter"), consisting of (a) a non-accountable expense
allowance equal to 3% of the gross proceeds of the Offering, and (b)
warrants entitling the Underwriter to purchase up to an aggregate of 200,000
shares of Common Stock from the Company (the "Underwriter's Warrants"). The
Company has agreed to indemnify the Underwriter 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 Underwriter's non-accountable expense allowance) estimated at
$2,132,600, assuming no exercise of the Underwriter's over-allotment option.
(3) The Company has granted an option to the Underwriter, 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 Underwriter exercises
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 Underwriter, subject to prior sale,
when, as, and if delivered to and accepted by it, and subject to its 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 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 975,836 SHARES OF SERIES A PREFERRED STOCK AND 408,479 SHARES OF
SERIES B PREFERRED STOCK INTO AN AGGREGATE OF 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 UNDERWRITER'S
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.
The Company has focused most of its sales, marketing, and research and
development efforts in 1997 on its interactive video segment and intends to
continue to focus primarily on such segment in the future. Sales of interactive
video products accounted for 28% and 60% of the Company's revenues for the year
ended December 31, 1996 and the six months ended June 30, 1997, respectively.
INTERACTIVE VIDEO
Interactive video consists of applications, such as entertainment,
education, banking and shopping, which are transmitted over digital networks for
presentation on television or personal computers and are under the direct
control of the user. 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, 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
3
<PAGE>
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, 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 its products with 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.
Under previous management, the Company's revenues for the year ended
December 31, 1996 decreased to approximately $2,530,100 from approximately
$7,703,400 for the year ended December 31, 1995. Revenues for the six months
ended June 30, 1997 were approximately $1,254,500 as compared with approximately
$1,299,900 for the six months ended June 30, 1996. The Company's net loss for
the year ended December 31, 1996 was approximately $5,512,100 as compared to net
income of approximately $9,900 for the year ended December 31, 1995. Net loss
for the six months ended June 30, 1997 increased to approximately $3,825,100
from approximately $1,783,600 for the six months ended June 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Although the Company has retained new management and has refocused
its sales and marketing efforts in order to increase revenues, there can be no
assurance that the Company's revenues will increase or that the Company will
operate profitably in the future.
The Company was incorporated in Tennessee in 1993 and was reincorporated 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(1)
Common Stock to be outstanding after the
Offering...................................... 4,082,239 shares(1)
Use of Proceeds................................. The net proceeds of the Offering will be
used (i) to repay debt incurred in the
Company's 1996 and 1997 private
placements; (ii) to hire additional
engineering and administrative per-
sonnel; (iii) to fund the Company's sales
and marketing efforts (including the
hiring of sales and marketing personnel);
(iv) to fund directors' and officers'
liability insurance; (v) to pay amounts
under an agreement with a former officer
of the Company; and (vi) for working
capital and general corporate purposes.
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 Underwriter's over-allotment option, (ii)
200,000 shares of Common Stock issuable upon exercise of the Underwriter's
Warrants, (iii) 612,600 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 Underwriter
(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 loss applicable to common stock.................... (140) (5,790) (1,859) (3,964)
Net loss per share..................................... $ (0.08) $ (2.89) $ (1.06) $ (1.67)
Shares used in computing net 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) $ 1,113 $ 9,221
Total assets......................................... 5,650 4,531 5,468 12,378
Total debt........................................... 3,027 3,023 3,023 --
Redeemable, convertible preferred stock.............. 2,746 2,885 -- --
Stockholders' equity (deficit)....................... $ (2,582) $ (5,005) $ (840) $ 10,118
</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 charge of
approximately $1,909,000 related to the write-off of capitalized costs
related to the 1996 Placement and the Bridge Financing, interest expense and
loss on early extinguishment of debt. 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 AND ACCUMULATED DEFICIT. 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 $5,512,100 for the year ended December 31, 1996;
incurred a net loss of approximately $3,825,100 for the six months ended June
30, 1997; and had an accumulated deficit of approximately $9,622,200 as of 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.
SUBSTANTIAL UP-FRONT EXPENSES; LIQUIDATED DAMAGES PROVISIONS AND OTHER
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 projects are 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 reserved approximately $570,000, as of June 30,
1997, for potential uncollectible accounts receivable. In many instances, the
Company is dependent on the efforts of third parties to adequately complete
their portion of a 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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. 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.
7
<PAGE>
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 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 by En K of
two models of the Company's video 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.
ANTICIPATED NON-CASH CHARGES. As a result of the issuance of the Bridge
Warrants without separate consideration and at a price below the assumed initial
public offering price of $7.50 per share, at the time of the issuance of the
Bridge Notes, the Company was required to treat the Bridge Warrants as
additional paid in capital. There will be non-cash interest expense associated
with the Bridge Notes due to their original discount at issuance. The amount of
the non-cash interest expense is equal to the difference between the total
exercise price of the Bridge Warrants and the assumed initial public offering
price of the number of shares underlying the Bridge Warrants. This expense will
be amortized on a monthly basis over the one-year term of the Bridge Notes. Upon
repayment of the Bridge Notes the Company will be required to treat any
unamortized discount as a loss on early extinguishment of debt. The aggregate
amount of the non-cash interest expense and the loss on extinguishment of debt
will be approximately $1,440,000. Based on the foregoing, the Bridge Notes would
have an effective interest rate exceeding 300%. In addition, the Company will
incur a charge of approximately $469,000 related to the write-off of financing
costs previously capitalized in connection with the 1996 Placement and the
Bridge Financing. The Company also incurred significant non-cash compensation
expenses in the third quarter of 1997 related to the difference between the
exercise price of certain options granted and the deemed fair value of the
Common Stock underlying such options amounting to approximately $1,003,000.
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."
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
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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 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 currently
available only from one supplier or a limited number of suppliers. See
"Business-- Manufacturing and Materials." 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 be no assurance
that the Company, either on its own or through arrangements with others, will be
able to obtain such capabilities on acceptable terms.
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."
MANAGEMENTS' BROAD DISCRETION OF USE OF PROCEEDS. Of the approximately
$12,867,400 of net proceeds to be received by the Company in connection with the
Offering, approximately 27.6% has been allocated to the hiring of additional
engineering and administrative personnel, approximately 19.6% has been allocated
to sales and marketing (including the hiring of sales and marketing personnel),
approximately 1.9% will be used to purchase directors' and officers' liability
insurance, and approximately 8.2% has been allocated to working capital. These
net proceeds from the Offering 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. Of the approximately $12,867,400 of net
proceeds to be received by the Company in connection with the Offering,
approximately $5,450,000 or 42.4% of the net proceeds will be used to repay
existing indebtedness, including indebtedness incurred in the 1996 Placement and
the Bridge Financing. Such proceeds, together with $40,000 to be paid to a
former officer, will not be available to fund the future operations of the
Company. In addition, the Company anticipates that it will have only
approximately $1,057,900 to apply to working capital. See "Use of Proceeds." The
Company anticipates that the net proceeds of the Offering, together with funds
generated from operations, will be sufficient to
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satisfy its operations and capital requirements for approximately the next 18
months. Such belief is based upon certain assumptions, and there can be no
assurance that such assumptions are correct. 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 Underwriter 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."
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 $5.02, or 67% 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 26.9% 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 (20,000 of which were cancelled in October 1997),
granted options to purchase an aggregate of 270,000 shares of Common Stock at
$3.00 per share (20,000 of which were cancelled in October 1997) 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 129,400
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. 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 options to
purchase 129,400 shares of Common Stock issued under the 1995 Plan and the
Company's outstanding options and warrants to purchase an additional 1,242,286
shares of Common Stock, 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 and up to 190,714 additional shares of Common Stock
may be issued prior to the consummation of the Offering pursuant to the exercise
of warrants (with an exercise price of $4.90 per share of Common Stock) that
expire upon the consummation of the Offering. 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."
RISKS APPLICABLE TO FOREIGN SALES. For the years ended December 31, 1995
and 1996, substantially all of the Company's interactive video revenues were
derived from projects in foreign 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. See "--Risks Associated with Contracts with En Kay
Telecom Co., Ltd." Foreign sales, whether effected through U.S. or foreign-based
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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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Year Ended December 31, 1996
Compared to Year Ended December 31, 1995" and "--Six Months Ended June 30, 1997
Compared to Six Months Ended June 30, 1996."
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.
RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT. Technology-based industries,
such as the Company's, are characterized by 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, be able
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.
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 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
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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 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 materially adversely affect
the Company.
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, William R. Chambers, and Mark
Cromwell. In addition, the Company's senior officers (with the exception of Mr.
West) joined the Company in 1997 and do not have a long-standing relationship
with the Company. 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. Each of Messrs. Chambers' and
Cromwell's employment with the Company may be terminated by them or the Company
at any time. See "Management--Employment Agreements." 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,
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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 hire approximately 50 employees for its
engineering, sales, and operations staff over the next 12 months. Although the
Company intends to utilize a portion of the proceeds of the Offering for this
purpose, there can be no assurance that such funds will not be reallocated to
other uses. Even if funds are available for hiring of employees, 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. See
"Use of Proceeds."
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.
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 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 maintains product liability insurance in the amount of
$1,000,000 per occurrence and $2,000,000 in the aggregate. The Company may be
required to obtain additional insurance coverage.
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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."
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 26.9% 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."
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. See "Description of
Securities--Directors' Limitation of Liability and Indemnification."
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.
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ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF 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 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. The Company has no current
arrangement, commitment or understanding with respect to the issuance of its
preferred stock. There can be no assurance, however, that the Company will not,
in the future, issue shares of preferred stock. Certain provisions of Delaware
law may also discourage third party attempts to acquire control of the Company.
See "Description of Securities-- Preferred Stock."
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.
UNCERTAINTY OF LISTING OF SECURITIES ON THE NASDAQ SMALLCAP MARKET; PENNY
STOCK. 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 (i) net
tangible assets in excess of $2,000,000, market capitalization in excess of
$35,000,000 or net income (in the latest fiscal year or two of the last three
fiscal years) in excess of $500,000; (ii) a market value of shares held by
non-affiliates of the Company in excess of $4,000,000; and (iii) (subject to
certain exceptions) a bid price of $1.00 per share. 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 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 Underwriter's over-allotment option is
15
<PAGE>
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 Underwriter's 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 Underwriter 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 Underwriter. In addition,
certain stockholders holding an aggregate of 426,654 and 497,146 shares of
Common Stock have entered into agreements with the Underwriter which prohibit
them from offering, issuing, selling, or otherwise disposing of any securities
of the Company for a period of 12 months and six months, respectively, following
the date of this Prospectus, without the prior written consent of the
Underwriter. 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.
16
<PAGE>
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 $2,132,600, are estimated to be approximately
$12,867,400 ($14,858,650 if the Underwriter's over-allotment option is exercised
in full). The Company intends to use the net proceeds of the Offering as
follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE PERCENTAGE
APPLICATION OF NET PROCEEDS AMOUNT OF NET PROCEEDS
- --------------------------------------------------------------------- ------------- ----------------------------
<S> <C> <C>
Retirement of indebtedness(1)........................................ $ 5,450,000 42.4%
Additional engineering personnel(2).................................. $ 3,173,000 24.7%
Sales and marketing(3)............................................... $ 2,522,750 19.6%
Additional administrative personnel(4)............................... $ 373,750 2.9%
Directors' and officers' liability insurance......................... $ 250,000 1.9%
Payments to former officer(5)........................................ $ 40,000 0.3%
Working capital...................................................... $ 1,057,900 8.2%
------------- -------
Total........................................................ $ 12,867,400 100.0%
------------- -------
------------- -------
</TABLE>
- ------------------------
(1) The Offering proceeds will be used to repay the principal amount of the 1996
Notes, issued June 30,
1996 and July 16, 1996, and the Bridge Notes, issued August 8, 1997, in the
amount of $3,000,000 and $2,000,000, respectively, together with estimated
accrued interest thereon through the closing date of the Offering amounting
to $400,000 and $50,000, respectively. As a result of the attribution of
value of the Bridge Warrants issued with the Bridge Notes, the Bridge Notes
have an effective interest rate which exceeds 300%. See "Risk
Factors--Anticipated Non-Cash Charges." As a result of the Bridge Financing,
the Company received 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. As a result
of the 1996 Placement, the Company received approximately $5,404,300 of net
proceeds, which funds were used by the Company to pay overdue trade accounts
payable, fund the Company's long-term projects, and fund the Company's
working capital needs. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources.'
(2) The Company's plans to increase its engineering staff by adding
approximately 36 new positions.
(3) Includes $1,633,750 allocated to the Company's plans to increase its sales
and marketing force by adding approximately nine new positions. See
"Business--Interactive Video Segment--Sales and Marketing" and "--CD-ROM
Segment--Sales and Marketing" for additional uses of these proceeds.
(4) The Company plans to increase its administrative staff by adding
approximately five new positions.
(5) The Company agreed 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.'
Any net proceeds received by the Company from the exercise of the
Underwriter's over-allotment option or the Underwriter'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.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of this Offering based upon the Company's currently
contemplated operations, the Company's business plan and
17
<PAGE>
current economic and industry conditions and is subject, at the discretion of
management, to reapportionment of such proceeds among the categories listed
above or to new categories in response to, among other things, changes in its
plans, employment needs, industry conditions and future revenues and
expenditures.
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.
DILUTION
As of June 30, 1997, the Company had a pro forma net tangible book deficit
of approximately ($1,320,000), or ($0.73) 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 $10,108,000, or $2.48 per share, which represents an immediate
increase in the pro forma net tangible book value of $3.21 per share to present
stockholders and an immediate dilution of $5.02 or 67% 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.... $ (0.73)
Increase in pro forma net tangible book value per share attributable
to purchase of Shares by new investors.................................. $ 3.21
---------
Pro forma net tangible book value per share to investors after the
Offering.................................................................. $ 2.48
---------
Dilution per share to new investors......................................... $ 5.02
---------
---------
</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 Underwriter's 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
18
<PAGE>
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 Underwriter's over-allotment option, (ii) 200,000 shares of Common
Stock issuable upon exercise of the Underwriter'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 129,400 shares of Common Stock
are outstanding, including options to purchase 106,200 shares of Common
Stock exercisable at $0.10 per share, options to purchase 12,600 shares of
Common Stock exercisable at $1.38 per share, and options to purchase 10,600
shares of Common Stock exercisable at $4.90 per share granted to certain of
the Company's employees and executive officers, and (ix) 483,200 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 219,200 shares of Common Stock exercisable at
$1.38 per share, and options to purchase 250,000 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
"Risk Factors--Substantial Options and Warrants Reserved,"
"Management--Stock Option Plans," "Certain Relationships and Related
Transactions," and "Description of Securities."
19
<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, 4,384,315 shares authorized,
including 975,836 Series A shares authorized and 408,479 Series B
shares authorized; 975,836 Series A shares issued and outstanding
actual and 408,479 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 21,872,950
Treasury stock, at cost............................................. (67,500) (227,500) (227,500)
Accumulated deficit................................................. (9,622,180) (9,622,180) (11,531,638)
------------- ------------- --------------
Total stockholders' equity (deficit)............................ (5,004,961) (839,740) 10,118,202
------------- ------------- --------------
Total capitalization............................................ $ (1,982,450) $ 2,742,771 $ 10,118,202
------------- ------------- --------------
------------- ------------- --------------
</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 charge of
approximately $1,909,000 related to the write-off of capitalized costs
related to the 1996 Placement and the Bridge Financing, interest expense and
loss on early extinguishment of debt. See "Use of Proceeds" and Note 16 to
Notes to Financial Statements.
20
<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 loss applicable to common stock..................................... $ (140) $ (5,790) $ (1,859) $ (3,964)
Net loss per share...................................................... $ (0.08) $ (2.89) $ (1.06) $ (1.67)
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' deficit................................................... (260) (2,582) (1,624) (5,005)
</TABLE>
21
<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
The Company has focused most of its sales, marketing, and research and
development efforts in 1997 on its interactive video segment and intends to
continue to focus primarily on such segment in the future. Sales of interactive
video products accounted for 28% and 60% of revenues for the year ended December
31, 1996 and the six months ended June 30, 1997, respectively.
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
suspended substantially all of its interactive video 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.
The Company entered into one short-term interactive video contract in 1996
and two others in 1997. Due to the short-term nature of these projects, revenues
from these contracts are recorded by the completed contract method of
accounting, which provides for recognition of revenues and related costs upon
completion of each contract. Costs in excess of billings on these uncompleted
short-term contracts are reflected as current assets, while billings in excess
of costs are reflected as current liabilities. These short-term contracts have
not been completed and, accordingly, revenues have not yet been recognized.
The Company's 1996 short-term contract was received from IBM Taiwan
Corporation. The value of this contract is approximately $650,000, of which
approximately $125,000, relating to separate deliverable items, was recognized
in 1996. The Company anticipates recognizing revenues of approximately $525,000
upon completion of the project, which is estimated to occur during the fourth
quarter of 1997. The Company has capitalized approximately $471,000 in costs
associated with the Taiwan project and anticipates that it will incur an
additional $26,000 in costs before the project's completion.
The Company has also entered into short-term contracts with the Guangdong
Public Telecommunications Authority ("GPTA") and the Beijing Telecom Authority
("BTA") in 1997. The value of the GPTA contract is approximately $1,400,000. The
Company anticipates recognizing all of the revenues relating to the GPTA
contract upon the project's completion, which is estimated to occur in the first
quarter of 1998. The Company has capitalized approximately $716,000 in costs
associated with the GPTA project and estimates that it will incur an additional
$176,000 in costs before the completion of the project. The value of the BTA
contract is approximately $712,000. The Company anticipates recognizing all of
the revenues relating to the BTA contract upon the project's completion, which
is estimated to occur in the first quarter of 1998. The Company has capitalized
approximately $317,000 in costs associated with the BTA project and anticipates
incurring an additional $269,000 in costs before its completion.
22
<PAGE>
During 1995, the Company had one interactive video customer that represented
57% of its revenues and one CD-ROM customer that represented 25% of its
revenues. The Company had two interactive video customers and one CD-ROM
customer that represented 13%, 13%, and 51%, respectively, of its revenues in
1996. The Company had two interactive video customers and one CD-ROM customer
that represented 9%, 45%, and 17%, respectively, of its revenues for the six
months ended June 30, 1997.
Currently, the principal markets for the Company's interactive video
products are Korea, Israel, Taiwan, and China. Export sales for the years ended
December 31, 1995 and 1996, and the six months ended June 30, 1997 were
approximately $5,186,600, $878,500, and $716,100, respectively. Export sales
represented 67%, 35% and 57% of revenues for the years ended December 31, 1995
and 1996, and for the six months ended June 30, 1997, respectively. Sales to a
Korean customer represented 86%, 41%, and 81% of revenues, while sales to an
Israeli customer represented 13%, 36%, and 17% of revenues, for the years ended
December 31, 1995 and 1996, and for the six months ended June 30, 1997,
respectively. All revenues associated with the Company's long-term Korean and
Israeli projects have been previously recognized by the Company.
There are inherent risks associated with foreign sales, including the
difficulty of enforcing agreements against foreign-based customers, political
and economic instability, shipping delays, foreign taxes, and export
restrictions. See "Risk Factors--Risk Applicable to Foreign Sales" and "--Risks
Associated with Contracts with En Kay Telecom Co., Ltd." In addition, the
Company has experienced difficulties with respect to certain of its foreign
deployments. See "--Results of Operations."
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 as compared to approximately $1,299,900 for the same
period in 1996.
Revenues from the interactive video segment were approximately $755,900 for
the six months ended June 30, 1997 as compared to approximately $461,400 for the
same period in 1996. The increase reflects approximately $560,000 of revenue
recognized in 1997 under contracts with En K. Of such $560,000, approximately
$360,000 relates to the 1996 En K Agreement, while the remaining En K revenues
relate to the 1997 En K Agreement. Under the 1996 En K Agreement, the Company
agreed to design a digital set top box which would be licensed for manufacture
and sale by En K in Korea. Under the 1997 En K Agreement, the Company agreed to
license to En K two models of video servers for manufacture in Korea and sale
worldwide. The Company was performing in accordance with contractual schedules
under both agreements and had completed significant portions of the design work
under the 1996 En K Agreement when it ceased production under both agreements in
April 1997 pending settlement of disputes under the 1997 En K Agreement. The
Company elected to recognize the revenues from the 1997 En K Agreement under the
installment method due to management's inability to estimate the probability of
collection of receivables arising from that contract. See "Risk Factors--Risks
Associated with Contracts with En Kay Telecom Co., Ltd." and Note 16 to Notes to
Financial Statements. Revenues for the same period in 1996 related to progress
on the Company's two existing long-term interactive video contracts.
Revenues from the CD-ROM segment were approximately $498,600 for the six
months ended June 30, 1997 as compared to approximately $838,500 for the same
period in 1996. The decrease was primarily due to the Company's focus on sales
of the Mediator and CD Workware products rather than the VCD Manager and VCD
Writer products. The CD Workware products generate greater revenues per sale
than the Company's other CD-ROM products, but have a longer sales cycle. The
Mediator products largest customer is the U.S. Navy, which has changed its
required specifications for this product and has not placed any additional
orders in 1997.
23
<PAGE>
COSTS 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, for the same period in 1996. Higher labor costs
in 1997 were partially offset by lower direct materials costs. The Company's
gross margin was approximately $84,500 for the six months ended June 30, 1997 as
compared to approximately $48,200 for the same period in 1996.
Costs of revenues for the interactive video segment for the six months ended
June 30, 1997 were approximately $672,900, or 89% of revenues for such segment,
as compared to approximately $678,500, or 147% of such revenues, for the same
period in 1996. The decrease in costs of revenues as a percentage of revenues
was principally due to increased revenues resulting from the Company's
agreements with En K and a $200,000 decrease in materials costs. The decrease in
materials costs was partially offset by an increase in labor costs of
approximately $170,000 for the six months ended June 30, 1997, as a result of
the addition of engineering personnel. The Company's gross margin for the
interactive video segment was approximately $83,000 for the six months ended
June 30, 1997 as compared to a loss of approximately $217,100 for the same
period in 1996.
Costs of revenues for the CD-ROM segment for the six months ended June 30,
1997 were approximately $497,100, or 100% of revenues for such segment, as
compared to approximately $573,300, or 68% of such revenues, for the same period
in 1996. The decrease in costs of revenues was principally due to a decrease in
materials costs of approximately $128,000, which was partially offset by an
increase of approximately $41,000 in engineering costs. The decrease in
materials costs between the two periods was in proportion to the decrease in
hardware revenues of approximately $177,000 for the six months ended June 30,
1997. The increase in costs of revenues on a percentage basis was due
principally to decreased software revenues of approximately $136,800 for the six
months ended June 30, 1997 as compared to approximately $300,000 of such
revenues for the same period in the prior year. There were no material costs of
revenues associated with software sales in 1996 and 1997.
The Company's gross margin for the CD-ROM segment was approximately $1,500
for the six months ended June 30, 1997 as compared to a gross margin of
approximately $265,200 for the same period in 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.
Operating expenses for the interactive video segment were approximately
$2,829,000 for the six months ended June 30, 1997 as compared to $1,308,000 for
the same period in 1996. The increase was principally due to approximately
$1,156,000 of non-cash charges allocated to the interactive video segment
relating to the issuance of stock options during the first half of 1997 at an
exercise price below the assumed initial public offering price of $7.50 per
share. In addition, approximately $247,000 of such increase was attributable to
expenses related to the retention of contractors and consultants.
Operating expenses for the CD-ROM segment were approximately $950,000 for
the six months ended June 30, 1997 as compared to $480,000 for the same period
in 1996. The increase was principally due to (i) approximately $385,000 of
non-cash charges allocated to the CD-ROM segment relating to the issuance of
stock options during the first half of 1997 at an exercise price below the
assumed initial public offering price of $7.50 per share, (ii) approximately
$67,000 in expenses incurred in connection with hiring personnel, and (iii)
expenses related to the retention of consultants and contractors.
NET LOSS. As a result of the above factors, net loss for the six months
ended June 30, 1997 was approximately $3,825,100 as compared to a net loss of
approximately $1,783,600 for the same period in 1996.
Net loss for the interactive video segment was approximately $2,746,000 for
the six months ended June 30, 1997 as compared to approximately $1,525,300 for
the same period in 1996. The increase was principally due to increased operating
expenses for the segment, which was partially offset by increased revenues.
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Net loss for the CD-ROM segment was approximately $947,300 for the six
months ended June 30, 1997 as compared with approximately $213,200 for the same
period in 1996. The increase was principally due to decreased revenues and
increased operating expenses, as discussed above.
