<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1997
REGISTRATION NO. 333-27299
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
BOREALIS TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7371 88-0238203
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
4070 SILVER SAGE DRIVE
CARSON CITY, NV 89701
(702) 888-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PETER PITSKER
BOREALIS TECHNOLOGY CORPORATION
4070 SILVER SAGE DRIVE
CARSON CITY, NV 89701
(702) 888-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN E. BOCHNER, ESQ. THOMAS J. POLETTI, ESQ.
MARK L. REINSTRA, ESQ. KATHERINE J. BLAIR, ESQ.
WILSON SONSINI GOODRICH & ROSATI FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN
650 PAGE MILL ROAD 9100 WILSHIRE BOULEVARD
PALO ALTO, CALIFORNIA 94304-1050 BEVERLY HILLS, CALIFORNIA 90212-3480
(415) 493-9300 (310) 273-1870
FACSIMILE: (415) 493-6811 FACSIMILE: (310) 274-8293
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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 of
1933, check the following box: [X]
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,
please check the following box. [ ]
------------------------
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 SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 30, 1997
1,600,000 SHARES
[BOREALIS LOGO]
COMMON STOCK
------------------------
All of the shares of Common Stock, par value $0.001 ("Common Stock"),
offered hereby are being sold by Borealis Technology Corporation, a Delaware
corporation (the "Company"). The Common Stock is traded on the Nasdaq SmallCap
Market under the symbol "BRLS." On June 16, 1997, the reported last sale price
of the Common Stock was $4.125 per share. See "Price Range of Common Stock."
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
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
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
</TABLE>
(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $198,000, assuming
a public offering price of $4.125 per share, (or $227,700 if the
Underwriter's over-allotment option described in footnote (3) is exercised
in full), and (ii) a warrant to purchase up to 160,000 shares of Common
Stock at $5.78 per share, assuming a public offering price of $4.125 per
share, exercisable over a period of four years, commencing one year from the
date of this Prospectus (the "Underwriter's Warrant"). The Company has
agreed to indemnify the Underwriter against certain civil liabilities under
the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company, estimated
at $575,000.
(3) The Company has granted the Underwriter an option, exercisable within 30
business days of the date of this Prospectus, to purchase up to 240,000
additional shares of Common Stock on the same terms and conditions as set
forth above to cover over-allotments, if any. If all such additional shares
of Common Stock are purchased, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be increased to
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered hereby on a "firm commitment" basis
by the Underwriter, subject to prior sale when, as and if delivered to and
accepted by the Underwriter, and subject to the right of the Underwriter to
reject any order in whole or in part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made at the offices
of H.J. Meyers & Co., Inc., 1895 Mt. Hope Avenue, Rochester, New York 15620 on
or about , 1997.
------------------------
H.J. MEYERS & CO., INC.
The date of this Prospectus is , 1997
<PAGE> 3
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
The Company furnishes to its stockholders annual reports containing
financial statements audited by an independent accounting firm and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial information.
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<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Each prospective investor is urged to read this Prospectus in its entirety. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Borealis Technology Corporation ("Borealis" or the "Company") is a provider
of enterprise-wide software solutions for the sales force automation market.
Borealis has developed and recently commenced sales of Arsenal, an advanced
software solution for the sales automation market, which is designed to enable
customers to automate sales processes and information exchanges between hundreds
or thousands of mobile users and central information systems containing
enterprise-wide customer databases. The Company believes that Arsenal overcomes
limitations of commercially available sales automation solutions by providing
the customization and scalability features of custom solutions together with
rapid implementation capabilities. In April 1997, the Company introduced Arsenal
and, to date, has shipped copies to Heidelberg USA and Maersk, Inc.
Over the past decade, information technology has had a substantial impact
on finance, accounting, manufacturing and research and development functions
and, more recently, has made inroads in sales. The sales force automation market
has emerged as a result of competitive pressures that are causing many
organizations to seek new ways to reduce costs and improve enterprise
productivity by automating their sales processes. Core sales processes that may
be automated through the application of information technology include contact
management, calendaring, delivery of pricing updates, sales forecasting, report
generation and network-wide access to customer information and other data.
Moreover, increased use of portable computers, decreased communications costs
and the emergence of the World Wide Web and wireless data communications have
increased the number of businesses seeking to extend core business process
automation to mobile computer users.
Organizations seeking to provide their mobile sales personnel with
enterprise-wide sales automation solutions are faced with a limited number of
approaches, each of which, the Company believes, typically fail to provide a
viable and cost-effective solution. These approaches generally fall into one of
two categories: pre-packaged products that provide a fixed set of features, are
not customizable and are not optimized to meet the needs of a large segment of
the sales automation market or custom applications where ease and cost of system
implementation are mitigating factors.
The Company believes that other commercially available sales automation
solutions do not adequately meet the needs of both management information system
("MIS") administrators and sales personnel. Accordingly, the Company believes
that the successful implementation of an enterprise-wide client/server and
mobile sales automation solution requires a dramatically different approach from
those offered by other commercially available products. As a result, during mid
1995, the Company ceased sales and marketing activities related to all of its
products and refocused its operational and strategic efforts on the design of
Arsenal and the establishment of relationships with third-party consulting
organizations and systems integrators ("third party integrators") to develop a
third-party integrator channel to assist customers in the implementation and
customization of Arsenal and to help leverage the Company's direct selling
efforts. Arsenal is an advanced mobile computing client/server application with
a development tool that is designed to enable organizations or third-party
integrators to rapidly and cost-effectively implement, modify on an on-going
basis sales automation solutions to meet the dynamic and changing needs of an
organization's sales force.
The Company's objective is to become the leading supplier of sales
automation solutions to assist businesses in deploying and customizing mobile
and client/server-based applications to enhance the productivity and
effectiveness of their sales personnel. The Company believes that Arsenal: (i)
provides new and advanced functionality to enable a more competitive use of
information technology; (ii) is easily modifiable as
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<PAGE> 5
business requirements or technical infrastructures evolve; and (iii) provides
the high level of reliability, performance and manageability required for mobile
and client/server sales automation solutions.
Borealis Corporation was incorporated in the State of Nevada in June 1988
and reincorporated in the State of Delaware under the name Borealis Technology
Corporation prior to the completion of its initial public offering in June 1996.
The Company's headquarters are located at 4070 Silver Sage Drive, Carson City,
NV 89701, and its phone number is (702) 888-3200.
The Company has filed trademark applications for Arsenal and Borealis. This
Prospectus also includes trademarks of companies other than the Company.
------------------------
NOTICE TO CALIFORNIA INVESTORS
EACH PURCHASER OF SHARES OF COMMON STOCK IN CALIFORNIA MUST MEET ONE OF THE
FOLLOWING SUITABILITY STANDARDS: (I) A LIQUID NET WORTH (EXCLUDING HOME,
FURNISHINGS AND AUTOMOBILES) OF $250,000 OR MORE AND GROSS ANNUAL INCOME DURING
1996, AND ESTIMATED DURING 1997, OF $65,000 OR MORE FROM ALL SOURCES; OR (II) A
LIQUID NET WORTH (EXCLUDING HOME, FURNISHINGS AND AUTOMOBILES) OF $500,000 OR
MORE. EACH CALIFORNIA RESIDENT PURCHASING SHARES OF COMMON STOCK OFFERED HEREBY
WILL BE REQUIRED TO EXECUTE A REPRESENTATION THAT IT COMES WITHIN ONE OF THE
AFOREMENTIONED CATEGORIES.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- ---------------------
1995 1996 1996 1997
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 736 $ 177 $ 91 $ 22
Gross margin............................... 522 111 57 11
Loss from operations....................... (564) (6,073) (629) (1,929)
Net loss................................... (593) (6,027) (646) (1,911)
Net loss per share(1)...................... $ (0.64) $ (3.11) $ (0.69) $ (0.60)
Shares used in computing net loss per
share(1)................................ 931,758 1,935,984 931,758 3,184,506
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------
MARCH 31, 1996 ACTUAL AS ADJUSTED(2)
-------------- ------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ (404) $1,186 $ 6,610
Total assets......................................... 539 3,707 9,131
Current liabilities.................................. 756 1,520 1,520
Stockholders' equity (deficit)....................... $ (1,246) $2,128 $ 7,552
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of shares used in computing net loss per share.
(2) Adjusted to reflect the application of the estimated net proceeds of this
offering (this "Offering"), assuming no exercise of the Underwriter's
over-allotment option or Underwriter's Warrant, based upon an assumed public
offering price of $4.125 per share, and after deducting underwriting
discounts and commissions and estimated offering expenses. See "Use of
Proceeds," "Capitalization" and "Description of Capital Stock."
4
<PAGE> 6
THE OFFERING
Common Stock Offered by the
Company....................... 1,600,000 shares
Common Stock Outstanding after
the Offering.................... 4,784,506 shares
Use of Proceeds................. Sales and marketing, research and
development, general and administrative
expenses, and general corporate purposes. See
"Use of Proceeds."
Nasdaq SmallCap Symbol.......... "BRLS"
------------------------
RISK FACTORS
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
Except as otherwise specified, all information in this Prospectus relating
to shares of Common Stock outstanding excludes 649,304 shares of Common Stock
reserved for issuance pursuant to the Company's 1996 Stock Plan, 115,000 shares
of Common Stock reserved for issuance pursuant to the Company's 1996 Director
Option Plan, 185,786 shares of Common Stock reserved for issuance pursuant to
the Company's 1994 Stock Plan, 200,000 shares of Common Stock reserved for
issuance pursuant to the Company's 1997 Employee Stock Purchase Plan, 160,000
shares of Common Stock issuable upon exercise of the Underwriter's Warrant and
212,000 shares of Common Stock issuable upon exercise of other outstanding
warrants and assumes no exercise of the Underwriter's over-allotment option. The
Company's 1994 Stock Plan, 1996 Stock Plan, 1996 Director Option Plan and 1997
Employee Stock Purchase Plan are sometimes referred to herein as the "Stock
Plans." See "Stock Plans."
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, each prospective
investor should carefully consider the following factors in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby. No investor should participate in the Offering unless such investor can
afford a complete loss of his or her investment. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth in
the following risk factors and elsewhere in this Prospectus.
GOING CONCERN ASSUMPTION; FUTURE CAPITAL NEEDS UNCERTAIN; NO ASSURANCE OF FUTURE
FINANCING
The Company's independent auditors' report on the Company's financial
statements at December 31, 1996 and for the years ended December 31, 1995 and
1996 contains an explanatory paragraph indicating that the Company had recurring
operating losses that raise substantial doubt about its ability to continue as a
going concern. In addition, the Company had an accumulated deficit of $8,700,811
at March 31, 1997. The Company may require substantial additional funds in the
future, and there can be no assurance that any independent auditors' report on
the Company's future financial statements will not include a similar explanatory
paragraph if the Company is unable to raise sufficient funds or generate
sufficient cash from operations to cover the cost of its operations. The
existence of the explanatory paragraph may materially adversely affect the
Company's relationship with prospective customers, third party integrators and
suppliers, and therefore could have a material adverse effect on the Company's
business, financial condition and results of operations.
The net proceeds from this Offering are estimated to be $5,424,400,
assuming no exercise of the Underwriters' over-allotment option. In the absence
of receiving the proceeds of this Offering, the Company anticipates that its
existing capital resources and cash generated from operations, if any, will be
sufficient to meet the Company's cash requirements only through the end of June
1997 at its anticipated level of operations. The Company's future capital
requirements will depend upon numerous factors, including the amount of revenues
generated from operations, the cost of the Company's sales and marketing
activities and the progress of the Company's research and development
activities, none of which can be predicted with certainty. The Company
anticipates that the proceeds of this Offering, together with existing capital
resources and cash generated from operations, if any, will be sufficient to meet
the Company's cash requirements for at least the next 12 months at its
anticipated level of operations. However, the Company may seek additional
funding during the next 12 months and will likely seek additional funding after
such time. There can be no assurance that any additional financing will be
available on acceptable terms, or at all, when required by the Company.
Moreover, if additional financing is not available, the Company could be
required to reduce or suspend its operations, seek an acquisition partner or
sell securities on terms that may be highly dilutive or otherwise
disadvantageous to investors purchasing the shares of Common Stock offered
hereby. The Company has experienced in the past, and may continue to experience,
operational difficulties and delays in its product development due to working
capital constraints. Any such difficulties or delays could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1 of Notes to Financial Statements.
COMPLETE DEPENDENCE ON RECENT PRODUCT INTRODUCTION
The Company commenced sales of Arsenal, currently the Company's only
product, in April 1997. As a result, the Company will derive substantially all
of its revenues from the sale of licenses and maintenance contracts for Arsenal.
Consequently, the Company is entirely dependent on the successful introduction
and commercial acceptance of Arsenal. Unless and until Arsenal receives market
acceptance, the Company will have no material source of revenue. There can be no
assurance that Arsenal will achieve market acceptance. The Company's ability to
effectuate market acceptance and sales of Arsenal will be substantially
dependent on the hiring and training of additional personnel, and there can be
no assurance that the Company will be able to successfully hire and train such
personnel. Although the Company has begun to establish distribution channels
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for Arsenal, commercial acceptance of Arsenal will require the Company to
successfully establish additional sales and distribution channels, of which
there can be no assurance. Any such failure will have a material adverse effect
on the Company's business, financial condition and results of operations.
Failure of Arsenal to achieve significant market acceptance will have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Strategy," and "-- Sales and Marketing."
NEED TO FILL KEY EXECUTIVE POSITIONS; DEPENDENCE ON LIMITED NUMBER OF KEY
PERSONNEL
In January 1997, Curtis Faith, the Company's founder and then President,
Chief Executive Officer and Chairman of the Board resigned from the positions of
President and Chief Executive Officer, retaining his role as the Company's
Chairman. Consequently, the Company is seeking to hire an individual to serve as
its Chief Executive Officer. Peter Pitsker, a member of the Company's Board of
Directors, is currently serving as the Company's Interim President and Chief
Operating Officer. In addition, in May 1997, the Company's Vice President of
Sales resigned from that position and is now managing the Company's strategic
partnership program. As a result, the Company is also seeking to hire a new Vice
President of Sales.
There can be no assurance that the Company will timely locate and hire
either a new Chief Executive Officer or Vice President of Sales, if at all, or
that any such new Chief Executive Officer or Vice President of Sales will
possess the leadership and other skills necessary to effectively manage the
Company. Highly skilled candidates are in great demand and the Company will be
required to provide substantial compensation to any new Chief Executive Officer
or Vice President of Sales. Any failure by the Company to timely find and hire
either of these individuals will have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the Company's future success substantially depends on the
efforts of certain of its officers and key technical and other employees, many
of whom have only recently joined the Company. The Company's future success will
require it to recruit additional key personnel, in addition to a Chief Executive
Officer and a Vice President of Sales, including product support, product
development and sales and marketing personnel. The Company has not entered into
employment agreements nor does it have key man life insurance. The Company
believes that its future success also substantially depends on its ability to
attract, retain and motivate highly skilled employees, who are in great demand.
There can be no assurance that the Company will be successful in doing so. See
"Management" and "Business -- Employees."
DEPENDENCE ON THIRD PARTY INTEGRATORS
Sales automation software products that address the needs of medium- to
large-size businesses are typically highly complex and require significant
customization that often results in an extensive implementation process. The
Company's strategy for implementing Arsenal is dependent on the utilization of
third-party integrators to install, customize and service it. Consequently,
third-party integrators are required to undergo a substantial amount of training
to be able to apply the Company's products to the varied needs of the Company's
current and prospective customers. There can be no assurance that the Company
will be able to attract and retain personnel necessary to train such
integrators. In addition, there can be no assurance that the Company's training
will be sufficient or that such integrators will be able to provide the level or
quality of service required to meet the needs of the Company's current and
prospective customers. The Company will likely be dependent on third-party
integrators to complete certain post-delivery obligations prior to the Company's
recognition of revenue. Any failure of such integrators to complete such
obligations could prevent the Company from recognizing revenue and the failure
to so recognize revenue could have a material adverse effect on the Company's
business, financial condition and results of operations. If the Company is
unable to maintain effective, long-term relationships with these integrators, or
if such integrators fail to meet the needs of the Company's current and
prospective customers in a timely fashion, or at all, such failure would result
in a loss of, or delay in, market acceptance or sales and could result in
increased product support costs and an injury to the Company's reputation, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Strategy" and "-- Sales
and Marketing."
In addition, the Company uses its third-party integrators as a source for
sales leads and, to some extent, as part of its sales and distribution channels.
To the Company's knowledge, such use of third-party integrators
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<PAGE> 9
by other companies has been limited and there can be no assurance that such
third-party integrators will contribute meaningfully to the Company's sales
efforts.
The Company has not and does not plan to enter into or maintain exclusive
relationships with third-party integrators and, consequently, such integrators
may have existing relationships with, or may undertake new relationships with,
the Company's direct competitors. There can be no assurance that such
integrators will promote Arsenal effectively, or at all. The failure of the
Company to provide sufficient incentive for such integrators may materially and
adversely affect the Company's sales of Arsenal which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RECENT LOSSES; QUARTERLY FLUCTUATIONS IN PERFORMANCE
The Company has experienced significant operating losses in each of fiscal
1994, 1995, 1996 and for the three months ended March 31, 1997 and expects to
incur significant operating losses for the foreseeable future. In mid 1995, the
Company ceased sales and marketing of its entire product line and shifted its
focus to the development of Arsenal and the establishment of a third-party
integrator channel. As a result, the Company will derive substantially all of
its revenues from the sale of licenses and maintenance contracts for Arsenal.
There can be no assurance that the Company will ever achieve profitability.
The Company's operating and other expenses are relatively fixed in the
short term. As a result, variations in timing of revenues will cause significant
variations in quarterly operating results. Notwithstanding the difficulty in
forecasting future sales, the Company generally must undertake its development,
sales and marketing activities and other commitments months in advance.
Accordingly, any shortfall in revenues in a given quarter may materially
adversely affect the Company's business, financial condition and results of
operations due to the inability to adjust expenses during the quarter to match
the level of revenues for the quarter. Once commitments for such expenditures
are undertaken, the Company may be unable to reduce them quickly if revenue is
less than expected. In addition, the Company's sales expectations are based
entirely on its internal estimates of future demand. Due to these and other
factors, the Company believes that quarter-to-quarter comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
Operating results may fluctuate as a result of many factors, including
volume and timing of orders received, the extent to which the Company is
required to establish and support a third-party integrator channel or hire
additional sales personnel to supplement such channel, announcements by the
Company and its competitors, the timing of commercial introduction of
enhancements to Arsenal, if any, or competitive products, the impact of price
competition on the Company's average selling prices, and the level of research
and development required to complete any future product enhancements. Almost all
of these factors are beyond the Company's control. In addition, due to the short
product life cycles that characterize the sales automation software market, the
Company's failure to introduce any Arsenal enhancements in a timely manner could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Volatility of Stock Price" and "Market for
Common Stock."
RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DELAYS OR DEFECTS
The sales automation software market is characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. The Company's future success depends in large part upon its
ability to obtain market acceptance of Arsenal, develop enhancements to Arsenal
to address the changing requirements of its customers, educate third-party
integrators regarding Arsenal and anticipate or respond to technological
advances, competitive products and emerging industry standards and practices in
a timely, cost-effective manner. There can be no assurance that the Company will
be successful in marketing and supporting Arsenal or enhancements to Arsenal, if
any, or will not experience difficulties that could delay or prevent the
successful marketing and support of these products, or that Arsenal and any such
product enhancements will adequately meet the requirements of the marketplace
and achieve
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<PAGE> 10
any significant degree of commercial acceptance. The Company has in the past
experienced delays in product development, including significant delays in the
development of Arsenal. Delays in enhancements to Arsenal, if any, may result in
customer dissatisfaction and delay or loss of product and maintenance revenues.
In addition, there can be no assurance that Arsenal or other future products
will meet the requirements of the marketplace or will conform to industry
standards and requirements. Any delays in the development or introduction of
enhancements to Arsenal or failure to respond to market requirements could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Software products such as Arsenal often contain errors or "bugs" that can
adversely affect the performance of the product or damage a user's data. There
can be no assurance that, despite testing by the Company and by potential
customers, errors will not be found in Arsenal, resulting in a loss of, or delay
in, market acceptance and sales, diversion of development resources, injury to
the Company's reputation, or increased service and warranty costs, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Sales and Marketing" and
"-- Research and Development."
COMPETITION
The sales automation software market is highly competitive, highly
fragmented and characterized by rapid technological change, frequent new product
introductions, short product life cycles and evolving industry standards, and is
expected, in the future, to be characterized by significant price erosion over
the life of a product. Within specific ranges of functionality, the Company
experiences competition from many sources, including: (i) companies that
directly address the sales automation market, such as Aurum Software, Inc.,
Siebel Systems, Inc., Saratoga Systems, Inc., Saleskit Software and Brock
Control Systems, Inc.; (ii) third-party integrators, such as Andersen
Consulting, LLP and KPMG Peat Marwick LLP, that design, develop and implement
custom sales automation solutions; (iii) the internal information technology
departments of organizations that develop proprietary sales automation
applications; and (iv) companies such as Symantec Corporation, Goldmine Software
Corporation and Modatech Systems Corporation, suppliers of Personal Information
Managers ("PIMS") off-the-shelf software specific to personal computers designed
to aid in such activities as time management, contact management and
calendaring. In addition, the Company may experience competition from additional
companies, to the extent such companies enter the sales automation market, such
as "groupware" vendors, "help desk" vendors, Local Area Network ("LAN") based
application development tools vendors, remote LAN-access communication vendors
and communications and systems management software vendors. Among the Company's
potential competitors are also a number of large hardware and software companies
that may develop or acquire products that compete in the sales automation
software market.
Current and potential competitors have established and may establish
cooperative relationships with third parties to increase the ability of their
products to address the needs of the Company's current and prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing, name recognition and other resources than the
Company. As a result, they may be able to respond more quickly to new or
emerging technologies and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
can the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures will not materially adversely affect the Company's business, financial
condition and results of operations. See "Business -- Competition."
LENGTHY SALES AND IMPLEMENTATION CYCLES
The purchase and implementation of Arsenal involves a significant
commitment of resources by prospective customers. As a result, the Company's
sales process could be subject to delays associated with lengthy approval
processes over which the Company has little or no control. These delays may
contribute to fluctuations in the Company's operating results, which may have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company will likely be dependent on
9
<PAGE> 11
third-party integrators to complete certain post-delivery obligations prior to
the Company's recognition of revenue. See "-- Recent Losses; Quarterly
Fluctuations in Performance," "-- Dependence on Third Party Integrators,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales and Marketing."