The Company expects to incur additional net losses during the second half of
1997 as a result of certain non-cash charges as well as increased expenses
associated with hiring additional personnel. The anticipated non-cash charges
consist of approximately $1,003,000 in non-cash compensation expense related to
the issuance of stock options in July 1997 at an exercise price below the
assumed initial public offering price of $7.50 per share. Upon the consummation
of the Offering, the Company also anticipates that it will recognize a non-cash
charge of approximately $1,909,000 related to the write-off of costs capitalized
in connection with the 1996 Placement and the Bridge Financing and interest
expense and loss on early extinguishment of debt upon the expected repayment of
the 1996 Notes and the Bridge Notes. See "--Liquidity and Capital Resources" and
"Risk Factors--Anticipated Non-Cash Charges."
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 for the interactive video segment were approximately $720,700 for
the year ended December 31, 1996 as compared to approximately $4,807,100 for the
same period in 1995. The decrease in revenues for the interactive video segment
was primarily due to the Company's inability to complete its existing projects
in Korea and Israel, which limited the Company's ability to pursue new business
and resulted in the suspension of substantially all of the Company's interactive
video sales efforts from August 1996 until approximately January 1997.
The Company was unable to complete its Korean and Israeli projects in 1996
primarily because of difficulties associated with the initial deployments of
advanced new technologies and prototype products (the Company's initial model of
its digital video server in Korea and Israel and its initial set top box model
in Israel), including a lack of experienced staff at the Company, its prime
contractors, co-vendors and customers. These difficulties were exacerbated by
changing customer requirements, the long distances involved, and cultural
factors. Further, products and services provided by the other vendors, such as
the set top boxes for the Korean project, network equipment and system software,
were also at a prototypical stage and experienced numerous operational problems.
The Company has undertaken a number of initiatives to address these
difficulties. Improvements, including enhancements in speed, capacity,
reliability, and fault recovery, have been made to the Company's digital video
servers, which have moved these units from near-prototype to production status.
The Company has instituted a practice of semi-annual major software and hardware
releases for each product to enhance their stability. The Company has also
become more experienced and adept in international operations, and has
implemented numerous new policies and procedures, including (i) the provision of
full-time Company technical personnel at each deployment site, (ii) the
retention of in-country support sub-contractors, (iii) the provision of
replacement parts at deployment sites to avoid shipping delays, and (iv) the
institution of a product life cycle management program, which are intended to
enhance the Company's management of the deployment process, including
international deployments, and to improve communications with customers,
contractors and co-vendors. The Company believes that these changes will improve
the quality and serviceability of its products and potentially reduce the costs
and prices of those products. For information regarding the current status of
the Company's interactive video deployments, see "Business--Interactive Video
Segment--Deployments."
The Company has hired new management, including a Chief Executive Officer,
Vice President of Engineering, and Director of Training and Documentation, with
years of relevant experience, and intends to hire additional qualified
personnel. See "Use of Proceeds."
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Revenues for the CD-ROM segment were approximately $1,809,400 for the year
ended December 31, 1996 as compared to approximately $2,896,300 for the same
period in 1995. The decrease was primarily due to a reduced focus on selling the
VCD Manager and VCD Writer products. The Company analyzed the market and decided
to devote greater resources to selling its Mediator and CD Workware products
since the VCD Manager and VCD Writer products were encountering increased
competition and lower margins. The CD Workware products generate greater
revenues per sale than the Company's other CD-ROM products, but have a longer
sales cycle. 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 for 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, or 139% of revenues, as compared to approximately
$4,609,300, or 60% of revenues, for the same period in 1995. The majority of the
decrease was attributable to a decrease in materials costs for both the
interactive video and CD-ROM segments.
Costs of revenues for the interactive video segment were $2,418,300, or 336%
of interactive video revenues, for the year ended December 31, 1996 as compared
to $2,815,700, or 59% of interactive video revenues, for the same period in
1995. The decrease was due to decreased interactive video materials costs of
approximately $1,913,000 for the year ended December 31, 1996 as compared to the
same period in 1995. The higher costs in 1995 were due to the expenditures
associated with the initial phases of the Korean and Israeli projects. The
decreased materials costs in the year ended December 31, 1996 were partially
offset by reserves for estimated losses to be incurred during 1997 for the
completion of the Korean project amounting to $672,600, and reserves for
inventory obsolescence amounting to $500,000, as well as increased direct labor
costs of approximately $390,000.
The reserve for estimated losses was established based upon management's
determination that substantial costs, such as wages, contractor costs, and
travel expenses, would be incurred through September 1997, which was the
expected completion date of the Korean project. Approximately $348,000 remained
in the reserve at June 30, 1997, of which approximately $250,000 and $98,000
related to the estimated costs of completion of the Korean and Israeli projects,
respectively. The Company does not anticipate that it will incur any additional
costs on the Korean or Israeli projects which have not already been recognized.
The Company anticipates that the Israeli project will be completed in the fourth
quarter of 1997, while the Korean project has passed its systems acceptance test
and is currently in the systems reliability period, which is anticipated to be
completed in the fourth quarter of 1997. However, the reliability period (which
requires the system to operate to the customer's satisfaction for a period of 60
days) may be restarted at any point and as many times as the customer feels is
necessary until the customer is satisfied with the system. The Company revised
the reserve for estimated losses relating to completion of the Korean project to
include estimated costs to complete the Israeli project. The Company revised its
estimate following shipment of the set top boxes for the Israeli contract
because they were not accepted by the customer. The Company anticipates that
acceptance of the set top boxes and systems acceptance (which are the only
remaining milestones under the contract) will occur in the fourth quarter of
1997.
The inventory obsolescence reserve was establisted based upon management's
review of the inventory balances of certain items during the closing process of
the year ended December 31, 1996. Management evaluated those items based on
planned utilization. A large part of the Company's inventory consists of printed
circuit boards and items which make up those boards, such as integrated
circuits. Management determined that carrying costs of this inventory were
overstated due to obsolescence. The Company plans to dispose of the obsolete
inventory during the first quarter of 1998. The accrual was unchanged at June
30, 1997.
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Costs of revenues for the CD-ROM segment were approximately $1,094,800, or
60% of CD-ROM revenues, for the year ended December 31, 1996 as compared to
approximately $1,793,500, or 62% of CD-ROM revenues, for the same period in
1995.
As a result of the factors 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 approximately $3,044,600 for the
same period in 1995. The increase was primarily due to reserves established for
potentially uncollectible accounts receivable, an increase in depreciation
expense in the interactive video segment, 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 remainder of the increase was due to
increased general corporate expenses.
Operating expenses for the interactive video segment were approximately
$3,365,000 for the year ended December 31, 1996 as compared to approximately
$2,318,000 for the same period in 1995. The increase was principally due to the
accounts receivable reserve of $555,000 related to the interactive video
segment. The reserve was established at December 31, 1996 because management
determined that, due to missed deadlines relating to the Company's Korean and
Israeli projects, receivables relating to those projects were doubtful as to
collection. The Company anticipates that the Korean and Israeli receivables will
be settled not later than the end of the first quarter of 1998. As of June 30,
1997, the Company had approximately $467,000 and $308,000 in accounts receivable
outstanding relating to the Korean and Israeli projects, respectively.
Approximately $110,000 of the increase was due to increased depreciation of
fixed assets and approximately $100,000 of the increase was due to the portion
of the management compensation reserve allocated to the segment. The remainder
of the increase was due to increased general corporate expenses allocated to the
segment.
Operating expenses for the CD-ROM segment were approximately $1,126,000 for
the year ended December 31, 1996 as compared to approximately $726,600 for the
same period in 1995. The increase was due to increased corporate expenses
allocated to the CD-ROM segment, including insurance, telephone, administrative
staff, computer expenses and office rent.
Research and development expenses were approximately $479,000 in the year
ended December 31, 1996 as compared to approximately $810,800 for the same
period in 1995. The 1995 research and development expenses consisted of both
material and labor costs amounting to approximately $448,000 and $362,000,
respectively. Further materials expenditures were not required during 1996
because the Company maintained its focus on its existing projects during the
year. Labor costs were consistent between the two years.
NET INCOME (LOSS). As a result of the factors discussed above, net loss for
the year ended December 31, 1996 was approximately $5,512,100 as compared to net
income of approximately $9,900 for the same period in 1995. The interactive
video segment had net losses of approximately $326,600 and $5,062,900 for the
years ended December 31, 1995 and 1996, respectively. The CD-ROM segment had net
income of approximately $376,100 and a net loss of approximately $411,500 for
the years ended December 31, 1995 and 1996, respectively.
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, that 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
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$3,252,619 through the issuance for approximately $1,517,500 of 975,836 shares
of Series A Preferred Stock and warrants to purchase 408,479 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 1996, in connection with the 1996 Placement, the Company
received net proceeds of approximately $5,404,300 through the private placement
of units consisting of Common Stock, notes, and warrants consummated on June 30
and July 17, 1996. The net proceeds from the 1996 Placement were used to pay
overdue trade accounts payable, fund the Company's long-term projects, and fund
the Company's working capital needs. Also in 1996, the Company converted the
debt issued in 1995 into shares of Common Stock at a conversion rate of $4.90
per share. In August 1997, the Company received net proceeds of approximately
$1,700,000 from the Bridge Financing, consisting of a private placement of
$2,000,000 principal amount of the Bridge Notes and Bridge Warrants, which was
consummated on August 8, 1997. The effective interest rate of the Bridge Notes
is in excess of 300%, and the Company will be required to recognize non-cash
interest expense and loss on early extinguishment of debt of approximately
$1,440,000 upon the anticipated repayment of the Bridge Notes upon consummation
of the Offering. In addition, the Company will be required to recognize non-cash
expenses of approximately $469,000 consisting of the write-off of previously
capitalized expenses incurred in connection with the Bridge Financing and the
1996 Placement. 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.
The Company's accounts receivable turnover ratio for the six months ended
June 30, 1997 was .72 as compared to .48 for the same period in 1996. There has
been little change in the revenue amounts between the periods and a slight
decrease in the average receivable balance due principally to collections on
large accounts that had been outstanding at the end of 1995. The long-term
projects have retentions negotiated in the contracts that allow the customer to
hold a percentage of the billings until completion. Due to the inability of the
Company to complete those projects, the receivable turnover was adversely
affected. The accounts receivable turnover ratios for the years ended December
31, 1995 and 1996 were 3.5 and .9, respectively, which resulted from the larger
sales volume in 1995 than in 1996 with a consistent receivable balance.
The inventory turnover ratio for the six months ended June 30, 1997 was .64
as compared to 1.3 for the same period in 1996. The nature of the Company's
interactive video sales and production processes requires that inventory be on
hand for extended periods of time. The Company maintains working units in
inventory that are similar to units that have been installed in the field.
Therefore, as the Company has sold more video servers, the amount of the
inventory has increased. The inventory turnover ratio for the year 1995 was 17.1
but decreased to 1.3 during 1996. This was the result of the increases in
inventory, mainly in the increased number of video servers the Company had
on-hand. The decrease in revenues between the two years has also caused an
increase in inventory items which were anticipated to be in demand to remain
with the Company.
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
funds generated from operations, will be sufficient to satisfy its operating and
capital requirements for the next 18 months.
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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 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
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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 plans to hire a Vice President of Sales and Marketing to
develop and implement a comprehensive sales and marketing plan, and five
regional sales managers. The Company anticipates furthering its sales efforts
under new leadership by engaging in advertising and public relations activities
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that create visibility for the Company and its products. Such activities may
include distributing informational materials to industry professionals,
consultants, the press, and prospective customers, advertising in trade
journals, participation in trade shows, and direct mailing of press releases and
marketing materials. The Company also plans to construct a demonstration room
for its products, as well as demonstration units. 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.
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 Ltd. 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 Co., Ltd., 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.
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 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 ("KT"), 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 interactive television over telephone and cable lines. In
1994, the Company participated in a pilot interactive video trial for 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
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approximately $3,780,000 from Bescom pursuant to an oral distribution agreement;
in addition, approximately $467,000 is due following successful completion of a
sixty-day reliability period. Although systems acceptance testing has been
successfully completed, there can be no assurance that the reliability testing
will be successfully completed, or that the Company will receive payment from
Bescom. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Year Ended December 31, 1996
Compared to Year Ended December 31, 1995."
ISRAEL
In 1995, the Company received an order from Bezeq, the Israeli national
telephone company, through Tadiran Telecommunications Ltd. ("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. The
Company anticipates that set top box acceptance for this project will be
completed during the fourth quarter of 1997, and that systems acceptance testing
will occur shortly thereafter. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Year Ended December 31, 1996 Compared to Year
Ended December 31, 1995."
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 and
the customer has agreed to pay for the project by the end of 1997. 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 is being
installed and systems acceptance testing is expected in the first quarter of
1998. The aggregate value of this contract is approximately $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
approximately $712,000. The scheduled shipment dates for this project are in the
fourth quarter of 1997 with completion scheduled for the first quarter of 1998.
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 GPTA, 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 LTD. 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, INC. 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.
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
41
<PAGE>
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. The Company intends to hire a Vice President
and General Manager for the CD-ROM division who will be responsible for creating
a sales and marketing strategy for the division, which will include, among other
things, the development and management of third party sales channels, such as
distributors, integrators, and VARs. The Company also intends to hire additional
CD-ROM sales personnel and to upgrade its sales and marketing materials.
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."
42
<PAGE>
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 Company relies
on four principal sole source suppliers, Microware, Pacific Micro Devices, CMD
Technologies and Solaris, for integral parts of the Company's video servers. The
Company relies on three principal sole source suppliers, Kubik Enterprises, QNX
Software Systems and Diamond Head Software for its CD-ROM products. 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; Manufacturing 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 September 30, 1997, the Company had 64 full-time employees,
approximately 40 of whom were employed in the engineering and product
development area, six of whom fulfilled marketing and sales functions and 18 of
whom fulfilled management or administrative roles. Subject to the availability
of funds, the Company intends to recruit approximately 50 additional employees
over the next 12 months, of which the Company estimates approximately nine will
be in sales and marketing, five in management and administration, and 36 in
engineering and product development. See "Risk Factors--Attraction and Retention
or Employees." 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."
43
<PAGE>
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........................................... 35 Executive Vice-President, Director of Technology, and
Director
William R. Chambers.................................. 46 Vice-President of Business Development
Mark Cromwell........................................ 43 Vice-President of Engineering
Thomas E. Welch...................................... 27 Controller
Fenton Scruggs(1).................................... 59 Director
Donald Greenhouse(1)................................. 61 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee and the Audit 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 Sr. 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, a founder of the Company, has served as Executive
Vice-President, Director of Technology and a member of the Board of Directors
since the Company's inception in 1993. Prior to 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, Tieder & Hoffar, 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.
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 M.S. in Electrical
Engineering from Southern Methodist University
44
<PAGE>
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.
THOMAS E. WELCH--Mr. Welch has been Controller of the Company since January
15, 1996. Before joining the Company, Mr. Welch, a certified public accountant,
was a senior associate with Coopers & Lybrand L.L.P., where he was employed from
August 1992 to January 1996. Mr. Welch received a B.S. in Business
Administration Accounting from the University of Tennessee in May 1992.
FENTON SCRUGGS--Dr. Scruggs, a founder of the Company, 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 1969. 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 Methodist
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. 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.
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.
45
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------------- ------------------------ -----------
<CAPTION>
OTHER RESTRICTED SECURITIES LONG-TERM
NAME AND PRINCIPAL ANNUAL STOCK UNDERLYING INCENTIVE ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS PLAN PAYOUT COMPENSATION
- -------------------------- --------- ---------- --------- ------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth D. Van Meter(1)... 1996 -- -- -- -- -- -- --
Chairman of the Board, 1995 -- -- -- -- -- -- --
Chief 1994 -- -- -- -- -- -- --
Executive Officer, and
President
Glenn West................ 1996 $ 134,372 -- -- -- -- -- --
Executive Vice President 1995 $ 134,199 -- -- -- -- -- --
and Director 1994 $ 72,000 -- -- -- -- -- --
Mahmoud Youssefi.......... 1996 $ 134,372 -- -- -- -- -- --
Former Chief Executive 1995 $ 131,167 -- -- -- -- -- --
Officer and former 1994 $ 66,000 -- -- -- -- -- --
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."
46
<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,
but will not, after the date of this Prospectus, be less than 85% of the fair
market value of the Common Stock on the date of the grant. 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.
47
<PAGE>
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 129,400 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, William Chambers, an officer of the Company, has 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 483,200 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 193,200 shares of Common Stock granted
to officers of the Company, including 183,200 to Kenneth Van Meter and 10,000 to
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 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
48
<PAGE>
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. A state
court, however, may determine not to enforce such non-compete clause as against
public policy. 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 and
Mark Cromwell are each receiving salaries of $125,000 per annum. 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. In connection with his
employment, Mr. Chambers also 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, and 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 and Cromwell's employment with the Company may
be terminated by either the employee or the Company at any time.
49
<PAGE>
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 III, L.P..................... 198,064(7) 9.3% 4.8%
All directors and executive officers as a group (six
persons) (3)(4)(5)(8).............................. 1,232,751 47.8% 26.9%
</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 the Vice President
of AWM Investment Company, Inc. (See note 7 below.) 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. MGP Advisers Limited Partnership, a Delaware limited
partnership ("MGP"), is the general partner of the Special Situations Fund
III, L.P. and AWM Investment Company, Inc., a Delaware corporation
principally owned by Austin Marxe, is the general partner of MGP. The
address of Special Situations Fund III, L.P. 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 44,000 shares of Common Stock which will be exercisable upon
the consummation of the Offering.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was initially capitalized by Dr. Fenton Scruggs, a founder and
director of the Company, who contributed $155,000 in capital from January to
June 1993. In June 1993, Mahmoud Youssefi, a 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 29.2% per annum. 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
160,764 shares of Series A Preferred Stock in May 1995, which will be converted
into 64,305 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 975,836 shares of Series A Preferred Stock at
$1.55 per share and warrants to purchase 408,479 Series B Preferred Stock at
$1.96 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. As
a founder of the Company, Mr. West purchased for nominal consideration the
shares that were redeemed.
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 31, 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 and the six months ended June 30,
1997, the Company paid approximately $87,000 and $47,000, respectively, 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. Seneca Point Associates, Inc., does not have an ongoing
consulting arrangement with the Company. In addition, Mr. Greenhouse's son,
David Greenhouse, is the Vice President of AWN Investment Company, Inc., which
indirectly controls the Special Situations Fund III, L.P., 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 Underwriter 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").
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Pursuant to the Termination Agreement, Mr. Youssefi agreed, among other things,
(i) not to compete with the Company for a three-year period (although such
provision may be deemed unenforceable by a state court), (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
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 payment by En K to the Company of $2,000,000 on or prior
to May 5, 1997 because Mr. Youssefi's compensation under such agreement was
premised, in part, on the continued success of the Company's relationship with
En K. 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.
As a condition to proceeding with the Bridge Financing and the Offering, the
Company deemed it necessary for it to repurchase a portion of its outstanding
Common Stock in order for the Common Stock to be sold in the Offering at the
appropriate valuation. Mr. Youssefi and Dr. Scruggs, who were in a position to
benefit substantially from the consummation of the Offering, agreed to sell
240,000 and 80,000 shares of Common Stock, respectively, to the Company at a
purchase price of $0.50 per share.
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 Underwriter 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.
The Company believes that each of the above referenced transactions was made
on terms no less favorable to the Company than could have been obtained from an
unaffiliated third party. Furthermore, any future transactions or loans between
the Company and officers, directors, principal stockholders or affiliates and,
any forgiveness of such loans, will be on terms no less favorable to the Company
than could be obtained from an unaffiliated third party, and will be approved by
a majority of the Company's directors, including a majority of the Company's
independent and disinterested directors who have access at the Company's expense
to the Company's legal counsel.
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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. The Company has no current arrangement, commitment or
understanding with respect to the issuance of its preferred stock. There can be
no assurance, however, that the Company will not, in the future, issue shares of
preferred stock. See "Risk Factors--Anti-Takeover Effects of Certain Provisions
of Certificate of Incorporation and Delaware Law."
UNDERWRITER'S WARRANTS
In connection with this Offering, the Company has agreed to issue to the
Underwriter and its designees, Underwriter's Warrants to purchase up to 200,000
shares of Common Stock. The Underwriter's Warrants will be exercisable, at a
price equal to 165% of the public offering price, for a period of four years
commencing one year after the closing of this Offering. The Underwriter 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
Underwriter's Warrants. The Underwriter's Warrants may not be sold, assigned,
pledged, hypothecated, or transferred for a period of one year from the date of
this Prospectus, except to members of the selling group and officers or partners
of the Underwriter or members of the selling group. The Underwriter'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 Underwriter's
Warrants (the
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"Warrant Shares") upon the occurrence of certain events, including stock
dividends, stock splits and recapitalizations.
The Company has agreed that, at the request of the holders of a majority of
the Underwriter'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 Underwriter'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 Underwriter's Warrants and
Warrant Shares of its intention to file a registration statement, and in one
such case, holders of the Underwriter's Warrants and the Warrant Shares will
have the right to require the Company to include the Underwriter'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 612,600 options for the
purchase of the Common Stock, 129,400 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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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 intends to maintain 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
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been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
DELAWARE 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
Underwriter's over-allotment option is exercised in full). Of these shares, the
2,000,000 Shares offered hereby (2,300,000 shares if the Underwriter's
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 1,371,686 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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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
Underwriter through the exercise of the Underwriter'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 Underwriter'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 Underwriter's
Warrants may be freely tradeable, provided that the Company satisfies certain
securities registration and qualification requirements in accordance with the
terms of the Underwriter's Warrants. See "Description of
Securities--Underwriter'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 Underwriter 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 Underwriter. In addition, certain stockholders holding an
aggregate of 426,654 and 497,146 shares of Common Stock have entered into
agreements with the Underwriter which prohibit them from offering, issuing,
selling, or otherwise disposing of any securities of the Company for a period of
12 months and six months, respectively, following the date of this Prospectus,
without the prior written consent of the Underwriter. 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."
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to Hampshire
Securities Corporation (the "Underwriter"), and the Underwriter has agreed to
purchase from the Company, the 2,000,000 Shares offered hereby.
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 Underwriter to purchase the Shares
is subject to certain conditions. The Underwriter shall be obligated to purchase
all of the Shares (other than those covered by the Underwriter's over-allotment
option described below), if any are purchased.
The Underwriter has advised the Company that it proposes 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 it 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 Underwriter.
The Company has agreed to pay the Underwriter 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 Underwriter's over-allotment option). The Company has also
granted to the Underwriter and its designees, for nominal consideration,
Underwriter's Warrants to purchase from the Company up to 200,000 shares of
Common Stock at an exercise price per share equal to 165% of the public offering
price per share. See "Description of Securities--Underwriter's Warrants."
The Company has granted the Underwriter 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 Underwriter has advised the Company that the Underwriter does 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 Underwriter, 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, the Underwriter will become
obligated, subject to certain conditions, to purchase additional shares of
Common Stock. The Underwriter 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 Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriter may be required to make in respect
thereof. The Company has been advised by the Securities and Exchange Commission,
however, that such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Company, its officers, directors, and certain stockholders holding an
aggregate of 895,552 shares of Common Stock have entered into agreements with
the Underwriter 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
Underwriter. In addition, certain stockholders holding an aggregate of 426,654
and 497,146 shares of Common Stock have entered into agreements with the
Underwriter which prohibit them from offering, issuing, selling, or otherwise
58
<PAGE>
disposing of any securities of the Company for a period of 12 months and six
months, respectively, following the date of this Prospectus, without the prior
written consent of the Underwriter. 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 Underwriter
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 Underwriter may purchase and sell Common
Stock in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover short positions created in
connection with the Offering. The Underwriter also may impose a penalty bid,
whereby selling concessions allowed to dealers participating in the Offering or
other broker-dealers in respect of the Common Stock sold in the Offering for
their account may be reclaimed by the Underwriter if such shares are repurchased
by the Underwriter 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 the Underwriter 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 the Underwriter makes any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued at any time.
The Underwriter 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 Underwriter by Fulbright & Jaworski
L.L.P., New York, New York.
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 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
59
<PAGE>
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 Market,
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.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CELERITY SYSTEMS, INC.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' Equity......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<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.