RISKS ASSOCIATED WITH MANAGING GROWTH
The Company's anticipated level of growth, should it occur, will challenge
the Company's management and its sales and marketing, customer support, research
and development, finance and general and administrative operations. To the
extent that significant growth occurs prior to the time that the Company hires a
new Chief Executive Officer, the challenges associated with such growth may be
particularly disruptive to the Company's operations. The Company's future
performance will depend in part on its ability to manage any such growth, should
it occur, and to adapt its operational and financial control systems, if
necessary, to respond to changes resulting from any such growth. The failure of
the Company's management to respond to and manage growth effectively will have a
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Need to Fill Key Executive Positions; Dependence
on Limited Number of Key Personnel."
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's ability to compete effectively depends in large part on its
ability to develop and maintain proprietary aspects of its technology. The
Company relies on a combination of trade secret, copyright and trademark law and
nondisclosure agreements to protect its proprietary rights in its anticipated
products. Existing copyright laws afford only limited protection for Arsenal and
any future products. Despite precautions taken by the Company, it may be
possible for unauthorized third parties to copy aspects of Arsenal or future
products or to obtain and use information that the Company regards as
proprietary. Moreover, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. In addition, some aspects of the Company's proposed products are not
subject to intellectual property protection.
The Company cannot be certain that others will not independently develop
substantially equivalent or superseding proprietary technology, or that an
equivalent product will not be marketed in competition with the Company's
products, thereby substantially reducing the value of the Company's proprietary
rights. There can be no assurance that any confidentiality agreements between
the Company and its employees will provide adequate protection for the Company's
proprietary information in the event of any unauthorized use or disclosure of
such proprietary information. See "Business -- Proprietary Rights and Licenses."
PRODUCT LIABILITY
The Company's license agreements with its customers typically have
contained, and are expected in the future to contain, provisions designed to
limit the Company's exposure to potential product liability claims. However, it
is possible that the limitation of liability provisions contained in the
Company's license agreements may not be effective under the laws of certain
jurisdictions. Although the Company has not experienced any product liability
claims to date, the sale and support of Arsenal or other future products by the
Company may entail the risk of such claims and there can be no assurance that
the Company will not be subject to such claims in the future. And although the
Company maintains insurance covering such claims, no assurance can be given that
the amount or terms of such insurance will be adequate. A product liability
claim brought against the Company, regardless of its merit, could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
EFFECT OF ANY FUTURE LEGAL PROCEEDINGS
Although the Company is not currently party to any material legal
proceedings, any future litigation involving the Company could result in
substantial costs and diversion of resources and could have a material
10
<PAGE> 12
adverse effect on the Company's business, financial condition and results of
operations regardless of the final outcome of any such litigation. See
"Business -- Legal Proceedings."
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
As permitted by Delaware General Corporation Law, the Company has included
in its Certificate of Incorporation a provision to eliminate the personal
liability of its directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In addition,
the Bylaws of the Company provide that the Company is required to indemnify its
officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary and the
Company is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them for which they may
indemnified. The Company has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. See "Management -- Limitations on Liability and Indemnification
Matters."
SHARES ELIGIBLE FOR FUTURE SALE
Sale of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could materially adversely affect the
market price of the Common Stock. Upon completion of this Offering, the Company
will have outstanding approximately 4,784,506 shares of Common Stock. On the
date of this Prospectus, the 1,600,000 shares offered hereby and 2,291,050
additional shares will be immediately eligible for sale in the public market
without restriction. The remaining 893,456 shares (the "Lock-up Shares") are
subject to lock-up agreements under which the holders of such shares have agreed
not to sell or otherwise dispose of such shares, or shares subsequently acquired
under any option, warrant or convertible security owned by them until June 1998
without the prior written consent of the Underwriter. Substantially all of the
Lock-up Shares will be eligible for sale beginning in June 1998.
The Company has filed a registration statement on Form S-8 under the
Securities Act to register the sale of approximately 477,973 shares of Common
Stock reserved for issuance under its 1994 Stock Plan, 1996 Stock Plan and 1996
Director Option Plan. The Company also intends to file a registration statement
on Form S-8 to register the sale of approximately 672,117 additional shares of
Common Stock issuable pursuant to the Company's 1996 Stock Plan, 1996 Director
Option Plan and 1997 Employee Stock Purchase Plan. Shares of Common Stock issued
upon exercise of options granted after the effective date of the registration
statements on Form S-8 will be available for sale in the public market, subject
in some cases to volume and other limitations, including the lock-up agreements
referred to above. In addition, the Company's Board of Directors has authorized
the issuance of up to 1,000,000 shares of the Company's Common Stock upon the
Company achieving certain milestones, and has issued warrants to purchase
212,000 shares of Common Stock (372,000 upon the closing of this Offering). See
"Contingent Stock Issuance," "Management -- Stock Plans," "Description of
Capital Stock," "Shares Eligible for Future Sale," "Underwriting" and "Legal
Matters."
CHARGE TO INCOME IN THE EVENT OF CONTINGENT STOCK ISSUANCE
The Company's Board of Directors has authorized the issuance of 1,000,000
shares of Common Stock (the "Contingent Shares") issuable to holders of record
("Participants") of the Company's Common Stock and stock options issued by the
Company as of the effective time of the Company's initial public offering in
June 1996 contingent upon the Company achieving certain milestones. In the event
that the Company achieves net revenues for the year ended December 31, 1997 in
excess of $12,000,000 and a net loss of $2,500,000 or less for that year (before
giving effect to any compensation expense recognized by virtue of the issuance
of the Contingent Shares), then rights to purchase 350,000 shares of Common
Stock for one dollar per share will be issued to the Participants. In the event
that the Company achieves net revenues for the year ended December 31, 1998 in
excess of $18,000,000 and pre-tax profits of at least $2,730,000 for that year
(before giving effect to any compensation expense recognized by virtue of the
issuance of the Contingent Shares), then rights to purchase 650,000 shares of
Common Stock for one dollar per share will be issued to the Participants. In
addition, rights to purchase all of the unissued Contingent Shares for one
dollar per share will be issued to the Participants upon the occurrence of a
transaction in which control of the Company changes
11
<PAGE> 13
hands at a price (excluding the Contingent Shares) equal to or greater than
approximately: (i) $15 per share prior to December 31, 1997; or (ii) $30 per
share after December 31, 1997 and prior to December 31, 1998.
To date, the Company has not recorded any compensation expense related to
the issuance of the contingent shares. When in the opinion of the Company's
management it becomes probable that the milestones will be achieved, a
compensation expense will be recorded equal to the number of contingent shares
to be issued times the difference between the fair market value of the Company's
Common Stock (at the time of determination that the milestones will be met) and
one dollar per share. Such expense would have a material adverse effect on the
results of operations. If the Company's management does not determine that it is
probable that it will achieve the milestones, it will be required to record such
compensation expense if such milestones are, in fact, achieved, which would
result in a substantial one-time charge and will have a material adverse effect
on the Company's results of operations.
VOLATILITY OF STOCK PRICE
The Company's stock price has historically been volatile. The trading price
of the Company's Common Stock could be subject to significant fluctuations in
the future in response to variations in quarterly operating results, changes in
analysts' estimates, announcements of technological innovations by the Company
or its competitors, general conditions in the marketplace for sales automation
technology and other factors. In addition, the stock market is subject to price
and volume fluctuations that affect the market prices for companies in general,
and small capitalization, high technology companies, such as the Company, in
particular, and are often unrelated to such companies' operating performance.
See "-- Recent Losses; Quarterly Fluctuations in Performance" and "Market for
Common Stock."
POSSIBLE ILLIQUIDITY OF TRADING MARKET; PENNY STOCK; PENDING SEC INVESTIGATION
OF UNDERWRITER;
RECENTLY SETTLED NASD INVESTIGATION REGARDING UNDERWRITER
The shares of Common Stock are quoted on the Nasdaq SmallCap Market which
is a significantly less liquid market than the Nasdaq National Market. If the
Company should continue to experience losses from operations, it may be unable
to maintain the standards for continued quotation on the Nasdaq SmallCap Market,
and the shares of Common Stock could be subject to removal from the Nasdaq
SmallCap Market. Trading, if any, in the Common Stock would therefore be
conducted in the over-the-counter market on an electronic bulletin board
established for securities that do not meet the Nasdaq SmallCap Market listing
requirements, or in what are commonly referred to as the "pink sheets." As a
result, an investor would find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Company's Common Stock. Nasdaq has
recently promulgated new rules which make continued listing of companies on the
Nasdaq SmallCap Market more difficult and has significantly increased its
enforcement efforts with regard to the standards for such listing. In addition,
if the Company's Common Stock were removed from the Nasdaq SmallCap Market, the
Company's Common Stock would be subject to so-called "penny stock" rules that
impose additional sales practice and market making requirements on
broker-dealers who sell and/or make a market in such securities. Consequently,
removal from the Nasdaq SmallCap Market, if it were to occur, could affect the
ability or willingness of broker-dealers to sell and/or make a market in the
Company's Common Stock and the ability of purchasers of the Company's Common
Stock to sell their securities in the secondary market. In addition, if the
market price of the Company's Common Stock is less than $5.00 per share, the
Company may become subject to certain penny stock rules even if still quoted on
the Nasdaq SmallCap Market. Such rules may further limit the market liquidity of
the Common Stock and the ability of purchasers in this Offering to sell such
Common Stock in the secondary market.
The Chicago office of the Securities and Exchange Commission is conducting
a private, nonpublic investigation of H.J. Meyers & Co., Inc., the Underwriter
and the principal market maker in the Company's Common Stock, pursuant to a
Formal Order of Investigation issued by the Commission. The Staff is
investigating whether the Underwriter may have violated Section 17(a) of the
Securities Act of 1933 and Sections 10(b), 15(c) and 17(a) of the Securities
Exchange Act of 1934, and the rules and regulations thereunder, with respect to
sales of certain securities including those of the Company. The Company has
received a subpoena for the production of documents pursuant to this
investigation. Specifically, the subpoena requests that the Company provide
documents relating to the following: loans received by the Company, sales
12
<PAGE> 14
of the Company's securities by employees, officers and directors of the Company,
information relating to the Underwriter, information relating to any other
underwriter whether or not retained by the Company, communications with the
Company's stockholders, sales materials pertaining to the Company's stock,
documents filed with the Commission or any other regulatory agency,
self-regulatory organization or securities exchange, sales or shipments of
Arsenal, minutes to Board of Director and stockholder meetings, audits conducted
for the Company, documents pertaining to any due diligence conducted as part of
a stock issuance and a list of employees, officers and directors of the Company.
The Company is currently unable to assess the potential impact of the
outcome of the Staff's investigation on the Offering or trading in the Company's
securities. Any limitation on the ability of the Underwriter to make a market in
the Company's Common Stock as a result of this investigation, or for any other
reason, could adversely impact the liquidity or trading price of the Company's
Common Stock, which could have a material adverse impact on the market price of
the Company's Common Stock. In addition, any adverse impact on the Company as a
result of this investigation, or for any other reason, could have a material
adverse effect on the market value and liquidity of the Company's Common Stock.
The Underwriter has informed the Company that it believes that it has
materially complied with the above-mentioned securities laws, and rules and
regulations thereunder, and that it has, and will continue to cooperate fully
with the Staff with respect to such investigation.
On July 16, 1996, the National Association of Securities Dealers, Inc. (the
"NASD") issued a notice of Acceptance, Waiver and Consent (the "AWC") whereby
the Underwriter was censured and ordered to pay fines and restitution to retail
customers in the amount of $250,000 and approximately $1.025 million,
respectively. The AWC was issued in connection with claims by the NASD that the
Underwriter charged excessive markups and markdowns in connection with the
trading of four certain securities originally underwritten by the Underwriter;
the activities in question occurred during periods between December 1990 and
October 1993. The Underwriter has informed the Company that the fines and
refunds will not have a material adverse effect on the Underwriter's operations
and that the Underwriter has effected remedial measures to help ensure that the
subject conduct does not recur.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock offered hereby will incur an immediate
and substantial dilution of approximately 62% of their investment in the shares
of Common Stock. The pro forma net tangible book value of the Company's Common
Stock after this Offering will be approximately $1.58 per share. See "Dilution"
and "Capitalization."
NO ANTICIPATED DIVIDENDS
The Company has not paid any dividends on its Common Stock and, for the
foreseeable future, intends to continue its policy of retaining earnings, if
any, to finance the development and expansion of its business. See "Dividend
Policy."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and certain other contractual provisions could have the effect of making it more
difficult for a third-party to acquire, or of discouraging a third-party from
attempting to acquire control of the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. Certain of these provisions allow the Company to
issue Preferred Stock with rights senior to those of the Common Stock without
any further vote or action by the stockholders, and impose various procedural
and other requirements which could make it more difficult for stockholders to
affect certain corporate actions. These provisions could also have the effect of
delaying or preventing a change in control of the Company. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the rights
and powers, including voting rights, of the holders of the Common Stock. In
certain circumstances, such issuance could have the effect of decreasing the
market price of the Common Stock.
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock being offered hereby, after deducting underwriting discounts and
commissions and offering expenses, are estimated to be approximately $5,424,400.
The Company expects to use the net proceeds from this Offering approximately as
follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------- -------
<S> <C> <C>
Sales and marketing (See "Business -- Sales and Marketing")..... $ 2,983,000 55%
Research and development (See "Business -- Research and
Development")................................................. 1,899,000 35
General and administrative...................................... 542,400 10
-------- ----
Total................................................. $ 5,424,400 100%
</TABLE>
The projected expenditures described above are estimates and approximations
only and do not represent firm commitments by the Company. The Company
anticipates that the allocation to sales and marketing will include hiring
additional sales personnel (including a Vice President of Sales), attracting and
retaining additional solution providers and engaging in certain marketing
activities such as seminars and trade show events. Proceeds allocated to general
corporate purposes may be utilized for acquisitions of or investments in
complementary technologies or businesses. No such acquisitions or investments
are currently planned by the Company. Pending such uses, the net proceeds will
be invested in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain future earnings, if any, to fund
the development of its business and therefore does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. Pursuant to a bank
term loan, the Company is restricted from paying cash dividends without the
prior approval of the lender. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of March 31, 1997; (i) actual, and (ii) as adjusted to reflect
the sale by the Company of 1,600,000 shares of Common Stock at an assumed public
offering price of $4.125 per share, less applicable underwriting discounts and
commissions and net of expenses and the application of the estimated net
proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
Short-term debt:
Current portion of capital lease obligations........................ $ 143 $ 143
Promissory note..................................................... 650 650
------- -------
Total short-term debt....................................... $ 793 $ 793
======= =======
Long-term debt:
Long-term portion of capital lease obligations...................... $ 60 $ 60
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding.................................... -- --
Common stock, $0.001 par value; 10,000,000 shares authorized;
3,184,506 shares issued and outstanding actual, 4,784,506 shares
issued and outstanding as adjusted.................................. 3 5
Additional paid in capital.......................................... 10,826 16,248
Accumulated deficit................................................. (8,701) (8,701)
------- -------
Total stockholders' equity.................................. 2,128 7,552
------- -------
Total capitalization........................................ $ 2,188 $ 7,612
======= =======
</TABLE>
- ---------------
(1) Assumes no exercise of the Underwriter's over-allotment option, the
Underwriter's Warrant or exercise of outstanding stock options or warrants.
15
<PAGE> 17
DILUTION
The net tangible book value of the Company's Common Stock as of March 31,
1997 was $2,127,795, or approximately $0.67 per share. Net tangible book value
per share represents the amount of the Company's total tangible assets less
total liabilities, divided by 3,184,506 shares of Common Stock outstanding as of
March 31, 1997.
Net tangible book value dilution per share represents the difference
between the amount per share paid by new investors who purchase shares of Common
Stock in this Offering and the pro forma net tangible book value per share of
Common Stock immediately after the closing of this Offering. After giving effect
to the sale by the Company of 1,600,000 shares of Common Stock in this Offering
at an assumed public offering price of $4.125 per share and after deduction of
underwriting discounts and commissions and estimated offering expenses, the pro
forma net tangible book value of the Company as of March 31, 1997 would have
been $7,552,195 or $1.58 per share. These effects result in an immediate net
increase in net tangible book value of $0.91 per share to existing stockholders,
and an immediate dilution of $2.55 per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share(l)................... $4.13
Net tangible book value per share at March 31, 1997........ $0.67
Increase per share attributable to new investors........... 0.91
-----
Pro forma net tangible book value per share after the
Offering(2)................................................ 1.58
-----
Pro forma net tangible book value dilution per share to new
investors(3)............................................... $2.55
=====
</TABLE>
- ---------------
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering to be paid by the Company.
(2) Does not give effect to an aggregate of up to 240,000 shares of Common Stock
issuable upon exercise of the Underwriter's over-allotment option.
(3) Represents dilution of approximately 62% to purchasers of the shares of
Common Stock.
As of March 31, 1997, there were outstanding options to purchase an
aggregate of 428,877 shares of Common Stock at a weighted average exercise price
of $3.57 per share and warrants to purchase an aggregate of 212,000 shares of
Common Stock at a weighted average exercise price of $7.59 per share. As of
March 31, 1997, the Company had reserved 2,150,090 shares of Common Stock for
issuance upon the exercise of options that may be granted under its Stock Plans
and including the Contingent Shares. To the extent options are exercised, there
will be further dilution to new investors in the Offering.
16
<PAGE> 18
CONTINGENT STOCK ISSUANCE
The Company's Board of Directors has authorized the issuance of 1,000,000
shares of Common Stock (the "Contingent Shares") issuable to holders of record
of the Company's Common Stock and stock options issued by the Company as of June
21, 1996 (the "Participants") as of the effective date of the Company's initial
public offering in June 1996 contingent upon the Company achieving certain
milestones. In the event that the Company achieves total revenues for the year
ended December 31, 1997 in excess of $12,000,000 and a net loss of $2,500,000 or
less for that year (before giving effect to any compensation expense recognized
by virtue of the issuance of the Contingent Shares), then rights to purchase
350,000 shares of Common Stock for one dollar per share will be issued to the
Participants. In the event that the Company achieves total revenues for the year
ended December 31, 1998 in excess of $18,000,000 and pre-tax profits of at least
$2,730,000 for that year (before giving effect to any compensation expense
recognized by virtue of the issuance of the Contingent Shares), then rights to
purchase 650,000 shares of Common Stock for one dollar per share will be issued
to the Participants. In addition, rights to purchase all of the unissued
Contingent Shares for one dollar per share will be issued to the Participants
upon the occurrence of a transaction in which control of the Company changes
hands at a price (excluding the Contingent Shares) equal to or greater than
approximately: (i) $15 per share prior to December 31, 1997; or (ii) $30 per
share after December 31, 1997 and prior to December 31, 1998.
To date, the Company has not recorded any compensation expense related to
the issuance of the Contingent Shares, because in the opinion of the Company's
management it is not probable that the milestones will be achieved. If and when
management determines that it is probable that the milestones will be achieved,
the Company will record a compensation expense equal to the number of Contingent
Shares to be issued times the difference between the fair market value of the
Company's Common Stock (at the time of determination that the milestones will be
met) and one dollar per share over the remaining fiscal year from the time of
such determination. Such expense would have a material adverse effect on the
results of operations. If the Company's management does not determine that it is
probable that it will achieve the milestones, it will be required to record such
compensation expense if such milestones are, in fact, achieved, which would
result in a substantial one-time charge and will have a material adverse effect
on the Company's results of operations.
MARKET FOR COMMON STOCK
The Company's Common Stock is traded on the Nasdaq SmallCap Market under
the symbol "BRLS." Following the Company's initial public offering on June 20,
1996, the following high and low closing prices were reported by Nasdaq each
quarter:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
Quarter ended June 30, 1996 (subsequent to June 20, 1996).............. $8.13 $6.75
Quarter ended September 30, 1996....................................... 6.88 3.88
Quarter ended December 31, 1996........................................ 4.75 3.00
Quarter ended March 31, 1997........................................... 6.00 3.88
Quarter ending June 30, 1997 (through June 16, 1997)................... 6.13 4.06
</TABLE>
At March 31, 1997, the Company had approximately 84 holders of record of
its Common Stock.
17
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected statement of operations data for each of the two
years in the period ended December 31, 1996 and the balance sheet data at
December 31, 1995 and December 31, 1996 are derived from financial statements of
the Company which have been audited by Ernst & Young LLP, independent auditors,
whose report with respect thereto states that there is substantial doubt about
the Company's ability to continue as a going concern, and are included elsewhere
in this Prospectus. The financial statements and selected financial data do not
include any adjustments that might result from the outcome of this uncertainty.
The selected statements of operations data for the three month periods ended
March 31, 1996 and 1997 and the selected balance sheet data as of March 31, 1996
and 1997 have been derived from unaudited interim condensed financial statements
of the Company contained elsewhere herein and reflect in management's opinion,
all adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the results of operations for these periods. Results of
operations for the three months ended March 31, 1996 and 1997 are not
necessarily indicative of results to be expected for the full fiscal year or any
future period. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, notes thereto and the independent
auditors' report included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------------------------
1995 1996 1996 1997
-------- ---------- ---------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 736 $ 177 $ 91 $ 22
Cost of revenues........................ 214 66 34 11
------ ------ ------- -------
Gross margin.......................... 522 111 57 11
Operating expenses:
Sales and marketing................... 188 2,744 178 817
Research and development.............. 565 2,452 334 617
General and administrative............ 333 988 174 506
------ ------ ------- -------
Loss from operations.................... (564) (6,073) (629) (1,929)
Interest income, net.................... (29) 46 (17) 18
------ ------ ------- -------
Net loss................................ $ (593) $ (6,027) $ (646) $ (1,911)
====== ====== ======= =======
Net loss per share...................... $ (0.64) $ (3.11) $ (0.69) $ (0.60)
Shares used in computing net loss per
share(1).............................. 931,758 1,935,984 931,758 3,184,506
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- ---------------------------
1995 1996 1996 1997
-------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............... $ (375) $ 3,182 $ (404) $ 1,186
Total assets............................ 331 5,607 539 3,707
Current liabilities..................... 577 878 756 1,520
Stockholders' equity (deficit).......... $ (600) $ 3,991 $ (1,246) $ 2,128
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of shares used in computing net loss per share.
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<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors," below and elsewhere in this
Prospectus. The following discussion should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
The Company was incorporated and began operation as a division of a company
founded by Curtis M. Faith, Chairman of the Board of Directors of the Company.
In September 1992, the Company purchased all of the assets and operations of
such division.
The Company has experienced a significant decrease in revenues and
significant operating losses in fiscal 1994, 1995 and 1996, and for the three
months ended March 31, 1997. In mid 1995, the Company ceased sales and marketing
of its entire product line and shifted its focus to the development of Arsenal
and the establishment of a third party integrator channel. The Company's
revenues in past periods have been generated almost entirely from the sale of
consulting services and products which the Company no longer sells and, as a
result, are not meaningful in predicting future performance. Although the
Company continues to provide product support for the products it no longer
sells, this activity is not expected to be meaningful to future operating
results. Due to the shift to the development and sale of Arsenal, the Company
will derive substantially all of its revenues from the sale of licenses and
maintenance contracts for Arsenal.