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
and 16 for which the date is August 8, 1997
F-2
<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, 975,836 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, 408,479 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-3
<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)
Accretion of premiums on preferred stock............... 149,839 278,174 74,920 139,087
------------ ------------- ------------- -------------
Net loss applicable to common stock.................. $ (139,947) $ (5,790,287) $ (1,858,521) $ (3,964,202)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Loss per common share (Note 12):
Primary loss per share............................... $ (0.08) $ (2.89) $ (1.06) $ (1.67)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-4
<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-5
<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)
Change in 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-6
<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 two CD-ROM customers and one interactive video customer that
represented 37%, 13%, and 13% of its revenues in 1996, respectively. During
1995, the Company had one customer from the CD-ROM segment that represented 25%
of its revenues and one customer from the interactive video segment that
represented 57% of its revenues. The Company had two interactive video customers
and one CD-ROM customer that represented 9%, 45%, and 17%, respectively of its
revenues for the six month period ended June 30, 1997. Export sales for years
ended December 31, 1995 and 1996, and the six month period ended June 30, 1997
were approximately $5,186,600, $878,450, and $716,057, respectively. The export
sales represented 67%, 35% and 57% of revenues for the years ended December 31,
1995 and 1996, and for the six months ended June 30, 1997, respectively. Sales
related to Korea represented 86%, 41%, and 81% of export sales while sales
relating to Israel represented 13%, 36%, and 17% of export sales, for the years
ended December 31, 1995 and 1996, and for the six months ended June 30, 1997,
respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS--Information in the accompanying financial
statements and notes to the financial statements for the interim period as of
June 30, 1997 and for the six months periods ended June 30, 1996 and 1997, 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
F-7
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 each 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. At December 31, 1996, billings in excess of costs
and estimated earnings on uncompleted long-term contracts are reflected as a
liability in the accompanying balance sheet. The Company has established an
allowance for estimated losses on uncompleted long-term contracts to record
management's estimates of losses that have been projected on the contracts in
progress.
The Company entered into one short-term interactive video contract in 1996
and another in 1997. Due to the short-term nature of these projects, revenue
from these contracts is recorded by the completed contract method of accounting
which provides for recognition of revenue and related costs upon completion of
each contract. Costs in excess of billings on these uncompleted short-term
contracts are reflected as a current asset in the accompanying balance sheet
while billings in excess of costs are reflected as a current liability.
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.
F-8
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
Additionally, the Statement requires dual presentation of basic and diluted
earnings per share on the face of the income statement and requires a
reconciliation of the numerator and denominator of the diluted 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 loss per share would have been $(1.55) and $(2.18). Basic loss per
share at December 31, 1995 and 1996, would have been $(.12) and $(4.01),
respectively. The diluted loss per share for the six month periods ended June
30, 1996 and 1997, and for the years ended December 31, 1995 and 1996, would
have been $(1.06), $(1.67), $(0.08) and $(2.89), 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.
F-9
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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. 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.
<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 Company recognized revenues related to the Israel project of
approximately $626,490, $298,960, and $118,550, respectively, for the years
ended December 31, 1995 and 1996, and for the six month period ended June 30,
1997.
F-10
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CONTRACTS (CONTINUED)
The Korea project which began in 1995, had a fixed contract price of
$4,227,280. The Company recognized revenues related to this project of
$3,847,300, $379,900 and $0, for the years ended December 31, 1995 and 1996 and
for the six months ended June 30, 1997, respectively.
The Company incurred losses related to the Korea project of $318,000 during
the year ended December 31, 1996 which it recorded as they occurred. At December
31, 1996, management estimated that it would cost an additional $672,600 to
complete the project in 1997 and recorded an allowance for estimated losses on
uncompleted contracts and increased costs of revenues by this amount. The effect
of the change in estimated cost to complete the Korea project was to increase
the net loss by $672,600 and the loss per share by $.34 for the year ended
December 31, 1996. 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.
The Company has recorded costs in excess of billings of $187,749 at December
31, 1996 and billings in excess of costs of $724,381 at June 30, 1997 related to
two short-term contracts accounted for under the completed contract method.
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.
F-11
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 expense (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 expense (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>
F-12
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The Company's income tax expense (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 effect.................................... 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 for $100,000 per unit 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, sales commissions of $480,000 and reimbursement of
expenses totaling $120,000. 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.
Notes payable at December 31, 1996, consisted of the $3,000,000 unsecured
promissory notes payable to outside investors due July 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
F-13
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INVESTOR DEBT WITH DETACHABLE WARRANTS (CONTINUED)
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 975,836 shares of Series A
Preferred Stock at $1.55 per share and 408,479 shares of Series B Preferred
Stock at $1.96 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 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-14
<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 per share 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-15
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS (CONTINUED)
The Company recorded no compensation expense related to the options granted
in 1995 or 1996 as the exercise price of the options was equal to the fair
market value of the Company's common stock at grant dates. 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 adjusted 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 (loss)............................................ $ 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.
12. LOSS PER SHARE
Loss per share has been computed by dividing net loss attributable to Common
Stock 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 loss per share because they were anti-dilutive.
After giving effect to the items described above, 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-16
<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, 1995 and 1996, approximates the following:
<TABLE>
<CAPTION>
INTERACTIVE
CD-ROM VIDEO TOTALS
------------ ------------- ------------
<S> <C> <C> <C>
1995
Revenues from external customers....................................... $ 2,896,265 $ 4,807,120 $ 7,703,385
Depreciation and amortization.......................................... 35,837 78,398 114,235
Segment profit (loss).................................................. 376,138 (326,598) 49,540
Segment long-lived assets.............................................. 741,289 4,513,662 5,254,951
Expenditures for segment assets........................................ 115,273 388,692 503,965
1996
Revenues from external customers....................................... $ 1,809,400 $ 720,697 $ 2,530,097
Depreciation and amortization.......................................... 71,700 187,200 258,900
Segment loss........................................................... (411,477) (5,062,882) (5,474,359)
Other significant non-cash 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 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>
<CAPTION>
1995 1996
------------ --------------
<S> <C> <C>
ASSETS
Total assets of the segments...................................................... $ 5,254,951 $ 2,963,400
Unallocated corporate assets...................................................... 545,299 2,686,395
------------ --------------
Total assets.................................................................. $ 5,800,250 $ 5,649,795
------------ --------------
------------ --------------
DEPRECIATION AND AMORTIZATION EXPENSE
Segment depreciation and amortization............................................. $ 110,208 $ 258,900
Unallocated corporate depreciation................................................ 13,874 18,387
------------ --------------
Total depreciation and amortization expense................................... $ 124,082 $ 277,287
------------ --------------
------------ --------------
SEGMENT PROFIT (LOSS)
Total segment profit (loss)....................................................... $ 49,540 $ (5,474,359)
Unallocated corporate interest and taxes.......................................... (39,648) (37,754)
------------ --------------
Total net income (loss)....................................................... $ 9,892 $ (5,512,113)
------------ --------------
------------ --------------
EXPENDITURES FOR LONG-LIVED ASSETS
Segment expenditures for long-lived assets........................................ $ 503,965 $ 281,700
Unallocated corporate expenditures for long-lived assets.......................... 37,649 18,852
------------ --------------
Total expenditures for assets................................................. $ 541,614 $ 300,552
------------ --------------
------------ --------------
</TABLE>
F-17
<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..................................................................... $ (213,174) $ (947,349)
Interactive video.......................................................... (1,525,320) (2,746,031)
---------------- ----------------
Total.................................................................. $ (1,738,494) $ (3,693,300)
---------------- ----------------
---------------- ----------------
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. The segment profit
(loss) amounts do not contain amounts attributable to the Company's net interest
expense, corporate income tax expense (benefit), or accretion of premiums on
preferred stock.
14. CASH FLOWS:
Supplemental disclosure of cash flow information for the years ended
December 31, 1995 and 1996 is as follows:
<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.
F-18
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. CASH FLOWS: (CONTINUED)
Amounts due to stockholders and related interest payable totaling
$87,784 were converted into the Company's common stock in 1995.
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. Additionally, the
agent received commissions of $200,000 and a $60,000 expense allowance. 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. Based upon the recording of
the debt discount, the notes have an effective interest rate in excess of 300%.
Upon the initial public offering, the Company expects that it will repay
amounts due under the placement creating a charge of $1,909,000 in the third
quarter of 1997, related to interest expense, loss on early extinguishment of
debt and write-off of capitalized financing costs related to the these notes as
well as the notes issued in the 1996 Placement.
F-19
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (CONTINUED)
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 two models of the Company's video servers in
Korea, as well as a license to sell those server models on an exclusive basis in
Korea and on a non-exclusive basis elsewhere (the "1997 En K Agreement"). The
Company 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. At that time, the Company had been
performing in accordance with contractual schedules under both agreements and
had completed significant portions of the design work under the 1996 En K
Agreement. The Company recorded the $600,000 payment as deferred revenue and
amortized the amount into income on a straight-line basis over nine months,
beginning in October 1996, which approximately matched costs and revenues during
that period. The amortization is net of $60,000 in commissions paid by the
Company to the sales agent. The Company recognized $180,000 in revenue in 1996
and $360,000 in 1997. 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
recorded the $200,000 payment as revenue under the installment method as
management could not estimate collectibility of the remaining amounts due under
the 1997 En K Agreement. The Company gave notice of default on April 5, 1997 and
placed En K in default on May 5, 1997, which 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 the 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. 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. The Company
considered the consideration received to be equal to the fair value of the stock
at purchase date and, accordingly, recorded no compensation expense related to
this purchase. This agreement expires January 20, 2000 and may not be terminated
without cause.
F-20
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (CONTINUED)
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.
STOCK OPTIONS
From April 1997 through July 1997, the Company granted 521,800 options to
purchase common stock, including those granted under the aforementioned
employment agreement, with exercise prices ranging from $1.38 to $3.00 as
follows:
<TABLE>
<CAPTION>
EXERCISE
OPTIONS PRICE
--------- -----------
<S> <C> <C>
1995 Plan grants 22,600 $ 1.38
Options granted outside the plans:
229,200 $ 1.38
270,000 $ 3.00
</TABLE>
In the second quarter of 1997, the Company recorded compensation expense
totaling approximately $1,541,000 and expects to record approximately $1,003,000
in the third quarter of 1997 related to these awards based on the assumed
initial public offering price of $7.50 per share.
F-21
<PAGE>
CTL SERIES DIGITAL VIDEO SERVER
<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 UNDERWRITER. 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................................. 17
Dividend Policy................................. 18
Dilution........................................ 18
Capitalization.................................. 20
Selected Financial Data......................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 22
Business........................................ 29
Management...................................... 44
Principal Stockholders.......................... 50
Certain Relationships and Related
Transactions.................................. 51
Description of Securities....................... 53
Shares Eligible for Future Sale................. 56
Underwriting.................................... 58
Legal Matters................................... 59
Experts......................................... 59
Available Information........................... 59
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 OR
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........................................... 100,000*
---------
Blue Sky Fees (including counsel fees)............................ 65,000*
---------
NASD Filing Fees.................................................. 2,405
---------
Listing and Nasdaq SmallCap Market fees........................... 25,020*
---------
Accounting Fees and Expenses...................................... 35,000*
---------
Transfer Agent and Registrar Fees................................. 5,000*
---------
Printing and Engraving Expenses................................... 130,000*
---------
Underwriting Non-Accountable Expense Allowance.................... 450,000
---------
Miscellaneous..................................................... 39,402*
---------
Total............................................................. $ 857,600
---------
---------
</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 975,836 shares of Series A Preferred Stock at
$1.55 per share (including 160,764 shares of Series A Preferred Stock sold 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 408,479 shares of Series B
Preferred Stock at $1.96 per share for an aggregate purchase price of
$1,517,500, solely to accredited investors. 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 solely to 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 solely to 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 190,714 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 and an accredited investor, 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.
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 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.
On July 15, 1997, the Company, through Hampshire Securities Corporation,
acting as placement agent, commenced the offer of 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. At the closing of such
offering on August 8, 1997, 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.
The Company's currently outstanding options to purchase 129,400 shares of
Common Stock under the 1995 Plan were granted from August 10, 1995 through April
4, 1997 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 believes that the issuance of such securities was exempt from
registration under Rule 701 under the Securities Act. In addition to the options
granted under the 1995 Plan, the Company granted to accredited investors between
April 4, 1997 and July 18, 1997 options to purchase 513,200 shares of Common
Stock outside of the 1995 Plan at exercise prices ranging from $0.10 to $3.00,
30,000 of which have been cancelled. 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 Underwriter'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 Agreements, dated January 6, and October 1, 1997, between the Company and Doyal H. Hodge*
10.5 Letter Agreement, dated March 13, 1997, between the Company and William Chambers*
10.6 Letter Agreement, dated July 24, 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*
10.15 Lease Agreement for Crossroad Commons, dated November 25, 1996, as amended, between Lincoln
Investment Management, Inc., as attorney in fact for the Lincoln National Life Insurance Company, and
the Company*
11 Statement re: computation of per share earnings*
23.1 Consent of Coopers & Lybrand L.L.P
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
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)*
24.1 Power of Attorney (included in signature page)*
27 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed.
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 Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned, in
Knoxville, Tennessee on October 28, 1997.
CELERITY SYSTEMS, INC.
By: /s/ Kenneth D. Van Meter
-----------------------------------------
Name: Kenneth D. Van Meter
Title: President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to 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 October 28, 1997
Kenneth D. Van Meter Executive Officer)
/s/ Thomas E. Welch * Controller (Principal
- ------------------------------ Financial and Principal October 28, 1997
Thomas E. Welch Accounting Officer)
/s/ Glenn West *
- ------------------------------ Executive Vice President October 28, 1997
Glenn West and Director
/s/ Fenton Scruggs *
- ------------------------------ Director October 28, 1997
Fenton Scruggs
/s/ Donald Greenhouse *
- ------------------------------ Director October 28, 1997
Donald Greenhouse
*By: /s/ Kenneth D. Van
Meter
-------------------------
Kenneth D. Van Meter,
Attorney-in-Fact
II-7
<PAGE>
INDEX TO EXHIBITS
<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 Underwriter'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 Agreements, dated January 6 and October 1, 1997, between the Company and Doyal H. Hodge*
10.5 Letter Agreement, dated March 13, 1997, between the Company and William Chambers*
10.6 Letter Agreement, dated July 24, 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*
10.15 Lease Agreement for Crossroad Commons, dated November 25, 1996, as amended, between Lincoln
Investment Management, Inc., as attorney in fact for the Lincoln National Life Insurance Company, 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)*
24.1 Power of Attorney (included in signature page)*
27 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
2,000,000 Shares of Common Stock
CELERITY SYSTEMS, INC.
UNDERWRITING AGREEMENT
, 1997
Hampshire Securities Corporation
640 Fifth Avenue, 4th Floor
New York, New York 10019
Gentlemen:
The undersigned, Celerity Systems, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Company"), hereby
confirms its agreement with Hampshire Securities Corporation (the
"Underwriter"), as follows:
1. Introduction.
(a) The Company proposes to issue and sell to the Underwriter an
aggregate of 2,000,000 shares of common stock, par value $0.001 per share, of
the Company (the "Common Stock"). Such 2,000,000 shares of Common Stock are
hereinafter referred to as the "Firm Stock."
(b) Solely for the purpose of covering over-allotments, if any, the
Company proposes to grant to the Underwriter an option (the "Over-allotment
Option") to purchase 300,000 shares of Common Stock. Such shares of Common Stock
are hereinafter referred to as the "Additional Stock." The Firm Stock and the
Additional Stock are hereinafter referred to collectively as the "Stock."
(c) The Company proposes to sell to the Underwriter 200,000 warrants
(the "Underwriter's Warrants") to purchase up to an aggregate of 200,000 shares
of Common Stock (the "Warrant Shares") for a purchase price of $0.001 per
warrant, or an aggregate purchase price of $200.00. The Underwriter's Warrants
will have an exercise price per share equal to 165% of the public offering price
per share. The Underwriter's Warrants shall be substantially in the form last
filed with the National
<PAGE>
Association of Securities Dealers, Inc. ("NASD"). The Underwriter's Warrants and
the Warrant Shares are hereinafter referred to collectively as the
"Underwriter's Securities." The Stock and the Underwriter's Securities are
hereinafter referred to collectively as the "Securities."
2. Representations and Warranties.
The Company, represents and warrants to, and agrees with, the
Underwriter that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed one
or more amendments thereto, on Form SB-2 (Registration No. 333-33509), including
in such registration statement and each such amendment a related preliminary
prospectus, for the registration of the Stock under the Securities Act of 1933,
as amended (the "Securities Act"). As used in this Agreement, the term
"Registration Statement" shall refer to such registration statement referred to
in the first sentence of this Section 2(a), as amended, on file with the
Commission at the time such registration statement is declared by the Commission
to be effective under the Securities Act (including the prospectus, financial
statements, and exhibits filed as a part thereof, provided, however, that such
registration statement, at the time it is declared by the Commission to be
effective under the Securities Act, may omit such information as is permitted to
be omitted from such registration statement when it becomes effective under the
Securities Act pursuant to Rule 430A of the General Rules and Regulations of the
Commission under the Securities Act (the "Regulations"), which information (the
"Rule 430A Information") shall be deemed to be included in such registration
statement when a final prospectus is filed with the Commission in accordance
with Rules 430A and 424(b)(1) or (4) of the Regulations); the term "Preliminary
Prospectus" shall refer to each prospectus included in the Registration
Statement, or any amendments thereto, before the Registration Statement is
declared by the Commission to be effective under the Securities Act, the form of
prospectus omitting Rule 430A Information included in the Registration Statement
when the Registration Statement becomes effective under the Securities Act, if
applicable (the "Rule 430A Prospectus"), and any prospectus filed by the Company
with the consent of the Underwriter pursuant to Rule 424(a) of the Regulations,
and the term "Prospectus" shall refer to (x) if the Company relies on Rule 434
of the Regulations, the Term Sheet (as defined below) relating to the Stock that
is first filed pursuant to Rule 424(b)(7) of the Regulations, together with the
Preliminary Prospectus identified therein that the Term Sheet supplements, or
(y) if the Company does not rely on Rule 434 of the Regulations, the final
prospectus forming a part of the Registration Statement in the form first filed
with the Commission pursuant to Rule 424(b)(1) or (4) of the Regulations or, if
no such filing is required, the form of final prospectus forming a part of the
Registration Statement. "Term Sheet" shall mean any term sheet thereof satisfies
the requirements of Rule 434 of the Regulations. The date on which the
Registration Statement is declared effective by the Commission is referred to as
the "Effective Date." For purposes of this Agreement, all references to the
Registration Statement, Prospectus, Preliminary Prospectus or Term Sheet or to
any
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amendment or supplement to any of the foregoing shall be deemed to include the
copy filed with the Commission pursuant to its Electronic Data Gathering
Analysis and Retrieval system ("EDGAR").
(b) When the Registration Statement becomes effective under the
Securities Act, and at all times subsequent thereto up to and including the
Closing Date (as defined in Section 3(a)) and each Additional Closing Date (as
defined in Section 3(b)), and during such longer period as the Prospectus may be
required to be delivered in connection with sales by the Underwriter or a
dealer, and during such longer period until any post-effective amendment thereto
shall become effective under the Securities Act, the Registration Statement (and
any post-effective amendment thereto) and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement to the Registration Statement or the Prospectus) will contain all
statements which are required to be stated therein in accordance with the
Securities Act and the Regulations, will comply with the Securities Act and the
Regulations in all material respects, and will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which such statements were made, not misleading, and no
event will have occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus which has not then
been set forth in such an amendment or supplement; if a Rule 430A Prospectus is
included in the Registration Statement at the time it is declared by the
Commission to be effective under the Securities Act, the Prospectus filed
pursuant to Rules 430A and 424(b)(1) or (4) of the Regulations will contain all
Rule 430A Information and all statements which are required to be stated therein
in accordance with the Securities Act or the Regulations, will comply with the
Securities Act and the Regulations in all material respects, and will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
and each Preliminary Prospectus, as of the date filed with the Commission,
contained all statements required to be stated therein, in the light of the
circumstances under which such statements were made, in accordance with the
Securities Act and the Regulations, complied with the Securities Act and the
Regulations in all material respects, and did not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which such statements were made, not misleading, except that
no representation or warranty is made in this Section 2(b) with respect to
statements or omissions made in reliance upon, and in conformity with, written
information furnished to the Company as stated in Section 8(b) with respect to
the Underwriter by, or on behalf of, the Underwriter expressly for inclusion in
the Registration Statement, any Preliminary Prospectus, or the Prospectus, or
any amendment or supplement thereto. Each Preliminary Prospectus and the
Prospectus delivered to the Underwriter for use in connection with the offering
of the Stock will, at the time of delivery, be identical to the electronically
transmitted copies thereof filed
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with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T under the Securities Act.
(c) Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction has issued an order (a "Stop Order") suspending
the effectiveness of or preventing or suspending the use of, the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, refusing to permit the effectiveness of the Registration
Statement, or suspending the registration, qualification or exemption of the
Securities nor has any of such authorities instituted or to the best knowledge
of the Company threatened to institute any proceedings with respect to a Stop
Order.
(d) Any contract, agreement, instrument, lease, or license required
to be described in the Registration Statement or the Prospectus has been
described therein. Any contract, agreement, instrument, lease, or license
required to be filed as an exhibit to the Registration Statement has been filed
with the Commission as an exhibit to the Registration Statement.
(e) The Company is a corporation duly organized and validly existing
under the laws of the State of Delaware, with full power and authority, and all
necessary consents, authorizations, approvals, orders, licenses, certificates
and permits of and from, and declarations and filings with, all federal, state,
local and other governmental authorities and all courts and other tribunals, to
own, lease, license, and use its properties and assets and to conduct its
business in the manner described in the Registration Statement and the
Prospectus, except where the failure to obtain such consents, authorizations,
approvals, orders, licenses, certificates and permits would not, individually or
in the aggregate, have a material adverse effect on the business, assets,
results of operations or financial condition of the Company (a "Material Adverse
Effect"). The Company is duly qualified to do business as a foreign corporation
and is in good standing as such in every jurisdiction in which its ownership,
leasing, licensing, or use of property and assets or the conduct of its business
makes such qualification necessary, except where the failure to so qualify will
not have a Material Adverse Effect. A complete and correct copy of the
Certificate of Incorporation and By-Laws of the Company, as currently in effect,
have been delivered to you, and no changes therein will be made subsequent to
the date hereof and prior to the Closing Date.
(f) The Company has no subsidiaries (as defined in the Regulations).
(g) The authorized capital stock of the Company consists of
15,000,000 shares of Common Stock, of which 2,082,239 shares of Common Stock are
issued and outstanding, and 3,000,000 shares of Preferred Stock, par value $0.01
per share, no shares of which are outstanding. Each outstanding share of Common
Stock is validly authorized and issued, fully paid, and nonassessable, without
any personal liability attaching to the ownership thereof, and has not been
issued and is not owned or held in violation of any preemptive or similar rights
of shareholders. There is no commitment, plan, or arrangement to issue, and no
outstanding option, warrant, or
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other right calling for the issuance of, any share of capital stock of the
Company or any security or other instrument which by its terms is convertible
into, or exercisable or exchangeable for, shares of capital stock of the
Company, except as may be properly described in the Prospectus. There is
outstanding no security or other instrument which by its terms is convertible
into, or exercisable or exchangeable for, capital stock of the Company, except
as may be properly described in the Prospectus. The certificates evidencing the
shares of Common Stock are in due and proper form.
(h) The financial statements of the Company included in the
Registration Statement and the Prospectus fairly present, with respect to the
Company, the financial position, the results of operations, the cash flows, and
the other information purported to be shown therein at the respective dates and
for the respective periods to which they apply. Such financial statements have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, and are in accordance with
the books and records of the Company. Coopers & Lybrand L.L.P., the accountants
whose report on the audited financial statements is filed with the Commission as
a part of the Registration Statement, are, and during the periods covered by its
report included in the Registration Statement and the Prospectus were,
independent certified public accountants with respect to the Company within the
meaning of the Securities Act and the Regulations. The selected and summary
financial information included in the Registration Statement and the Prospectus
present fairly the information shown therein and have been compiled on a basis
substantially consistent with the financial statements presented therein. No
other financial statements are required by Form SB-2 or otherwise to be included
in the Registration Statement or the Prospectus. There has at no time been a
material adverse change in the financial condition, results of operations,
business, properties, assets, liabilities or future prospects of the Company
from the latest information set forth in the Registration Statement or the
Prospectus, except as may be described in the Prospectus.