The Company's independent auditors' report on the Company's financial
statements at December 31, 1996 and for the years ended December 31, 1995 and
1996 contains an explanatory paragraph indicating that the Company had recurring
operating losses that raise substantial doubt about its ability to continue as a
going concern. In the absence of receiving the proceeds of this Offering, the
Company anticipates that its existing capital resources and cash generated from
operations, if any, will be sufficient to meet the Company's cash requirements
only through the end of June 1997 at its anticipated level of operations. The
Company's future operating results will depend on many factors, including demand
for the Company's Arsenal product, which has only recently been introduced, the
level of product and price competition, the ability of the Company to develop
and market new products and to control costs, the ability of the Company to
expand its direct sales force and indirect distribution channels and the ability
of the Company to attract and retain key personnel. In particular, the ability
of the Company to achieve revenue growth in the future will depend on its
success in adding a substantial number of direct sales personnel and in
attracting third party integrators in the current year and in future periods.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its existing sales personnel or that it can attract,
assimilate or retain additional highly qualified sales personnel in the future.
Further, the Company believes, based on interactions with its customers and
potential customers, that the purchase of its product is relatively
discretionary and generally involves a significant commitment of capital. As a
result, in the event of a downturn in any potential customer's business or the
economy in general, purchases of the Company's product may be deferred or
canceled, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has generally recognized product license revenues not subject
to significant future obligations upon execution of a licensing agreement and
delivery of software products, provided there are no significant post-delivery
obligations and collection is probable. Service revenues have been and are
expected to be recognized as services are performed while maintenance revenues
have been and are expected to be recognized ratably over the term of the support
period.
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
Revenues:
Revenues have historically consisted of revenue from the licensing and sale
of products, revenue from service and maintenance agreements and revenue from
consulting services. Revenues decreased from $90,586 for the three months ended
March 31, 1996 compared to $22,349 for the three months ended March 31, 1997
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<PAGE> 21
due to the cessation of sales of the Company's previous products. While the
Company continues to provide support for previously discontinued products, this
activity is not expected to generate significant revenues. The Company does not
expect such fees to constitute a significant percentage of future revenues. The
Company anticipates that revenues will continue to decrease until the Company
begins to recognize revenues from sales of Arsenal.
Cost of Revenues:
Cost of revenues represents primarily amounts incurred pursuant to royalty
obligations and maintenance agreements on certain technology. Cost of revenues
decreased from $33,524 for the three month period ended March 31, 1996 to
$11,020 for the three month period ended March 31, 1997 due to the cessation of
sales of the Company's previous product line. The Company anticipates that cost
of revenues will increase in future periods as the Company commences sales of
Arsenal. The Company believes that the ratio of cost of revenues to revenues is
not meaningful in this period or indicative of future results.
Operating Expenses:
Total operating expenses, which are comprised of sales and marketing,
research and development, and general and administrative expenses, increased
from $685,972 to $1,940,498 between the three months ended March 31, 1996 and
1997. Sales and marketing expenses increased from $178,493 to $816,586 between
the three months ended March 31, 1996 and 1997. This increase was the result of
increased staffing as well as costs associated with the Company's attendance at
trade shows, print advertising and public relations. The Company anticipates
that sales and marketing expenses will continue to increase in future periods as
the Company expands its sales and marketing efforts in connection with the
introduction of Arsenal. Research and development expenses increased from
$333,648 to $617,509 between the three months ended March 31, 1996 and 1997.
This increase was the result of additional staffing and expenditures related to
the development of Arsenal. General and administrative expenses increased from
$173,831 to $506,403 between the three months ended March 31, 1996 and 1997.
This increase was due primarily to increased staffing. The Company anticipates
that total operating expenses will continue to increase for the foreseeable
future as the Company: (i) expands its sales and marketing function in order to
facilitate the market acceptance and sale of Arsenal; (ii) expands its technical
services organization to support customer needs and (iii) adds additional
software engineers to fund the development of enhancements to Arsenal and
develop new products.
Based on the Company's research and development process, costs incurred
between the establishment of technical feasibility and general release have not
been material and therefore have not been capitalized in accordance with
Statement of Financial Accounting Standards No. 86. All research and development
costs are expensed as incurred.
YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenues:
Revenues decreased from $736,152 to $176,941 between the fiscal years ended
December 31, 1995 and 1996. This decrease was primarily due to the cessation of
sales of the Company's previous products. The majority of the revenues in the
fiscal year ended December 31, 1996 are attributable to the recognition of
revenues related to sales and maintenance of products the Company no longer
sells.
In 1996, the Company received 35% and 36% of its revenues from its two
largest customers, Nortel and Synopsys, Inc., respectively. The Company received
14%, 27% and 38% of its 1995 revenues from Nortel, Scitex America Corp., and
Synopsys, Inc., respectively. As significant sales to any particular customer
are typically non-recurring, the Company does not believe its future results are
dependent on recurring revenues from any particular customer. The Company
anticipates, however, that a small number of customers may account for
disproportionately large percentages of its revenues in future quarters.
Cost of Revenues:
Cost of revenues decreased from $214,325 to $66,140 between the fiscal
years ended December 31, 1995 and 1996. The decrease is primarily the result of
the cessation of sales of the Company's previous products.
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<PAGE> 22
The Company believes that the ratio of cost of revenues to revenues is not
meaningful in this period or indicative of future results.
Operating Expenses:
Total operating expenses increased from $1,085,472 to $6,183,414 between
the fiscal years ended December 31, 1995 and 1996. Sales and marketing expenses
increased from $187,525 to $2,743,778 between the fiscal years ended December
31, 1995 and 1996. This increase was the result of increased staffing as well as
costs associated with the Company's attendance at several trade shows, print
advertising and public relations. Research and development expenses increased
from $565,276 to $2,451,544 between the fiscal years ended December 31, 1995 and
1996. This increase was the result of additional staffing and expenditures
related to the development of Arsenal. General and administrative expenses
increased from $332,671 to $988,092 between the fiscal years ended December 31,
1995 and 1996. This increase was due primarily to increased staffing.
The number of the Company's employees increased from 17 to 49 full time
employees between the end of fiscal year 1995 and 1996 and dropped to 46 as of
March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In June 1996, the Company completed an initial public offering of 2,000,000
shares of Common Stock. In July 1996, the Company completed the public sale of
an additional 291,050 shares of Common Stock pursuant to the exercise of an
over-allotment option granted by the Company to the Underwriter, who was also
the underwriter of the Company's initial public offering. As a result of these
sales, the Company received proceeds of $9.6 million, net of related
underwriting discounts and offering expenses. The Company invested the proceeds
from these sales in investment grade, interest-bearing securities, and has not
invested in any derivative securities or other financial instruments that
involve a high level of risk.
The Company's cash and short-term investments totaled $3.9 million at
December 31, 1996 and $2.5 million at March 31, 1997, representing 70% and 67%,
respectively, of total assets. The Company used $5.6 million of cash to fund
operations during fiscal 1996 and $1.8 million to fund operations for the first
quarter of 1997. Net cash used in operating activities was primarily for the
development and sales and marketing costs associated with Arsenal. The Company's
principal investing activities consisted of expenditures for computers, computer
related equipment, office furniture and leasehold improvements associated with a
new office facility the Company began occupying in February 1997.
In addition to sales of Common Stock, financing activities for the fiscal
year ended December 31, 1996 included $375,946 in new long-term lease
commitments to finance purchases of equipment and office furniture and a
$650,000 bank loan secured by an 18-month restricted certificate of deposit. The
bank loan was secured to repay stockholder debt which was at less favorable
terms and contains restrictions which preclude the Company from paying out cash
dividends or from incurring any indebtedness which would incumber the assets of
the Company without the prior written consent of the lender. Financing
activities for the three months ended March 31, 1997 consisted of scheduled
lease payments.
The net proceeds from this Offering are estimated to be $5,424,400
(assuming no exercise of the Underwriter's over-allotment option). In the
absence of receiving the proceeds of this Offering, the Company anticipates that
its existing capital resources and cash generated from operations, if any, will
be sufficient to meet the Company's cash requirements only through the end of
June 1997 at its anticipated level of operations. The Company's future capital
requirements will depend upon numerous factors, including the amount of revenues
generated from operations, the cost of the Company's sales and marketing
activities and the progress of the Company's research and development
activities, none of which can be predicted with certainty. The Company
anticipates that the proceeds of this Offering, together with existing capital
resources and cash generated from operations, if any, will be sufficient to meet
the Company's cash requirements for at least the next 12 months at its
anticipated level of operations, which includes increases in expenses,
particularly sales and marketing expenses, and costs of revenues. However, the
Company may seek additional funding during the next 12 months and will likely
seek additional funding after such time. There can be no assurance that any
additional financing will be available on acceptable terms, or at all, when
required by the
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Company. Moreover, if additional financing is not available, the Company could
be required to reduce or suspend its operations, seek an acquisition partner or
sell securities on terms that may be highly dilutive or otherwise
disadvantageous to investors purchasing the shares of Common Stock offered
hereby. The Company has experienced in the past, and may continue to experience,
operational difficulties and delays in its future product enhancement and
product development efforts due to working capital constraints. Any such
difficulties or delays could have a material adverse effect on the Company's
business, financial condition and results of operations.
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<PAGE> 24
BUSINESS
The following Business section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
Borealis Technology Corporation is a provider of enterprise-wide software
solutions for the sales force automation market. The Company was incorporated in
Nevada in June 1988 and reincorporated in Delaware in June 1996 prior to the
Company's initial public offering. From its inception until 1994, the Company
created and marketed development tools for software developers. In 1994, the
Company bought from an unrelated third party and began selling Salesbase, a
sales force automation product. The Company recognized the inherent risks and
drain on internal resources associated with the implementation of then current
enterprise-wide salesforce automation products and decided to design a sales
force automation product that could be easily implemented and customized by
third parties rather than the Company.
Borealis has developed and recently commenced sales of Arsenal, an advanced
software solution for the sales automation market, which is designed to enable
customers to automate sales processes and information exchanges between hundreds
or thousands of mobile users and central information systems containing
enterprise-wide customer databases. The Company believes that Arsenal overcomes
limitations of commercially available sales automation solutions by providing
the customization and scalability features of custom solutions together with
rapid implementation capabilities. In April 1997, the Company introduced Arsenal
and has shipped copies to Heidelberg USA and Maersk, Inc.
Traditionally, third-party integrators have functioned as an implementation
rather than a distribution channel of sales automation products. The Company
believes that such integrators have been constrained in their ability to serve
as a distribution channel due to product complexities, long implementation times
and the high cost of licensing and support of commercially available sales
automation products. The Company believes that Arsenal is deployable and
modifiable with considerably less effort and in a more timely and cost-effective
manner than other commercially available products. Reduced installation and
customization time is expected to enable third-party integrators to implement an
increased number of Arsenal systems without a corresponding increase in staffing
and related expenses. As a result, the Company believes that its network of
third-party integrators provides a more broad-based implementation capacity than
the Company could establish if implementing solutions itself, and which also
functions as a highly leveraged incremental distribution channel. The Company
believes that this approach should allow it to focus greater attention on
product development and marketing rather than on consulting and implementation.
INDUSTRY OVERVIEW
Over the past decade, information technology has had a substantial impact
on finance, accounting, manufacturing and research and development functions
and, more recently, has made inroads in sales. The sales force automation market
has emerged as a result of competitive pressures that are causing many
organizations to seek new ways to reduce costs and improve enterprise
productivity by automating their sales processes. Core sales processes that may
be automated through the application of information technology include contact
management, calendaring, delivery of pricing updates, sales forecasting, report
generation and network-wide access to customer and other data.
Advances in personal computer, telecommunications and related technologies
continue to stimulate interest in more effective client/server approaches to the
automation of core business processes. Moreover, increased use of portable
computers, decreased communications costs and the emergence of the World Wide
Web and wireless data communications have increased the number of businesses
seeking to extend core business process automation to mobile computer users.
Organizations seeking to provide their mobile sales personnel with
enterprise-wide sales automation solutions are faced with a limited number of
approaches, each of which, the Company believes, fails to provide a viable and
cost-effective solution. These approaches generally fall into one of two
categories: pre-packaged products that provide a fixed set of features, are not
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customizable and are not optimized to meet the needs of a large segment of the
sales automation market or custom applications where ease and cost of system
implementation are mitigating factors.
Pre-packaged products enable individuals and small groups to monitor
contact information such as addresses and telephone numbers; calendar
information such as appointments, meetings and phone calls; and, in some cases,
provide limited task-specific sales functionality. However, the Company does not
believe that these pre-packaged products are effective substitutes for
enterprise-wide sales automation systems, because they are not designed to scale
in size to address large mobile user groups, are inflexible and are generally
configurable in limited ways. Moreover, the Company believes that such products
do not fully address the customer's internal sales process because they do not
work with the customer's existing information system infrastructure and lack
comprehensive sales-specific functionality.
Custom solutions are better suited to meet the individual requirements of
different organizations and their respective sales methodologies. However,
custom solutions are typically expensive to implement and require programming of
source code by an MIS administrator or third party integrator for their
installation or modification. The complexities introduced by source code
modifications often result in long and expensive installations and may cause
difficulty in integrating subsequent upgrades and improvements. In addition,
because each custom product requires its own quality assurance testing, custom
solutions do not achieve the efficiencies obtainable when quality assurance
efforts are leveraged across many customers.
As a result of the foregoing, the Company believes that a substantial
market opportunity exists for a sales automation solution that provides "off the
shelf" functionality that can be readily customized to match the unique needs of
an organization and can be quickly and cost-effectively reconfigured as the
organization grows and its needs evolve.
STRATEGY
The Company's objective is to become the leading supplier of sales
automation solutions to enable businesses to enhance the productivity and
effectiveness of their sales personnel. The Company's strategy includes the
following key elements:
Leverage Proprietary Technology to Provide Easily Modified and Upgraded
Solutions
Borealis has developed a powerful set of software technologies that have
been designed to enable the Company to bring to market sales automation
solutions that work on multiple host and client platforms and provide
competitive advantages over commercially available products. These technologies
include: (i) a proprietary mobile database synchronization engine; (ii) a
proprietary object-oriented graphical interface library; (iii) a proprietary
high-speed multiple platform mobile computing database engine; and (iv) an
extensive library of software tools designed to minimize product development
time and ensure product quality.
The Company believes that these proprietary technologies provide, among
other things: (i) inherent scalability; (ii) an architecture that enables rapid
deployment and continuous modification; (iii) automatic distribution of
application updates; (iv) efficient and continuous collection and dissemination
of critical data, (v) support for integration with existing legacy systems; (vi)
support for existing and emerging communication and connectivity strategies,
including wireless data communications such as paging and cellular, the Internet
and the World Wide Web; and (vii) an architecture that permits intermittent
connections to a central computing center by mobile users. The Company believes
that its proprietary software technology should allow it to develop and
introduce products that meet the needs of both MIS administrators and sales
personnel within the sales automation marketplace.
Establish and Leverage Third-Party Integrator and Distribution Channel
As many of the Company's current and potential licensing arrangements will
require customization or systems integration consulting, Borealis has devoted
significant resources to develop relationships with third-party sales automation
integrators to assist end-use customers with the implementation and
customization of Arsenal. To develop these relationships, the Company has
trained third-party integrators in the use of Arsenal,
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and intends to identify appropriate projects for specific integrators and to
introduce one or more of such integrators to the customer early in the sales
process. The Company believes that this strategy will enable its customers to
achieve efficient implementation and customization of Arsenal, while enabling
the Company to focus on the marketing and enhancement of Arsenal. In addition,
the Company believes that, as third party integrators become increasingly
familiar with Arsenal, such integrators could become a source of sales leads.
The Company has signed agreements with several third party integrators to
implement Arsenal and the Company is continuing to have discussions with other
potential integrators.
ARSENAL
Arsenal consists of three separate software components: the Arsenal
Designer, which is the development tool that enables customization and
modification of the application; the Arsenal Server, which coordinates the
distribution of various changes to the application and data across multiple
users; and the Arsenal Client, which is the software application that resides on
the end-user's computer.
Arsenal Designer
Using the Arsenal Designer, an MIS administrator, without modifying the
source code of the product, can: extensively modify the database or third party
integrator structure by adding or removing tables, database fields and indexes;
create new screens and forms with graphical and display editing controls; and,
through the use of Visual Basic compatible scripting, alter business rules and
functionality. In addition to these built-in customization capabilities, the
Arsenal Designer allows MIS administrators or third party integrators to extend
the product's functionality through the use of C++ plug-in extension modules.
Using the application programming interface, developers are able to access
native low-level operating system routines directly, making available the full
range of capabilities of the operating system. Changes made with the Arsenal
Designer are automatically distributed to mobile and LAN computer users
throughout a customer's mobile enterprise through processes controlled by MIS
administrators. The Company believes that the Arsenal Designer offers
significant functionality not available in commercially available sales
automation products.
Arsenal Server
The Arsenal Server manages central-site administration and synchronization,
administers the implementation of enterprise-wide business rules and translates
higher-level user requests into low-level commands executable by the Database
Management System, the central data repository for the system. This approach
creates a three-tier client/server architecture which the Company believes
offers the following benefits over two-tier systems used by certain of the
Company's competitors: reduced network traffic, increased ability to handle a
large number of users, and improved system performance.
Arsenal Client
The Arsenal Client is designed to be installed on the computers of
enterprise wide sales personnel. It contains Arsenal's graphical user interface
and the individual data subsets that upload and download data to and from the
Application Server when the Client is detached from the Server. Customization of
individual Arsenal Client applications allows data to be displayed and processed
in different ways by different users. Some of the pre-built modules that are
included in an Arsenal Client application include calendaring, account and
customer contact management, sales opportunity management, forecasting and
others.
A modular open architecture, industry-standard scripting language and a
well-defined application programming interface give MIS administrators and third
party integrators the ability to control and extend Arsenal's capabilities in
ways that isolate these extensions from the Arsenal source code. Arsenal is
designed to allow customers to easily upgrade to new versions of the Arsenal
system in the future without requiring the replacement or re-entry of data.
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RESEARCH AND DEVELOPMENT
The Company's research and development efforts are currently focused upon
the enhancement and improvement of Arsenal. The Company's research and
development expenses were $565,276 and $2,451,544 for the fiscal years ended
December 31, 1995 and 1996, respectively, and $333,648 and $617,509 for the
three months ended March 31, 1996 and 1997, respectively. Software products such
as Arsenal often contain errors or "bugs" that can adversely affect the
performance of the product or damage a user's data. There can be no assurance
that despite testing by the Company and by current and potential customers
errors will not be found in Arsenal, resulting in a loss of, or delay in, market
acceptance and sales of the product, diversion of development resources, injury
to the Company's reputation or increased service and warranty costs, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
SALES AND MARKETING
The Company endeavors to leverage and complement its direct sales efforts
by recruiting and training a network of domestic and international third party
integrators. Traditionally, third-party integrators have functioned as an
implementation rather than a distribution channel of sales automation solutions.
The Company believes that such integrators have been constrained in their
ability to serve as a distribution channel due to product complexities, long
implementation times and the high cost of licensing and supporting commercially
available sales automation products. Arsenal is designed to be deployable and
modifiable with considerably less effort and in a more timely and cost-effective
manner than commercially available products. Reduced installation and
customization time is expected to enable third-party integrators to implement an
increased number of Arsenal systems without a corresponding increase in staffing
and related expenses. As a result, the Company believes that its network of
third-party integrators should not only provide a more broad-based
implementation capacity than the Company could establish if implementing
solutions itself, but which should also function as a highly leveraged
incremental distribution channel which complements its direct sales force.
Nonetheless, third-party integrators are required to undergo a substantial
amount of training to be able to apply the Company's products to the varied
needs of the Company's prospective customers. There can be no assurance that the
Company will be able to attract and retain personnel necessary to train such
integrators. In addition, there can be no assurance that the Company's training
will be sufficient or that such integrators will be able to provide the level or
quality of service required to meet the needs of the Company's customers. The
Company will likely be dependent on third-party integrators to complete certain
post-delivery obligations prior to the Company's recognition of revenue. Any
failure of such integrators to complete such obligations could prevent the
Company from recognizing revenue and the failure to so recognize revenue could
have a material adverse affect on the Company's business, financial condition
and results of operations. If the Company is unable to maintain effective,
long-term relationships with these integrators, or if such integrators fail to
meet the needs of the Company's prospective customers in a timely fashion, or at
all, such failure would result in a loss of or delay in market acceptance or
sales and could result in increased product support costs and an injury to the
Company's reputation, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect its proprietary rights. The Company does not have any
patents or patent applications pending, and existing copyright, trademark and
trade secret laws afford only limited protection. The Company licenses its
products in object code form only, although it has in the past, and in the
future may have source code escrow arrangements when required by customers.
Despite the Company's efforts to protect its proprietary rights, attempts
may be made to copy or reverse engineer aspects of the Company's products or to
obtain and use information that the Company regards as
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proprietary. Moreover, there can be no assurance that others will not develop
products that infringe the Company's proprietary rights, or that are similar or
superior to those developed by the Company. Policing the unauthorized use of the
Company's products is difficult. Litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determinations in any
such litigation could result in the loss of the Company's proprietary rights,
subject the Company to significant liabilities, require the Company to seek
licenses from third parties or prevent the Company from manufacturing or selling
its products, any of which would have a material adverse affect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Limited Intellectual Property Protection."
In addition, the laws of certain foreign countries treat the protection of
proprietary rights of the Company in its products differently from those in the
United States, and in many cases the protection afforded by such foreign laws is
weaker than in the United States. Accordingly, there can be no assurance that
the Company will be able to protect its proprietary rights against unauthorized
third party copying or use, which could materially adversely affect the
Company's business, operating results or financial condition.
The Company believes that its past products did not and Arsenal does not
infringe the proprietary rights of third parties. There can be no assurance,
however, that infringement claims will not successfully be made. The Company may
receive communications in the future from third parties asserting infringement
upon intellectual property rights of such parties as a result of either features
or content of its software products. Although the Company is not currently
engaged in any intellectual property litigation or proceedings regarding any
claim or a violation by the Company of the intellectual property rights of
others, there can be no assurance that the Company will not become involved in
such proceedings.
The Company currently licenses certain technology from third parties
pursuant to fully paid up, royalty free source code licenses. The Company has no
material obligations with respect to such licenses. The Company expects that it
may be required to license certain software from third parties. While the
Company has not identified any technology for which it expects to obtain
licenses for future product development, the inability to obtain any such future
software licenses could result in delays in future product development or delays
or reductions in shipment until equivalent software could be developed or
identified, licensed and integrated, which could adversely affect the Company's
business, financial condition and results of operations.