(i) The Company has a duly authorized and outstanding capitalization
as disclosed in the Prospectus under "Capitalization" and will have the adjusted
capitalization set forth therein at the Closing Date (based on the assumptions
set forth therein). The financial information and data set forth in the
Prospectus under "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Dilution," "Capitalization," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business," and "Management," are fairly presented and prepared on a basis
consistent with the audited financial statements of the Company.
(j) There is no litigation, arbitration, claim, governmental or
other proceeding (formal or informal), or investigation pending, or, to the best
knowledge of the Company, threatened with respect to the Company or any of its
operations, businesses, properties, or assets, except as may be described in the
Prospectus or such as individually or in the aggregate do not now have, and will
not in the future have, a Material Adverse Effect. The Company is not in
violation of, or in default with respect
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to, any law, rule, regulation, order, judgment, or decree, except as may be
described in the Prospectus or such as in the aggregate do not now have, and
will not in the future have, a Material Adverse Effect nor is the Company
currently required to take any action in order to avoid any such violation or
default.
(k) The Company has good and marketable title to all properties and
assets which the Prospectus indicates are owned by it, free and clear of all
liens, security interests, pledges, charges, encumbrances, and mortgages
(collectively "Liens"), except as may be described in the Prospectus. The
Company does not own any real property. No real property, leased, licensed, or
used by the Company lies in an area which is, or to the knowledge of the Company
will be, subject to zoning, use, or building code restrictions which would
prohibit the present or contemplated use thereof in a material respect, and, no
state of facts relating to the actions or inaction of another person or entity
or his or its ownership, leasing, licensing, or use of any real or personal
property exists or will exist which would prevent, the continued effective,
leasing, licensing, or use of such real property in any material respect in the
business of the Company as presently conducted or as the Prospectus indicates it
contemplates conducting, except as may be described in the Prospectus.
(l) Except as described in the Prospectus, neither the Company, nor
to the knowledge of the Company, any other party is now, or is expected by the
Company to be, in violation or breach of, or in default with respect to, any
provision of any contract, agreement, instrument, lease, license, arrangement,
or understanding to which the Company is a party, and each such contract,
agreement, instrument, lease, license, arrangement, and understanding is in full
force and effect and, to the knowledge of the Company, is the legal, valid, and
binding obligation of the parties thereto and is enforceable as to them in
accordance with its respective terms, except in each case, that which would not
have a Material Adverse Effect. The Company enjoys peaceful and undisturbed
possession under all leases and licenses under which it is operating, except
where the failure of such possession would not have a Material Adverse Effect.
The Company is not in violation or breach of, or in default with respect to, any
term of its Certificate of Incorporation and By-Laws.
(m) The Company owns or possesses adequate licenses or other rights
to use, free and clear of all liens, charges, claims, encumbrances and
restrictions of any kind whatsoever, all patents, patent rights, inventions,
trade secrets, technology, licenses, know-how, proprietary techniques, including
processes and substances, trademarks, service marks, trade names, and copyrights
described or referred to in the Prospectus as owned or used by it or which are
necessary for the conduct of its business as currently conducted as described in
the Prospectus. The Company does not own any patent or patent rights. To the
best knowledge of the Company, all such patents, patent rights, licenses,
trademarks, service marks, and copyrights are valid and enforceable, are not
being infringed by any third parties which infringement could, singly or in the
aggregate, have a Material Adverse Effect, and are uncontested by any third
party. Except as disclosed in the Registration Statement and the Prospectus, the
Company is not obligated or under any liability whatsoever to make any payments
by
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<PAGE>
way of royalties, fees or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, tradename, copyright, trade
secret, know-how, technology or other intangible asset, with respect to the use
thereof or in connection with the conduct of its business or otherwise. The
Company has no knowledge of, nor has it received any notice of, infringement of,
or conflict with, asserted rights of others with respect to any patents, patent
rights, inventions, trade secrets, licenses, know-how, proprietary techniques,
including processes and substances, trademarks, service marks, trade names, or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling, or finding could have a Material Adverse Effect.
(n) The Company owns and has the right to use all trade secrets,
know-how (including all other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), inventions, designs,
processes, works of authorship, computer programs and technical data and
information that are material to its business, properties and operations as
currently conducted.
(o) Neither the Company, nor, to the best knowledge of the Company,
any director, officer, agent, employee, or other person associated with, or
acting on behalf of, the Company has, directly or indirectly used any corporate
funds for unlawful contributions, gifts, entertainment, or other unlawful
expenses relating to political activity, made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds, violated any provision of the United
States Foreign Corrupt Practices Act of 1977, as amended, or made any bribe,
rebate, payoff, influence payment, kickback, or other unlawful payment. The
Company's internal accounting controls and procedures are sufficient to cause
the Company to comply in all respects with the Foreign Corrupt Practices Act of
1977, as amended.
(p) The Company has all requisite power and authority to execute,
deliver, and perform this Agreement and the Underwriter's Warrants. All
necessary corporate proceedings of the Company have been duly taken to authorize
the execution, delivery and performance by the Company of this Agreement and the
Underwriter's Warrants. This Agreement has been duly authorized, executed, and
delivered by the Company and is the legal, valid, and binding obligation of the
Company, and is enforceable as to the Company in accordance with its terms. The
Underwriter's Warrants have been duly authorized by the Company and, when
executed and delivered by the Company, will be legal, valid, and binding
obligations of the Company, each enforceable as to the Company in accordance
with its terms. No consent, authorization, approval, order, license,
certificate, or permit of or from, or declaration or filing with any federal,
state, local, or other governmental authority or any court or other tribunal is
required by the Company for the execution, delivery, or performance by the
Company of this Agreement or the Underwriter's Warrants, except filings under
the Securities Act which have been or will be made before the Closing Date, and
except as may be required by the NASD or under "blue sky" or securities laws,
which have been obtained at or prior to the date of this Agreement. No consent
of any party to any contract, agreement, instrument, lease, license,
arrangement, or understanding to which the
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<PAGE>
Company is a party, or to which any of its properties or assets are subject, is
required for the execution, delivery, or performance of this Agreement and the
Underwriter's Warrants, and the execution, delivery, and performance of this
Agreement and the Underwriter's Warrants will not violate, result in a breach
of, conflict with, result in the creation or imposition of any lien, charge, or
encumbrance upon any properties or assets of the Company pursuant to the terms
of, or, with or without the giving of notice or the passage of time or both,
entitle any party to terminate or call a default under, any such contract,
agreement, instrument, lease, license, arrangement, or understanding, or
violate, result in a breach of, or conflict with any term of the Certificate of
Incorporation and By-Laws of the Company or violate, result in a breach of, or
conflict with, any law, rule, regulation, order, judgment, or decree binding on
the Company or to which any of its operations, businesses, properties, or assets
are subject.
(q) The Stock is validly authorized and, when issued and delivered
in accordance with this Agreement, will be validly issued, fully paid, and
nonassessable, without any personal liability attaching to the ownership
thereof, and will not be issued in violation of any preemptive or similar rights
of stockholders, and the Underwriter will receive good title to the Stock
purchased by it, free and clear of all liens, security interests, pledges,
charges or encumbrances, stockholders' agreements, and voting trusts. The Stock
conforms to all statements relating thereto contained in the Registration
Statement and the Prospectus.
(r) The Warrant Shares are validly authorized and have been duly and
validly reserved for issuance and, when issued and delivered upon exercise of
the Underwriter's Warrants in accordance with the terms thereof, will be validly
issued, fully paid, and nonassessable, without any personal liability attaching
to the ownership thereof, and will not be issued in violation of any preemptive
or similar rights of stockholders, and the holders of the Underwriter's Warrants
will receive good title to the securities purchased by them upon the exercise of
the Underwriter's Warrants, free and clear of all liens, security interests,
pledges, charges or encumbrances, stockholders' agreements and voting trusts.
The Underwriter's Securities conform in all material respects to all statements
relating thereto contained in the Registration Statement and the Prospectus.
(s) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as may
otherwise be described in the Registration Statement or Prospectus, the Company
has not (i) issued any securities or incurred any liability or obligation,
primary or contingent, for borrowed money, (ii) entered into any material
transaction not in the ordinary course of business, (iii) declared or paid any
dividend on its shares of Common Stock, or (iv) experienced any changes or any
development which could reasonably be expected to have a Material Adverse
Effect.
(t) Neither the Company, nor any of its officers, directors, or
affiliates (as defined in the Regulations), has taken or will take, directly or
indirectly, prior to the termination of the offering contemplated by this
Agreement, any action designed
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<PAGE>
to stabilize or manipulate the price of any security of the Company, or which
has caused or resulted in, or which might in the future reasonably be expected
to cause or result in, stabilization or manipulation of the price of any
security of the Company, to facilitate the sale or resale of any of the Stock.
(u) The Company has obtained from each of its directors, officers
(other than its Vice President of Operations) and stockholders designated by the
Underwriter a written agreement, in form and substance satisfactory to counsel
for the Underwriter, that, for a period of 18 months from the Effective Date he,
she, or it will not, without the prior written consent of the Underwriter offer,
pledge, sell, contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or any security
or other instrument which by its terms is convertible into, or exercisable or
exchangeable for, shares of Common Stock or other securities of the Company,
including, without limitation, any shares of Common Stock issuable pursuant to
the terms of any employee stock options, provided, however, that such persons
may offer, sell, contract to sell, grant an option for the sale of, or otherwise
dispose of all or any part of his, her, or its shares of Common Stock or other
such security or instrument of the Company during such period if such
transaction is private in nature and the transferee of such shares of Common
Stock or other securities or instruments agrees, prior to such transaction, to
be bound by all of the provisions of such agreement.
(v) The Company is not, and does not intend to conduct its business
in a manner in which it would be required to register as, an "investment
company" as defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and the rules and regulations promulgated thereunder.
(w) All issuances and sales of securities by the Company prior to
the date hereof were exempt from registration under the Securities Act and
complied in all respects with the provisions of all applicable federal and state
securities laws. No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company because of the filing
or effectiveness of the Registration Statement, which right has not been waived,
except as set forth in the Prospectus, and no holder of any security of the
Company has the right to demand registration of any security owned by such
holder during the period ending 18 months after the date of the Prospectus,
except as set forth in the Prospectus.
(x) Except as may be set forth in the Prospectus, the Company has
not incurred any liability for a fee, commission, or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by this Agreement.
(y) No officer, director, or to the knowledge of the Company, any
shareholder of the Company has any affiliation or association with the NASD or
any member thereof, except as disclosed in writing to the Underwriter.
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(z) The Company has filed all necessary federal, state, local, and
municipal, and all foreign income and franchise tax returns and other reports
required to be filed and has paid all taxes shown as due thereon and all
assessments received by it to the extent that the same have become due. The
provisions for income taxes payable, if any, shown on the financial statements
filed with or as part of the Registration Statement and the Prospectus are
sufficient for all accrued and unpaid foreign and domestic taxes, whether or not
disputed, and for all periods to and including the dates of such financial
statements, and there is no material tax deficiency which has been, or, to the
knowledge of the Company, might be, asserted against the Company. Except as
disclosed in writing to the Underwriter, or set forth in the Registration
Statement and the Prospectus, the Company has not executed or filed with any
taxing authority, foreign or domestic, any agreement extending the period for
assessment or collection of any income taxes and the Company is not a party to
any pending action or proceeding by any foreign or domestic governmental agency
for assessment or collection of taxes, and no claims for assessment or
collection of overdue taxes have been asserted against the Company.
(aa) To the best knowledge of the Company, none of the activities or
business of the Company is in violation of, or will cause the Company to
violate, any law, rule, regulation, or order of the United States, or any
country, municipality or locality, or of any agency or body of the United States
or of any state, municipality or locality thereof, the violation of which would
have a Material Adverse Effect.
(ab) The Common Stock has been approved for quotation on the Nasdaq
Smallcap Market subject to official notice of issuance.
(ac) The Company maintains insurance covering its properties,
operations, personnel and businesses. The Company has not been refused any
casualty insurance coverage sought or applied for; and the Company has no reason
to believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
have a Material Adverse Effect. All such insurance is outstanding and duly in
force on the date hereof.
(ad) The Company is in compliance with all applicable laws or
regulations relating to pollution or protection of human health or the
environment ("Environmental Laws") in the states and countries in which it has
facilities or operates, except where the failure to be in compliance would not
have a Material Adverse Effect. The Company has not authorized, conducted or has
knowledge of the generation, transportation, storage, use, treatment, disposal
or release of any hazardous substance, hazardous waste, hazardous material,
hazardous constituent, toxic substance, pollutant, contaminant, petroleum
product, natural gas, liquified gas or synthetic gas, defined or regulated under
any Environmental Law on, in or under any property currently leased or by any
means controlled by the Company (the "Real Property") in violation of any
applicable law, except for any violation which would not have a Material Adverse
Effect; there is no pending or, to the Company's knowledge, threatened claim,
action, litigation
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or any administrative agency proceeding involving the Company or any of its
properties, nor has the Company received any written notice, or any oral notice
to any executive officer of the Company or any other employee responsible for
receipt of any such notice, from any governmental entity or third party, that
(A) alleges a violation of any Environmental Laws by the Company or any person
or entity whose liability for a violation of an Environmental Law the Company
has retained or assumed either contractually or by operation of law, which
liability or violation could be reasonably expected to have a Material Adverse
Effect, (B) alleges the Company is a liable party under the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 et
seq., or any state superfund law, (C) alleges possible contamination of the
environment by the Company or (D) alleges possible contamination of the Real
Property.
(ae) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (A) transactions are executed in
accordance with management's general or specific authorizations, (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (C) access to assets is permitted only in
accordance with management's general or specific authorization and (D) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(af) The Company is not involved in any labor dispute and, to the
knowledge of the Company, no such dispute is threatened.
(ag) The Company is not presently doing business with the government
of Cuba or with any person or affiliate located in Cuba. If, at any time after
the date on which the Registration Statement is declared by the Commission to be
effective under the Securities Act or with the Florida Department of Banking and
Finance (the "Florida Department"), whichever is later, and prior to the end of
the period referred to in the first clause of Section 2(b) hereof, the Company
commences engaging in business with the government of Cuba or with any person or
affiliate located in Cuba, the Company will so inform the Florida Department
within 90 days after such commencement of business in Cuba, and, during the
period referred to in Section 2(b) hereof, will inform the Florida Department
within 90 days after any change occurs with respect to previously reported
information.
3. Purchase, Sale, and Delivery of the Stock and the
Underwriter's Warrants.
(a) On the basis of the representations, warranties, covenants, and
agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to the
Underwriter, and the Underwriter agrees to purchase from the Company, the Firm
Stock.
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The purchase price per share of the Firm Stock to be paid by the
Underwriter shall be $______. The initial public offering price per share of the
Firm Stock shall be $______.
Payment for the Firm Stock by the Underwriter shall be made by
certified or official bank check or wire transfer and payable in immediately
available funds payable to the order of the Company, at the offices of Hampshire
Securities Corporation, 640 Fifth Avenue, 4th Floor, New York, New York 10019,
or at such other place in the New York City metropolitan area as the Underwriter
shall determine and advise the Company by at least two full days' notice in
writing, upon delivery of the Firm Stock to the Underwriter for its account.
Such delivery and payment shall be made at 10:00 a.m., New York City local time,
on the third or fourth business day (as permitted under Rule 15c6-1 under the
Securities Exchange Act of 1934, as amended) following the time of the initial
public offering, as defined in Section 11(a) hereof, or at such other time as
shall be agreed upon between the Underwriter and the Company. The time and date
of such delivery and payment are hereinafter referred to as the "Closing Date."
Certificates representing the Firm Stock shall be registered in such
name or names and in such authorized denominations as the Underwriter may
request in writing at least two full business days prior to the Closing Date.
The Company shall permit the Underwriter to examine and package such
certificates for delivery at least one full business day prior to the Closing
Date.
(b) The Company hereby grants to the Underwriter an Over-allotment
Option to purchase up to 300,000 shares of Common Stock, as may be necessary to
cover over-allotments, at the same purchase price per share to be paid by the
Underwriter to the Company for the Firm Stock as provided for in this Section 3.
The Over-allotment Option may be exercised only to cover over-allotments in the
sale of Stock by the Underwriter. The Over-allotment Option may be exercised by
the Underwriter on the basis of the representations, warranties, covenants, and
agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, at any time and from time to time on or before the
45th day following the Effective Date by written notice by the Underwriter to
the Company. Such notice shall set forth the aggregate number of shares of
Additional Stock as to which the Over-allotment Option is being exercised, the
name or names in which the certificates representing the Additional Stock are to
be registered, the authorized denominations in which the Additional Stock are to
be registered, and the time and date, as determined by the Underwriter, when
such shares of Additional Stock are to be delivered (each such time and date are
hereinafter referred to as an "Additional Closing Date"), provided, however,
that no Additional Closing Date shall be earlier than the Closing Date nor
earlier than the second business day after the date on which the notice of the
exercise of the Over-allotment Option shall have been given nor later than the
eighth business day after the date on which such notice shall have been given.
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In the event that the Company declares or pays a dividend or a
distribution on the shares of Common Stock, whether in the form of cash, shares
of Common Stock or other consideration, prior to the Additional Closing Date,
such dividend or distribution shall also be paid on the Additional Stock on the
later of the Additional Closing Date and the date on which such dividend or
distribution is payable.
Payment for the Additional Stock by the Underwriter shall be made by
certified or official bank check or wire transfer and payable in immediately
available funds, payable to the order of the Company at the offices of Hampshire
Securities Corporation, 640 Fifth Avenue, 4th Floor, New York, New York 10019,
or at such other place in the New York City metropolitan area as the Underwriter
shall determine and advise the Company by at least two full days' notice in
writing, upon delivery of the Additional Stock to the Underwriter.
Certificates for the Additional Stock shall be registered in such
name or names and in such authorized denominations as the Underwriter may
request in writing at least two full business days prior to the Additional
Closing Date with respect thereto. The Company shall permit the Underwriter to
examine and package such certificates for delivery at least one full business
day prior to the Additional Closing Date with respect thereto.
(c) The Company hereby agrees to issue and sell to the Underwriter
and/or its designees on the Closing Date the Underwriter's Warrants to purchase
the Warrant Shares for an aggregate purchase price for the Underwriter's
Warrants equal to $200.00.
Delivery and payment for the Underwriter's Warrants shall be made on
the Closing Date. The Company shall deliver to the Underwriter, upon payment
therefor, certificates representing the Underwriter's Warrants in the name or
names and in such authorized denominations as the Underwriter may request. The
Underwriter's Warrants shall be exercisable for a period of four years
commencing one year from the date on which the Registration Statement was
declared effective under the Securities Act at an initial exercise price per
Warrant Share equal to $____.
4. Offering. The Underwriter is to make a public offering of the
Firm Stock as soon, on or after the date on which the Registration Statement
becomes effective under the Securities Act, as the Underwriter deems it
advisable so to do. The Firm Stock is to be initially offered to the public at
the initial public offering price as provided for in Section 3(a) (such price
being hereinafter referred to as the "public offering price"). After the initial
public offering, the Underwriter may from time to time increase or decrease the
public offering price, in the sole discretion of the Underwriter, by reason of
changes in general market conditions or otherwise.
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5. Covenants. The Company covenants with the Underwriter that it
will:
(a) Use its best efforts to cause the Registration Statement to
become effective under the Securities Act as promptly as possible, and notify
the Underwriter and counsel to the Underwriter immediately, and confirm such
notice in writing, (i) when the Registration Statement and any post-effective
amendment thereto, (ii) of the receipt by the Company of any comments from the
Commission or the "blue sky" or securities authority of any jurisdiction
regarding the Registration Statement, any post-effective amendment thereto, the
Prospectus, or any amendment or supplement thereto, (iii) of the filing with the
Commission of any supplement to the Prospectus, and (iv) of the receipt by the
Company of any notification with respect to a Stop Order by the Commission. The
Company will use its best efforts to prevent the issuance of any Stop Order and,
if any Stop Order is issued, to obtain the lifting thereof as promptly as
possible. If the Registration Statement has become or becomes effective under
the Securities Act with a form of prospectus omitting Rule 430A information, or
filing of the Prospectus with the Commission is otherwise required under Rule
424(b) of the Regulations, the Company will file with the Commission the
Prospectus, properly completed, pursuant to Rule 424(b) of the Regulations
within the time period prescribed and will provide evidence satisfactory to the
Underwriter of such timely filing.
(b) During the time when a prospectus relating to the Firm Stock or
the Additional Stock is required to be delivered hereunder or under the
Securities Act or the Regulations, comply with all requirements imposed upon it
by the Securities Act, as now existing and as hereafter amended, and by the
Regulations, as from time to time in force, so far as necessary to permit the
continuance of sales of, or dealings in, the Firm Stock and the Additional Stock
in accordance with the provisions hereof and the Prospectus. If, at any time
when a prospectus relating to the Firm Stock or the Additional Stock is required
to be delivered hereunder or under the Securities Act or the Regulations, any
event shall have occurred as a result of which, in the reasonable opinion of
counsel for the Company or of counsel for the Underwriter, the Registration
Statement or the Prospectus as then amended or supplemented contains any untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, or
if, in the opinion of either of such counsel, it is necessary at any time to
amend or supplement the Registration Statement or the Prospectus to comply with
the Securities Act or the Regulations, the Company will immediately notify the
Underwriter and promptly prepare and file with the Commission an appropriate
amendment or supplement (in form and substance reasonably satisfactory to the
Underwriter and counsel to the Underwriter) which will correct such statement or
omission or which will effect such compliance and will use its best efforts to
have any such amendment declared effective under the Securities Act as soon as
possible. The Company will not file any amendment of or supplement to the
Registration Statement or Prospectus which is not approved by the Underwriter
after reasonable notice from the Company to the Underwriter, which approval
shall not be unreasonably withheld or delayed.
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(c) Deliver without charge to the Underwriter such number of copies
of each Preliminary Prospectus as may reasonably be requested by such
Underwriter and, as soon as the Registration Statement, or any amendment
thereto, becomes effective under the Securities Act or a supplement is filed
with the Commission, deliver without charge to the Underwriter one signed copy
of the Registration Statement, including exhibits, or such amendment thereto, as
the case may be, and two copies of any supplement thereto, and deliver without
charge to the Underwriter such number of copies of the Prospectus, the
Registration Statement, and amendments and supplements thereto, if any, without
exhibits, as the Underwriter may request for the purposes contemplated by the
Securities Act.
(d) Endeavor in good faith, in cooperation with the Underwriter, at
or prior to the time the Registration Statement becomes effective under the
Securities Act, to qualify the Stock for offering and sale under the "blue sky"
or securities laws of such jurisdictions as may be designated by the
Underwriter, provided, however, that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction to which it is not then subject or which would
require shares of Common Stock owned by any shareholder of the Company to be
escrowed or locked-up, except as agreed in advance by the Company, the
Underwriter and each such shareholder. In each jurisdiction where such
qualification shall be effected, the Company will, unless the Underwriter agrees
in writing that such action is not at the time necessary or advisable, file and
make such statements or reports at such times as are or may be required by the
laws of such jurisdiction.
(e) Make generally available, within the meaning of Section 11(a) of
the Securities Act and the Regulations, to its security holders as soon as
practicable, but not later than 45 days after the end of the 12-month period
beginning at the end of the fiscal quarter of the Company during which the
Effective Date occurs (or 90 days, if such 12-month period coincides with the
Company's fiscal year), an earnings statement, which need not be certified by
independent certified public accountants unless required by the Securities Act
or the Regulations, but which shall satisfy the provisions of Section 11(a) of
the Securities Act and the Regulations, covering a period of at least 12 months
beginning after the date on which the Registration Statement was declared
effective under the Securities Act. The Company will furnish to its stockholders
a copy of its annual reports containing financial statements audited by the
Company's independent accountants and quarterly reports containing unaudited
financial information for the first three quarters of each year.
(f) For a period of 18 months after the date of the Prospectus, not,
without the prior written consent of the Underwriter, offer, issue, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Common Stock or other securities of the
Company, or any security or other instrument which by its terms is convertible
into, or exercisable or exchangeable for, shares of Common Stock, except as
contemplated by Section 3 hereof and except for (i) the issuance of stock
options, or shares of Common Stock issuable upon the exercise
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thereof, which have been or may be granted pursuant to the Company's existing
stock option plans, up to an aggregate of 378,929 shares of Common Stock, as
described in the Prospectus, (ii) upon the exercise of warrants and options
outstanding on the date hereof, as described in the Prospectus, (iii) the
issuance of the Warrant Shares upon exercise of the Underwriter's Warrants, and
(iv) a private transaction in which the transferee prior to the transfer agrees
to be bound by all the provisions of such agreement.