COMPETITION
The sales automation software market is highly-competitive,
highly-fragmented and characterized by rapid technological change, frequent new
product introductions, short product life cycles and evolving industry
standards, and is expected, in the future, to be characterized by significant
price erosion over the life of a product. Within specific ranges of
functionality, the Company experiences competition from many sources, including:
(i) companies that directly address the sales automation market, such as Aurum
Software, Inc., Siebel Systems, Inc., Saratoga Systems, Inc., Saleskit Software
and Brock Control Systems, Inc.; (ii) third party integrators, such as Andersen
Consulting, LLP and KPMG Peat Marwick, that design, develop and implement custom
sales automation solutions; (iii) the internal information technology
departments of potential customers that develop proprietary sales automation
applications; and (iv) companies such as Symantec Corporation, Goldmine Software
Corporation and Modatech Systems Corporation, suppliers of Personal Information
Managers ("PIMS") off-the-shelf software specific to personal computers designed
to aid in such activities as time management, contact management and
calendaring. In addition, the Company may experience competition from additional
companies, to the extent such companies enter the sales automation market, such
as "groupware" vendors, "help desk" vendors, LAN-based application development
tools vendors, remote LAN-access communication vendors and communications and
systems management software vendors. Among the Company's potential competitors
are also a number of large hardware and software companies that may develop or
acquire products that compete in the sales automation software market.
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The Company believes that the principal competitive factors affecting its
market include product features such as adaptability, scalability, ability to
integrate with third party products, functionality, ease of use, product
reputation, quality, performance, price, customer service and support,
effectiveness of sales and marketing efforts and company reputation.
Current and potential competitors have established or may establish
cooperative relationships with third parties to increase the ability of their
products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing, name recognition and other resources than the Company. As
a result, they may be able to respond more quickly to new or emerging
technologies and to changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than can the
Company. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
will not materially adversely affect the Company's business, operating results
and financial condition. See "Risk Factors -- Competition."
FACILITIES
The Company's principal administrative, engineering, marketing and sales
facilities total approximately 19,000 square feet, and are located in a single
building in Carson City, Nevada under a lease that expires in 2002. In addition,
the Company has approximately 3,700 square feet in Incline Village, Nevada under
a lease that expires in July 1997. Management believes that its current
facilities are adequate to meet its currently foreseeable needs, and that, if
required, suitable additional space will be available to accommodate expansion
of the Company's operations on commercially reasonable terms.
EMPLOYEES
As of March 31, 1997, Borealis had 46 full-time employees. This number
includes 17 persons in research and development, 4 in technical services, 16 in
sales and marketing, and 9 in administration. The Company has experienced no
work stoppages and believes its relationship with its employees is good.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings. However, the Company
has received a letter alleging wrongdoing by the Company in connection with the
hiring of certain of the Company's employees by a former employer of such
employees, which allegation the Company believes is without merit. There can be
no assurance that litigation will not develop. Litigation is inherently
uncertain and any such litigation, regardless of its merit, could be expensive,
disruptive of management time, and could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Effect of Any Future Legal Proceedings."
28
<PAGE> 30
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------
<S> <C> <C>
Curtis Faith.................. 33 Chairman of the Board
Peter Pitsker................. 64 Interim President, Chief Operating Officer and
Director
Elizabeth Gasper.............. 43 Executive Vice President and Chief Financial
Officer
Ed Murphy..................... 43 Vice President of Marketing
Brian Breidenbach............. 35 Vice President of Engineering
Timothy Arnold................ 31 Vice President of Application Strategies
Edward Esber.................. 44 Director
Patrick Grady................. 29 Director
Shekar Swamy.................. 41 Director
</TABLE>
Curtis Faith founded the Company in June 1988 and has served as Chairman of
the Board since that time. Mr. Faith also served as the Company's President and
Chief Executive Officer from June 1988 to January 1997. Mr. Faith attended
Worcester Polytechnic Institute in Worcester, Massachusetts.
Peter Pitsker has served as interim President and Chief Operating Officer
since January 1997 and has served on the Board of Directors since August 1995.
Mr. Pitsker was President of Wonderware Corporation from October 1989 through
January 1991 and served as Chairman of the Board from January 1991 to January
1992. Since December 1993, Mr. Pitsker has served as President of
TechnoManagement, Inc. Mr. Pitsker graduated from Stanford University with a
B.S. in Chemical Engineering.
Elizabeth Gasper joined the Company in November 1996 as Executive Vice
President and Chief Financial Officer. From March 1993 until November 1996, Ms.
Gasper served as Controller of Scopus Technology, a customer asset management
software vendor. From May 1990 through August 1992, Ms. Gasper managed the
Corporate Financial Planning and Treasury Operations groups at Sybase, Inc., a
database vendor. Ms. Gasper graduated from the University of California at
Irvine with a B.A. in Economics and graduated from the University of California
at Los Angeles with an M.B.A. in Finance.
Ed Murphy joined the Company in June 1996 as Vice President of Marketing.
From April 1995 to June 1996, Mr. Murphy was Vice President of Marketing at Live
Picture, Inc. and from May 1988 to April 1995, Mr. Murphy served as Worldwide
Director of Marketing Communications at Borland International, Inc. Mr. Murphy
graduated from the University of California at Davis with a B.S. in Geology.
Brian Breidenbach joined the Company as Vice President of Engineering in
December 1996. From March 1991 to November 1996, Mr. Breidenbach served as
Director of Development at Quarterdeck Corporation, an Internet software vendor.
Mr. Breidenbach attended the University of Southern California.
Timothy Arnold joined the Company in September 1992 and has served as Vice
President of Application Strategies since January 1997. Prior thereto, Mr.
Arnold served as Vice President of Operations and Finance from January 1994 to
October 1996, Director of Marketing, Finance and Operations from January 1993 to
January 1994 and as a software engineer from September 1992 to January 1993.
Prior to joining the Company, Mr. Arnold served as a Senior Information Systems
Specialist for Sales at Bose Corporation. Mr. Arnold holds a B.A. in Economics
from Harvard University.
Edward Esber joined the Company as a Director in July 1996. Mr. Esber has
served as Chief Executive Officer and President of SoloPoint, Inc. since October
1995 and as the principal of The Esber Group, a strategy consulting group, since
April 1990. From July 1994 to October 1995 he was Chairman, Chief Executive
Officer and President of Creative Insights. Prior thereto, he served as
President and Chief Operating Officer of Creative Labs from May 1993 to July
1994. Mr. Esber holds a bachelor's degree in computer engineering from Case
Western Reserve University, a master's degree in electrical engineering from
29
<PAGE> 31
Syracuse University and an M.B.A. in general management from Harvard Business
School. Mr. Esber also serves on the boards of directors of Quantum Corporation
and SoloPoint, Inc. Pursuant to the Underwriting Agreement between the Company
and H.J. Meyers & Co., Inc. dated June 21, 1996, the Company has agreed, until
June 27, 1999, that H.J. Meyers & Co., Inc., shall have the right to designate
two members to the Company's Board of Directors provided that such members are
acceptable to the Company. Mr. Esber has been nominated to the Company's Board
of Directors pursuant to this Agreement.
Patrick Grady became a director of the Company in July 1996. Mr. Grady is
currently Managing Director, Venture Capital of H.J. Meyers & Co., Inc. From
June 1993 to March 1996. Mr. Grady served as Senior Vice President of Corporate
Finance at H.J. Meyers & Co., Inc. From March 1990 to May 1993, he was Vice
President of Corporate Finance at Josephthal, Lyon & Ross, Inc. Mr. Grady also
serves as a director of Deltapoint, Inc. and SoloPoint, Inc. Pursuant to the
Underwriting Agreement between the Company and H.J. Meyers & Co., Inc. dated
June 21, 1996, the Company has agreed, until June 27, 1999, that H.J. Meyers &
Co., Inc., shall have the right to designate two members to the Company's Board
of Directors provided that such members are acceptable to the Company. Mr. Grady
has been nominated to the Company's Board of Directors pursuant to this
Agreement.
Shekar Swamy joined the Company as a Director in May 1996. Mr. Swamy
co-founded American Technology Corporation, an integrator of mobile sales
automation and information solutions, in 1991, and has served as President of
such company since such time. Prior thereto, Mr. Swamy was Vice President of
Sales and Client Services at Dun & Bradstreet Corporation from April 1987 to
June 1991.
The Company currently is authorized to elect five directors. Each director
holds office until the next annual meeting of stockholders or until his
successor is duty elected and qualified. The officers serve at the discretion of
the Board.
Directors receive reimbursement of expenses incurred in attending Board
meetings. Except as otherwise described in this Prospectus, and for the
reimbursement of expenses, the Company has not paid cash or other compensation
to its directors. See "-- 1996 Director Option Plan."
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned for services rendered in all capacities to the Company for
the fiscal year ended December 31, 1996, as well as the total compensation paid
for the Company's previous two fiscal years to the Company's Chairman and former
President and Chief Executive Officer:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION(2)
------------------------------------------ ---- -------- ------- ---------------
<S> <C> <C> <C> <C>
Curtis Faith.............................. 1996 $ 87,500 -- $ 3,263
Chairman of the Board(3) 1995 $ 53,333 $ 6,667 $ 2,869
1994 $ 17,500 $ 500 $ 2,918
</TABLE>
- ---------------
(1) Other than salary described herein, the Company did not pay Mr. Faith any
compensation, including incidental personal benefits, in excess of 10% of
such individual's salary. No executive officer of the Company had a total
annual salary and bonus which exceeded $100,000 during fiscal 1996.
(2) Represents premiums paid for health and life insurance on behalf of Mr.
Faith.
(3) Mr. Faith resigned as President and Chief Executive Officer of the Company
in January 1997.
30
<PAGE> 32
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation contains provisions that
eliminate to the fullest extent permissible under Delaware law the liability of
its directors to the Company for monetary damages. Such limitation of liability
does not affect the availability of equitable remedies such as injunction relief
or rescission. The Company's Bylaws provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by Delaware law,
including in circumstances in which indemnification is otherwise discretionary
under Delaware law. The Company has entered into indemnification agreements with
its officers and directors containing provisions which require the Company,
among other things, to indemnify the officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. See "Risk
Factors -- Limitations on Liability and Indemnification Matters."
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
31
<PAGE> 33
STOCK PLANS
1994 STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors and stockholders on July 2, 1994. An aggregate of 185,786
shares of Common Stock have been reserved for issuance under the Option Plan.
Following approval of the Company's 1996 Stock Plan, discussed below, the
Company ceased granting options under the Option Plan. The Option Plan provides
for the grant to employees of the Company of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for the grant of nonstatutory stock options to employees and
consultants of the Company. The Option Plan may be administered by the Board or
a committee approved by the Board in a manner that complies with Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Currently, the Option Plan is administered by the Board, which determines the
terms of options and rights granted, including the exercise price, number of
shares subject to the option or right and the exercisability thereof.
Options granted under the Option Plan are not transferable other than by
will or the laws of descent or distribution, and such options are exercisable
during the lifetime of the recipient only by such person. The exercise price of
all incentive stock options granted under the Option Plan must be at least equal
to the fair market value of the shares of Common Stock on the date of the grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of the Company, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date and the maximum term of the option must not exceed five (5)
years. The term of all other options granted under the Option Plan may not
exceed ten (10) years.
1996 DIRECTOR OPTION PLAN
The 1996 Director Option Plan (the "Director Plan") was adopted by the
Board of Directors and approved by the stockholders of the Company in May 1996.
Non-employee directors are entitled to participate in the Director Plan. The
Director Plan has a term of ten years, unless terminated sooner by the Board. A
total of 115,000 shares of Common Stock have been reserved for issuance under
the Director Plan.
The Director Plan provides for the automatic grant of 20,000 shares of
Common Stock to each non-employee director on the date on which the person first
becomes a non-employee director (the "First Option"), unless immediately prior
to becoming a non-employee director, such person was a director of the Company.
After the First Option is granted to the non-employee director, he or she shall
automatically be granted an option to purchase 6,667 additional shares (a
"Subsequent Option") each year on the day immediately following the annual
stockholders' meeting of the Company, if on such date he or she shall have
served on the Board for at least three years. Each First Option and each
Subsequent Option will have a term of 10 years. The exercise prices of the First
Option and each Subsequent Option shall be the fair market value per share of
the Common Stock, generally determined with reference to the closing price of
the Common Stock as reported on the Nasdaq SmallCap Market.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted by the successor corporation. Options granted under the Director
Plan must be exercised within three months of the end of the optionee's tenure
as a director of the Company, or within twelve months after such director's
termination by death or disability, but in no event later than the expiration of
the option's ten year term. No option granted under the Director Plan is
transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.
The administration and other terms of the Director Plan are structured so
that options granted to the nonemployee directors who administer the Company's
stock plans shall qualify as transactions exempt from Section 16(b) of the
Securities Exchange Act of 1934 as amended (the "Exchange Act"), pursuant to
Rule 16b-3 promulgated thereunder.
32
<PAGE> 34
1996 STOCK PLAN
The 1996 Stock Plan (the "1996 Plan") was adopted by the Board of Directors
and approved by the stockholders of the Company in May 1996. The Company's 1996
Plan provides for the granting to employees of incentive stock options within
the meaning of Section 422 of the Code, and for the granting to employees and
consultants of nonstatutory stock options and stock purchase rights ("SPRs"). A
total of 649,304 shares of Common Stock have been reserved for issuance pursuant
to the 1996 Plan. Unless terminated sooner, the 1996 Plan will terminate
automatically on its tenth anniversary. The Board has the authority to amend,
suspend or terminate the 1996 Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the 1996 Plan.
The 1996 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee is required to be constituted to
comply with Section 16(b) of the Exchange Act and applicable laws. The Committee
has the power to determine the terms of the options or SPRs granted, including
the exercise price, the number of shares subject to each option or SPR and the
exercisability thereof, and the form of consideration payable upon exercise.
Options and SPRs granted under the 1996 Plan will not generally be transferable
by the optionee, and each option and SPR will be exercisable during the lifetime
of the optionee only by such optionee. Options granted under the 1996 Plan must
be exercised within three months of the end of optionee's status as an employee
or consultant of the Company, or within twelve months after such optionee's
termination by death or disability, but in no event later than the expiration of
the option's ten year term. The exercise price of all incentive stock options
granted under the 1996 Plan must be at least equal to the fair market value of
the Common Stock on the date of grant. The exercise price of nonstatutory stock
options and SPRs granted under the 1996 Plan is determined by the Committee.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date and the term of such incentive stock
option must not exceed five years. The term of all other options granted under
the 1996 Plan may not exceed ten years.
The 1996 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets or
a like transaction involving the Company, each option shall be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options are not assumed or substituted as described in the preceding sentence,
the Committee shall provide for the optionee to have the right to exercise the
option or SPR as to all or a portion of the optioned stock, including shares as
to which it would not otherwise be exercisable. If the Committee makes an option
or SPR exercisable in full in the event of a merger or sale of assets, the
Committee shall notify the optionee that the option or SPR shall be fully
exercisable for a period of fifteen days from the date of such notice, and the
option or SPR will terminate upon the expiration of such period.
1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors in April 1997 and the stockholders in May
1997. The 1997 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains consecutive, overlapping, twelve month offering periods. Each
offering period includes two six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year. A total of 200,000 shares have been reserved for issuance under the
1997 Purchase Plan.
Employees are eligible to participate if they are customarily employed by
the Company or any designated subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, any employee who: (i)
immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of the capital stock of the Company; or
(ii) whose rights to purchase stock under all employee stock purchase plans of
the Company accrues at a rate which exceeds $25,000 worth of stock for each
calendar year may not be granted an option to purchase stock under the 1997
Purchase Plan.
33
<PAGE> 35
The 1997 Purchase Plan permits participants to purchase Common Stock
through payroll deductions of up to 10% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings,
including commissions, incentive bonuses and performance bonuses. Amounts
deducted and accumulated by the participant are used to purchase shares of
Common Stock at the end of each purchase period. The price of stock purchased
under the 1997 Purchase Plan is 85% of the lower of the fair market value of the
Common Stock at the beginning of the offering period or at the end of the
purchase period. The maximum number of shares a participant may purchase during
a single offering period is determined by dividing $25,000 by the fair market
value of a share of the Company's Common Stock on the first day of the offering
period. In the event the fair market value at the end of a purchase period is
less than the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. Participants
may end their participation at any time during an offering period, and they will
be paid their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan.
The 1997 Purchase Plan provides that, in the event of a merger of the
Company with or into another corporation or a sale of substantially all of the
Company's assets, each outstanding option may be assumed or substituted for by
the successor corporation. If the successor corporation refuses to assume or
substitute for the outstanding options, the offering period then in progress
will be shortened and a new purchase date will be set so that shares of Common
Stock are purchased with the participant's accumulated payroll deductions prior
to the effective date of such transaction.
The Board of Directors has the authority to amend or terminate the 1997
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 1997 Purchase Plan. Unless sooner terminated
by the Board of Directors, the 1997 Purchase Plan will terminate on April 9,
2007.
34
<PAGE> 36
CERTAIN TRANSACTIONS
On December 31, 1995 and April 17, 1996, the Company borrowed $49,472 and
$100,000, respectively, from Curtis Faith, the Company's Chairman of the Board,
pursuant to demand promissory notes which bore interest at 6% per year. In
addition, on each of April 25, 1996 and May 14, 1996, the Company borrowed
$100,000 from Mr. Faith, pursuant to 8.5% promissory notes. These notes were
repaid by the Company in July 1996. From September 1992 to February 1995, the
Company made royalty payments of $5,000 per month to Efficient Field Service
Corporation, a company 50% owned by Mr. Faith and 50% owned by Mr. Faith's
father.
On November 3, 1995, Peter Pitsker, the Company's interim President and
Chief Operating Officer and a director of the Company, invested $83,000 in a 6%
Convertible Promissory Note financing of the Company. In addition, Mr. Pitsker
loaned $100,000 to the Company on May 6, 1996 pursuant to an 8.5% promissory
note. This note was repaid by the Company in July 1996. On June 11, 1996, the
Company also granted to Mr. Pitsker a warrant to purchase up to 2,000 shares of
Common Stock. The warrant is exercisable until July 2001 at a per share exercise
price of $5.00. In addition, in May 1997, in connection with Mr. Pitsker's
service as the Company's Interim President and Chief Operating Officer, the
Company granted TechnoManagement, Inc., a company owned by Mr. Pitsker, an
option to purchase up to 15,600 shares of Common Stock at a price of $4.25 per
share. 10,400 shares of Common Stock represented by this option vested
immediately, with the remainder vesting at a rate of 2,600 shares per month each
month during which Mr. Pitsker serves as the Company's Interim President and
Chief Operating Officer. Moreover, the Company has agreed to pay
TechnoManagement, Inc. $7,000 per month during which Mr. Pitsker serves in such
capacity. See "Notes to Condensed Financial Statements."
On May 23, 1996 and June 5, 1996, Jerry Brooks, Vice President of Strategic
Accounts of the Company, loaned $160,000 and $190,000, respectively, to the
Company pursuant to 8.5% promissory notes that were due 15 months from the date
of issue. These notes were repaid in July 1996. In addition, on June 11, 1996,
the Company granted Mr. Brooks a warrant to purchase up to 7,000 shares of
Common Stock. The warrant is exercisable until June 2001 at a per share exercise
price of $5.00.
Curtis Faith, the Company's Chairman of the Board, and Peter Pitsker,
interim President and Chief Operating Officer, are eligible to receive rights to
purchase shares of Common Stock pursuant to the Company's Contingent Rights
Plan. In the event that the Company achieves total revenues for the year ended
December 31, 1997 in excess of $12,000,000 and a net loss of $2,500,000 or less
for that year, Messrs. Faith and Pitsker would receive rights to purchase
123,687 and 5,877 shares of Common Stock, respectively. In the event that the
Company achieves total revenues for the year ended December 31, 1998 in excess
of $18,000,000 and pre-tax profits of at least $2,730,000 for that year, Messrs.
Faith and Pitsker would receive rights to purchase 229,705 and 10,915 shares of
Common Stock, respectively. See "Contingent Stock Issuance."
The Company and American Technology Corporation ("American") entered into a
Solution Provider Agreement dated October 4, 1996 pursuant to which American
will assist in the integration of the Company's Arsenal product following its
release. Mr. Swamy, a director of the Company, is President of American. The
Company believes that its negotiations with American have been held on an
arm-length basis. The Company's Solution Provider Agreements with its
third-party integrators grant a non-exclusive, non-transferable license to
implement Arsenal. Such agreements, including the agreement with American,
provide for standard pricing licensing terms, payment terms and support, among
other things.
The Company is negotiating a Settlement Agreement and Mutual Release with
its former Chief Operating Officer, Richard Mellor, pursuant to which it is
expected that the Company will agree to pay Mr. Mellor $8,334 per month, less
applicable withholding through July 31, 1997, and to continue to provide Mr.
Mellor with medical insurance benefits through such time. The Company expensed
the entire amount of these costs, which amounted to approximately $85,000, in
the first quarter of 1997. In addition, in connection with such Agreement, the
Company expects to loan Mr. Mellor $75,000 pursuant to a Note for the purpose of
exercising options which were previously granted to him. It is expected that
pursuant to a Security Agreement to be entered into between the Company and Mr.
Mellor that Mr. Mellor's obligations pursuant to such Note
35
<PAGE> 37
will be secured by certain shares of Common Stock of the Company held by Mr.
Mellor. The Company expects to agree that it shall have no recourse against Mr.
Mellor in connection with the Note, and shall only proceed against the
collateral securing the Note in the event of default.
The Company's initial public offering was underwritten and this Offering is
being underwritten by H.J. Meyers & Co., Inc., a firm that also serves as a
market maker with regard to the Company's Common Stock. Patrick Grady, a
director of the Company serves as the Managing Director, Venture Capital of H.J.
Meyers & Co., Inc. In addition to an underwriting discount of $1,145,525, in
connection with the Company's initial public offering, the Company paid H.J.
Meyers & Co., Inc. a non-accountable expense allowance of $343,657.50 and
$10,000 related to the publishing of a "tombstone" notice. In addition, in
connection with the Company's initial public offering, the Company issued to
H.J. Meyers & Co., Inc., a warrant to purchase up to 200,000 shares of the
Company's Common Stock at a price of $7.75 per share at any time during the
four-year period commencing on June 21, 1997. See "Underwriting."
The Company believes that the above-referenced transactions were made on
terms no less favorable to the Company than those available from unaffiliated
parties. All future transactions by the Company with officers, directors, 5%
stockholders and their affiliates will be entered into only if the Company
believes that such transactions are reasonably expected to benefit the Company
and the terms of such transactions are no less favorable to the Company than
could be obtained from unaffiliated parties.
36
<PAGE> 38
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 17, 1997 information relating to
the beneficial ownership of the Company's Common Stock by each person known by
the Company to be the beneficial owner of more than five percent (5%) of the
outstanding shares of Common Stock, by each director and nominee for director,
by each of the executive officers named in the Summary Compensation Table, and
by all directors and executive officers as a group. Unless otherwise indicated,
all persons named as beneficial owners of Common Stock have sole voting power
and sole investment power with respect to the shares indicated as beneficially
owned.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
---------------------
NO. OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Curtis Faith(1)........................................... 447,020 13.7% 9.2%
2246 Willowbend
Genoa, Nevada 89411
Edward Esber(2)........................................... 46,000 1.4% *
13430 Country Way
Los Altos Hills, CA 94022
Patrick Grady(3).......................................... 5,000 * *
2812 Laguna
San Francisco, CA 94123
Peter Pitsker(4).......................................... 143,893 4.4% 3.0%
925 Vista Lago Way
Boulder City, NV 89005
Shekar Swamy(5)........................................... 10,416 * *
29 Cedar Meadow Lane
Media, PA 19063
All directors and officers as a group (9 people)(6)....... 734,535 22.5% 15.1%
</TABLE>
- ---------------
* Less than one percent (1%).
(1) Mr. Faith has agreed, for a period of three years, to vote all of his shares
for the election of two nominees to the Board of Directors identified by
H.J. Meyers & Co., Inc.
(2) Includes 20,000 shares held by the Esber Family Trust and 5,000 shares
issuable upon exercise of stock options within 60 days of May 31, 1997.
(3) Represents 5,000 shares issuable upon exercise of stock options within 60
days of May 31, 1997. Mr. Grady currently serves as Managing Director,
Venture Capital, of H.J. Meyers & Co., Inc. He disclaims any beneficial
ownership of any shares beneficially owned by H.J. Meyers & Co., Inc.
(4) Includes 120,290 shares held by the Pitsker Revocable Living Trust dated
9-11-85, 8,003 shares issuable upon exercise of stock options and warrants
within 60 days of May 31, 1997, and 15,600 shares issuable upon exercise of
stock options within 60 days of May 31, 1997 held by TechnoManagement, Inc.,
a Company owned by Mr. Pitsker.
(5) Includes 5,416 shares issuable upon exercise of stock options within 60 days
of May 31, 1997.
(6) Includes 76,275 shares issuable upon exercise of stock options within 60
days of May 31, 1997.
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<PAGE> 39
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the sale of the shares of Common Stock offered hereby,
the authorized capital stock of the Company will consist of 10,000,000 shares of
Common Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock, $0.001
par value.
COMMON STOCK
As of March 31, 1996, there were approximately 3,184,506 shares of Common
Stock outstanding. The holders of Common Stock are entitled to one vote per
share on all matters to be voted on by stockholders. Subject to preferences that
may be applicable to any outstanding Preferred Stock, if any, the holders 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 in its discretion out of
funds legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, the holders 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. The Common Stock has no preemptive or other subscription rights and
there are no conversion rights or redemption or sinking fund provisions with
respect to such shares. All of the outstanding shares of Common Stock are fully
paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to determine the powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed upon any wholly unissued series of undesignated Preferred
Stock, as well as to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders. The issuance of any Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of the Common Stock. At present, the Company has no plans
to issue any shares of Preferred Stock.
WARRANTS
In connection with the Company's initial public offering, the Company
issued to H.J. Meyers & Co., Inc., the underwriter of such offering, a warrant
to purchase for investment a maximum of 200,000 shares of Common Stock. This
warrant becomes exercisable for a four-year period commencing June 21, 1997. The
exercise price of this warrant is $7.75 per share. The warrant will not be
transferable prior to its exercise date except to H.J. Meyers & Co., Inc. The
warrant contains anti-dilution provisions providing adjustment in the event of
any recapitalization, stock dividend, stock split or similar transaction. The
warrant does not entitle H.J. Meyers & Co., Inc. to any rights as a stockholder
of the Company until such warrant is exercised and shares are purchased
thereunder. The warrant and the shares of Common Stock thereunder may not be
offered for sale except in compliance with the applicable provisions of the
Securities Act. The Company has agreed that, if it shall cause to be filed with
the Securities and Exchange Commission a registration statement, the Underwriter
shall have the right during the four-year period commencing on June 21, 1996 to
include in such registration statement the warrant and the shares of Common
Stock issuable upon its exercise at no expense to the Underwriter. Additionally,
the Company has agreed that, upon written request by a holder or holders of 50%
or more of the warrant which is made during the exercise period of the warrant,
the Company will, on two separate occasions, register the warrant and the shares
of Common Stock issuable upon exercise thereof. The initial such registration
will be at the Company's expense and the second such registration will be at the
expense of the holder(s) of the warrant.
In connection with this Offering, the Company will issue to the Underwriter
the Underwriter's Warrant to purchase for investment a maximum of 160,000 shares
of Common Stock. The Underwriter's Warrant and the underlying shares are being
registered by means of the Registation Statement of which this Prospectus forms
a part. The Underwriter's Warrant will be exercisable for a four-year period
commencing one year from the
38
<PAGE> 40
effective date of the Registration Statement relating to the shares of Common
Stock offered hereby. The exercise price of such warrant is expected to be $5.78
per share (assuming an Offering price of $4.125 per share). The Underwriter's
Warrant will be restricted from sale, assignment or hypothecation prior to its
exercise date except to officers of the Underwriter and members of the selling
group and officers and partners thereof. The Underwriter's Warrant will contain
anti-dilution provisions providing adjustment in the event of any
recapitalization, stock dividend, stock split or similar transaction. The
Underwriter's Warrant will not entitle the Underwriter to any rights as a
stockholder of the Company until such warrant is exercised and shares are
purchased thereunder. The Underwriter's Warrant and the shares of Common Stock
thereunder may not be offered for sale except in compliance with the applicable
provisions of the Securities Act. The Company has agreed that, if it shall cause
to be filed with the Securities and Exchange Commission a registration
statement, the Underwriter shall have the right during the four-year period
commencing on the date of this Prospectus to include in such registration
statement the Underwriter's Warrant and the shares of Common Stock issuable upon
its exercise at no expense to the Underwriter. Additionally, the Company has
agreed that, upon written request by a holder or holders of 50% or more of the
Underwriter's Warrant which is made during the exercise period of such warrant,
the Company will, on two separate occasions, register such warrant and the
shares of Common Stock issuable upon exercise thereof. The initial such
registration will be at the Company's expense and the second such registration
will be at the expense of the holder(s) of the Underwriter's Warrant. See
"Underwriting."
In addition, the Company has issued to Peter Pitsker, the Company's Interim
President and Chief Operating Officer and a Director of the Company; Jerry
Brooks, an officer of the Company, and Wilson Sonsini Goodrich & Rosati,
Professional Corporation ("WSGR"), the Company's corporate counsel, warrants to
purchase a maximum of 2,000, 7,000 and 3,000 shares of Common Stock,
respectively. The warrant issued to WSGR is exercisable at any time prior to the
fourth anniversary of its execution and the warrants issued to Messrs. Pitsker
and Brooks are exercisable at any time prior to the fifth anniversary of their
execution. The exercise price of each warrant is $5.00 per share. These warrants
contain anti-dilution provisions providing adjustment in the event of any
recapitalization, stock dividend, stock split or similar transaction. These
warrants do not entitle the holders thereof to any rights as stockholders of the
Company until they are exercised and shares are purchased thereunder. These
warrants and the shares of Common Stock thereunder may not be offered for sale
except in compliance with the applicable provisions of the Securities Act. See
"Certain Transactions" and "Legal Matters."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
39
<PAGE> 41
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market or
the perception that such sales could occur could materially adversely affect the
market price of the Common Stock and the ability of the Company to raise capital
in the future.
Upon completion of this Offering, the Company will have outstanding
approximately 4,784,506 shares of Common Stock, assuming no exercise of the
Underwriter's over-allotment option, the Underwriter's Warrant and no exercise
of outstanding options or warrants. The 1,600,000 shares of Common Stock that
are sold by the Company to the public in this Offering and an additional
2,291,050 shares will be freely tradeable without restriction under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act.
The remaining 893,456 shares of Common Stock outstanding upon completion of
this Offering are subject to lock-up agreements, providing that the holders of
such shares will not offer, sell, contract to sell or grant any option to
purchase or otherwise dispose of the shares of stock owned by them or that could
be purchased by them through the exercise of options to purchase stock of the
Company prior to June 1998 without the prior written consent of the Underwriter.
The Company has agreed not to offer, issue, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock prior to the
date that is 12 months from the date of this Prospectus without the prior
written consent of the Underwriter, subject to certain exceptions. See
"Underwriting."
The Company has filed a registration statement on Form S-8 under the
Securities Act covering 477,973 shares of Common Stock reserved for issuance
under its 1994 Stock Plan, 1996 Stock Plan and 1996 Director Option Plan. In
addition, the Company intends to file a registration statement on Form S-8 to
register the sale of approximately 672,117 additional shares of Common Stock
issuable pursuant to the Company's 1996 Stock Plan, 1996 Director Option Plan
and 1997 Employee Stock Purchase Plan. Accordingly, shares registered under such
registration statements will, subject to volume limitations applicable to
affiliates of the Company, be available for sale in the open market, subject to
vesting restrictions and the lock-up agreements described above. In addition,
the Company's Board of Directors has authorized the issuance of up to 1,000,000
shares of the Company's Common Stock upon the Company achieving certain
milestones, and has issued warrants to purchase 212,000 shares of Common Stock
(372,000 upon the closing of this Offering).
40
<PAGE> 42
UNDERWRITING
The Underwriter has agreed subject to the terms and conditions of the
Underwriting Agreement between the Company and the Underwriter to purchase from
the Company 1,600,000 shares of Common Stock. The underwriting discount set
forth on the cover page of this Prospectus will be allowed to the Underwriter at
the time of delivery to the Underwriter of the shares so purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
NAME OF UNDERWRITER PURCHASED
------------------------------------------------------------------ ---------
<S> <C>
H.J. Meyers & Co., Inc. .......................................... 1,600,000
</TABLE>
The Underwriter has advised the Company that it proposes to offer the
shares to the public at an offering price of $ per share and that the
Underwriter may allow certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") a concession of not in excess
of $ per share. After the Offering, the public offering price and
concession may be changed.
The Company has granted to the Underwriter an option, exercisable during
the 30 business-day period from the date of this Prospectus, to purchase up to a
maximum of 240,000 additional shares on the same terms set forth above. The
Underwriter may exercise such right only to satisfy over-allotments in the sale
of the shares.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to 3% of the total proceeds of the Offering, or $198,000
($227,700 if the Underwriter exercises the over-allotment option in full). In
addition to the Underwriter's commissions and the Underwriter's non-accountable
expense allowance, the Company is required to pay the costs of qualifying the
shares of Common Stock, under federal and state securities laws, together with
legal and accounting fees, printing and other costs in connection with this
Offering, estimated to total approximately $575,000.
At the closing of this Offering, the Company will issue to the Underwriter
the Underwriter's Warrant to purchase for investment a maximum of 160,000 shares
of Common Stock. The Underwriter's Warrant and the underlying shares are being
registered by means of the Registration Statement of which this Prospectus forms
a part. The Underwriter's Warrant will be exercisable for a four-year period
commencing one year from the date of this Prospectus. The exercise price of the
Underwriter's Warrant will be $5.78 per share (assuming an Offering price per
share of $4.125). The Underwriter's Warrant will be restricted from sale,
assignment or hypothecation prior to its exercise date except to officers of the
Underwriter and members of the selling group and officers and partners thereof.
The Underwriter's Warrant will contain anti-dilution provisions providing
adjustment in the event of any recapitalization, reclassification, stock
dividend, stock split or similar transaction. The Underwriter's Warrant does not
entitle the Underwriter to any rights as a stockholder of the Company until such
Warrant is exercised and the shares of Common Stock are purchased thereunder.
The Underwriter's Warrant and the shares of Common Stock thereunder may not be
offered for sale except in compliance with the applicable provisions of the
Securities Act. The Company has agreed that, if it shall cause to be filed with
the Securities and Exchange Commission either an amendment to the Registration
Statement of which this Prospectus is a part or a separate registration
statement, the Underwriter shall have the right during the five-year period
commencing on the date of this Prospectus to include in such amendment or
Registration Statement the Underwriter's Warrant and the shares of Common Stock
issuable upon its exercise at no expense to the Underwriter. Additionally, the
Company has agreed that, upon written request by a holder or holders of 50% or
more of the Underwriter's Warrant which is made during the exercise period of
the Underwriter's Warrant, the Company will on two separate occasions, register
the Underwriter's Warrant and the shares of Common Stock issuable upon exercise
thereof. The initial such registration will be at the Company's expense and the
second such registration will be at the expense of the holder(s) of the
Underwriter's Warrant.
For the period during which the Underwriter's Warrant is exercisable, the
holder or holders thereof will have the opportunity to profit from a rise in the
market value of the Company's Common Stock, with a resulting dilution in the
interests of the other stockholders of the Company. The holder or holders of the
41
<PAGE> 43
Underwriter's Warrant can be expected to exercise it at a time when the Company
would, in all likelihood, be able to obtain any needed capital from an offering
of its unissued Common Stock on terms more favorable to the Company than those
provided for in the Underwriter's Warrant. Such facts may materially adversely
affect the terms on which the Company can obtain additional financing. To the
extent that the Underwriter realizes any gain from the resale of the
Underwriter's Warrant or the securities issuable thereunder, such gain may be
deemed additional underwriting compensation under the Securities Act.
The Company has agreed to enter into a consulting agreement with the
Underwriter under the terms of which the Underwriter has agreed to perform
consulting services related to corporate finance and will be paid a
non-refundable fee of $6,000 per month for 12 months. The Company has agreed to
pay the Underwriter the entire one year fee upon the closing of this Offering.
The Company has agreed that, for a period of 12 months from the date of
this Prospectus, it will not sell any securities, with the exception of the
shares of Common Stock issued upon exercise of options granted under the
Company's Stock Plans, without the Underwriter's prior written consent, which
consent shall not be unreasonably withheld. In addition, for a period of 24
months from the date of this Prospectus, the Company has agreed not to issue any
shares of Preferred Stock or sell or issue any securities pursuant to Regulation
S under the Securities Act without the Underwriter's prior written consent.
Directors and officers of the Company are expected to be subject to lock-up
agreements under which they will agree not to sell or dispose of any shares of
Common Stock issued to them directly by the Company, for a period of 13 months
after the date of this Prospectus, without prior written consent of the
Underwriter.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
The Company's initial public offering was underwritten by the Underwriter,
and the Underwriter also serves as a market maker with regard to the Company's
Common Stock. Patrick Grady, a director of the Company, serves as the Managing
Director, Venture Capital of the Underwriter. In addition to an underwriting
discount of $1,145,525, in connection with the Company's initial public
offering, the Company paid the Underwriter a non-accountable expense allowance
of $343,658 and $10,000 related to the publishing of a "tombstone" notice. In
addition, in connection with the Company's initial public offering, the Company
issued to the Underwriter a warrant to purchase up to 200,000 shares of the
Company's Common Stock at a price of $7.75 per share at any time during the
four-year period commencing on June 21, 1997.
In connection with its initial public offering, the Company agreed that
until June 1999, the Underwriter shall have the right to designate two members
to the Company's Board of Directors, provided that the designees are acceptable
to the Company. Edward Esber and Patrick Grady are the current designees of the
Underwriter pursuant to this agreement. In connection with this Offering, the
Company has agreed with the Underwriter that Messrs. Esber and Grady, or any
successors designated by them, will continue to serve on the Company's Board of
Directors, subject to stockholder approval, until the date that is 36 months
from the closing of this Offering.
The Underwriter has advised the Company that the Underwriter does not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Chicago office of the Securities and Exchange Commission is conducting
a private, nonpublic investigation of H.J. Meyers & Co., Inc., the Underwriter
and the principal market maker in the Company's Common Stock, pursuant to a
Formal Order of Investigation issued by the Commission. The Staff is
investigating whether the Underwriter may have violated Section 17(a) of the
Securities Act of 1933 and Sections 10(b), 15(c) and 17(a) of the Securities
Exchange Act of 1934, and the rules and regulations thereunder, with respect to
sales of certain securities including those of the Company. The Company has
received a subpoena for the production of documents pursuant to this
investigation. Specifically, the subpoena requests that the Company provide
documents relating to the following: loans received by the Company, sales of the
Company's securities by employees, officers and directors of the Company,
information relating to the Underwriter, information relating to any other
underwriter whether or not retained by the Company,
42
<PAGE> 44
communications with the Company's stockholders, sales materials pertaining to
the Company's stock, documents filed with the Commission or any other regulatory
agency, self-regulatory organization or securities exchange, sales or shipments
of Arsenal, minutes to Board of Director and stockholder meetings, audits
conducted for the Company, documents pertaining to any due diligence conducted
as part of a stock issuance and a list of employees, officers and directors of
the Company.
The Company is currently unable to assess the potential impact of the
outcome of the Staff's investigation on the Offering or trading in the Company's
securities. Any limitation on the ability of the Underwriter to make a market in
the Company's Common Stock as a result of this investigation, or for any other
reason, could adversely impact the liquidity or trading price of the Company's
Common Stock, which could have a material adverse impact on the market price of
the Company's Common Stock. In addition, any adverse impact on the Company as a
result of this investigation, or for any other reason, could have a material
adverse effect on the market value and liquidity of the Company's Common Stock.
The Underwriter has informed the Company that it believes that it has
materially complied with the above-mentioned securities laws, and rules and
regulations thereunder, and that it has, and will continue to cooperate fully
with the Staff with respect to such investigation.
On July 16, 1996, the National Association of Securities Dealers, Inc. (the
"NASD") issued a notice of Acceptance, Waiver and Consent (the "AWC") whereby
the Underwriter was censured and ordered to pay fines and restitution to retail
customers in the amount of $250,000 and approximately $1.025 million,
respectively. The AWC was issued in connection with claims by the NASD that the
Underwriter charged excessive markups and markdowns in connection with the
trading of four certain securities originally underwritten by the Underwriter;
the activities in question occurred during periods between December 1990 and
October 1993. The Underwriter has informed the Company that the fines and
refunds will not have a material adverse effect on the Underwriter's operations
and that the Underwriter has effected remedial measures to help ensure that the
subject conduct does not recur.
In connection with the Offering, the Underwriter may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriter may overallot the Offering, creating a syndicate
short position. In addition, the Underwriter may bid for and purchase shares of
Common Stock in the open market to cover syndicate short positions or to
stabilize the price of the Common Stock. Finally, the underwriting syndicate may
reclaim selling concessions from syndicate members in the Offering, if the
syndicate repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilizing transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriter is not required to engage in these activities,
and may end any of these activities at any time.
The Underwriter has advised the Company that the Underwriter does not
intend to confirm sales to any account over which they exercise discretionary
authority.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California ("WSGR"). In May 1996, the Company issued a warrant to WSGR
(the "WSGR Warrant") to purchase a maximum of 3,000 shares of Common Stock. The
WSGR Warrant is exercisable for a four-year period commencing from the date of
its issuance. The exercise price of the WSGR Warrant is $5.00 per share. The
WSGR Warrant contains anti-dilution provisions providing adjustment in the event
of any recapitalization, stock dividend, stock split or similar transaction. The
WSGR Warrant does not entitle WSGR to any rights as a stockholder of the Company
until such Warrant is exercised and shares are purchased thereunder. The WSGR
Warrant and the shares of Common Stock thereunder may not be offered for sale
except in compliance with the applicable provisions of the Securities Act. See
"Description of Capital Stock --Warrants."
Certain legal matters in connection with the Offering will be passed upon
for the Underwriter by Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation, Beverly Hills, California.
43
<PAGE> 45
EXPERTS
The financial statements of the Company at December 31, 1996 and for each
of the two years in the period ended December 31, 1996, appearing in the
Prospectus and the Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon (which contains
an explanatory paragraph which raises substantial doubt about the Company's
ability to continue as a going concern) appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Company's Common
Stock is quoted for trading on the Nasdaq SmallCap Market and reports, proxy
statements and other information concerning the Company may also be inspected at
the offices of the National Association of Securities Dealers, 1735 K Street,
N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Securities and Exchange
Commission pursuant to the Securities Act and the rules and regulations of the
Securities and Exchange Commission thereunder. For further information with
respect to the Company and the shares of Common Stock, reference is made to the
Registration Statement and the exhibits and schedules thereto. The Registration
Statement, including exhibits thereto, as well as the Company's Exchange Act
filings, may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at 75
Park Place, Room 1400, New York, New York 10007 and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies
may be obtained at the prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in its entirety by such
reference. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http:/www.sec.gov.