(g) For a period of five years after Effective Date furnish the
Underwriter without charge, the following:
(i) within 90 days after the end of each fiscal year, one copy
of financial statements certified by independent certified public accountants,
including a balance sheet, statement of income, and statement of changes in cash
flows of the Company and its then existing subsidiaries, if any, with supporting
schedules, prepared in accordance with generally accepted accounting principles
as at the end of such fiscal year and for the 12 months then ended, which may be
on a consolidated basis;
(ii) as soon as practicable after they have been sent to
stockholders of the Company or filed with, or furnished to, the Commission or
the NASD, one copy of each annual and interim financial and other report or
communication sent by the Company to its stockholders or filed with, or
furnished to, the Commission or the NASD;
(iii) upon request, as soon as practicable, one copy of every
press release and every material news item and article in respect of the
Company, including any subsidiary, or its affairs which was released by the
Company; and
(iv) such additional documents and information with respect to
the Company, and its affairs, as the Underwriter may from time to time
reasonably request, provided, however, that such additional documents and
information shall be received by the Underwriter on a confidential basis, unless
otherwise disclosed to the public, and shall not be used in violation of the
laws of the federal securities laws and the rules and regulations promulgated
thereunder.
(h) Apply the net proceeds received by the Company from the offering
contemplated by this Agreement in the manner set forth under the heading "Use of
Proceeds" in the Prospectus.
(i) Furnish to the Underwriter as early as practicable prior to the
Closing Date and each Additional Closing Date, if any, as the case may be, but
not less than two full business days prior thereto, a copy of the latest
available unaudited interim financial statements of the Company which have been
read by the Company's independent certified public accountants, as stated in
their letters to be furnished pursuant to Section 7(f) hereof.
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(j) File no amendment or supplement to the Registration Statement or
Prospectus at any time, whether before or after the date on which the
Registration Statement was declared effective under the Securities Act, unless
such filing shall comply with the Securities Act and the Regulations, and unless
the Underwriter shall previously have been advised of such filing and furnished
with a copy thereof, and the Underwriter shall have approved such filing in
writing, such approval not to be unreasonably withheld. Until the later of (i)
the completion by the Underwriter of the distribution of the Stock (but in no
event more than nine months after the date on which the Registration Statement
shall have been declared effective under the Securities Act) and (ii) 25 days
after the date on which the Registration Statement shall have been declared
effective under the Securities Act, the Company will prepare and file with the
Commission, promptly upon the Underwriter's request, any amendments or
supplements to the Registration Statement or the Prospectus which, in the
Underwriter's reasonable opinion and the reasonable opinion of its counsel, may
be necessary or advisable in connection with the distribution of the Stock.
(k) File timely with the Commission an appropriate form with respect
to the registration of the shares of Common Stock pursuant to Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") to become
effective under the Exchange Act concurrently with the effectiveness of the
Registration Statement under the Securities Act and comply with all
registration, filing, and reporting requirements of the Exchange Act, which may
from time to time be applicable to the Company.
(l) Comply with all provisions of all undertakings contained in the
Registration Statement.
(m) Prior to the later of 25 days after the Effective Date or any
Additional Closing Date, as the case may be, issue no press release or, subject
to Sections 5(b) and (j) hereof, any other communication directed to the general
public or the stockholders of the Company as a whole, directly or indirectly,
and hold no press conference with respect to the Company, the financial
condition, results of operations, business, properties, assets, liabilities or
future prospects of the Company or this offering, without the prior written
consent of the Underwriter, which consent shall not be unreasonably withheld.
(n) Make all filings required to maintain the inclusion of the
Company Stock on the Nasdaq Smallcap Market (or the Nasdaq National Market, as
the case may be) for at least five years from the date of this Agreement.
(o) On the Closing Date, sell to the Underwriter, the Underwriter's
Warrants at an aggregate purchase price of $200.00, which Underwriter's Warrants
shall be substantially in the form last filed with the NASD.
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(p) Until expiration of the Underwriter's Warrants, keep reserved
sufficient shares of Common Stock for issuance upon exercise of the
Underwriter's Warrants.
(q) Deliver to the Underwriter, without charge, within a reasonable
period after the last Additional Closing Date or the expiration of the period
during which the Underwriter may exercise the Over-allotment Option, a total of
five sets of bound volumes of the Registration Statement and all related
materials to the individuals designated by the Underwriter or counsel to the
Underwriter.
(r) For a period of three years from the Effective Date, provide, at
its sole expense, to the Underwriter copies of the Company's daily transfer
sheets, if so requested by the Underwriter.
(s) For a period of three years from the Effective Date, the Company
shall use its best efforts to cause two persons to be elected to the Company's
Board of Directors who are deemed to be independent of the Company's management
within the meaning of the rules of the Nasdaq Smallcap Market.
(t) For a period of three years from the Effective Date, the
Underwriter shall have the right to appoint a designee as an observer of the
Company's Board of Directors. Such observer will have the right to attend all
meetings of the Board of Directors. Such observer shall be entitled to receive
reimbursement for all out-of-pocket expenses incurred in attending such
meetings, including, but not limited to, food, lodging and economy
transportation. The Underwriter shall be given notice of such meetings at the
same time and in the same manner as directors of the Company are informed. To
the extent permitted by law, the Underwriter and such observer shall be
indemnified to the same extent as the independent directors of the Company. The
Company will use its best efforts to purchase directors and officers insurance
in an amount of not less than $2,000,000; provided, however, that the Company
shall not be required to pay more than $50,000 per year in order to maintain
such insurance, and if insurance in such amount is not available at such cost,
the Company shall purchase that amount of such insurance which is available at a
cost of $50,000 per year.
(u) Maintain key-person life insurance payable to the Company on the
life of Kenneth D. Van Meter, President and Chief Executive Officer of the
Company, and Glenn West, Executive Vice President and Chief Technical Officer of
the Company, each in the amount of at least $1,000,000, for a period of time
equal to three years from the Effective Date, or such shorter time if the
employment agreements between the Company and such officers are no longer in
effect.
(v) Cause stockholders owning at least five percent (5%) of the
Company's outstanding shares of Common Stock as of the date hereof, and use its
best efforts to cause stockholders owning at least five percent (5%) of the
Company's outstanding shares of Common Stock immediately following the Closing
Date, to grant to the Underwriter a preferential right for a period of eighteen
months following the
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<PAGE>
Effective Date to sell for the account of such holder any securities sold
pursuant to Rule 144 under the Securities Act. Each of such holders shall agree
to consult with the Underwriter with regard to any such sale and will offer the
Underwriter the exclusive opportunity to sell such securities on terms at least
as favorable to such holder as such holder can secure elsewhere. If the
Underwriter fails to accept in writing any such proposal for sale by such holder
within five (5) business days after receipt of a notice containing such
proposal, then the Underwriter shall have no claim or right with respect to any
such sales contained in such notice. If, thereafter, such proposal is modified
in any material respect, such holders shall adopt the same procedure as with
respect to the original proposal.
(w) Until the expiration of three years from the Effective Date, the
Company will not effect a change in the independent certified public accountants
for the Company unless either the Company has received the Underwriter's prior
written consent or such substitute independent certified public accountant is
one of the "big six" firms.
6. Payment of Expenses. The Company hereby agrees to pay all
expenses (other than fees and disbursements of counsel for the Underwriter,
except as provided in subdivision (c) of this Section 6) in connection with (a)
the preparation and printing of the Registration Statement including all
amendments thereto, the Prospectus, this Agreement and related other
underwriting documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments or supplements
thereto supplied to the Underwriter in quantities as hereinabove stated, (b) the
issuance, sale, transfer, and delivery (as applicable) of the Securities,
including any transfer or other taxes payable thereon, (c) the qualification of
the Securities under state or foreign "blue sky" or securities laws, including
the costs of printing and mailing any preliminary and final "Blue Sky Survey"
and the fees and disbursements of counsel for the Underwriter in connection
therewith in the amount of up to $30,000 ($45,000 if Nasdaq National Market
listing is not obtained) plus disbursements in connection therewith, (d) the
filing fees payable to the NASD, and the jurisdictions in which such
qualification is sought, (e) any fees relating to the listing of the shares of
Common Stock on the Nasdaq Smallcap Market, (f) the cost of printing
certificates representing shares of Common Stock and the Underwriter's Warrants
(g) the fees of the transfer agent for the shares of Common Stock, (h) the cost
of publication of "tombstone" advertisements with respect to the offering, (i)
all expenses relating to the "roadshow" except the Underwriter' travel and
lodging, and (j) a non-accountable expense allowance equal to three percent (3%)
of the gross proceeds of the sale of the Firm Stock and any Additional Stock
with respect to which the Over-allotment Option has been exercised to the
Underwriter on the Closing Date or the Additional Closing Date, as the case may
be. Notwithstanding the foregoing, if the offering contemplated hereby should be
terminated, the Company agrees to pay the Underwriter only the out-of-pocket
expenses incurred by the Underwriter in connection with the Agreement and the
proposed offer, sale, and delivery of Securities.
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7. Conditions of Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Firm Stock and the Underwriter to
purchase and pay for the Additional Stock, as provided herein, and the
obligation of the Underwriter to purchase and pay for the Underwriter's
Warrants, each as provided herein, shall be subject, in the discretion of the
Underwriter's, to the continuing accuracy of the representations and warranties
of the Company contained herein and in each certificate and document
contemplated under this Agreement to be delivered to the Underwriter, as of the
date hereof and as of the Closing Date (or any Additional Closing Date, as the
case may be), to the performance by the Company of its obligations hereunder,
and to the following conditions:
(a) The Registration Statement shall have become effective under the
Securities Act not later than 6:00 P.M., New York City local time, on the date
of this Agreement or such later date and time as shall be consented to in
writing by the Underwriter, on or prior to the Closing Date, or any Additional
Closing Date, as the case may be, no Stop Order shall have been issued and no
proceeding shall have been initiated or threatened with respect to a Stop Order,
and any request by the Commission for additional information shall have been
complied with by the Company to the reasonable satisfaction of counsel for the
Underwriter. If required, the Prospectus shall have been filed with the
Commission in the manner and within the time period required by Rule 424(b)
under the Securities Act.
(b) At the Closing Date and any Additional Closing Date, as the case
may be, the Underwriter shall have received the opinion of Squadron, Ellenoff,
Plesent & Sheinfeld, LLP, counsel for the Company, dated the date of delivery,
addressed to the Underwriter, and in the form and scope satisfactory to counsel
for the Underwriter, with reproduced copies or signed counterparts thereof for
the Underwriter, to the effect that:
(i) the Company is a corporation duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
incorporation, with full corporate power and authority, to own, lease, license,
and use its properties and assets and to conduct its business in the manner
described in the Prospectus. To our knowledge, the Company is duly qualified to
do business as a foreign corporation and is in good standing as such in every
United States jurisdiction in which its ownership, leasing, licensing, or use of
property and assets or the conduct of its business makes such qualification
necessary, except where the failure to so qualify or be in good standing would
not have a Material Adverse Effect;
(ii) the authorized capital stock of the Company consists of
(1) 15,000,000 shares of Common Stock, of which 2,082,239 shares are outstanding
and (ii) 3,000,000 shares of Preferred Stock, par value $.01 per share, none of
which is outstanding. Except as disclosed in the Prospectus, each outstanding
share of Common Stock is validly authorized and issued, fully paid, and
nonassessable and, has not been issued and, to our knowledge, is not owned or
held in violation of any preemptive or similar rights of stockholders. To the
knowledge of such counsel, there is no
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commitment, plan, or arrangement to issue, and no outstanding option, warrant,
or other right calling for the issuance of, any share of capital stock of the
Company or any security or other instrument which by its terms is convertible
into, or exercisable or exchangeable for, capital stock of the Company except as
may be described in the Prospectus. Except as described in the Prospectus, to
our knowledge there is outstanding no security or other instrument which by its
terms is convertible into, or exercisable or exchangeable for, capital stock of
the Company. The certificates evidencing the Common Stock are in due and proper
form under Delaware law and the By-laws of the Company;
(iii) to the knowledge of such counsel, there is no
litigation, arbitration, governmental or other proceeding pending or threatened,
with respect to the Company or any of its operations, businesses, properties, or
assets, which is required to be described in the Prospectus except as may be
described in the Prospectus. To the knowledge of such counsel, the Company is
not in violation of, or in default with respect to, any law, rule, regulation,
order, judgment, or decree, except as may be described in the Prospectus or such
as individually or in the aggregate do not now have and will not in the future
have a Material Adverse Effect; nor is the Company required to take any action
in order to avoid any such violation or default;
(iv) the Company is not in violation or breach of, or in
default with respect to, any term of its Certificate of Incorporation or
By-Laws;
(v) the Company has all requisite corporate power and
authority to execute, deliver, and perform this Agreement and the Underwriter's
Warrants. All necessary corporate proceedings of the Company have been taken to
authorize the execution, delivery, and performance by the Company of this
Agreement and the Underwriter's Warrants. This Agreement has been duly
authorized, executed, and delivered by the Company, is the legal, valid, and
binding obligation of the Company, and, subject to applicable bankruptcy,
insolvency, and other laws affecting the enforceability of creditors' rights
generally, is enforceable as to the Company in accordance with its terms (except
to the extent rights to indemnity hereunder or thereunder may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or equitable principles).
The Underwriter's Warrants have been duly authorized by the Company and, when
executed and delivered by the Company, will be legal, valid, and binding
obligations of the Company, each enforceable as to the Company in accordance
with its terms. No consent, authorization, approval, order, license,
certificate, or permit of or from, or declaration or filing with, any federal,
state, local, or other governmental authority or any court or other tribunal is
required by the Company for the execution, delivery, or performance by the
Company of this Agreement or the Underwriter's Warrants, except filings under
the Securities Act which have been made prior to the Closing Date or Additional
Closing Date, as the case may be, and except as may be required under "blue sky"
or securities laws or by the NASD as to which we express no opinion. No consent
of any party to any contract, agreement, instrument, lease, license,
arrangement, or understanding known to such counsel to which the Company is a
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party, or to which any of its properties or assets are subject, is required for
the execution, delivery, or performance of this Agreement and the Underwriter's
Warrants; and the execution, delivery, and performance of this Agreement and the
Underwriter's Warrants will not violate, result in a breach of, conflict with,
result in the creation or imposition of any lien, charge, or encumbrance upon
any properties or assets of the Company pursuant to the terms of, or, with or
result in a breach of, or conflict with any law, rule, regulation, or any order,
judgment, or decree known to us binding on the Company to which any of its
operations, business, properties, or assets are subject;
(vi) each share of Firm Stock to be delivered on the Closing
Date is validly authorized and, when issued and delivered in accordance with the
terms hereof, will be validly issued, fully paid, and nonassessable, and will
not be issued in violation of any preemptive or similar rights of stockholders.
Each share of Additional Stock to be delivered on the Closing Date or any
Additional Closing Date, as applicable, is validly authorized and, when issued
and delivered in accordance with the terms hereof, will be validly issued, fully
paid, and nonassessable, and will not be issued in violation of any preemptive
or similar rights of stockholders. The Underwriter will receive good title to
the shares of Firm Stock and Additional Stock purchased by them, respectively,
free and clear of all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts. The Additional Stock has been duly
and validly reserved for issuance. The Stock conforms in all material respects
to all statements relating thereto contained in the Registration Statement or
the Prospectus under the caption "Description of Capital Stock";
(vii) the Warrant Shares are validly authorized and have been
duly and validly reserved for issuance pursuant to the terms of the
Underwriter's Warrants. The Underwriter's Warrants have been duly and validly
issued and delivered. The Warrant Shares, when issued and delivered in
accordance with the Underwriter's Warrants, will be validly issued, fully paid,
and nonassessable, and will not have been issued in violation of any preemptive
rights of stockholders. The Underwriter, and any other holders of the
Underwriter's Warrants, will receive good title to the securities purchased by
them upon exercise of the Underwriter's Warrants, free and clear of all liens,
security interests, pledges, charges, encumbrance, stockholders' agreements, and
voting trusts. The Underwriter's Securities conform in all material respects to
all statements relating thereto contained in the Registration Statement or the
Prospectus;
(viii) to the knowledge of such counsel, each contract,
agreement, instrument, lease, or license required to be described in the
Registration Statement or the Prospectus has been accurately described therein
in all material respects, and each contract, agreement, instrument, lease, or
license required to be filed as an exhibit to the Registration Statement has
been filed with the Commission as an exhibit to the Registration Statement;
(ix) insofar as statements in the Prospectus purport to
summarize the provisions of contracts, agreements, instruments, leases, licenses
or United States
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law, such statements have been prepared or reviewed by such counsel and
accurately reflect the provisions purported to be summarized in all material
respects;
(x) the Company is not an "investment company" as defined in
the Investment Company Act and the rules and regulations thereunder and, if the
Company conducts its business as set forth in the Prospectus, will not become an
"investment company", and will not be required to be registered under the
Investment Company Act;
(xi) to the knowledge of such counsel, no person or entity has
the right to require registration of shares of Common Stock or other securities
of the Company because of the filing or effectiveness of the Registration
Statement, except by persons or entities which have waived such rights as
described in the Registration Statement and the Prospectus or who have been
furnished with a notice stating that such registration is not required as a
result of the determination by the Underwriter that the registration of the
shares would be materially adversely affected by such registration and that
therefore such registration is not required; and
(xii) the Registration Statement has become effective under
the Securities Act, the Prospectus has been filed in accordance with Rule 424(b)
of the Regulations, including the applicable time periods set forth therein, or
such filing is not required. To the knowledge of such counsel, no Stop Order has
been issued and no proceeding for that purpose has been instituted or
threatened.
In addition, such counsel shall state that in the course of
the preparation of the Registration Statement and Prospectus, such counsel have
participated in conferences with representatives of the Underwriter, officers
and representatives of the Company and representatives of the independent
certified public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus and related matters were
discussed, and that although such counsel have not verified the accuracy,
completeness or fairness of the statements contained in the Registration
Statement, the Prospectus, or any amendment or supplement thereto, and
accordingly are not passing thereon, such counsel have no reason to believe that
(A) the Registration Statement (except as to financial statements and other
financial data and schedules which are or should be contained therein, as to
which such counsel need express no opinion) on the Effective Date, contained any
untrue statement of a material fact required to be stated therein, or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein, not misleading, or (B) the Prospectus (except as to the
financial statements and other financial data and schedules which are or should
be contained therein, as to which such counsel need express no opinion), as of
its date or the date hereof, contained or contains any untrue statement of a
material fact or omitted or omits to state any material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading or (C) the Registration Statement and the Prospectus
do not comply as to form in all material respects with the requirements of the
Securities Act and the applicable Regulations. There is no
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assurance that all material facts were disclosed to such counsel or that such
counsel's familiarity with the Company is such that such counsel necessarily
recognized the materiality of such facts as were disclosed to such counsel, and
such counsel have relied to a large extent upon the statements of
representatives of the Company as to the materiality of the facts disclosed to
such counsel.
In rendering such opinion, counsel for the Company may rely
(A) as to matters involving the application of laws other than the laws of the
United States and the laws of the State of New York, to the extent counsel for
the Company deems proper and to the extent specified in such opinion, upon an
opinion or opinions (in form and substance reasonably satisfactory to counsel
for the Underwriter) of other counsel, reasonably acceptable to counsel for the
Underwriter, familiar with the applicable laws, in which case the opinion of
counsel for the Company shall state that reliance upon the opinion of such other
counsel by counsel for the Company and the Underwriter is reasonable; (B) as to
matters of fact, to the extent they deem proper, on certificates of responsible
officers of the Company; and (C) to the extent they deem proper, upon written
statements of certificates of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company; provided that copies of any such opinions, certificates, or
statements shall be annexed as exhibits to the opinion of counsel for the
Company.
(c) On or prior to the Closing Date and any Additional Closing Date,
as the case may be, the Underwriter shall have been furnished such information,
documents, certificates, and opinions as they may reasonably require for the
purpose of enabling them to review the matters referred to in Section 7(b), and
in order to evidence the accuracy, completeness, or satisfaction of any of the
representations, warranties, covenants, agreements, or conditions herein
contained, or as the Underwriter may reasonably request.
(d) At the Closing Date or any Additional Closing Date, as the case
may be, (i) the Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements which are required to be stated
therein in accordance with the Securities Act and the Regulations, and in all
material respects conform to the requirements thereof; and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) there shall have been, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, no material adverse change, or any development involving a
prospective material adverse change, in the business, properties, or condition
(financial or otherwise), results of operations, future prospects, capital
stock, long-term or short-term debt, or general affairs of the Company from that
set forth in the Registration Statement and the Prospectus, except changes which
the Registration Statement and Prospectus indicate might occur after the date on
which the Registration Statement becomes effective under the Securities Act, and
the Company shall not have incurred any material liabilities or entered into any
agreements not in
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<PAGE>
the ordinary course of business other than as referred to in the Registration
Statement and Prospectus, (iii) except as set forth in the Prospectus, no
litigation, arbitration, claim, governmental or other proceeding (formal or
informal), or investigation shall be pending, threatened, or in prospect (or any
basis therefor) with respect to the Company, or any of its respective
operations, businesses, properties, or assets which would be required to be set
forth in the Registration Statement, wherein an unfavorable decision, ruling, or
finding would have a Material Adverse Effect, and (iv) the Stock shall be quoted
upon the Nasdaq Smallcap Market.
(e) At the Closing Date and any Additional Closing Date, as the case
may be, the Underwriter shall have received a certificate of the President and
the Controller of the Company, dated the Closing Date or such Additional Closing
Date, as the case may be, to the effect, among other things, that (i) the
conditions set forth in Sections 7(a) and 7(d) have been satisfied, (ii) as of
the date of this Agreement and as of the Closing Date or such Additional Closing
Date, as the case may be, the representations and warranties of the Company
contained herein were and are accurate and correct, and (iii) as of the Closing
Date or such Additional Closing Date, as the case may be, the obligations to be
performed by the Company hereunder on or prior to such time have been fully
performed.
(f) At the time this Agreement is executed and at the Closing Date
and any Additional Closing Date, as the case may be, the Underwriter shall have
received a letter, addressed to the Underwriter, and in form and substance
satisfactory to the Underwriter, from Coopers & Lybrand L.L.P., independent
certified public accountants for the Company, dated the date of delivery:
(i) confirming that they are, and during the period covered by
their report(s) included in the Registration Statement and the Prospectus were,
independent certified public accountants with respect to the Company within the
meaning of the Securities Act and the published Regulations;
(ii) stating that, in their opinion, the financial statements
and schedules of the Company included in the Registration Statement examined by
them comply in form in all material respects with the applicable accounting
requirements of the Securities Act and the related published rules and
regulations;
(iii) stating that they have performed, with respect to the
interim financial statements of the Company included in the Registration
Statement, the procedures set out in Statement on Auditing Standards No. 71
("SAS 71") for a review of interim financial information and providing the
report of Coopers & Lybrand L.L.P as described in SAS 71 on the interim
financial statements of the Company;
(iv) stating that, on the basis of procedures (but not an
examination made in accordance with the generally accepted auditing standards)
consisting of a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim
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<PAGE>
financial statements), a reading of the latest available minutes of the
stockholders and Boards of Directors of the Company and committees of such Board
of Directors, inquires to certain officers and other employees of the Company
responsible for financial and accounting matters, and other specified procedures
and inquiries, nothing has come to their attention that caused them to believe
that: (A) the unaudited financial statements and schedules of the Company
included in the Registration Statement and Prospectus do not comply in form in
all material respects with the applicable accounting requirements of the
Securities Act and the Exchange Act and related published rules and regulations
under the Securities Act or the Exchange Act or are not fairly presented in
conformity with generally accepted accounting principles (except to the extent
that certain footnote disclosures regarding any stub period may have been
omitted in accordance with the applicable rules of the Commission under the
Exchange Act) applied on a basis consistent with that of the audited financial
statements appearing therein; (B) there was any change in the capital stock or
long-term debt of the Company or any decrease in the total current assets or
stockholders' equity of the Company as of the date of the latest available
monthly financial statements of the Company as of a specified date not more than
five business days prior to the date of such letter, each, as compared with the
amounts shown in the June 30, 1997 balance sheets included in the Registration
Statement and Prospectus, other than as described in the Registration Statement
and Prospectus or any change or decrease (which shall be set forth therein)
which, in the sole discretion of the Underwriter, the Underwriter shall accept,
or (C) there was any decrease in the revenues, net income, or net income per
share of Common Stock during the period from June 30, 1997 to the date of the
latest available monthly financial statements of the Company or to a specified
date not more than five business days prior to the date of such letter, each as
compared with the corresponding prior period, other than as described in the
Registration Statement and Prospectus or any decrease (which shall be set forth
therein) which, in the sole discretion of the Underwriter, the Underwriter shall
accept; and
(v) stating that they have compared specific numerical data
and financial information pertaining to the Company set forth in the
Registration Statement, which have been specified by the Underwriter prior to
the date of this Agreement, to the extent that such data and information may be
derived from the general accounting records of the Company, and excluding any
questions requiring any interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures (which procedures do not constitute an examination in
accordance with the generally accepted auditing standards) set forth in the
letter, and found them to be in agreement.
(g) All proceedings taken in connection with the issuance, sale,
transfer, and delivery of the Securities shall be reasonably satisfactory in
form and substance to the Underwriter and to counsel for the Underwriter, and
the Underwriter shall have received from such counsel for the Underwriter
opinions, dated as of the Closing Date and the Additional Closing Date, as the
case may be, with respect to such of the
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<PAGE>
matters set forth under Section 7(b), and with respect to such other related
matters, as the Underwriter may reasonably request.
(h) The NASD, upon review of the terms of the public offering of the
Stock, shall not have objected to the Underwriter' participation in such
offering.
(i) On the Closing Date, the Company shall have sold the
Underwriter's Warrants to the Underwriter and its designees.
(j) Prior to or on the Closing Date, the Company shall have provided
to the Underwriter copies of the agreements referred to in Section 2(u). In
order to enforce this covenant, the Company shall impose stop-transfer
instructions with respect to the shares of capital stock owned by the officers,
directors and stockholders covered by such agreements until the end of such
period.
Any certificate or other document signed by any officer of the
Company and delivered to the Underwriter or to counsel for the Underwriter
pursuant to the terms of this Agreement shall be deemed a representation and
warranty by the Company, as applicable, hereunder to the Underwriter as to the
statements made therein. If any condition to the Underwriter' obligations
hereunder to be fulfilled prior to or at the Closing Date or any Additional
Closing Date, as the case may be, is not so fulfilled, the Underwriter may
terminate this Agreement or, if the Underwriter so elects, in writing waive any
such conditions which have not been fulfilled or extend the time for their
fulfillment.
8. Indemnification and Contribution.
(a) Subject to the conditions set forth below, the Company agrees,
to indemnify and hold harmless the Underwriter, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
the Underwriter within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act, against any and all loss, liability, claim,
damage, and expense whatsoever (which shall include, for all purposes of this
Section 8, but not be limited to, reasonable 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 in (A) the Registration
Statement, any Preliminary Prospectus, or the Prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto or (B) any
application or other document or communication (for purposes of this Section 8,
collectively referred to as 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 qualify the Securities under the
"blue sky" or securities 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
-27-
<PAGE>
therein not misleading, unless such statement or omission was made in reliance
upon, and in conformity with, written information furnished to the Company as
stated in Section 8(b) with respect to the Underwriter by, or on behalf of, the
Underwriter expressly for inclusion in the Registration Statement, any
Preliminary Prospectus or the 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 in
this Agreement; provided, that the Company will not be liable to the Underwriter
or any person controlling the Underwriter with respect to any such untrue
statement or omission made in any Preliminary Prospectus that is corrected in
the Prospectus (or any amendment or supplement thereto) if the person asserting
any such loss, claim, damage or liability purchased Securities from such
Underwriter but was not sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the Prospectus (as
amended or supplemented) is required by the Securities Act, unless such failure
to deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with its obligations under this Agreement. The
foregoing agreement to indemnify shall be in addition to any liability the
Company may otherwise have, including liabilities arising under this Agreement.
If any action is brought against the Underwriter or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of the Underwriter (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 they may have other than pursuant to this
Section 8(a)), and the Company shall promptly assume the defense of such action,
including, without limitation, 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 promptly employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action or counsel for 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 in
addition to, those available to the Company in any of which events such fees and
expenses shall be borne by the Company and neither the Company shall not have
the right to direct the defense of such action on behalf of any such indemnified
party or parties.
Anything in this section to the contrary notwithstanding, the
Company shall not be liable for any settlement of any such claim or action
effected without its written consent. The Company shall not, without the prior
written consent of each indemnified party that is not released as described in
this sentence, settle or
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<PAGE>
compromise any action, or permit a default or consent to the entry of judgment
or otherwise seek to terminate any pending or threatened action, in respect of
which indemnity may be sought hereunder (whether or not any indemnified party is
a party thereto), unless such settlement, compromise, consent, or termination
includes an unconditional release of each indemnified party from all liability
in respect of such action. The Company agrees promptly to notify the Underwriter
of the commencement of any litigation or proceedings against the Company or any
of its officers or directors in connection with the sale of the Securities, the
Registration Statement, any Preliminary Prospectus, or the Prospectus, or any
amendment or supplement thereto, or any application.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who shall
have signed the Registration Statement, and each other person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity
from the Company to the Underwriter in Section 8(a), but only with respect to
statements or omissions, if any, made in the Registration Statement, any
Preliminary Prospectus, or the 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 as stated in this Section 8(b) with respect to any Underwriter by, or on
behalf of, the Underwriter expressly for inclusion in the Registration
Statement, any Preliminary Prospectus or the Prospectus, or any amendment or
supplement thereto, or on any application, as the case may be (it being agreed
that the only such information is that set forth in the stabilization legend on
the inside front cover page of the Prospectus, the amounts of the selling
concession and reallowance and the name of the Underwriter, and the number of
shares of Firm Stock purchased by the Underwriter set forth in the Prospectus),
provided, however, that the obligation of the Underwriter to provide indemnity
under the provisions of this Section 8(b) shall be limited to the amount which
represents the product of (i) the number of shares of Stock underwritten by the
Underwriter hereunder and the (ii) the underwriting discount per share of Common
Stock set forth on the cover page of the Prospectus. If any action shall be
brought against the Company, or any other person so indemnified based on the
Registration Statement, any Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto, or in any application, and in respect of which
indemnity may be sought against the Underwriter pursuant to this Section 8(b),
the Underwriter shall have the rights and duties given to the Company, and the
Company, and each other person so indemnified shall have the rights and duties
given to the indemnified parties, by the provisions of Section 8(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 8(a) or
8(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 Agreement expressly provides for
indemnification in such case or (ii) any indemnified or indemnifying party seeks
contribution under the Securities Act, the
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<PAGE>
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 the Registration Statement, and any controlling person
of the Company), as one entity, and the Underwriter (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, based on relative benefits so
that the Underwriter is responsible for the proportion thereof equal to the
percentage which the underwriting discount per share of Common Stock set forth
on the cover page of the Prospectus represents of the initial public offering
price per share of Common Stock set forth on the cover page of the Prospectus
and the Company is responsible for the Company's proceeds, provided, however,
that if applicable law does not permit such allocation, then other relevant
equitable considerations such as the relative fault of the Company and the
Underwriter in connection with the facts which resulted in such losses,
liabilities, claims, damages, and expenses shall also be considered. The
relative fault, in the case of an untrue statement, alleged untrue statement,
omission, or alleged omission, shall be determined by, among other things,
whether such statement, alleged statement, omission, or alleged omission relates
to information supplied by the Company or by the Underwriter, 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 Underwriter agree that it would be unjust and inequitable if the
respective obligations of the Company and the Underwriter for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Underwriter 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 8(c). No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 8(c), each person, if
any, who controls the Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act and each officer, director,
partner, employee and agent of the Underwriter shall have the same rights to
contribution as the Underwriter, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement, and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to the provisions of
this Section 8(c). Anything in this Section 8(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 8(c) is intended to supersede any right to contribution under the
Securities Act, the Exchange Act, or otherwise.
9. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties,
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<PAGE>
covenants, and agreements of the Underwriter and the Company, including the
indemnity and contribution agreements contained in Section 8, shall remain
operative and in full force and effect regardless of any investigation made by,
or on behalf of, the Underwriter or any indemnified person, or by, or on behalf
of, the Company or any person or entity which is entitled to be indemnified
under Section 8(b), and shall survive termination of this Agreement or the
delivery of the Firm Stock and the Additional Stock, if any, to the Underwriter.
In addition, the provisions of Sections 6, 8, 9, 12, and 14 shall survive
termination of this Agreement, whether such termination occurs before or after
the Closing Date or any Additional Closing Date.
10. Default by an Underwriter. [intentionally omitted]
11. Effective Date of This Agreement and Termination Thereof.
(a) This Agreement shall become effective at 9:30 A.M., New York
City local time, on the first full business day following the day on which the
Registration Statement becomes effective under the Securities Act or at the time
of the initial public offering by the Underwriter of the Firm Stock, whichever
is earlier. The time of the initial public offering shall mean the time, after
the Registration Statement becomes effective under the Securities Act, of the
release by the Underwriter for publication of the first newspaper advertisement
which is subsequently published relating to the Firm Stock or the time, after
the Registration Statement becomes effective under the Securities Act, when the
shares of Firm Stock are first released by the Underwriter for offering by the
Underwriter or dealers by letter or telegram, whichever shall first occur. The
Underwriter or the Company may prevent this Agreement from becoming effective
without liability of any party to any other party, except as noted below in this
Section 11, by giving the notice indicated in Section 11(d) before the time this
Agreement becomes effective under the Securities Act.
(b) If the purchase price of the Firm Stock has not been determined
as provided for in Section 3 prior to 4:30 p.m., New York City local time, on
the third full business day after the date on which the Registration Statement
was declared effective under the Securities Act, this Agreement may be
terminated at any time thereafter either by the Underwriter or by the Company by
giving notice to the other unless before such termination the purchase price for
the Firm Stock has been so determined. If the purchase price of the Firm Stock
has not been so determined prior to 4:30 p.m., New York City local time, on the
tenth full business day after the date on which the Registration Statement was
declared effective under the Securities Act, this Agreement shall automatically
terminate forthwith.
(c) In addition to the right to terminate this Agreement pursuant to
Sections 7 hereof, the Underwriter shall have the right to terminate this
Agreement at any time prior to the Closing Date or any Additional Closing Date,
as the case may be, by giving notice to the Company, and, if exercised, the
Over-allotment Option, at any time prior to any Additional Closing Date, by
giving notice to the Company, (i) if any domestic or international event, act,
or occurrence has materially and adversely
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<PAGE>
disrupted, or, in the opinion of the Underwriter will in the immediate future
materially and adversely disrupt, the securities markets; or (ii) if there shall
have been a general suspension of, or a general limitation on prices for,
trading in securities on the New York Stock Exchange, the American Stock
Exchange or in the over-the-counter market; or (iii) if there shall have been an
outbreak or increase in the level of major hostilities or other national or
international calamity; or (iv) if a banking moratorium has been declared by a
United States; or (v) if there shall have been a material interruption in the
mail service or other means of communication within the United States if such
interruption materially impairs the ability of the Underwriter to offer the
securities for sale or materially impairs the securities markets generally; or
(vi) if the Company shall have sustained a material loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage, or other calamity or malicious
act, whether or not such loss shall have been insured, or from any labor dispute
or court or government action, order, or decree, which, in the opinion of the
Underwriter, such event materially impairs the ability of the Underwriter to
offer the securities for sale or materially impairs securities markets generally
and will make it inadvisable to proceed with the offering, sale, or delivery of
the Firm Stock or the Additional Stock, as the case may be; or (vii) if any
material governmental restrictions shall have been imposed on trading in
securities in general, which restrictions are not in effect on the date hereof;
or (ix) if there shall be passed by the Congress of the United States or by any
state legislature any act or measure, or adopted by any governmental body or
authoritative accounting institute or board, or any governmental executive, any
orders, rules, or regulations, which the Underwriter believes likely to have a
material adverse effect on the business, financial condition, or financial
statements of the Company or the securities market generally; or (x) if there
shall have been such material and adverse change in the market for securities in
general or in political, financial, or economic conditions as in the judgment of
the Underwriter makes it inadvisable due to the material impact on the
securities market generally to proceed with the offering, sale, and delivery of
the Firm Stock or the Additional Stock, as the case may be, on the terms
contemplated by the Prospectus.
(d) If the Underwriter elects to prevent this Agreement from
becoming effective, as provided in this Section 11 or to terminate this
Agreement pursuant to Section 7 of this Agreement, the Underwriter shall notify
the Company promptly by telephone, facsimile or telegram, confirmed by letter.
If, as so provided, the Company elects to prevent this Agreement from becoming
effective or to terminate this Agreement, the Company shall notify the
Underwriter promptly by telephone, telex, facsimile or telegram, confirmed by
letter.
(e) Anything in this Agreement to the contrary notwithstanding if
this Agreement shall not become effective by reason of an election pursuant to
this Section 11 or if this Agreement shall terminate or shall otherwise not be
carried out within the time specified herein by reason of any failure on the
part of the Company to perform any covenant or agreement or satisfy any
condition of this Agreement required by it to be performed or satisfied, the
sole liability of the Company to the Underwriter, in addition to the obligations
the Company assumed pursuant to Section 6 hereof, will be to reimburse the
Underwriter for such out-of-pocket expenses (including
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the reasonable fees and disbursements of their counsel) as shall have been
incurred by it in connection with this Agreement or the proposed offer, sale,
and delivery of the Securities, and, upon demand, the Company agrees to pay
promptly the full amount thereof to the Underwriter.
12. Notices. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to the
Underwriter, shall be mailed, delivered, telexed, sent by facsimile or
telegraphed, confirmed by letter, to Hampshire Securities Corporation, 640 Fifth
Avenue, 4th Floor, New York, New York 10019, Attention: Mr. Leo T. Abbe Managing
Director, with a copy to Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New
York, New York 10103, Attention: Mara H. Rogers, Esq.; or if sent to the
Company, shall be mailed, delivered, sent by facsimile or telegraphed, confirmed
by letter, to the Company, 9051 Executive Park Drive, Suite 302, Knoxville,
Tennessee, Attention: Kenneth D. Van Meter, with a copy to Squadron, Ellenoff
Plesent & Sheinfeld, LLP, 551 Fifth Avenue, New York, New York 10176, Attention:
Kenneth R. Koch, Esq. All notices hereunder shall be effective upon receipt by
the party to which it is addressed.
13. Construction. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without giving effect to
conflict of laws.
14. Consent to Jurisdiction. The Company irrevocably consent 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 Agreement, any document or instrument delivered
pursuant to, in connection with, or simultaneously with this Agreement, or a
breach of this Agreement 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 12 and upon itself at the address set forth in the Registration
Statement or such other address as such agent may designate by notice in
accordance with Section 12. 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 or answer such summons,
complaint, or other process. Should the Company 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.
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If the foregoing correctly sets forth the understandings between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
CELERITY SYSTEMS, INC.
By:
---------------------------------
Name:
Title:
Accepted as of the date first above
written in New York, New York
HAMPSHIRE SECURITIES CORPORATION
as Underwriter
By:
---------------------------------
Name:
Title:
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY BE REOFFERED,
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IF REGISTERED PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR IF AN EXEMPTION
FROM REGISTRATION IS AVAILABLE.
VOID AFTER 5:00 P.M., NEW YORK TIME, ON ______, 2002 [5 YEARS FROM EFFECTIVE
DATE] OR IF NOT A BUSINESS DAY, AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME,
ON THE NEXT FOLLOWING BUSINESS DAY.
WARRANT TO PURCHASE SHARES OF COMMON STOCK
OF
CELERITY SYSTEMS, INC.
TRANSFER RESTRICTED -- SEE SECTION 6.02
NO. W-1 200,000 Shares
This certifies that, for good and valuable consideration, Hampshire Securities
Corporation, and its registered, permitted assigns (collectively, the
"Warrantholder"), is entitled to purchase from Celerity Systems, Inc., a
corporation incorporated under the laws of the State of Delaware (the
"Company"), subject to the terms and conditions hereof, at any time on or after
9:00 A.M., New York time, on _____, 1998 [1 year from Effective Date], and
before 5:00 P.M., New York time, on _____, 2002 [5 years from Effective Date]
(or, if such day is not a Business Day, at or before 5:00 P.M., New York time,
on the next following Business Day), the number of fully-paid and non-assessable
shares of common stock (par value $0.001 per share) of the Company stated above
at the Exercise Price (as hereinafter defined). The Exercise Price and the
number of shares purchasable hereunder are subject to adjustment as provided in
Article III hereof.
ARTICLE I
Section 1.01: Definition of Terms. As used in this Warrant, the following
capitalized terms shall have the following respective meanings:
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(a) Business Day: A day other than a Saturday, Sunday or other day
on which banks in the State of New York are authorized by law to remain closed.
(b) Common Stock: common stock, par value $0.001 per share, of the
Company.
(c) Demand Registration: See Section 7.02.
(d) Exchange Act: The Securities Exchange Act of 1934, as amended.
(e) Exercise Price: $_____ per Warrant Share, as such price may be
adjusted from time to time pursuant to Article III hereof [165% of public
offering price].
(f) Expiration Date: 5:00 P.M., New York time, on __________, 2002
or, if such day is not a Business Day, the next succeeding day which is a
Business Day.
(g) Holder: A holder of Warrants and/or Registrable Securities.
(h) NASD: National Association of Securities Dealers, Inc.
(i) Common Stock Equivalents: Securities that are convertible into
or exercisable for Common Stock.
(j) Person: An individual, partnership, joint venture, corporation,
trust, unincorporated organization or government or any department or agency
thereof.
(k) Piggyback Registration: See Section 7.01.
(l) Prospectus: Any prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement, with respect
to the terms of the offering of any portion of the Registrable Securities
covered by such Registration Statement and all other amendments and supplements
to the Prospectus, including post-effective amendments and all material
incorporated by reference in such Prospectus.
(m) Public Offering: A public offering of any of the Company's
equity or debt securities pursuant to a registration statement under the
Securities Act.
(n) Registrable Securities: (i) The Warrants and (ii) any Warrant
Shares issued or issuable to the Warrantholder, and/or its designees or
transferees as permitted under Section 6.02 and/or other securities that may be
or are issued by the Company upon exercise of Warrants, including those which
may thereafter be issued by the Company in respect of any such securities by
means of any stock splits, stock dividends, recapitalizations or the like, and
as adjusted pursuant to Article III hereof; provided, however, that as to any
particular security contained in Registrable Securities, such securities shall
cease to be Registrable Securities (i) for purposes of Section 7.02
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hereof, when a Registration Statement with respect to the sale of such
securities shall have become effective under the Securities Act; or (ii) when
they shall have been sold or shall be eligible for sale pursuant to Rule 144 (or
any successor provision) under the Securities Act; or (iii) when they shall have
been sold, assigned or otherwise transferred to any Person other than those
Persons specified in Section 6.02(i) below ("6.02(i) Persons") and other than to
any spouses, lineal descendants or adopted children of a 6.02(i) Person to whom
such securities are transferred upon the death of any 6.02(i) Person by
operation of law or by bequest.
(o) Registration Expenses: Any and all expenses incident to
performance of or compliance with Article VII, including, without limitation,
(i) all SEC, stock exchange, NASD registration and filing fees, listing and
transfer agent fees; (ii) all fees and expenses of complying with securities or
blue sky laws (including the fees and disbursements of counsel for the
underwriters in connection with blue sky qualifications of the Registrable
Securities); (iii) all printing, mailing, messenger and delivery expenses and
(iv) all fees and disbursements of counsel for the Company and of its
independent certified public accountants, including the expenses of any special
audits and/or "cold comfort" letters required by or incident to such performance
and compliance, but excluding underwriting fees, discounts and commissions and
transfer taxes, if any, and the fees and disbursements of counsel for the
holders of the Registrable Securities.
(p) Registration Statement: Any registration statement of the
Company filed or to be filed with the SEC which covers any of the Registrable
Securities pursuant to the provisions of this Warrant, including the Prospectus,
amendments and supplements to such Registration Statement, including
post-effective amendments and all exhibits to and material incorporated by
reference by such registration statement.
(q) SEC: The Securities and Exchange Commission or any other federal
agency at the time administering the Securities Act or the Exchange Act.
(r) Securities Act: The Securities Act of 1933, as amended.
(s) Warrant Shares: Common Stock purchasable upon exercise of the
Warrants.
(t) Warrantholder: The person(s) or entity(ies) to whom this Warrant
is originally issued, or any successor in interest thereto, or any assignee or
transferee thereof, in whose name this Warrant is registered upon the books to
be maintained by the Company for that purpose.
(u) Warrants: This Warrant, the warrants issued on the date hereof
and all other warrants that may be issued in its or their place (together
initially evidencing the right to purchase an aggregate of 200,000 shares of
Common Stock).
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ARTICLE II
Duration and Exercise of Warrant
Section 2.01: Duration of Warrant. (a) Subject to the terms contained
herein, this Warrant may be exercised at any time after 9:00 A.M., New York
time, on ______, 1998 [1 year from Effective Date], and before 5:00 P.M., New
York time, on the Expiration Date. If this Warrant is not exercised on the
Expiration Date, it shall become void, and all rights hereunder shall thereupon
cease.
Section 2.02 : Exercise of Warrant. (a) The Warrantholder may exercise
this Warrant, in whole or in part, as follows:
i) By presentation and surrender of this Warrant to the
Company at its corporate office at 9051 Executive Park Drive, Suite 302
Knoxville, Tennessee 37923 with the Subscription Form annexed hereto duly
executed and accompanied by payment of the Exercise Price for each Warrant
Share to be purchased. Payment for Warrant Shares shall be made in cash or
by certified or official bank check payable to the order of the Company;
or
ii) By presentation and surrender of this Warrant to the
Company at its corporate office set forth above, with a Cashless Exercise
Form annexed hereto duly executed (a "Cashless Exercise"). Such
presentation and surrender shall be deemed a waiver of the Warrantholder's
obligation to pay all or any portion of the aggregate Exercise Price. In
the event of a Cashless Exercise, the Warrantholder shall exchange its
Warrant for that number of Shares of Common Stock determined by
multiplying the number of Warrant Shares for which the Warrantholder
desires to exercise this Warrant by a fraction, the numerator of which
shall be the difference between the then current market price per share of
Common Stock and the Exercise Price, and the denominator of which shall be
the then current market price per share of Common Stock. For purposes of
any computation under this Section 2.02(a)(ii), the then current market
price per share of Common Stock at any date shall be deemed to be the
average for the twenty (20) consecutive Business Days immediately prior to
the Cashless Exercise of the daily closing prices of the shares of Common
Stock on the principal national securities exchange on which the shares of
Common Stock are admitted to trading or listed, or if not listed or
admitted to trading on any such exchange, the closing prices as reported
by the Nasdaq National Market, or if not then listed on the Nasdaq
National Market, the average of the highest reported bid and lowest
reported asked prices as reported by the Nasdaq SmallCap Market, or if not
then listed on the Nasdaq SmallCap Market, the average of the highest
reported bid and lowest reported asked prices as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System
("Nasdaq") or if not then publicly traded, the fair market price of the
shares of Common Stock as determined in good faith by the Board of
Directors of the Company.
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(b) Upon receipt of this Warrant with the Subscription Form duly
executed and accompanied by payment of the aggregate Exercise Price or upon
receipt of this Warrant with a Cashless Exercise form duly executed, in each
case as set forth in Section 2.02(a) for the Warrant Shares for which this
Warrant is then being exercised, the Company shall cause to be issued
certificates for the total number of shares of Common Stock for which this
Warrant is being exercised or the net amount of Warrant Shares which the
Warrantholder is entitled to receive upon a Cashless Exercise (adjusted to
reflect the effect of the anti-dilution provisions contained in Article III
hereof, if any, and as provided in Section 4.04 hereof) in such denominations as
are requested for delivery to the Warrantholder, and the Company shall thereupon
deliver such certificates to the Warrantholder. If at the time this Warrant is
exercised a registration statement is not in effect to register under the
Securities Act the Warrant Shares issuable upon exercise of this Warrant, the
Company may require the Warrantholder to make such investment intent
representations, and may place such legends on certificates representing the
Warrant Shares, as may be reasonably required in the opinion of counsel to the
Company to permit the Warrant Shares to be issued without such registration.
(c) In case the Warrantholder shall exercise this Warrant with
respect to less than all of the Warrant Shares that may be purchased under this
Warrant, the Company shall execute a new warrant in the form of this Warrant for
the balance of such Warrant Shares and deliver such new warrant to the
Warrantholder.