44
<PAGE> 46
BOREALIS TECHNOLOGY CORPORATION
------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Financial Statements
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets as of December 31, 1995 and 1996....................................... F-3
Statements of Operations for the years ended December 31, 1995 and 1996............... F-4
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995 and
1996................................................................................ F-5
Statements of Cash Flows for the years ended December 31, 1995 and 1996............... F-6
Notes to Financial Statements......................................................... F-7
Condensed Balance Sheets as of December 31, 1996 and March 31, 1997 (unaudited)....... F-15
Condensed Statements of Operations (unaudited) for the three months ended March 31,
1996 and 1997....................................................................... F-16
Condensed Statements of Cash Flows (unaudited) for the three months ended March 31,
1996 and 1997....................................................................... F-17
Notes to Condensed Financial Statements (unaudited)................................... F-18
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Borealis Technology Corporation
We have audited the accompanying balance sheets of Borealis Technology
Corporation (the "Company") as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended December 31, 1995 and 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 Borealis Technology
Corporation at December 31, 1995 and 1996, and the results of its operations and
its cash flows for the years ended December 31, 1995 and 1996, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming Borealis
Technology Corporation will continue as a going concern. As discussed in Note 1
to the financial statements, the Company's recurring operating losses and
uncertainty with regard to future revenues from its new product raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are also discussed in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Reno, Nevada
January 20, 1997
F-2
<PAGE> 48
BOREALIS TECHNOLOGY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 158,840 $ 3,921,506
Accounts receivable.............................................. 36,188 2,000
Other current assets............................................. 7,080 136,073
--------- -----------
Total current assets..................................... 202,108 4,059,579
Property and equipment, net........................................ 128,989 856,653
Long-term investment............................................... -- 650,000
Other assets....................................................... -- 40,850
--------- -----------
Total assets............................................. $ 331,097 $ 5,607,082
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $ 82,310 $ 258,377
Accrued employee compensation and benefits....................... 75,218 298,492
Other accrued liabilities........................................ 43,206 60,375
Deferred revenue................................................. 129,028 81,550
Note payable to stockholder...................................... 221,311 --
Current portion of capital lease obligations..................... 25,944 178,814
--------- -----------
Total current liabilities................................ 577,017 877,608
Capital lease obligations.......................................... 29,628 88,800
Convertible promissory notes....................................... 324,000 --
Long-term promissory note.......................................... -- 650,000
--------- -----------
Total liabilities........................................ 930,645 1,616,408
--------- -----------
Commitments and contingency (Notes 1 and 10)
Stockholders' equity (deficit):
Preferred stock, $.001 par value:
Authorized shares: 5,000,000.................................. -- --
Issued and outstanding -- none
Common stock, $.001 par value:
Authorized shares: 10,000,000
Issued and outstanding shares -- 651,658 at 12/31/95 and
3,184,506 at 12/31/96........................................ 652 3,185
Additional paid-in capital......................................... 162,471 10,777,241
Accumulated deficit................................................ (762,671) (6,789,752)
--------- -----------
Total stockholders' equity (deficit)..................... (599,548) 3,990,674
--------- -----------
Total liabilities and stockholders' equity (deficit)..... $ 331,097 $ 5,607,082
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 49
BOREALIS TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
---------- -----------
<S> <C> <C>
Revenues:
Licenses......................................................... $ 397,207 $ 35,170
Service and maintenance.......................................... 338,945 141,771
--------- -----------
Total revenues........................................... 736,152 176,941
Cost of revenues:
Licenses......................................................... 69,538 2,310
Service and maintenance.......................................... 144,787 63,830
--------- -----------
Total cost of revenues................................... 214,325 66,140
--------- -----------
Gross margin....................................................... 521,827 110,801
Operating expenses:
Sales and marketing.............................................. 187,525 2,743,778
Research and development......................................... 565,276 2,451,544
General and administrative....................................... 332,671 988,092
--------- -----------
Total operating expenses................................. 1,085,472 6,183,414
--------- -----------
Loss from operations..................................... (563,645) (6,072,613)
Interest expense................................................... (29,147) (134,107)
Interest income.................................................... -- 179,639
--------- -----------
Net loss................................................. $ (592,792) $(6,027,081)
========= ===========
Net loss per share................................................. $ (0.64) $ (3.11)
========= ===========
Shares used in computing net loss per share........................ 931,758 1,935,984
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 50
BOREALIS TECHNOLOGY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY(DEFICIT)
--------- ------ ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994......... 597,569 $ 598 $ 39,925 $ (169,879) $ (129,356)
Issuance of common shares for
compensation..................... 1,682 2 2,598 -- 2,600
Sale of common shares............... 52,407 52 119,948 -- 120,000
Net loss............................ -- -- -- (592,792) (592,792)
--------- ------ ----------- ----------- ----------
Balances at December 31, 1995......... 651,658 652 162,471 (762,671) (599,548)
Issuance of common stock in public
offering, net of issuance costs
of $1,865,678.................... 2,291,050 2,291 9,587,281 -- 9,589,572
onversion of promissory notes....... 241,798 242 1,027,489 -- 1,027,731
Net loss............................ -- -- -- (6,027,081) (6,027,081)
--------- ------ ----------- ----------- ----------
Balances at December 31, 1996......... 3,184,506 $3,185 $10,777,241 $(6,789,752) $ 3,990,674
========= ====== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 51
BOREALIS TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................................... $(592,792) $(6,027,081)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 76,065 157,387
Common stock issued for compensation............................. 2,600 --
Changes in operating assets and liabilities:
Accounts receivable........................................... 40,847 34,188
Other assets.................................................. (2,913) (169,843)
Accounts payable.............................................. 67,271 176,067
Accrued employee compensation and benefits.................... 30,305 223,274
Other accrued liabilities..................................... 15,918 45,330
Deferred revenue.............................................. 90,803 (47,478)
--------- -----------
Net cash used in operating activities.............................. (271,896) (5,608,156)
INVESTING ACTIVITIES
Purchase of investment............................................. -- (650,000)
Purchases of property and equipment................................ (98,087) (515,707)
Proceeds from disposal of property and equipment................... -- 6,602
--------- -----------
Net cash used in investing activities.............................. (98,087) (1,159,105)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net........................ 120,000 9,589,572
Proceeds from issuance of convertible promissory notes............. 324,000 675,570
Proceeds from issuance of long-term promissory note................ -- 650,000
Proceeds from issuance of notes payable to stockholder and related
parties.......................................................... 154,472 750,000
Payment on notes payable to stockholder and related parties........ (105,000) (971,311)
Payments under capital lease obligations........................... (12,085) (163,904)
--------- -----------
Net cash provided by financing activities.......................... 481,387 10,529,927
--------- -----------
Net increase in cash and cash equivalents.......................... 111,404 3,762,666
Cash and cash equivalents at beginning of year..................... 47,436 158,840
--------- -----------
Cash and cash equivalents at end of year........................... $ 158,840 $ 3,921,506
========= ===========
Cash paid during the year for:
Interest......................................................... $ 6,078 $ 173,087
Income taxes..................................................... -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 52
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Borealis Technology Corporation (the "Company") was originally incorporated
in Nevada in 1988. (See Note 5.) The Company develops, markets and supports
mobile and client/server software for the sales force automation market.
BASIS OF PRESENTATION
The financial statements have been prepared on a going concern basis. The
Company has incurred significant losses in 1995 and 1996 and at December 31,
1996 has an accumulated deficit of $6,789,752. In addition, the Company
generated substantially all of its historical revenue from sales of products it
no longer sells and will commercially introduce its new product no earlier than
the second quarter of 1997. In the absence of receiving additional funding, the
Company anticipates that its existing capital resources and cash generated from
operations, if any, will be sufficient to meet the Company's cash requirements
only through the end of June 1997 at its anticipated level of operations. The
Company's future capital requirements will depend upon numerous factors,
including the amount of revenues generated from operations, the cost of the
Company's sales and marketing activities and the progress of the Company's
research and development activities, none of which can be predicted with
certainty. The Company anticipates filing a registration statement to raise
approximately $5.4 million in the second or third quarter of 1997. The Company
believes that proceeds from that offering together with existing capital
resources and cash generated from operations, if any, will be sufficient to meet
the Company's cash requirements for at least the next 12 months at its
anticipated level of operations, which includes increases in expenses,
particularly sales and marketing expenses, and costs of revenues. However, the
Company may seek additional funding during the next 12 months and will likely
seek additional funding after such time. There can be no assurance that any
additional financing will be available on acceptable terms, or at all, when
required by the Company. Moreover, if additional financing is not available, the
Company could be required to reduce or suspend its operations or seek an
acquisition partner. The Company has experienced in the past, and may continue
to experience, operational difficulties and delays in its future product
enhancement and product development efforts due to working capital constraints.
Any such difficulties or delays could have a material adverse effect on the
Company's business, financial condition and results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company generally recognizes license revenues upon execution of a
licensing agreement provided there are no significant post delivery obligations
and collection is deemed probable. Royalty revenues are recognized based on the
reporting of usage of certain of the Company's products by third party
manufacturers or end users. Service revenues from training and consulting are
recognized as services are performed while service revenues from customer
maintenance contracts are recognized ratably over the term of the support
period, which is one to three years. At December 31, 1995 and 1996, the
Company's deferred revenue related to maintenance contracts for products sold
during 1994 and 1995.
RESEARCH AND DEVELOPMENT
Research and development expenditures are generally charged to operations
as incurred.
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS
86"), requires that software development costs be capitalized once the
technological feasibility of the software product has been established. To date,
such
F-7
<PAGE> 53
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amounts have been insignificant and have been charged to research and
development expenses in the period incurred.
ADVERTISING
Advertising costs are charged in the period the costs are incurred.
Advertising expense totaled $9,394 and $389,517, for the years ended December
31, 1995 and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires the Company to record deferred income taxes for temporary differences
that are reported in different years for financial reporting and for income tax
purposes, and classifies tax liabilities and assets into current and non-current
amounts based on the classification of the related assets and liabilities.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 7, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("Statement
123") requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
COMPUTATION OF NET LOSS PER SHARE
Except as noted below, net loss per common share is computed using the
weighted average number of common shares outstanding during each period and
common equivalent shares from common stock options and warrants are excluded
from the computation because their effect is antidilutive. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued by the Company at prices below the initial public
offering price during the twelve-month period prior to the offering have been
included in the computation of net loss per share for the year ended December
31, 1995 as if they were outstanding for the entire period (using the treasury
stock method and the proposed public offering price). Also included in the
computation of net loss per share for the year ended December 31, 1995 was the
conversion of the convertible promissory notes. (See Note 5.)
Fully diluted and primary loss per common share are the same amounts for
each of the periods presented.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company invests
its excess cash principally in mutual funds which focus on high quality,
short-term money market securities of all types.
PROPERTY AND EQUIPMENT
Depreciation and amortization is calculated using the straight-line method
over the estimated useful lives of three to five years. Assets under capital
leases are amortized over the asset life.
F-8
<PAGE> 54
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Leasehold improvements at December 31, 1996 include $134,081 of
improvements relating to a new facility that will be occupied in 1997. (See Note
10.) Amortization of these leasehold improvements will commence upon occupation
of the facility.
During the years ended December 31, 1995 and 1996, the Company financed,
under capital lease obligations, the acquisition of property and equipment for
$54,769 and $375,946, respectively.
SIGNIFICANT CUSTOMERS
Sales are not concentrated geographically. The Company received significant
portions of its revenues from Nortel (14%), Scitex American Corp. (27%) and
Synopsys, Inc. (38%) during 1995 and from Nortel (35%) and Synopsys, Inc. (36%)
during 1996.
USE OF ESTIMATES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which require the Company's management
to make estimates and assumptions that affect the amounts reported therein.
Actual results could vary from such estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Computer equipment........................................... $136,877 $ 690,802
Furniture and equipment...................................... 63,081 260,125
Leasehold improvements....................................... 24,214 158,296
-------- ---------
224,172 1,109,223
Less accumulated depreciation and amortization............... (95,183) (252,570)
-------- ---------
Total property and equipment, net............................ $128,989 $ 856,653
======== =========
</TABLE>
4. LONG-TERM PROMISSORY NOTE
At December 31, 1996, the Company has a promissory note payable to a bank
for $650,000. The note matures on January 11, 1998 and bears interest of 7.55%
per annum. The note is collaterallized by the $650,000 long-term investment
(certificate of deposit) and places certain business and borrowing restrictions
on the Company, including the Company's ability to pay cash dividends.
5. COMMON STOCK
CONVERTIBLE PROMISSORY NOTES
During the period November 1995 through February 1996, the Company issued
unsecured Convertible Promissory Notes (the "Notes") in the aggregate amount of
$999,570 of which $324,000 had been issued by December 31, 1995. The notes bore
interest at 6%. The Notes plus accrued interest converted to 241,798 shares of
common stock upon the effective date of the initial public offering of the
Company's common stock.
REINCORPORATION AND STOCK SPLIT
In May 1996, the Board of Directors and stockholders approved the
reincorporation of the Company in Delaware and a split of the Company's common
stock of 1.294 to one. With the reincorporation, the authorized shares of common
stock were increased to 10,000,000 and the authorized shares of preferred stock
F-9
<PAGE> 55
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
were established at 5,000,000. All common stock, common equivalent shares, and
per share amounts were adjusted retroactively to give effect to the stock split.
PUBLIC OFFERING
In 1996, the Company sold 2,291,050 shares of common stock in an initial
public offering which generated net proceeds of $9,589,572 after deducting
underwriting discounts and expenses. The Company is using the proceeds to fund
the development of their new product and to fund operations.
WARRANTS
As part of its initial public offering, the Company issued 200,000 warrants
to its underwriter at an exercise price of $7.75, exercisable for 4 years
commencing one year from the effective date of the registration statement, and
3,000 warrants to its legal firm at an exercise price of $5.00, exercisable for
4 years commencing from the date of issuance.
In addition, during 1996 the Company issued 7,000 warrants to an officer
and 2,000 warrants to a director, both at an exercise price of $5.00,
exercisable for 5 years from the execution of the warrant.
6. STOCK OPTION PLANS
STOCK PLANS
The Company's 1994 Stock Plan (the "1994 Plan") provides for the grant of
incentive stock options and nonstatutory stock options or the issuance of the
Company's common stock to employees, directors, and consultants of the Company.
The Company's 1996 Stock Plan (the "1996 Plan") provides for the grant of
incentive stock options to employees and the grant of nonstatutory stock options
and stock purchase rights to employees and consultants of the Company. Both
plans stipulate that the exercise prices cannot be less than the fair market
value of the common stock on the date of grant. A total of 185,786 and 224,304
shares of common stock are reserved for issuance under the 1994 Plan and 1996
Plan, respectively. The vesting and exercise provisions for the plans are
determined by the Board of Directors, with a maximum term for exercise of ten
years. Options granted and shares issued under the 1994 Plan vest over various
periods (grant date to seven years) while options granted under the 1996 Plan
generally vest in two or four year periods.
A summary of the Company's 1994 Plan's stock option activity, and related
information for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year............... 54,833 $ 1.55 151,495 $ 2.29
Granted..................................... 96,662 2.71 34,284 2.71
Exercised................................... -- -- -- --
Forfeited................................... -- -- (7,117) 2.71
------- ----- ------- -----
Outstanding-end of year..................... 151,495 $ 2.29 178,662 $ 2.35
======= ===== ======= =====
Exercisable at end of year.................. 47,554 $ 1.55 83,991 $ 1.95
Weighted-average fair value of options
granted during the year................... $ 1.88 $ 2.09
</TABLE>
Exercise prices for options outstanding, under the 1994 Plan, as of
December 31, 1996 ranged from $1.55 to $2.71. The weighted-average remaining
contractual life of those options is 8.4 years.
F-10
<PAGE> 56
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's 1996 Plan's stock option activity, and related
information for the year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding-beginning of year.............................. -- $ --
Granted.................................................... 146,726 4.14
Exercised.................................................. -- --
Forfeited.................................................. (5,823) 4.00
------- -----
Outstanding-end of year.................................... 140,903 $ 4.15
======= =====
Exercisable at end of year................................. 472 $ 4.00
Weighted-average fair value of options granted during the
year..................................................... $ 2.60
</TABLE>
Exercise prices for options outstanding, under the 1996 Plan, as of
December 31, 1996 ranged from $3.81 to $5.00. The weighted-average remaining
contractual life of those options is 9.6 years.
1996 DIRECTOR OPTION PLAN
The Company's 1996 Director Option Plan (the "Director Plan") provides for
the automatic grant of 20,000 shares of common stock to each non-employee
director and an additional automatic grant of 6,667 shares each year on the day
immediately following the annual stockholder's meeting of the Company, if on
such date he or she has served on the Board for at least three years. A total of
75,000 shares of common stock have been reserved for issuance under the Director
Plan. Each option will have a term of 10 years. The exercise prices of options
will be the fair market value per share of the common stock on the date of
grant.
A summary of the Company's 1996 Director Plan's stock option activity, and
related information for the year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding-beginning of year............................... -- $ --
Granted..................................................... 75,000 4.73
Exercised................................................... -- --
Forfeited................................................... -- --
------ -----
Outstanding-end of year..................................... 75,000 $ 4.73
====== =====
Exercisable at end of year.................................. -- --
Weighted-average fair value of options granted during the
year...................................................... $ 3.01
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$4.50 to $5.00. The weighted-average remaining contractual life of those options
is 9.5 years.
7. STOCK-BASED COMPENSATION
The Company has three stock based compensation plans: the 1994 Stock Plan,
the 1996 Stock Plan, and the 1996 Director Option Plan, all of which are
described in Note 6.
Pro forma information regarding net loss and loss per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1995
and 1996, respectively: risk-free interest rates of 6.4% and 6.2%;
F-11
<PAGE> 57
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
dividend yields of 0% and 0%; volatility factors of the expected market price of
the Company's common stock of .823 and .823; and a weighted-average expected
life of the options of 5.3 and 4.3 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for years ended December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Pro forma net loss........................................... $611,113 $6,141,084
Pro forma net loss per share................................. $ .66 $ 3.17
</TABLE>
8. CONTINGENT STOCK
The Company's Board of Directors authorized the issuance of 1,000,000
shares of common stock (the "Contingent Shares") issuable to holders of record
of the Company's common stock and stock options issued by the Company as of the
effective date of the Company's initial public offering ("Participants"),
contingent upon the Company achieving certain milestones. In the event that the
Company achieves total revenues for the year ended December 31, 1997 in excess
of $12,000,000 and a net loss of $2,500,000 or less for that year, then rights
to purchase 350,000 shares of common stock for one dollar per share will be
issued to the Participants. In the event that the Company achieves total
revenues for the year ended December 31, 1998 in excess of $18,000,000 and
pre-tax profits of at least $2,730,000 for that year, then rights to purchase
650,000 shares of common stock for one dollar per share will be issued to the
Participants. The compensation expense related to the contingent stock will be
recorded as operating expenses periodically through the date the contingent
shares are issued when, in the opinion of the Company's management, it becomes
probable that the milestones will be achieved. This expense could adversely
affect results of operations for a number of quarters. If the Company's
management does not determine that it is probable that the shares will be issued
until the milestones are met, it could result in a substantial one-time charge
and a material adverse effect on the Company's operating results.
In addition, rights to purchase all of the unissued contingent shares for
one dollar per share will be issued to the participants upon the occurrence of a
transaction in which control of the company changes hands at a price (excluding
the contingent shares) equal to or greater than approximately: (i) $15 per share
prior to December 31, 1997; or (ii) $30 per share after December 31, 1997 and
prior to December 31, 1998.
9. INCOME TAXES (SECTION 382) LOSS LIMITATIONS
There is no provision for income taxes for the years ended December 31,
1996 and 1995, as the Company has incurred net operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. The Company uses the cash method of
F-12
<PAGE> 58
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accounting for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts payable and other accruals...................... $ 68,250 $ 209,863
Deferred revenue......................................... 43,870 27,727
Net operating loss carryforwards......................... 115,600 2,061,304
--------- -----------
Total deferred tax assets.................................. 227,720 2,298,894
Valuation allowance........................................ (215,415) (2,261,905)
--------- -----------
Net deferred tax assets.................................... 12,305 36,989
Deferred tax liabilities:
Receivables and prepaid expenses......................... (12,305) (36,989)
--------- -----------
Net deferred tax assets.................................... $ -- $ --
========= ===========
</TABLE>
Based upon the weight of available evidence, which includes the Company's
historical operating losses and the uncertainties regarding future results, the
Company has provided a full valuation allowance against its net deferred tax
assets, as it is more likely than not that the deferred tax assets will not be
realized. The valuation allowance increased by $2,046,490 during 1996.
At December 31, 1995 and 1996, the Company had federal net operating loss
carryforwards of approximately $340,000 and $6,060,000, respectively. These
carryforwards will expire beginning in the year 2011. Utilization of these
carryforwards may be limited due to the ownership change provisions as enacted
by the Tax Reform Act of 1986 and subsequent legislation.
10. COMMITMENTS
LEASES
The Company leases its facilities under operating leases expiring at
various dates through May 2000. The Company has an option to extend their new
facility lease discussed in Note 2 for two consecutive terms of five years each.
The Company leases certain equipment under noncancelable lease agreements
that are accounted for as capital leases. Equipment under capital lease
arrangements and included in property and equipment aggregated $502,531 at
December 31, 1996. Related accumulated amortization was $111,541 at December 31,
1996. In addition, the capital leases are secured by the related equipment, and
the Company is required to maintain liability and property damage insurance.
F-13
<PAGE> 59
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable capital and operating
leases are as follows at December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- --------
<S> <C> <C>
1997.......................................................... $ 216,020 $269,740
1998.......................................................... 73,486 266,278
1999.......................................................... 23,915 275,597
2000.......................................................... 2,244 118,381
--------- --------
Total minimum payments........................................ 315,665 $929,996
========
Less amount representing interest............................. (48,051)
---------
Present value of minimum lease payments....................... 267,614
---------
Less current obligations...................................... (178,814)
---------
Long-term obligations......................................... $ 88,800
=========
</TABLE>
Total rental expense for 1995 and 1996 was approximately $42,143 and
$103,109, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments which include the
long-term investment, the long-term promissory note, the note payable to
stockholder and the convertible promissory notes approximate their recorded book
values at December 31, 1995 and 1996. The fair values are based on quoted market
prices and discounted cash flow using the Company's incremental borrowing rate.
F-14
<PAGE> 60
BOREALIS TECHNOLOGY CORPORATION
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents....................................... $ 3,921,506 $ 1,837,105
Accounts receivable............................................. 2,000 --
Other current assets............................................ 136,073 868,217
----------- -----------
Total current assets.................................... 4,059,579 2,705,322
Property and equipment, net..................................... 856,653 955,228
Long term investment............................................ 650,000 --
Other assets.................................................... 40,850 46,708
----------- -----------
Total assets............................................ $ 5,607,082 $ 3,707,258
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 258,377 $ 212,555
Accrued employee compensation................................ 298,492 321,526
Promissory note.............................................. -- 650,000
Other current liabilities.................................... 320,739 335,647
----------- -----------
Total current liabilities............................... 877,608 1,519,728
Long-term obligations........................................... 738,800 59,735
----------- -----------
Total liabilities....................................... 1,616,408 1,579,463
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 5,000,000
Issued and outstanding -- none
Common stock, $.001 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 3,184,506
at December 31, 1996, and March 31, 1997................... 3,185 3,185
Additional paid-in capital................................... 10,777,241 10,825,421
Accumulated deficit.......................................... (6,789,752) (8,700,811)
----------- -----------
Total stockholders' equity.............................. 3,990,674 2,127,795
----------- -----------
Total liabilities and stockholders' equity.............. $ 5,607,082 $ 3,707,258
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-15
<PAGE> 61
BOREALIS TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1997
--------- -----------
<S> <C> <C>
Total revenues..................................................... $ 90,586 $ 22,349
Cost of revenues................................................... 33,524 11,020
--------- -----------
Gross profit....................................................... 57,062 11,329
Operating expenses:
Sales and marketing.............................................. 178,493 816,586
Research and development......................................... 333,648 617,509
General and administrative....................................... 173,831 506,403
--------- -----------
Total operating expenses................................. 685,972 1,940,498
--------- -----------
Loss from operations............................................... (628,910) (1,929,169)
Interest income (expense), net..................................... (17,306) 18,110
--------- -----------
Net loss........................................................... $(646,216) $(1,911,059)
========= ===========
Net loss per common and common share equivalent.................... $ (0.69) $ (0.60)
========= ===========
Weighted average common and common equivalent shares outstanding... 931,758 3,184,506
========= ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-16
<PAGE> 62
BOREALIS TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1997
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................................... $(646,216) $(1,911,059)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 15,954 80,511
Compensation expense related to stock options.................... -- 48,180
Changes in assets and liabilities:
Accounts receivable........................................... 8,388 2,000
Other assets.................................................. (150) (88,002)
Accounts payable.............................................. 90,383 (45,822)
Other liabilities............................................. 53,312 73,743
--------- -----------
Net cash used in operating activities.............................. (478,329) (1,840,449)
INVESTING ACTIVITIES
Purchases of property and equipment................................ (16,645) (179,086)
--------- -----------
Net cash used in investing activities.............................. (16,645) (179,086)
FINANCING ACTIVITIES
Payments under capital lease obligations........................... (22,102) (64,866)
Proceeds from issuance of convertible promissory notes............. 675,570 --
--------- -----------
Net cash (used in) provided by financing activities................ 653,468 (64,866)
--------- -----------
Net increase (decrease) in cash and cash equivalents............... 158,494 (2,084,401)
Cash and cash equivalents at beginning of period................... 158,840 3,921,506
--------- -----------
Cash and cash equivalents at end of period......................... $ 317,334 $ 1,837,105
========= ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-17
<PAGE> 63
BOREALIS TECHNOLOGY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of 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 three month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
NOTE B -- LOSS PER COMMON SHARE
Loss per share was computed by dividing the net loss by the weighted
average number of shares of common stock outstanding. Common stock equivalents
from stock options and warrants are excluded from the computation because their
effect is anti-dilutive. The weighted average number of shares of common stock
and common stock equivalents has been computed in accordance with Securities and
Exchange Commission's Staff Accounting Bulletin No. 83, pursuant to which "cheap
stock," as defined, is considered outstanding even if the effect is
anti-dilutive. Fully diluted earnings per share are considered equal to primary
earnings per share in all periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. A restatement of prior periods will not be necessary as common
equivalent shares from common stock options and warrants have been excluded from
the computation of net loss per share because their effect is anti-dilutive. The
impact of Statement No. 128 on the calculation of fully diluted earnings per
share for these quarters is not expected to be material.