(d) The Company shall pay any and all stock transfer and similar
taxes which may be payable in respect of the issue of this Warrant or in respect
of the issue of any Warrant Shares. The Company shall not, however, be required
to pay any tax imposed on income or gross receipts of the Warrantholder or any
tax which may be payable in respect of any transfer involved in the issuance or
delivery of this Warrant or of Warrant Shares in a name other than that of the
Warrantholder at the time of surrender and, until the payment of such tax, shall
not be required to issue such Warrant Shares.
(e) The Company shall use its best efforts to cause all Warrant
Shares to be listed on each securities exchange, if any, on which similar
securities issued by the Company are then listed or, if not then listed, cause
such Warrant Shares to be included in a national automated quotation system.
ARTICLE III
Adjustment of Shares of Common Stock
Purchasable and of Exercise Price
The Exercise Price and the number and kind of Warrant Shares shall be
subject to adjustment from time to time upon the happening of certain events as
provided in this Article III.
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Section 3.01: Mechanical Adjustments. (a) If at any time prior to the
exercise of this Warrant in full, the Company shall (i) pay a dividend or make a
distribution on its shares of Common Stock, in either case in shares of Common
Stock; (ii) subdivide, reclassify or recapitalize its outstanding shares of
Common Stock into a greater number of shares; (iii) combine, reclassify or
recapitalize its outstanding shares of Common Stock into a smaller number of
shares; or (iv) issue by reclassification of its shares of Common Stock any
shares of capital stock of the Company, the Exercise Price in effect at the time
of the record date of such dividend, distribution, subdivision, combination,
reclassification or recapitalization shall be adjusted so that the Warrantholder
shall be entitled to receive, upon exercise of this Warrant, the aggregate
number and kind of shares which, if this Warrant had been exercised in full
immediately prior to such time, he would have owned upon such exercise and been
entitled to receive upon such dividend, subdivision combination,
reclassification or recapitalization. Any adjustment required by this paragraph
3.01(a) shall be made whenever any event listed in this paragraph 3.01(a) shall
occur.
(b) If at any time prior to the exercise of this Warrant in full,
the Company shall issue or distribute generally to the holders of shares of
Common Stock evidences of its indebtedness, any other securities of the Company
or any cash, property or other assets (excluding a dividend, distribution,
combination, reclassification or recapitalization referred to in Section 3.01(a)
and cash dividends or cash distributions paid out of net profits legally
available therefor if the full amount thereof, together with the value of other
dividends and distributions made substantially concurrently therewith or
pursuant to a plan which includes payment thereof, is equivalent to not more
than 5% of the Company's net worth) (any such nonexcluded event being herein
called a "Special Dividend"), the Exercise Price shall be decreased immediately
after the effective date of such Special Dividend to a price determined by
multiplying the Exercise Price then in effect by a fraction the numerator of
which shall be the then current market price per share of Common Stock (as
defined in Section 3.01(e)) on such effective date less the fair market value
(as determined in good faith by the Company's Board of Directors) of the
evidences of indebtedness, securities or property, or other assets issued or
distributed in such Special Dividend applicable to one share of Common Stock and
the denominator of which shall be the then current market price per share of
Common Stock. Any adjustment required by this paragraph 3.01(b) shall be made
whenever the effective date of any such Special Dividend occurs.
(c) If at any time prior to the exercise of this Warrant in full,
the Company shall make a distribution to all the holders of shares of Common
Stock (other than dividends or distributions covered by Section 3.01(a) or (b))
of subscription rights, options or warrants for shares of Common Stock or Common
Stock Equivalents, then in each such case the Exercise Price in effect after the
effective date of such distribution shall be adjusted to the price determined by
multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the current market price per share of
Common Stock (as defined in Section 3.01(e)), less the fair market value (as
determined in good faith by the Company's Board of Directors) of said
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Common Stock subscription rights, options and warrants or of such Common Stock
Equivalents applicable to one share of Common Stock, and the denominator of
which shall be the current market price per share of Common Stock. Any
adjustment required by this paragraph 3.01(c) shall be made whenever the
effective date of any such distribution occurs. To the extent such shares of
Common Stock (or Common Stock Equivalents) are not delivered after the
expiration of such subscription rights, options or warrants, the Exercise Price
shall be readjusted to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights, options or warrants been made
on the basis of delivery of only the number of shares of Common Stock (or Common
Stock Equivalents) actually delivered, but no such readjustment shall have the
effect of increasing the Exercise Price to an amount which exceeds the lower of
(i) the Exercise Price on the original adjustment date (prior to the original
adjustment) or (ii) the Exercise Price that would have resulted from any other
adjustments pursuant to this Article III (other than adjustments for the
issuance of subscription rights, options or warrants which expire unexercised).
(d) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to one or more of paragraphs (a), (b) and (c) of
this Section 3.01, the Warrant Shares shall simultaneously be adjusted by
multiplying the number of Warrant Shares initially issuable upon exercise of
each Warrant by the Exercise Price in effect immediately prior to the date
thereof and dividing the product so obtained by the Exercise Price, as adjusted.
(e) For the purpose of any computation under this Section 3.01, the
current market price per share of Common Stock at any date shall be deemed to be
the average of the daily closing price for the twenty (20) consecutive Business
Days commencing thirty-five (35) Business Days before such date. The closing
price for each day shall be the closing price of the shares of Common Stock as
reported by the national securities exchange upon which the shares of Common
Stock is then listed or if not listed on any such exchange, the average of the
closing prices as reported by the Nasdaq National Market, or if not then listed
on the Nasdaq National Market, the average of the highest reported bid and
lowest reported asked prices as reported by the Nasdaq SmallCap Market, or if
not then listed on the Nasdaq SmallCap Market, the average of the highest
reported bid and lowest reported asked prices as reported by Nasdaq, or if not
then publicly traded, as the fair market price as determined in good faith by
the Company's Board of Directors.
(f) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five cents
($.05) in such price; provided, however, that any adjustments which by reason of
this paragraph (f) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 3.01 shall be made to the nearest cent or to the nearest one-hundredth
of a share, as the case may be.
(g) If at any time, as a result of any adjustment made pursuant to
Section 3.01(a), the Warrantholder thereafter shall become entitled to receive
any
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shares of the Company other than shares of Common Stock, thereafter the number
of such other shares so receivable upon exercise of any Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the shares of Common Stock
contained in this Section 3.01.
(h) In case any event shall occur as to which the other provisions
of this Article III are not strictly applicable but as to which the failure to
make any adjustment would not fairly protect the purchase rights represented by
this Warrant in accordance with the essential intent and principles hereof then,
in each such case, the Warrantholders representing the right to purchase a
majority of the Warrant Shares subject to all outstanding Warrants may appoint a
firm of independent public accountants of recognized national standing
reasonably acceptable to the Company, which shall give their opinion as to the
adjustment, if any, on a basis consistent with the essential intent and
principles established herein, necessary to preserve the purchase rights
represented by the Warrants. Upon receipt of such opinion, the Company will
promptly mail a copy thereof to the Warrantholder and shall make the adjustments
described therein. The fees and expenses of such independent public accountants
shall be borne by the Company.
(i) If, as a result of an adjustment made pursuant to this Article
III, the Warrantholder shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive and
shall be described in a written notice to the Warrantholder promptly after such
adjustment) shall determine the allocation of the adjusted Exercise Price
between or among shares or such classes of capital stock or shares of Common
Stock and other capital stock.
Section 3.02: Notice of Adjustment. Whenever the number of Warrant Shares
or the Exercise Price is adjusted as herein provided, the Company shall prepare
and deliver to the Warrantholder a certificate signed by its President, any Vice
President, Treasurer or Secretary, setting forth the adjusted number of shares
purchasable upon the exercise of this Warrant and the Exercise Price of such
shares after such adjustment, setting forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made.
Section 3.03: No Adjustment for Dividends. Except as provided in Section
3.01(b) of this Agreement, no adjustment in respect of any cash dividends shall
be made during the term of this Warrant or upon the exercise of this Warrant.
Section 3.04: Preservation of Purchase Rights in Certain Transactions. In
case of any capital reorganization or reclassification, or any consolidation or
merger to which the Company is a party other than a merger or consolidation in
which the Company is the continuing corporation, or in case of any sale or
conveyance to another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange of
securities with another corporation (including any
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exchange effected in connection with a merger of a third corporation into the
Company), this Warrantholder shall have the right thereafter to receive on the
exercise of this Warrant the kind and amount of securities, cash or other
property which the Warrantholder would have owned or have been entitled to
receive immediately after such reorganization, reclassification, consolidation,
merger, statutory exchange, sale or conveyance had this Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Article III with respect to the
rights and interests thereafter of the Warrantholder to the end that the
provisions set forth in this Article III shall thereafter correspondingly be
made applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the exercise of
this Warrant. The provisions of this Section 3.04 shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The issuer of any shares of stock or
other securities or property thereafter deliverable on the exercise of this
Warrant shall be responsible for all of the agreements and obligations of the
Company hereunder. Notice of any such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance and of said
provisions so proposed to be made, shall be mailed to the Holders of the
Warrants on the later of a date not less than thirty (30) days prior to such
event or the day following the public announcement of such event. A sale of all
or substantially all of the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger for the
foregoing purposes.
Section 3.05: Form of Warrant After Adjustments. The form of this Warrant
need not be changed because of any adjustments in the Exercise Price or the
number or kind of the Warrant Shares, and Warrants theretofore or thereafter
issued may continue to express the same price and number and kind of shares as
are stated in this Warrant, as initially issued.
ARTICLE IV
Other Provisions Relating
to Rights of Warrantholder
Section 4.01: No Rights as Stockholders; Notice to Warrantholders. Nothing
contained in this Warrant shall be construed as conferring upon the
Warrantholder or his or its transferees the right to vote or to receive
dividends or to consent or to receive notice as a stockholder in respect of any
meeting of stockholders for the election of directors of the Company or of any
other matter, or any rights whatsoever as stockholders of the Company. The
Company shall give notice to the Warrantholder if at any time prior to the
expiration or exercise in full of the Warrants, any of the following events
shall occur:
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(a) the Company shall declare any dividend payable in any securities
upon shares of Common Stock or make any distribution (other than a cash dividend
subject to the parenthetical set forth in Section 3.01(b)) to the holders of
shares of Common Stock;
(b) the Company shall offer to the holders of shares of Common Stock
any additional shares of Common Stock or Common Stock Equivalents or any right
to subscribe thereto;
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation, merger, or sale of all, or
substantially all, of its property, assets, and business as an entirety) shall
be proposed; or
(d) any consolidation of the Company with or merger of the Company
into another corporation, or in the case of any sale or conveyance to another
corporation of the property of the Company, as an entirety or substantially as
an entirety shall be proposed.
Such giving of notice shall be initiated (i) at least ten (10) Business Days
prior to the date fixed as a record date or the date of closing of the Company's
stock transfer books for the determination of the stockholders entitled to such
dividend, distribution, or subscription rights, or for the determination of the
stockholders entitled to vote on such proposed merger, consolidation, sale,
conveyance, dissolution, liquidation or winding up. Such notice shall specify
such record date or the date of closing the stock transfer books, as the case
may be. Failure to provide such notice shall not affect the validity of any
action taken in connection with such dividend, distribution or subscription
rights, or proposed merger, consolidation, sale, conveyance, dissolution,
liquidation or winding up.
Section 4.02: Lost, Stolen, Mutilated or Destroyed Warrants. If this
Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms
as to indemnity or otherwise as it may in its discretion impose (which shall, in
the case of a mutilated Warrant, include the surrender thereof), issue a new
Warrant of like denomination and tenor as, and in substitution for, this
Warrant.
Section 4.03: Reservation of Common Stock.
(a) The Company shall at all times reserve and keep available for
the exercise of this Warrant such number of authorized shares of Common Stock as
are sufficient to permit the exercise in full of this Warrant.
(b) Prior to the issuance of any shares of Common Stock upon
exercise of this Warrant, the Company shall use its best efforts to secure the
listing of such shares of Common Stock upon the securities exchange or automated
quotation system, if any, upon which shares of Common Stock are then listed.
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(c) The Company covenants that all shares of Common Stock issued on
exercise of this Warrant will be validly issued, fully paid, nonassessable and
free of preemptive rights.
Section 4.04: No Fractional Shares. Anything contained herein to the
contrary notwithstanding, the Company shall not be required to issue any
fraction of a share in connection with the exercise of this Warrant, and in any
case where the Warrantholder would, except for the provisions of this Section
4.04, be entitled under the terms of this Warrant to receive a fraction of a
share upon the exercise of this Warrant, the Company shall, upon the exercise of
this Warrant and receipt of the Exercise Price, issue the smaller number of
whole shares purchasable upon exercise of this Warrant and shall make a cash
adjustment in respect of such fraction of a share to which the Warrantholder
would otherwise be entitled.
ARTICLE V
Treatment of Warrantholder
Prior to due presentment for registration of transfer of this Warrant, the
Company may deem and treat the Warrantholder as the absolute owner of this
Warrant (notwithstanding any notation of ownership or other writing hereon) for
all purposes and shall not be affected by any notice to the contrary.
ARTICLE VI
Split-Up, Combination,
Exchange and Transfer of Warrants
Section 6.01: Split-Up, Combination and Exchange of Warrants. Subject to
the provisions of Section 6.02 hereof, this Warrant may be split up, combined or
exchanged for another Warrant or Warrants containing the same terms to purchase
a like aggregate number of Warrant Shares. If the Warrantholder desires to split
up, combine or exchange this Warrant, he or it shall make such request in
writing delivered to the Company and shall surrender to the Company this Warrant
and any other Warrants to be so split up, combined or exchanged. Upon any such
surrender for a split up, combination or exchange, the Company shall execute and
deliver to the person entitled thereto a Warrant or Warrants, as the case may
be, as so requested. The Company shall not be required to effect any split up,
combination or exchange which will result in the issuance of a Warrant entitling
the Warrantholder to purchase upon exercise a fraction of a share of Common
Stock or a fractional Warrant. The Company may require such Warrantholder to pay
a sum sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, split up, combination or exchange of Warrants.
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Section 6.02: Restrictions on Transfer. This Warrant may not be sold,
hypothecated, pledged, assigned or transferred (any such action, a "Transfer")
until _______, 1998 [1 year from Effective Date], except (i) to Hampshire
Securities Corporation, any successor to the business of Hampshire Securities
Corporation or any officer or partner of such company or of any successor firm,
or (ii) to any underwriter or selling group member in connection with the
initial public offering of the Common Stock, provided as to both (i) and (ii),
only in accordance with and subject to the provisions of the Securities Act and
the rules and regulations promulgated thereunder. If at the time of a Transfer,
a Registration Statement is not in effect to register this Warrant, the Company
may require the Warrantholder to make such representations, and may place such
legends on certificates representing this Warrant, as may be reasonably required
in the opinion of counsel to the Company to permit a Transfer without such
registration.
ARTICLE VII
Registration Under the Securities Act of 1933
Section 7.01: Piggyback Registration.
(a) Right to Include Registrable Securities. If at any time after
__________, 1998 [1 year from Effective Date] and prior to ________, 2004 [7
years from Effective Date], the Company proposes to register any Common Stock or
any other class of equity security or any Common Stock Equivalent under the
Securities Act on any form for the registration of securities under such Act,
whether or not for its own account (other than (i) a registration of a stock
option, stock purchase or compensation or incentive plan or of stock issued or
issuable pursuant to any such plan, or a dividend investment plan; (ii) a
registration of securities proposed to be issued in exchange for securities or
assets of, or in connection with a merger or consolidation with, another
corporation; or (iii) a registration of securities proposed to be issued in
exchange for other securities of the Company) in a manner which would permit
registration of Registrable Securities for sale to the public under the
Securities Act (a "Piggyback Registration"), it shall not later than twenty (20)
days prior to the effective date of such registration give written notice to all
Holders of its intention to do so and of such Holders' rights under this Section
7.01. Such rights are referred to hereinafter as "Piggyback Registration
Rights". Upon the written request of such Holder made within fifteen (15) days
after the giving of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such Holder and the intended method of
disposition thereof), the Company shall include in the Registration Statement
the Registrable Securities which the Company has been so requested to register
by the Holders thereof.
(b) Withdrawal of Piggyback Registration by Company. If, at any time
after giving written notice of its intention to register any securities in a
Piggyback Registration but prior to the effective date of the related
Registration Statement filed
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in connection with such Piggyback Registration, the Company shall determine for
any reason not to register such securities, the Company shall give written
notice of such determination to each Holder and, thereupon, shall be relieved of
its obligation to register any Registrable Securities in connection with such
Piggyback Registration. All best efforts obligations of the Company pursuant to
Section 7.03 shall cease if the Company determines to terminate any registration
where Registrable Securities are being registered pursuant to this Section 7.01.
(c) Piggyback Registration of Underwritten Public Offerings. If a
Piggyback Registration involves an underwritten offering, then all Holders
requesting to have Registrable Securities included in the Company's registration
must sell their Registrable Securities to the underwriters selected by the
Company on the same terms and conditions as apply to other selling stockholders.
(d) Payment of Registration Expenses for Piggyback Registration. The
Company shall pay all Registration Expenses in connection with each registration
of Registrable Securities requested pursuant to a Piggyback Registration Right
contained in this Section 7.01.
(e) Priority in Piggyback Registration. If a Piggyback Registration
involves an underwritten offering and the managing underwriter advises the
Company in writing that, in its opinion, marketing factors require a limitation
of the number of shares to be underwritten, then the Registrable Securities to
be offered for the accounts of Holders pursuant to a Piggyback Registration
Right shall be reduced pro rata as to all requesting Holders on the basis of the
relative number of Registrable Securities each such Holder has requested to be
included in such registration, to the extent necessary to reduce the total
amount or kind of Registrable Securities to be included in such offering to the
amount advised by such managing underwriter; provided, however, that no
securities may be offered in such registration for the account of persons other
than the Company (including for this purpose any affiliate of the Company) by
virtue of their also having "piggyback" registration rights, or otherwise,
unless the Registrable Securities requested to be included in such registration
are so included on a pro rata basis (by percentage of each class of securities)
as to such other persons holding "piggyback" registration rights and the Holders
requesting registration; and provided, further, that nothing in this paragraph
(e) shall be implied to permit the Company to include in such registration
shares of any person other than persons holding "piggyback" registration rights
unless the Registrable Securities requested to be included in such registration
are so included.
(f) Expiration of Piggyback Registration Rights. The Piggyback
Registration Rights shall survive the exercise of the Warrant or the
transactions or events pursuant to which such Registrable Securities were
issued, but all such rights will terminate in all events on __________, 2004 [7
years from Effective Date].
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Section 7.02: Demand Registration.
(a) Request for Registration. Subject to the limitations set forth
below in this Section 7.02, any Holder or Holders who hold in the aggregate 50%
or more of the Registrable Securities (assuming exercise of the Warrants) may
after __________, 1998 [1 year from Effective Date] but prior to the Expiration
Date make written requests for the registration under the Securities Act of all
or part of their Registrable Securities (a "Demand Registration") and the
Company shall use its best efforts to effect such Demand Registration. The
Holders, as a group, shall be limited to one Demand Registration and thereafter
may not make any further written requests for registration other than Piggyback
Registrations pursuant to Section 7.01. Any written request for registration
which is never effectuated due to Section 7.02(b)(ii) or (iii) shall not count
as the Holders' Demand Registration.
(b) Limitations on Demand Registration. The Company shall not be
required to effect a Demand Registration (i) if the Company, in its reasonable
judgment, determines that the filing of the registration statement at the time
requested would require disclosure of information not otherwise then required to
be disclosed and that such disclosure would adversely affect any material
business situation, transaction or negotiation then proposed, contemplated or
being engaged in by the Company, but in no event shall such delay exceed ninety
(90) days from the date of such request for registration; (ii) if the timing of
the Demand Registration is such that a special audit of the Company would be
required in connection with the preparation of financial statements for the
registration, but in no event shall such delay exceed 90 days from the date of
such request for registration; or (iii) within one hundred eighty (180) days
following the effective date of any Public Offering. The Company shall also not
be required to effect a Demand Registration if, within twenty (20) days after it
receives a request therefor, it or insiders who individually own more than five
percent (5%) of the Company's outstanding Common Stock agree to purchase the
Warrants and/or the underlying Warrant Shares from the requesting holders
thereof at a price, in the case of the Warrants, equal to the difference between
the Exercise Price and the then current market price of the Company's Common
Stock, and, in the case of the Warrant Shares, the current market price of the
Company's Common Stock. For purposes hereof, the current market price of the
Company's Common Stock shall be the average of the closing asked prices for the
Company's Common Stock during the twenty (20) Business Day period preceding such
request for registration.
(c) Payment of Registration Expenses for Demand Registration. The
Company shall pay all Registration Expenses in connection with the Demand
Registration as elected in the written request(s) for registration under Section
7.02(a) by the Holders of a majority of Registrable Securities (assuming
exercise of the Warrants) as to which the Demand Registration is requested. Such
Registration Expenses shall not include the fees of any counsel retained by
underwriters or any Holder and any underwriting fees or selling discounts or
commissions or transfer taxes.
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(d) Procedure for Requesting Demand Registration. Any request for a
Demand Registration shall specify the aggregate number of the Registrable
Securities proposed to be sold and the intended method of disposition. Within
ten (10) Business Days after receipt of such a request, the Company shall give
written notice of such registration request to all Holders, and, subject to the
limitations of Section 7.02(b), the Company shall include in such registration
all Registrable Securities with respect to which the Company has received
written requests for inclusion therein within ten (10) Business Days after the
date on which such notice is given. Each such request shall also specify the
aggregate number of Registrable Securities to be registered and the intended
method of disposition thereof.
(e) Selection of Underwriters. If any Demand Registration is
requested to be in the form of an underwritten offering, the managing
underwriter shall be Hampshire Securities Corporation and the co-manager (if
any) and the independent pricer required under the rules of the NASD (if any)
shall be selected and obtained by the Holders of a majority of the Registrable
Securities to be registered (assuming exercise of the Warrants). Such selection
shall be subject to the Company's consent, which consent shall not be
unreasonably withheld. All fees and expenses of any managing underwriter, any
co-manager or any qualified independent underwriter or other independent pricer
(other than Registration Expenses otherwise required to be paid) required under
the rules of the NASD shall be paid for by the Holders whose shares are being
registered. If Hampshire Securities Corporation should decline to serve as
managing underwriter, the Holders of a majority of the Registrable Securities to
be registered (assuming exercise of the Warrants) may select and obtain one or
more managing underwriters. Such selection shall be subject to the Company's
consent, which shall not be unreasonably withheld.
Section 7.03: Registration Procedures. If and whenever the Company is
required to use its best efforts to effect or cause the registration of any
Registrable Securities under the Securities Act as provided in this Article VII,
the Company shall, at its expense and as expeditiously as practicable:
(a) prepare and file with the SEC, as soon as practicable within
sixty (60) days (subject to extension for up to an additional thirty (30) days
provided that the Company has not exercised its deferral right contained in
Section 7.02(b) and does not within thirty (30) days exercise such deferral
right) after the end of the period within which requests for registration may be
given to the Company (but subject to the proviso for deferral contained in
Section 7.02(b) hereof) a Registration Statement relating to the registration on
any appropriate form under the Securities Act, which form shall be available for
the sale of the Registrable Securities in accordance with the intended method or
methods of distribution thereof, and use its best efforts to cause such
Registration Statements to become effective; provided that before filing a
Registration Statement or Prospectus or any amendment or supplements thereto,
including documents incorporated by reference after the initial filing of any
Registration Statement, the Company shall furnish to the selling Holders or
their counsel pursuant to such Registration Statement and the underwriters, if
any, copies of all such
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documents proposed to be filed, which documents will be subject to the review of
such Holders and underwriters;
(b) prepare and file with the SEC such amendments and post-effective
amendments to a Registration Statement as may be necessary to keep such
Registration Statement effective for a period of nine months commencing from the
date of effectiveness of the Registration Statement or such shorter period as
may be required for the sale of the Warrant Shares in the open market; cause the
related Prospectus to be supplemented by any required Prospectus supplement, and
as so supplemented, to be filed pursuant to Rule 424 under the Securities Act;
and comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement during such
period in accordance with the intended methods of disposition by the sellers
thereof set forth in such Registration Statement or supplement to such
Prospectus;
(c) notify the selling Holders or their counsel and the managing
underwriters, if any, promptly, and (if requested by any such Person) confirm
such advice in writing, (i) when a Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to a Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the SEC for amendments or supplements to a Registration
Statement or related Prospectus or for additional information; (iii) of the
issuance by the SEC of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that purpose;
(iv) if at any time the representations and warranties of the Company
contemplated by paragraph (l) below cease to be true and correct; (v) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose; and (vi) of
the happening of any event that makes any statement made in the Registration
Statement, the Prospectus or any document incorporated therein by reference
untrue or which requires the making of any changes in the Registration Statement
or Prospectus so that they will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the earliest
possible moment;
(e) if reasonably requested by the managing underwriters,
immediately incorporate in a prospectus supplement or post-effective amendment
such information as the managing underwriters reasonably believe (on advice of
counsel) should be included as required by applicable law relating to such sale
of Registrable Securities, including, without limitation, information with
respect to the purchase price being paid for the Registrable Securities by such
underwriters and with respect to any other terms of the underwritten (or
"best-efforts" underwritten) offering; and make all required
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filings of such prospectus supplement or post-effective amendment as soon as
notified of the matters to be incorporated in such prospectus supplement or
post-effective amendment;
(f) furnish to each managing underwriter, without charge, at least
one signed copy of the Registration Statement and any posteffective amendment
thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits (including those incorporated
by reference);
(g) deliver to each selling Holder and the underwriters, if any,
without charge, as many copies of the Prospectus or Prospectuses (including each
preliminary Prospectus) and any amendment or supplement thereto as such Persons
may reasonably request; the Company consents to the use of such Prospectus or
any amendment or supplement thereto by each of the selling Holders and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by such Prospectus or any amendment or supplement
thereto;
(h) prior to any public offering of Registrable Securities,
cooperate with the selling Holders, the underwriters, if any, and their
respective counsel in connection with the attempt to register or qualify such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any seller or underwriter
reasonably requests in writing; keep each such registration or qualification
effective during the period such Registration Statement is required to be kept
effective and use reasonable efforts to enable the disposition in such
jurisdictions of the Registrable Securities covered by the applicable
Registration Statement; provided that the Company shall not be required to
qualify generally to do business in any jurisdiction where it is not then so
qualified or to take any action which would subject the Company to general
service of process in any jurisdiction where it is not at the time so subject or
to subject itself to taxation as doing business in any jurisdiction;
(i) cooperate with the selling Holders and the managing
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold and not bearing any
restrictive legends; and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters may
request at least two Business Days prior to any sale of Registrable Securities
to the underwriters;
(j) upon the occurrence of any event contemplated by paragraph
(c)(vi) above, prepare a supplement or post-effective amendment to the
applicable Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
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<PAGE>
(k) with respect to each issue or class of Registrable Securities,
use its best efforts to cause all Registrable Securities covered by the
applicable Registration Statement to be listed on each securities exchange, if
any, on which similar securities issued by the Company are then listed or, if
not then listed, cause such Registered Securities to be included in a national
automated quotation system;
(l) enter into such agreements (including an underwriting agreement)
and take all such other actions reasonably required in connection therewith in
order to expedite or facilitate the disposition of such Registrable Securities
and in such connection, if the registration is in connection with an
underwritten offering (i) make such representations and warranties, if any, to
the underwriters in form, substance and scope as are customarily made by issuers
to underwriters in underwritten offerings and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriters) addressed to the underwriters
covering the matters customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by such
underwriters; (iii) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the
underwriters, if any, such letters to be in customary form and covering matters
of the type customarily covered in "cold comfort" letters obtained by
underwriters in connection with underwritten offerings; (iv) if an underwriting
agreement is entered into, the same shall set forth in full the indemnification
provisions and procedures of Section 7.04 hereof with respect to all parties to
be indemnified pursuant to said Section; and (v) the Company shall deliver such
documents and certificates as may be reasonably requested by the managing
underwriters to evidence compliance with clause (i) above and with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company; the above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required thereunder;
(m) provide a transfer agent and registrar and a CUSIP number for
all Registrable Securities, not later than the effective date of the applicable
Registration Statement;
(n) make available for inspection by a representative of the selling
Holders, any underwriter participating in any disposition pursuant to such
registration and any one firm of attorneys or accountants retained by such
selling Holders and any one firm of attorneys retained by the underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such representative, underwriter,
attorney or accountant in connection with such registration; provided, that any
records, information or documents that are designated by the Company in writing
as confidential shall be kept confidential by such Persons unless disclosure of
such records, information or documents is requested by court or administrative
order;
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(o) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make generally available to its security
holders an earnings statement, covering a period of not less than twelve (12)
months satisfying the provisions of Section 11(a) or Rule 158 of the Securities
Act not later than sixteen (16) months after the first day of the month
following the effective date of the applicable Registration Statement;
(p) use its best efforts to cause such Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
sellers thereof to consummate the disposition of such Registrable Securities;
and
(q) take all such other actions as the Holders of a majority of the
Registrable Securities being sold (assuming exercise of the Warrants, as
applicable) and the underwriters, if any, reasonably request in order to
expedite or facilitate the disposition of such Registrable Securities.
Except as otherwise provided in this Agreement, the Company shall
have sole control in connection with the preparation, filing, withdrawal,
amendment or supplementing of each Registration Statement, the selection of
underwriters and the distribution of any preliminary prospectus included in the
Registration Statement, and may include within the coverage thereof additional
shares of Common Stock or other securities for its own account or for the
account of one or more of its other security holders.
Holders shall have no registration rights hereunder in respect of
any proposed transfer of such securities if, in the opinion of recognized
securities counsel to the Company acceptable to the Holders, (A) registration
under the Securities Act is not required for the transfer of the Registrable
Securities in the manner provided by such Holder or (B) a post-effective
amendment to an existing registration statement would be legally sufficient for
such transfer and such post-effective amendment is filed with the SEC and
declared effective.
The provisions of subsections (a) (other than the proviso at the end
thereof), (d), (e), (h), (l), (n) and (p) above shall apply only in the event of
a Demand Registration. Expenses incurred in connection with this Section 7.03
shall be borne by the respective parties as otherwise provided in this
Agreement.
Each seller of Registrable Securities as to which any registration
is being effected shall furnish to the Company such information regarding the
distribution of such securities and such other information as may otherwise be
required by the Securities Act to be included in such Registration Statement.
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Section 7.04: Indemnification.
(a) Indemnification by Company. The Company agrees to indemnify and
hold harmless each Holder, its officers, directors and agents and each Person
who controls such Holder or agents (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) against any and all losses,
claims, damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other Federal or state law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement, Prospectus or
preliminary prospectus or any amendment thereof or supplement thereto, or arise
out of or are based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that such indemnity shall not inure
to the benefit of any Holder (or any Person controlling such Holder within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
on account of any losses, claims, damages or liabilities arising from the sale
of the Registrable Securities if such untrue statement or omission or alleged
untrue statement or omission was made in such Registration Statement, Prospectus
or preliminary prospectus, or such amendment or supplement, in reliance upon and
in conformity with information furnished in writing to the Company by the Holder
specifically for use therein. The Company shall also indemnify underwriters and
selling brokers participating in the distribution, their officers and directors
and each Person who controls such Persons (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) to the same extent as
provided above with respect to the indemnification of the Holders, if requested.
This indemnity agreement shall be in addition to any liability which the Company
may otherwise have.
(b) Indemnification by Selling Holders. In connection with any
registration, each selling Holder will furnish to the Company in writing such
information as the Company reasonably requests for use in connection with any
Registration Statement or Prospectus and agrees to indemnify, to the same extent
as the indemnification provided by the Company in Section 7.04(a), the Company,
its directors and officers and each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act)
but only insofar as such losses, claims, damages and liabilities arise out of or
are based upon any untrue statement or omission or alleged untrue statement or
omission which was made in the Registration Statement, the Prospectus or
preliminary prospectus or any amendment thereof or supplement thereto, in
reliance upon and in conformity with information furnished in writing by such
Holder to the Company specifically for use therein. In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation. The
Company
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shall be entitled to receive indemnities from underwriters and selling brokers
participating in the distribution, to the same extent as provided above with
respect to information so furnished in writing by such Persons specifically for
inclusion in any Prospectus, Registration Statement or preliminary prospectus or
any amendment thereof or supplement thereto.
(c) Conduct of Indemnification Procedure. Any party that proposes to
assert the right to be indemnified hereunder will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim is to be made against an indemnifying party or parties
under this Section, notify each such indemnifying party of the commencement of
such action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 7.04(a) or 7.04(b) shall be available to
any party who shall fail to give notice as provided in this Section 7.04(c) if
the party to whom notice was not given was unaware of the proceeding to which
such notice would have related and was prejudiced by the failure to give such
notice, but the omission so to notify such indemnifying party of any such
action, suit or proceeding shall not relieve it from any liability that it may
have to any indemnified party for contribution or otherwise than under this
Section. In case any such action, suit or proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses, except as provided below and except for the
reasonable costs of investigation subsequently incurred by such indemnified
party in connection with the defense thereof. The indemnified party shall have
the right to employ its counsel in any such action, but the fees and expenses of
such counsel shall be at the expense of such indemnified party unless (i) the
employment of counsel by such indemnified party has been authorized in writing
by the indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such action
(in which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party) or (iii) the
indemnifying parties shall not have employed counsel to assume the defense of
such action within a reasonable time after notice of the commencement thereof,
in each of which cases the fees and expenses of counsel shall be at the expense
of the indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without its written
consent, which consent shall not be unreasonably withheld. It is understood that
the indemnifying party or parties shall not, in connection with any proceeding
or related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm in such jurisdiction at any one time for
all such indemnified party or parties.
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Section 7.05: Restrictions on Public Sale by Holder of Registrable
Securities. Each Holder whose Registrable Securities are covered by a
Registration Statement filed pursuant to Article VII hereof agrees, if requested
by the managing underwriters in an underwritten offering, not to effect any
public sale or distribution of any securities of the Company of the same class
as the securities included in such Registration Statement, including a sale
pursuant to Rule 144 under the Securities Act (except as part of such
underwritten registration), during the ten (10)-day period prior to, and during
the ninety (90)-day period beginning on, the closing date of each underwritten
offering made pursuant to such Registration Statement, to the extent timely
notified in writing by the managing underwriters.
ARTICLE VIII
Other Matters
Section 8.01: Expenses of Transfer. The Company shall from time to time
promptly pay, subject to the provisions of Section 6.01 and paragraph (d) of
Section 2.02, all taxes and charges that may be imposed upon the Company in
respect to the issuance or delivery of Warrant Shares upon the exercise of this
Warrant by the Warrantholder.
Section 8.02: Successors and Assigns. All the covenants and provisions of
this Warrant by or for the benefit of the Company shall bind and inure to the
benefit of its successors and assigns hereunder.
Section 8.03: Amendments and Waivers. The provisions of this Warrant,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waiver or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of Holders
of at least a majority of the outstanding Registrable Securities (assuming
exercise of the Warrants). Holders shall be bound by any consent authorized by
this Section whether or not certificates representing such Registrable
Securities have been marked to indicate such consent.
Section 8.04: Counterparts. This Warrant may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
so executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
Section 8.05: Governing Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York.
Section 8.06: Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provisions in every
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other respect and of the remaining provisions contained herein shall not be
affected or impaired thereby.
Section 8.07: Integration/Entire Agreement. This Warrant is intended by
the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. This Warrant
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
Section 8.08: Attorneys' Fees. In any action or proceeding brought to
enforce any provisions of this Warrant, or where any provisions hereof are
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees and disbursements in addition to its costs and
expenses and any other available remedy.
Section 8.09: Computations of Consent. Whenever the consent or approval of
Holders of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or its affiliates (other
than the Warrantholder or subsequent Holders if they are deemed to be such
affiliates solely by reason of their holdings of such Registrable Securities)
shall not be counted in determining whether such consent or approval was given
by the Holders of such required percentage.
Section 8.10: Notices. Notice or demand pursuant to this Warrant to be
given or made by the Warrantholder to or on the Company shall be sufficiently
given or made if sent by first class mail, postage prepaid, addressed, until
another address is designated in writing by the Company, as follows:
Celerity Systems, Inc.
9051 Executive Park Drive
Suite 302
Knoxville, Tennessee 37923
Any notice or demand authorized by this Warrant to be given or made by the
Company to or on the Warrantholder or a Holder of Registrable Securities shall
be sufficiently given or made if sent by first class mail, postage prepaid, to
the Warrantholder or the Holder of Registrable Securities at his or its last
known address as it shall appear on the books of the Company.
Section 8.11: Headings. The headings herein are for convenience only and
are not part of this Warrant and shall not affect the interpretation thereof.
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IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the ____ day of _____________, 1997.
Celerity Systems, Inc.
By:
--------------------------------------
Name:
Title:
Attest:
------------------------
Secretary
The undersigned accepts this Warrant and
agrees to abide by the terms herein which
are applicable to the Warrantholder.
Hampshire Securities Corporation
-----------------------------------------
(Name of Warrantholder)
By:
--------------------------------------
(Name and title of duly authorized
officer)
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ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, _________________________ hereby sells, assigns
and transfers unto _____________________ the within Warrant Certificate,
together with all right, title and interest therein, and does hereby irrevocably
constitute and appoint __________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company with respect to the number
of Warrants set forth below, with full power of substitution in the premises:
Name(s) of
Assignee(s) Address No. of Warrants
----------- ------- ---------------
And if said number of Warrants shall not be all the Warrants represented by the
Warrant Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants represented by said
Warrant Certificate.
Dated: ____________________, 19__ ___________________________________________
Note: The above signature should correspond
exactly with the name on the face of
this Warrant Certificate.
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<PAGE>
SUBSCRIPTION FORM
(To be executed upon exercise of Warrant)
Celerity Systems, Inc.:
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, _____________________ shares of Common Stock, as provided for
therein, and tenders herewith payment of the purchase price in full in the form
of cash or a certified or official bank check in the amount of $____________.
If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder.
Please issue a certificate or certificates for such shares of Common Stock
in the name of, and pay any cash for any fractional share to:
Name:____________________________________
(Please Print Name, Address and
Social Security No.)
Address:_________________________________
_________________________________________
_________________________________________
Social Security Number:__________________
Signature:_______________________________
NOTE: The above signature should
correspond exactly with the name on the
first page of this Warrant Certificate or
with the name of the assignee appearing
in the assignment form below.
-26-
<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 2.02(a)(ii))
The undersigned hereby irrevocably elects to surrender its Warrant for
________ shares of Common Stock pursuant to the Cashless Exercise provisions of
the within Warrant, as provided for in Section 2.02(a)(ii) of such Warrant.
If said number of shares shall not be all the shares exchangeable or
purchasable under the within Warrant, a new Warrant is to be issued in the name
of the undersigned for the balance remaining of the shares purchasable
thereunder.
Please issue a certificate or certificates for such shares of Common Stock
in the name of, and pay cash for fractional shares to:
Name:____________________________________
(Please Print Name, Address and
Social Security No.)
Address:_________________________________
_________________________________________
_________________________________________
Social Security Number:__________________
Signature:_______________________________
NOTE: The above signature should
correspond exactly with the name on the
first page of this Warrant or with the
name of the assignee appearing in the
assignment form below.
-27-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT 4.4
[LOGO]
COMMON STOCK SHARES
SEE REVERSE FOR
CERTAIN DEFINITIONS
CELERITY SYSTEMS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 15100R 10 7
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE OF
- -------------------------------------------------CELERITY SYSTEMS, INC.-------------------------------------------------
(hereinafter the "Corporation"), transferable on the books of the Corporation by the holder hereof in person or by its duly
authorized attorney upon surrender of this Certificate properly endorsed or assigned. This Certificate and the shares
represented hereby are issued and shall be held subject to the laws of the State of Delaware and the provisions of the
Certificate of Incorporation and the By-laws of the Corporation, as amended from time to time, to which the holder by acceptance
hereof assents. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
[CORPORATE SEAL]
/s/ William R. Chambers /s/ Kenneth D. Van Meter
-------------------------------------- -------------------------------------
Vice President and Secretary President and Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST, COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
</TABLE>
<PAGE>
CELERITY SYSTEMS, INC.
Upon written request the Corporation will furnish without charge to each
stockholder a copy of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- Custodian
TEN ENT - as tenants by the entireties ______________________________
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act___________________________
(State)
Additional abbreviations may also be used though not in the above list.
For values received, ________________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________
/____________________________________/
___________________________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________Shares of
the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
__________________________________________________________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.
Dated________________________________________________
__________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
SIGNATURE(S) GUARANTEED:
_____________________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
2
<PAGE>
Exhibit 4.6
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (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 before 5:00
P.M. New York time on the earlier of (i) the fifth anniversary of the date of
this Warrant or (ii) the third anniversary of the closing of the initial
public offering of the Company's securities registered under the Act (the
"Exercise Period"), ______ shares of the Company's Common Stock, par value
$.001 per share ("Common Stock"), at an exercise price of $4.50 per share
(the "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) 17,777 shares of Common Stock, (ii) one promissory
note with a face value of $50,000 (collectively, the "Notes"), and (iii) a
warrant to purchase 6,562 shares of Common Stock at the Exercise Price
collectively, the "Warrants". As used herein, the term "this Warrant" shall
mean and include this Warrant and any
<PAGE>
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 this
Warrant (the "Warrant Shares") and the Exercise Price may be adjusted from
time to time as hereinafter set forth.
1. (a) 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 form at the end hereof duly executed) to the
Company at its office at 9051 Executive Park Drive, Suite 400, Knoxville,
Tennessee, 37923, or at such other place as is designated in writing by the
Company, 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.
(b) Notwithstanding anything to the contrary contained in
Section 1(a), the Holder may elect to exercise this Warrant in whole or in
part by receiving, upon surrender of this Warrant (with the election form at
the end hereof duly executed) to the Company at the address set forth above,
a number of Warrant Shares determined and computed using the following
formula:
X = Y[A-B]
A
X = the number of Warrant Shares to be issued to the Holder;
Y = the number of Warrant Shares to be exercised under this
Warrant;
A = the Current Fair Market Value per share of the Company's
Common Stock calculated as of the last trading day
immediately preceding exercise of this Warrant;
B = $4.50
As used herein, the "Current Fair Market Value" of the Common Stock as of a
specified date shall mean with respect to each share of Common Stock, (i) the
average of the closing prices of the Common Stock sold on all securities
exchanges on which the Common Stock may at the time be listed, or (ii) if there
have been no sales on any such exchange on such day, the average of the highest
bid and lowest asked prices on all such exchanges at the end of such day, or
(iii) if on such day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m.,
New York time, or (iv) if on such day the Common Stock is not quoted in the
NASDAQ System, the average of the highest bid and lowest asked prices on such
day in the domestic over-the-counter market as reported by the
-2-
<PAGE>
National Quotation Bureau, Incorporated or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which the Current Fair Market Value is being determined and the 20 consecutive
business days prior to such day. If on the date for which Current Fair Market
is to be determined the Common Stock is not listed on any securities exchange or
quoted in the NASDAQ System or the over-the-counter market, then Current Fair
Market Value of the Common Stock shall be the highest price per share which the
Company could then obtain from a willing buyer (not a current employee or
director) for Common Stock sold by the Company from authorized but unissued
shares, as determined in good faith by the Board of Directors of the Company,
unless prior to such date the Company has become subject to a merger,
consolidation, reorganization, acquisition or other similar transaction pursuant
to which the Company is not the surviving entity, in which case the Current Fair
Market Value of the Common Stock shall be deemed to be the per share value
received or to be received in such transaction by the holders of Common Stock.
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 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
-3-
<PAGE>
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 (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 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
-4-
<PAGE>
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(f) 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
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 at any time after the date of this
Warrant make a distribution (through a dividend or otherwise) to its
stockholders (a "Spin-Off") of capital stock of any entity other than the
Company ("Spin-Off Stock"), then (i) the Holder of this Warrant, to the extent
this Warrant is unexercised at the time of such distribution, shall receive a
warrant (a "Spin-Off Warrant") to purchase a number of shares of Spin-Off Stock
equal to the number of shares of Spin-Off Stock such Holder would have been
entitled to receive if such Holder had exercised this Warrant as of the record
date for such dividend or distribution and (ii) the Exercise Price shall be
adjusted as provided in the next sentence. The Spin-Off Warrant
-5-
<PAGE>
shall be substantially identical to this Warrant except it shall not expire
until the earlier of (i) the fifth anniversary of the date of the Warrant, or
(ii) the third anniversary of the initial public offering registered under the
Act of the issuer of the Spin-Off Stock, and the exercise price of such Spin-Off
Warrant shall be determined by multiplying the Exercise Price of this Warrant
immediately prior to the Spin-Off by a fraction, the numerator of which shall be
the aggregate Value (as determined below) of the Spin-Off Stock distributed in
the Spin-Off to all stockholders and the denominator of which shall be the
aggregate Value of the Company immediately prior to the Spin-Off. After the
exercise price of the Spin-Off Warrant has been determined, the Exercise Price
of this Warrant shall be reduced so that such Exercise Price as so reduced, when
added to the exercise price of the Spin-Off Warrant, shall equal the Exercise
Price of this Warrant immediately prior to the Spin-Off.
The Value of the Company immediately prior to the Spin-Off shall
be determined in good faith by the Board of Directors of the Company in reliance
upon a fairness opinion issued by an investment banking firm mutually acceptable
to the Company and to Hampshire Securities Corporation. The Value of the
Spin-Off Stock shall be determined in good faith by the Board of Directors of
the Company and of the issuer of the Spin-Off Stock after consideration of all
relevant factors, including any public trading market for the Spin-Off Stock,
the balance sheet and operations of the issuer of the Spin-Off Stock as compared
to that of the Company prior to the Spin-Off and such other factors as such
Boards determine are relevant. It shall be a condition to any Spin-Off that the
issuer at the Spin-Off Stock agree in writing to issue the Spin-Off Warrants to
the Holders and to effectuate this Agreement. In addition, the aggregate
price of the Warrants and the Spin-Off Warrants will not exceed $4.50.
(d) 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
Spin-Off Stock as the case may be), 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.
-6-
<PAGE>
(e) 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),
5(c) or 5(d) 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 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
-7-
<PAGE>
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. 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(e) 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.
(f) 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.
(g) 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.
(h) 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 to the Holder a due bill or other
appropriate instrument
-8-
<PAGE>
evidencing the Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(i) Upon each adjustment of the Exercise Price as a result of
the calculations made in Sections 5(b), 5(d), or 5(e) 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.
(j) 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.
(k) 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
agreement. Such agreement shall provide for adjustments which shall be as
nearly equivalent as practicable to the adjustments in Section 5.
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<PAGE>
(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; or
(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;
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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 continuing for a period of
24 months, 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 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
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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, underlying the Warrants issued in connection with the
Offering (but excluding the shares underlying the warrant issued to the
Placement Agent in connection with the Offering), 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) and
continuing for a period of 24 months, 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 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,
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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 Holder or such 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 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 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 (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
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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 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
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.
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 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
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<PAGE>
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 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
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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 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 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
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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 (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."
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
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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, distributing,
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 12 months from the date of the Company's initial public
offering.
14a. 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.
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15. 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 E(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: , 1996
CELERITY SYSTEMS, INC.
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.
ELECTION TO EXERCISE
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)
-21-
<PAGE>
Exhibit 5.1
[Letterhead of Squadron, Ellenoff, Plesent & Sheinfeld, LLP]
October 27, 1997
Celerity Systems, Inc.
9051 Executive Park Drive, Suite 302
Knoxville, Tennessee 37923
Re: Registration Statement on Form SB-2 (Registration No. 333-33509)
----------------------------------------------------------------
Ladies and Gentlemen:
You have requested our opinion, as counsel for Celerity Systems, Inc.,
a Delaware corporation (the "Company"), in connection with the registration
statement on Form SB-2 (No. 333-33509), as amended (the "Registration
Statement"), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act").
The Registration Statement relates to the offering by the Company of
2,000,000 shares of common stock, par value $0.001 per share, of the Company
(the "Common Stock"), and up to 300,000 shares of Common Stock to be issued
solely to cover over-allotments (collectively, the "Shares").
We have examined such records and documents and made such examinations
of law as we have deemded relevant in connection with this opinion. Based
upon such examinations, it is our opinion that when there has been compliance
with the Act and the applicable state securities laws, the Shares to be sold
by the Company, when issued, delivered, and paid for in the manner described
in the form of Underwriting Agreement filed as Exhibit 1 to the Registration
Statement, will be validly issued, and the Shares, when so issued, delivered
and paid for will also be fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Registration Statement. In so doing, we do not admit
that we are in the category of persons whose consent is required under the
Section 7 of the Act or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
Very truly yours,
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
<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 and 16, for which the date is
August 8, 1997, on our audits 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
October 27, 1997