NOTE C -- OTHER CURRENT ASSETS
At March 31, 1997, the Company has a promissory note payable to a bank for
$650,000. The note which was consummated in July 1996 and matures on January 11,
1998, bears interest at 7.55% per annum. The note is collateralized by a
$650,000 short-term investment, which is included with other current assets on
the accompanying condensed balance sheets.
NOTE D -- CERTAIN TRANSACTIONS
During May 1997, the Company granted an option to purchase 15,600 shares of
the Company's common stock at an exercise price of $4.25 per share to a company
which is wholly owned by the Company's interim President and Chief Operating
Officer. The option vests as follows: 10,400 shares at the grant date and the
remainder will vest at a rate of 2,600 shares per month of service as interim
President and Chief Operating Officer. The Company will recognize the difference
between the fair market value on the grant date ($5.00) and the exercise price
as compensation expense during the quarters ended June 30, 1997 and September
30, 1997.
F-18
<PAGE> 64
======================================================
NO DEALER, SALESPERSON OR ANY 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, THE UNDERWRITER OR BY ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION TO WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. 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 DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary............................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Contingent Stock Issuance............. 17
Market for Common Stock............... 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 23
Management............................ 29
Stock Plans........................... 32
Certain Transactions.................. 35
Principal Stockholders................ 36
Description of Capital Stock.......... 37
Shares Eligible for Future Sale....... 39
Underwriting.......................... 40
Legal Matters......................... 42
Experts............................... 43
Additional Information................ 43
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
1,600,000 SHARES
LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
H.J. MEYERS & CO., INC.
, 1997
======================================================
<PAGE> 65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee.............................................. $ 3,079
NASD filing fee................................................... 1,516
Nasdaq SmallCap Additional Shares Application..................... 7,500
Consulting fees payable to the Underwriter........................ 72,000
Underwriter's non-accountable expense allowance(1)................ 198,000
Printing expenses................................................. 90,000
Legal fees and expenses........................................... 75,000
Accounting fees and expenses...................................... 50,000
Blue sky fees and expenses........................................ 20,000
Transfer agent fees............................................... 5,000
Miscellaneous fees and expenses................................... 52,905
--------
Total................................................... $575,000
========
</TABLE>
- ---------------
(1) $227,700 if the Underwriter's over-allotment option is exercised in full.
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act"). The
Registrant's Bylaws provide that the Registrant shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Registrant has entered into indemnification agreements with its
directors containing provisions which are in some respects broader than the
specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements require the Registrant, among
other things, to indemnify its directors against certain liabilities that may
arise by reason of their status or service as directors (other than liabilities
arising from willful misconduct of culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors insurance, if available, on reasonable
terms. The Registrant's Certificate of Incorporation provides for
indemnification of its directors and officers to the maximum extent permitted by
the Delaware General Corporation Law and the Registrant's Bylaws provide for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since April 25, 1994, the Registrant issued and sold the following
unregistered securities:
(1) On April 24, 1995, the Registrant issued 1,682 shares of Common
Stock to employees in consideration of employment services rendered.
(2) On April 24, 1995, the Registrant issued 42,702 shares of Common
Stock to Richard Mellor for $99,000.
II-1
<PAGE> 66
(3) On June 1, 1995, the Registrant issued 9,705 shares of Common
Stock to Richard Mellor for $21,000.
(4) From November 1995 until February 1996, the Registrant issued an
aggregate of $999,570 in 6% Convertible Promissory Notes to 43 investors.
The following people invested at least $50,000 in this financing: Peter
Pitsker ($83,000), Mike Cavallo ($120,000) and Roy Molina ($62,500).
(5) In May 1996, the Registrant issued a warrant to purchase 3,000
shares of Common Stock to WSGR. This Warrant is exercisable for a four-year
period commencing from the date of its issuance and the exercise price of
the Warrant is $5.00 per share.
(6) On June 11, 1996, the Company granted a Warrant to purchase 2,000
shares of Common Stock to Peter Pitsker and a Warrant to purchase 7,000
shares of Common Stock to Jerry Brooks. Both Warrants are exercisable for a
five year period commencing with the date of grant and the exercise price
of each Warrant is $5.00 per share.
The issuance of the securities described in paragraphs (1) through (3), (5)
and (6) above were deemed to be exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act") in reliance on Section 4(2) under
the Securities Act, as transactions by an issuer not involving a public
offering.
The issuance of the securities described in paragraph (4) above were deemed
to be exempt from registration under the Securities Act of 1933 in reliance on
Rule 504 promulgated under the Securities Act. The number of shares has been
adjusted to give effect to the 1.294 to 1 split of Common Stock effected in
connection with the Company's reincorporation in the state of Delaware prior to
the closing of its initial public offering.
ITEM 27. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement
2.1(1) -- Agreement and Plan of Merger between Borealis Corporation, a Nevada
corporation, and Borealis Technology Corporation, a Delaware Corporation,
dated June 7, 1996.
3.1(1) -- Registrant's Certificate of Incorporation, as currently in effect
3.2(1) -- Registrant's Bylaws, as currently in effect
4.1(1) -- Specimen Certificate of Registrant's Common Stock
4.2(1) -- Form of WSGR Warrant
4.3(1) -- Form of Warrant issued to H.J. Meyers & Co., Inc. in connection with the
Registrant's initial public offering
4.4(1) -- Registrant's Contingent Rights Plan
4.5 -- Form of Underwriter's Warrant
5.1 -- Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1(1) -- Real Property Lease between Registrant and Incline Investors Group, dated June
15, 1995.
10.2(1) -- Real Property Sublease between Registrant and U.S. Bank of Nevada, dated
November 7, 1995
10.3(1) -- 1994 Stock Option Plan
10.4(1) -- 1996 Stock Plan
10.5(1) -- 1996 Directors Stock Option Plan
10.6(3) -- 1997 Employee Stock Purchase Plan
10.7(1) -- Form of Indemnification Agreement
</TABLE>
II-2
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------
<S> <C> <C>
10.8(1) -- Asset License and Purchase Agreement between the Company and Sales
Technologies, Inc., dated April 15, 1994.
10.9(1) -- Form of Warrant for 2,000 shares granted to Peter Pitsker on June 11, 1996
10.10(1) -- Form of Warrant for 7,000 shares granted to Jerry Brooks on June 11, 1996
10.11(1) -- Lease between the Company and DBB Holdings, Inc., dated June 11, 1996
10.12(2) -- Promissory Note between Registrant and U.S. Bank, dated July 11,1996
10.13 -- Solution Provider Agreement between the Company and American Technology
Corporation, dated October 4, 1996.
23.1 -- Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in exhibit 5.1)
23.2 -- Consent of Ernst & Young LLP
24.1(4) -- Power of Attorney (see page II-4)
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form SB-2 which became effective on June 20, 1996.
(2) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-QSB filed August 13, 1996.
(3) Incorporated by reference to annex filed with Registrant's Definitive Proxy
Statement on Schedule 14A filed April 11, 1997.
(4) Previously filed.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
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.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 24 of
this Registration Statement 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 hereunder, 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.
The undersigned Registrant hereby undertakes:
That for purposes of determining any liability under the Securities Act,
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 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-3
<PAGE> 68
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The Registrant further undertakes to remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the Offering.
II-4
<PAGE> 69
SIGNATURES
Pursuant to 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 has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Carson City, State of Nevada, on June 30, 1997.
BOREALIS TECHNOLOGY CORPORATION
By: *
------------------------------------
Peter Pitsker
Interim President and Chief
Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------------------------ --------------
<C> <S> <C>
* Chairman of the Board June 30, 1997
- -----------------------------------
Curtis Faith
/s/ ELIZABETH GASPER Chief Financial Officer (Principal June 30, 1997
- ----------------------------------- Financial and Accounting Officer)
Elizabeth Gasper
* Director, Interim President and Chief June 30, 1997
- ----------------------------------- Operating Officer (Principal Executive
Peter Pitsker Officer)
* Director June 30, 1997
- -----------------------------------
Edward Esber
* Director June 30, 1997
- -----------------------------------
Patrick Grady
* Director June 30, 1997
- -----------------------------------
Shekar Swamy
*By: /s/ ELIZABETH GASPER June 30, 1997
- -----------------------------------
Elizabeth Gasper,
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 70
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -----------
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement
2.1(1) -- Agreement and Plan of Merger between Borealis Corporation, a Nevada
corporation, and Borealis Technology Corporation, a Delaware
Corporation, dated June 7, 1996.
3.1(1) -- Registrant's Certificate of Incorporation, as currently in effect
3.2(1) -- Registrant's Bylaws, as currently in effect
4.1(1) -- Specimen Certificate of Registrant's Common Stock
4.2(1) -- Form of WSGR Warrant
4.3(1) -- Form of Warrant issued to H.J. Meyers & Co., Inc. in connection with
the Registrant's initial public offering
4.4(1) -- Registrant's Contingent Rights Plan
4.5 -- Form of Underwriter's Warrant
5.1 -- Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1(1) -- Real Property Lease between Registrant and Incline Investors Group,
dated June 15, 1995.
10.2(1) -- Real Property Sublease between Registrant and U.S. Bank of Nevada,
dated November 7, 1995
10.3(1) -- 1994 Stock Option Plan
10.4(1) -- 1996 Stock Plan
10.5(1) -- 1996 Directors Stock Option Plan
10.6(3) -- 1997 Employee Stock Purchase Plan
10.7(1) -- Form of Indemnification Agreement
10.8(1) -- Asset License and Purchase Agreement between the Company and Sales
Technologies, Inc., dated April 15, 1994.
10.9(1) -- Form of Warrant for 2,000 shares granted to Peter Pitsker on June 11,
1996
10.10(1) -- Form of Warrant for 7,000 shares granted to Jerry Brooks on June 11,
1996
10.11(1) -- Lease between the Company and DBB Holdings, Inc., dated June 11, 1996
10.12(2) -- Promissory Note between Registrant and U.S. Bank, dated July 11,1996
10.13 -- Solution Provider Agreement between the Company and American
Technology Corporation, dated October 4, 1996.
23.1 -- Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in exhibit 5.1)
23.2 -- Consent of Ernst & Young LLP
24.1(4) -- Power of Attorney (see page II-4)
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form SB-2 which became effective on June 20, 1996.
(2) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-QSB filed August 13, 1996.
(3) Incorporated by reference to annex filed with Registrant's Definitive Proxy
Statement on Schedule 14A filed April 11, 1997.
(4) Previously filed.
<PAGE> 1
EXHIBIT 1.1
BOREALIS TECHNOLOGY CORPORATION
4070 Silver Sage Drive
Carson City, Nevada 89701
UNDERWRITING AGREEMENT
__________, 1997
H.J. Meyers & Co., Inc.
1895 Mt. Hope Avenue
Rochester, New York 14620
Ladies and Gentlemen:
BOREALIS TECHNOLOGY CORPORATION, a Delaware corporation (the
"Company"), proposes to issue and sell pursuant to this Underwriting Agreement
(the "Agreement"), an aggregate of 1,600,000 shares of Common Stock, $0.001 par
value per share (the "Shares"), commencing on the effective date of the
Registration Statement (the "Effective Date"). In addition, the Company
proposes to grant the option referred to in Section 2(b) to purchase all or any
part of an aggregate of 240,000 additional Shares.
The aggregate of 1,600,000 Shares, together with all or any part of
the 240,000 Shares which you have the option to purchase, are herein called the
"Shares." The Common Stock of the Company to be outstanding after giving
effect to the sale of the Shares (including the 240,000 Shares that the
Underwriter has the option to purchase) is herein called the "Common Stock."
You have advised the Company that you desire to purchase the Shares.
The Company confirms the agreements made by it with respect to the purchase of
the Shares by you, as follows:
1. Representations and Warranties of the Company.
The Company represents and warrants to, and agrees with you
that:
(a) A registration statement (File No. 333-27299) on Form
SB-2 relating to the public offering of the Shares, including a preliminary
form of prospectus, copies of which have heretofore been delivered to you, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission under the Act.
"Preliminary Prospectus" shall mean each prospectus filed pursuant to Rule 430
of the Rules and Regulations. The registration statement (including all
1
<PAGE> 2
financial schedules and exhibits) as amended at the time it becomes effective
and the final prospectus included therein are respectively referred to as the
"Registration Statement" and the "Prospectus", except that (i) if the
prospectus first filed by the Company pursuant to Rule 424(b) or Rule 430A of
the Rules and Regulations or otherwise utilized and not required to be so filed
shall differ from said prospectus as then amended, the term "Prospectus" shall
mean the prospectus first filed pursuant to Rule 424(b) or Rule 430A or so
utilized from and after the date on which it shall have been filed or utilized,
and (ii) if such registration statement or prospectus is amended or such
prospectus is supplemented, after the effective date of such registration
statement and prior to the Option Closing Date (as defined in Section 2(b)),
the term "Registration Statement" shall include such registration statement as
so amended, and the term "Prospectus" shall include the prospectus as so
amended or supplemented, or both, as the case may be.
(b) At the time the Registration Statement becomes
effective and at all times subsequent thereto up to the Option Closing Date (as
defined below), (i) the Registration Statement and Prospectus will in all
material respects conform to the requirements of the Act and the Rules and
Regulations; and (ii) neither the Registration Statement nor the Prospectus
will include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were
made; provided, however, that the Company makes no representations, warranties
or agreements as to information contained in or omitted from the Registration
Statement or Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of you specifically for
use in the preparation thereof. It is understood that the statements set forth
in the last paragraph on the cover page of the Prospectus, set forth in the
Prospectus with respect to stabilization, the fourth and fifth paragraphs under
the caption "Risk Factors -- Possible Illiquidity of Trading Market; Penny
Stock; Pending SEC Investigation of Underwriter; Recently Settled NASD
Investigation Regarding Underwriter," the material set forth under the heading
"Underwriting" and the identity of counsel to you under the heading "Legal
Matters" constitute the only information furnished in writing by you for
inclusion in the Registration Statement and Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction
of its incorporation, with full power and authority (corporate and other) to
own its properties and conduct its business as described in the Prospectus and
is duly qualified to do business as a foreign corporation and is in good
standing in all other jurisdictions in which the nature of its business or the
character or location of its properties requires such qualification, except
where failure to so qualify is not reasonably likely to materially adversely
affect the Company's business, properties or financial condition.
(d) The authorized capital stock of the Company as of the
Effective Date was as set forth under "Capitalization" in the Prospectus. The
shares of issued and outstanding capital stock of the Company set forth
thereunder have been duly authorized, validly issued and are fully paid and
non-assessable; except as set forth in the Prospectus, no options, warrants or
other rights to purchase, agreements or other obligations to issue, or
agreements or other rights to convert any obligation into, any shares of
capital stock of the Company have been granted or entered into by the Company.
The Shares and Underwriter's Warrant conform in all material respects to all
statements relating thereto contained in the Registration Statement and
Prospectus.
2
<PAGE> 3
(e) The Shares are duly authorized and, when issued,
delivered and paid for pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and non-assessable and free of preemptive rights of
any security holder of the Company. The certificates evidencing the Shares are
and will be in valid and proper legal form. The Underwriter's Warrant (as
defined in Section 12) will be exercisable for shares of Common Stock of the
Company in accordance with the terms of the Underwriter's Warrant and at the
prices therein provided for. The shares of Common Stock have been duly
authorized and reserved for issuance upon such exercise, and such shares, when
issued upon such exercise in accordance with the terms of the Underwriter's
Warrant and when the price is paid, shall be fully paid and non- assessable.
Neither the filing of the Registration Statement nor the offering or sale of
the Shares as contemplated in this Agreement gives rise to any rights, other
than those which have been waived or satisfied, for or relating to the
registration of any securities of the Company, except as described in the
Registration Statement.
(f) This Agreement and the Underwriter's Warrant have
been duly and validly authorized, executed and delivered by the Company, and
assuming due execution by the other party or parties hereto and thereto,
constitute valid and binding obligations of the Company enforceable against the
Company in accordance with their respective terms, except as rights to
indemnity and contribution hereunder may be limited by applicable law and
except as enforceability may be limited by bankruptcy, insolvency or other laws
affecting the rights of creditors generally or by general equitable principles.
The Company has full power and lawful authority to authorize, issue and sell
the Shares to be sold by it hereunder on the terms and conditions set forth
herein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery or with the authorization, issue and sale of the Shares
or the Underwriter's Warrant, except such as may be required under the Act or
state securities laws.
(g) Except as described in the Prospectus, the Company is
not in material violation, breach or default of or under, and consummation of
the transactions herein contemplated and the fulfillment of the terms of this
Agreement and the Underwriter's Warrant will not conflict with, or result in a
breach of, any of the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge or encumbrance
pursuant to the terms of, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party or
by which the Company may be bound or to which any of the property or assets of
the Company are subject, which would have a material adverse effect on the
business, properties or financial condition of the Company, nor will such
action result in any violation of the provisions of the certificate of
incorporation or the By-laws of the Company, as amended, or any statute or any
order, rule or regulation applicable to the Company of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company, which would have a material adverse effect on the business, properties
or financial condition of the Company.
(h) The Company owns no real property and, subject to the
qualifications stated in the Prospectus, the Company has good and marketable
title to all properties and assets described in the Prospectus as owned by it,
free and clear of all liens, charges, encumbrances or restrictions, except such
as are not materially significant or important in relation to its business; all
of the leases and subleases under which the Company is the lessor or sublessor
of properties or assets or under which the Company holds properties or assets
as lessee or sublessee as described in the Prospectus are in full force and
effect, and, except as described in the Prospectus, the Company is not in
default
3
<PAGE> 4
in any respect with respect to any of the terms or provisions of any of such
leases or subleases which would have a material adverse effect on the business,
properties or financial condition of the Company, and no claim has been
asserted by anyone adverse to rights of the Company as lessor, sublessor,
lessee or sublessee under any of the leases or subleases mentioned above, or
affecting or questioning the right of the Company to continued possession of
the leased or subleased premises or assets under any such lease or sublease
except as described or referred to in the Prospectus, which would have a
material adverse effect on the business properties or financial condition of
the Company; and the Company owns or leases all such properties described in
the Prospectus as are necessary to its operations as now conducted and, except
as otherwise stated in the Prospectus, as proposed to be conducted as set forth
in the Prospectus.
(i) Ernst & Young LLP, who have given their report on
certain financial statements filed and to be filed with the Commission as a
part of the Registration Statement, which are included in the Prospectus, are
with respect to the Company independent public accountants as required by the
Act and the Rules and Regulations.
(j) The financial statements and schedules, together with
related notes, set forth in the Prospectus or the Registration Statement
present fairly the financial position and results of operations and changes in
financial position of the Company on the basis stated in the Registration
Statement, at the respective dates and for the respective periods to which they
apply. Said statements and schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a basis
which is consistent during the periods involved.
(k) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, the Company
has not incurred any liabilities or obligations, direct or contingent, not in
the ordinary course of business, or entered into any transaction not in the
ordinary course of business, which is material to the business of the Company,
and there has not been any change in the capital stock of, or any incurrence of
long-term debt by, the Company or any issuance of options, warrants or other
rights to purchase the capital stock of the Company or any adverse change or
any development involving, so far as the Company can now reasonably foresee, a
prospective adverse change in the condition (financial or other), net worth,
results of operations, business, key personnel or properties of it which would
be material to the business or financial condition of the Company, and the
Company has not become party to, and neither the business nor the property of
the Company has become the subject of, any material litigation whether or not
in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not
now pending nor, to the knowledge of the Company, threatened, any action, suit
or proceeding (including those related to environmental matters or
discrimination on the basis of age, sex, religion or race) to which the Company
is a party before or by any court or governmental agency or body, which, if
adversely determined, would result in any material adverse change in the
condition (financial or other), business prospects, net worth or properties of
the Company; and, except as set forth in the Prospectus, no labor disputes
involving the employees of the Company exist which, if adversely determined,
would result in any material adverse change in the condition (financial or
otherwise), business prospects, net worth or property of the Company.
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<PAGE> 5
(m) Except as disclosed in the Prospectus, the Company
has filed all necessary federal, state and foreign income and franchise tax
returns and has paid all taxes shown as due thereon; and there is no tax
deficiency which has been or to the knowledge of the Company might be asserted
against the Company which has not been adequately reserved for on the Company's
balance sheet.
(n) The Company has sufficient licenses, permits and
other governmental authorizations currently required for the conduct of its
business or the ownership of its property as described in the Prospectus and is
in all material respects complying therewith and owns or possesses adequate
rights to use all material patents, patent applications, trademarks, mark
registrations, copyrights and licenses necessary for the conduct of such
business and has not received any notice of conflict with the asserted rights
of others in respect thereof. To the best knowledge of the Company, none of
the activities or business of the Company is in violation of, or causes the
Company to violate, any law, rule, regulation or order of the United States,
any state, county or locality, or of any agency or locality, the violation of
which would have a material adverse effect upon the condition (financial or
otherwise), business prospects, net worth or properties of the Company.
(o) The Company has not, directly or indirectly, at any
time (i) made any contributions to any candidate for foreign political office,
or if made, failed to disclose fully any such contribution made in violation of
law, (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or
quasi-public duties, other than payments or contributions required or allowed
by applicable law, (iii) made any payment outside the ordinary course of
business to any purchasing or selling agent or person charged with similar
duties of any entity to which the Company sells or from which the Company buys
products for the purpose of influencing such agent or person to buy products
from or sell products to the Company, or (iv) except as set forth in the
Prospectus, engaged in any transaction, maintained any bank account or used any
corporate funds except for transactions, bank accounts and funds which have
been and are reflected in the normally maintained books and records of the
Company. The Company's internal accounting controls and procedures are
sufficient to cause the Company to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(p) On the Closing Dates (as defined in Section 2(c)),
all transfer or other taxes (including franchise, capital stock or other tax,
other than income taxes imposed by any jurisdiction), if any, which are
required to be paid in connection with the sale and transfer of the Shares to
the Underwriter hereunder will have been fully paid or provided for by the
Company and all laws imposing such taxes will have been fully complied with.
(q) All contracts and other documents of the Company
which are, under the Rules and Regulations, required to be filed as exhibits to
the Registration Statement have been so filed.
(r) The Company has not taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Shares or to facilitate the
sale or resale of the Shares.
(s) The Company has no subsidiaries.
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<PAGE> 6
(t) Except for this Agreement and other agreements with
you, the Company has not entered into any agreement pursuant to which any
person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public
offering.
(u) The Company's Common Stock is registered with the
Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(v) The Company is not in violation of any law,
ordinance, governmental rule or regulation or court decree to which it may be
subject which violation would have a material adverse effect on the financial
condition, results of operations, business or prospects of the Company.
2. Purchase, Delivery and Sale of the Shares.
(a) Subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company agrees to issue and sell to you, and you agree to
buy from the Company at $______ per Share at the place and time hereinafter
specified, the number of Shares set forth opposite your name in Schedule I
hereto (the "Firm Shares").
Delivery of the Firm Shares against payment therefor
shall take place at the offices of H.J. Meyers & Co., Inc., 1895 Mt. Hope
Avenue, Rochester, New York 14620 (or at such other place as may be designated
by agreement between you and the Company) at 9:30 a.m. New York time on
______________, 1997, or at such other time and date, not later than three
business days thereafter (or four business days if the Registration Statement
is declared effective after the close of the business day), as you may
designate, such time and date of payment and delivery for the Firm Shares being
herein called the "First Closing Date." Time shall be of the essence and
delivery at the time and place specified in this subsection (a) is a further
condition to your obligations hereunder.
(b) In addition, subject to the terms and conditions of
this Agreement, and upon the basis of the representations, warranties and
agreements herein contained, the Company hereby grants you an option to
purchase all or any part of an aggregate of 240,000 additional Shares at the
same price per Share as you shall pay for the Shares being sold pursuant to the
provisions of subsection (a) of this Section 2 (such additional Shares being
referred to herein as the "Option Shares"). This option may be exercised on
one occasion within 30 business days after the Effective Date upon notice by
you to the Company advising it as to the amount of Option Shares as to which
the option is being exercised, the names and denominations in which the
certificates for such Option Shares are to be registered and the time and date
when such certificates are to be delivered. Such time and date shall be
determined by you but shall not be earlier than four and not later than ten
full business days after the exercise of said option, nor in any event prior to
the First Closing Date, and such time and date is referred to herein as the
"Option Closing Date." Delivery of the Option Shares against payment therefor
shall take place at the offices of H.J. Meyers & Co., Inc., 1895 Mt. Hope
Avenue, Rochester, New York 14620. Time shall be of the essence and delivery
at the time and place specified in this subsection (b) is a further condition
to your obligations hereunder.
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<PAGE> 7
The Option granted hereunder may be exercised only to
cover over-allotments in the sale by you of Firm Shares referred to in
subsection (a) above.
(c) The Company will make the certificates for the Shares
to be purchased by you hereunder available to you for checking at least one
full business day prior to the First Closing Date or the Option Closing Date
(which are collectively referred to herein as the "Closing Dates" and
individually as a "Closing Date"), as the case may be. The certificates shall
be in such names and denominations as you may request, at least two full
business days prior to the relevant Closing Dates. Time shall be of the
essence and the availability of the certificates at the time and place
specified in this Agreement is a further condition to your obligations.
Definitive engraved certificates in negotiable form
for the Shares to be purchased by you hereunder will be delivered by the
Company to you for your account against payment of the purchase price by you,
at your option, by certified or bank cashier's checks in New York Clearing
House funds or by wire transfer, payable to the order of the Company.
In addition, in the event you exercise the option to
purchase from the Company all or any portion of the Option Shares pursuant to
the provisions of subsection (b) above, payment for such Option Shares shall be
made to or upon the order of the Company by you, at your option, by certified
or bank cashier's checks payable in New York Clearing House funds or by wire
transfer, at the offices of H.J. Meyers & Co., Inc. at the time and date of
delivery of such Option Shares as required by the provisions of subsection (b)
above, against receipt of the certificates for such Option Shares by you,
registered in such names and in such denominations as you may request.
It is understood that you propose to offer the Shares
to be purchased hereunder to the public upon the terms and conditions set forth
in the Registration Statement, after the Registration Statement becomes
effective.
3. Covenants of the Company.
The Company covenants and agrees with you that:
(a) Company will use its best efforts to cause the
Registration Statement to become effective and, upon notification from the
Commission that the Registration Statement has become effective, will so advise
you and will not at any time, whether before or after the Effective Date, file
any amendment to the Registration Statement or supplement to the Prospectus of
which you shall not previously have been advised and furnished with a copy or
to which you or your counsel shall have reasonably objected in writing or which
is not in compliance with the Act and the Rules and Regulations. At any time
prior to the completion by you of the distribution of the Shares contemplated
hereby (but in no event more than nine months after the Effective Date) the
Company will prepare and file with the Commission, promptly upon your request,
any amendments or supplements to the Registration Statement or Prospectus
which, in your reasonable opinion, may be necessary or advisable in connection
with the distribution of the Shares.
Promptly after you or the Company is advised thereof,
you will advise the Company or the Company will advise you, as the case may be,
and confirm the advice in writing, of
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<PAGE> 8
the receipt of any comments of the Commission, of the effectiveness of any
post-effective amendment to the Registration Statement, of the filing of any
supplement to the Prospectus or any amended Prospectus, of any request made by
the Commission for amendment of the Registration Statement or for supplementing
of the Prospectus or for additional information with respect thereto, of the
issuance by the Commission or any state or regulatory body of any stop orders
or other order suspending the effectiveness of the Registration Statement or
any order preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of the suspension of the qualification of the Shares for
offering in any jurisdiction, or the institution of any proceedings for any of
such purposes, and will use its best efforts to prevent the issuance of any
such order and, if issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies
of each Preliminary Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes you and selected dealers to use the Prospectus in connection
with the sale of the Shares for such period not to exceed nine months from the
Effective Date as in the reasonable opinion of counsel for you the use thereof
is required to comply with the applicable provisions of the Act and the Rules
and Regulations. In case of the happening, at any time within such period as a
Prospectus is required under the Act to be delivered in connection with sales
by an underwriter or dealer, of any event of which the Company has knowledge
and which materially affects the Company or the Shares, or which in the opinion
of counsel for the Company or counsel for you should be set forth in an
amendment to the Registration Statement or a supplement to the Prospectus in
order to make the statements therein not then misleading, in light of the
circumstances existing at the time the Prospectus is required to be delivered
to a purchaser of the Shares, or in case it shall be necessary to amend or
supplement the Prospectus to comply with the Act or with the Rules and
Regulations, the Company will notify you promptly and forthwith prepare and
furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as you may reasonably request,
in order that the Prospectus, as so amended or supplemented, will not contain
any untrue statement of a material fact or omit to state any material facts
necessary in order to make the statements in the Prospectus, in the light of
the circumstances under which they are made, not misleading. The preparation
and furnishing of any such amendment or supplement to the Registration
Statement or amended Prospectus or supplement to be attached to the Prospectus
shall be without expense to the Underwriter, except that in case you are
required, in connection with the sale of the Shares, to deliver a Prospectus
nine months or more after the Effective Date, the Company will upon request of
and at your expense, amend or supplement the Registration Statement and
Prospectus and furnish you with reasonable quantities of prospectuses complying
with Section 10(a)(3) of the Act.
(b) The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations thereunder in connection with the offering
and issuance of the Shares.
The Company will use its best efforts to qualify or
register the Shares for sale under the securities or "blue sky" laws of such
jurisdictions as you may have designated in writing prior to the execution
hereof and will make such applications and furnish such information to counsel
for you as may be required for that purpose and to comply with such laws,
provided that the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or to
8
<PAGE> 9
execute a general consent to service process in any jurisdiction. The Company
will, from time to time, prepare and file such statements and reports as are or
may be required to continue such qualification in effect for so long a period
as you may reasonably request. Legal fees for such qualifications shall be
itemized based on the time expended and costs incurred, shall be reasonable and
shall not in any event exceed [$35,000.00], exclusive of filing fees (unless
otherwise agreed).
(c) The Company will instruct its transfer agent to
provide you with copies of the Depository Trust Company stock transfer sheets
on a weekly basis for a period of six months from the First Closing Date and on
a monthly basis thereafter for six additional months.
(d) For so long as the Company is a reporting company
under either Section 12(g), 13 or 15(d) of the Exchange Act, the Company, at
its expense, will furnish to its shareholders an annual report (including
financial statements audited by independent public accountants), in reasonable
detail and at its expense, will furnish to you during the period ending five
years from the date hereof, (i) as soon as practicable after the end of each
fiscal year, a balance sheet of the Company and any subsidiaries as at the end
of such fiscal year, together with statements of income, stockholders, equity
and cash flows of the Company and any subsidiaries as at the end of such fiscal
year, all in reasonable detail and accompanied by a copy of the certificate or
report thereon of independent accountants; (ii) as soon as they are available,
a copy of all reports (financial or other) mailed to security holders; (iii) as
soon as they are available, a copy of all non- confidential reports and
financial statements furnished to or filed with the Commission; and (iv) such
other information of a public nature as you may from time to time reasonably
request.
(e) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e) above
will be on a consolidated basis to the extent the accounts of the Company and
its subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
(f) The Company will deliver to you at or before the
First Closing Date one signed copy of the Registration Statement including all
financial statements and exhibits filed therewith, and of all amendments
thereto. The Company will deliver to or upon your order, from time to time
until the Effective Date as many copies of any Preliminary Prospectus filed
with the Commission prior to the Effective Date as the Underwriter may
reasonably request. The Company will deliver to you on the Effective Date and
thereafter for so long as a Prospectus is required to be delivered under the
Act, from time to time, as many copies of the Prospectus, in final form, or as
thereafter amended or supplemented, as you may from time to time reasonably
request.
(g) The Company will make generally available to its
security holders and deliver to you as soon as it is practicable to do so, but
in no event later than 90 days after the end of 12 months after its current
fiscal quarter, an earnings statement (which need not be audited) covering a
period of at least 12 consecutive months beginning after the Effective Date
which shall satisfy the requirements of Section 11(a) of the Act.
(h) The Company will apply the net proceeds from the sale
of the Shares substantially for the purposes set forth under "Use of Proceeds"
in the Prospectus, and will file such
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<PAGE> 10
reports with the Commission with respect to the sale of the Shares and the
application of the proceeds therefrom as may be required pursuant to Rule 463
of the Rules and Regulations.
(i) The Company will, promptly upon your request, prepare
and file with the Commission any amendments or supplements to the Registration
Statement, preliminary Prospectus or Prospectus and take any other action,
which in the opinion of Freshman, Marantz, Orlanski, Cooper & Klein, counsel to
you may be reasonably necessary or advisable in connection with the
distribution of the Shares and will use its best efforts to cause the same to
become effective as promptly as possible.
(j) Prior to the Effective Date, the Company will use its
best efforts to cause all the Directors and officers of the Company to enter
into a written agreement with you, which, among other things, shall provide
that for a period of 13 months following the closing date of the offering, such
Directors and officers will not sell, assign, hypothecate or pledge any of the
shares of Common Stock of the Company owned by them on the Effective Date, or
subsequently acquired by the exercise of any options or warrants or conversion
of any convertible security of the Company held by them on the Effective Date
directly or indirectly, except with your prior written consent and such
Directors and officers will permit all certificates evidencing those shares to
be stamped with an appropriate restrictive legend, and will cause the transfer
agent for the Company to note such restrictions on the transfer books and
records of the Company.
(k) The Company shall, upon the initial filing of the
Registration Statement, make all filings required to obtain approval for the
quotation of the Shares on the Nasdaq Smallcap Market ("NASDAQ") and will use
its best efforts to effect and maintain the aforesaid approval for at least
five (5) years from the date of this Agreement. Within ten (10) business days
after the Effective Date, the Company shall cause the Company to be listed in
the Standard & Poor's Corporate Records and cause such listing to be maintained
for five years from the date of this Agreement.
(l) The Company represents that it has not taken, and
agrees that it will not take, directly or indirectly, any action designed to or
which has constituted or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of the Shares or to
facilitate the sale or resale the Shares.
(m) During the period of the offering, and for a period
of twelve (12) months from the Effective Date, the Company will not sell or
otherwise dispose of any securities of the Company (except for shares of Common
Stock issuable upon exercise of options or warrants or conversion of
convertible securities outstanding on the Effective Date or upon exercise of
options granted or the grant of options under said plan less any options to
purchase shares granted prior to the Effective Date, pursuant to the Company's
Stock Option Plans) without your prior written consent, which consent shall not
be unreasonably withheld. For a period of twenty-four (24) months from the
Effective Date, the Company will not issue, sell or otherwise dispose of any
securities of the Company pursuant to Regulation S under the Act without your
prior written consent.
(n) Prior to the filing of the Registration Statement,
the Company shall retain a public relations firm acceptable to you, and shall
continue to retain such firm, or any alternate firm acceptable to you, for a
minimum period of two (2) years.
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<PAGE> 11
(o) The Company will reserve and keep available that
maximum number of its authorized but unissued securities which are issuable
upon exercise of the Underwriter's Warrant outstanding from time to time.
(p) The Company shall deliver to you, at the Company's
expense, three (3) bound volumes in form and content acceptable to you,
containing the Registration Statement and all exhibits filed therewith, and all
amendments thereto, and all other material correspondence, filings,
certificates and other documents filed and/or delivered in connection with this
offering. The Company shall use its best efforts to deliver such volumes with
one hundred eighty (180) days of the First Closing Date.
(q) For a period of thirty-six (36) months from the First
Closing Date, the Company shall allow an observer designated by the Underwriter
and acceptable to the Company, to receive notice of and to attend all meetings
of the Board of Directors of the Company. Such observer shall have no voting
rights and may be excluded from an executive session of the Board of Directors
for confidential matters, such observer shall be reimbursed for all
out-of-pocket expenses incurred in attending such meetings. The Company shall
hold at least nine (9) meetings per year and the observer will be indemnified
by the Company against any claims arising out of his participation at Board
meetings. In addition, for a period of thirty-six (36) months from the closing
of the offering, the Underwriter shall have the right to designate two members
of the Board of Directors provided that the designees are acceptable to the
Company. Such members shall be entitled to the same compensation,
reimbursements and indemnification as other members of the Company's Board of
Directors.
(r) For a period of thirty-six (36) months from the First
Closing Date, the Company shall not (i) implement a "poison pill" or other
device designed to prevent a hostile takeover of the Company, (ii) increase the
size of the Company's Board of Directors, without the approval of those members
of the Company's Board of Directors who are not employees of the Company or
(iii) increase the compensation of or introduce severance packages for, its
Directors and officers, without the consent of the Compensation Committee of
the Company's Board of Directors.
4. Conditions of Obligations of H.J. Meyers & Co., Inc.
Your obligations to purchase and pay for the Shares which you
have agreed to purchase hereunder are subject to the accuracy (as of the date
hereof, and as of the Closing Dates) of and compliance with the representations
and warranties of the Company herein, to the performance by the Company of its
obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become
effective and you shall have received notice thereof not later than 10:00 a.m.,
New York time, on the date of this Agreement, or at such later time or on such
later date as to which you may Agree in writing; on the Closing Dates, no stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that or any similar purpose shall have been
instituted or shall be pending or, to the knowledge of any Underwriter or to
the knowledge of the Company, shall be contemplated by the Commission; any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of Freshman, Marantz,
Orlanski, Cooper & Klein, counsel to you; and no stop order shall be in effect
denying or suspending effectiveness of the
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<PAGE> 12
Registration Statement nor shall any stop order proceedings with respect
thereto be instituted or pending or threatened under the Act.
(b) At the First Closing Date, you shall have received
the opinion, dated as of the First Closing Date, of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, counsel for the Company, in form and
substance reasonably satisfactory to counsel for you, to the effect that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Delaware and is duly qualified or licensed to do business
as a foreign corporation in good standing in each other jurisdiction
in which the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where failure to so
qualify will not have a material adverse effect in the business,
properties or financial condition of the Company;
(ii) the authorized capitalization of the Company
as of the date of the Prospectus was as set forth in the Prospectus;
all of the shares of the Company's outstanding stock requiring
authorization for issuance by the Company's Board of Directors have
been duly authorized and validly issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock of the Company to
such counsels knowledge, have not been issued in violation of the
preemptive rights of any stockholder and the stockholders of the
Company do not have any preemptive rights or other rights to subscribe
for or to purchase; except for the transfer restrictions regarding
"affiliates" contained in Rule 144 promulgated under the Act, there
are no restrictions upon the voting or transfer of, any of the Shares;
the Common Stock and the Underwriter's Warrant conform in all material
respects to the respective descriptions thereof contained in the
Prospectus; the Shares to be issued as contemplated in the
Registration Statement and this Agreement have been duly authorized
and, when paid, will be validly issued, fully paid and non-assessable
and free of preemptive rights contained in the Company's certificate
of incorporation or By-laws, or any other document, instrument or
agreement known to counsel; a sufficient number of shares of Common
Stock has been reserved for issuance upon exercise of the
Underwriter's Warrant; to such counsels knowledge, neither the filing
of the Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any registration
rights or other rights, other than those contemplated by the
Underwriter's Warrant or which have been waived or satisfied, for or
relating to the registration of the Shares;
(iii) this Agreement and the Underwriter's Warrant
(sometimes hereinafter collectively referred to as the "Underwriter
Agreements") have been duly and validly authorized, executed and
delivered by the Company, and assuming due execution and delivery of
this Agreement by you, such agreements are, or when duly executed will
be, the valid and legally binding obligations of the Company except as
enforceability may be limited by bankruptcy, insolvency, moratorium or
other laws affecting the rights of creditors, or by general equitable
principles; provided that no opinion need be expressed as to the
enforceability of the indemnity provisions contained in Section 6 or
the contribution provisions contained in Section 7 of this Agreement;
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<PAGE> 13
(iv) the certificates evidencing the Shares are in
valid and proper legal form; the Underwriter's Warrant will be
exercisable for shares of Common Stock of the Company in accordance
with the terms of the Underwriter's Warrant and at the prices therein
provided for; the shares of Common Stock of the Company issuable upon
exercise of the Underwriter's Warrant have been duly authorized and
reserved for issuance upon such exercise, and such shares, when issued
upon such exercise in accordance with the terms of the Underwriter's
Warrant and when the price is paid shall be fully paid and
non-assessable;
(v) Such counsel knows of no pending or
threatened legal or governmental proceedings to which the Company is a
party which are required to be described or referred to in the
Registration Statement which are not so described or referred to;
(vi) The execution and delivery of this Agreement
and the Underwriter's Warrant and the incurrence of the obligations
herein and therein set forth and the consummation of the transactions
herein or therein contemplated will not result in a violation of, or
constitute a default under, the certificate or articles of
incorporation or By-laws of the Company, or in a violation of or
default under any obligation, agreement, covenant or condition
contained in any material bond, debenture, note or other evidence of
indebtedness or in any of the material contracts, indentures,
mortgages, loan agreements, leases, joint ventures or other agreements
or instruments to which the Company is a party that are filed as
Exhibits to the Registration Statement or otherwise known to counsel;
(vii) Based upon a telephone conversation from a
member of the Staff of the Commission, the Registration Statement has
become effective under the Act, and to such counsels knowledge, no
stop order suspending the effectiveness of the Registration Statement
is in effect, no proceedings for that purpose have been instituted or
are pending before, or threatened by, the Commission and the
Registration Statement and the Prospectus (except, in the case of both
the Registration Statement and any Amendment thereto, and the
Prospectus and any supplement thereto for the financial statements and
notes and schedules thereto, and other financial information or
statistical data contained therein, or omitted therefrom, as to which
such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Rules and Regulations;
(viii) All descriptions in the Registration
Statement and the Prospectus, and any amendment or supplement thereto,
of contracts and other documents are accurate and fairly present the
information required to be shown, and such counsel is familiar with
all contracts and other documents referred to in the Registration
Statement and the Prospectus and any such amendment or supplement, or
filed as exhibits to the Registration Statement, and such counsel does
not know of any contracts or documents of a character required to be
summarized or described therein or to be filed as exhibits thereto
which are not so summarized, described or filed;
(ix) No authorization, approval, consent or
license of any governmental or regulatory authority or agency is
necessary in connection with the authorization, issuance, transfer,
sale or delivery of the Shares by the Company, in connection with the
execution, delivery and performance of this Agreement or the
Underwriter's Warrant by the Company
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<PAGE> 14
or in connection with the taking of any action contemplated herein or
therein, or the issuance of the Underwriter's Warrant or the Shares
underlying the Underwriter's Warrant, other than registration or
qualification of the Shares under applicable state or foreign
securities or blue sky laws (as to which such counsel need express no
opinion) and registration under the Act; and
(x) The statements in the Registration Statement
under the caption "Description of Capital Stock," to the extent that
such statements constitute a matter of law or legal conclusion have
been reviewed by such counsel and are correct in all material
respects; and
Such counsel has participated in the preparation of
the Registration Statement and the Prospectus and although such counsel has not
reviewed the accuracy or completeness of the statements contained in the
Registration Statement or Prospectus nothing has come to the attention of such
counsel that caused such counsel to have reason to believe that the
Registration Statement or any amendment thereto at the time it became effective
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus or any supplement thereto
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make statements therein in light of the
circumstances under which they were made not misleading (except, in the case of
both the Registration Statement and any amendment thereto and the Prospectus
and any supplement thereto, for the financial statements, notes and schedules
thereto and other financial information and statistical data contained therein,
as to which such counsel need express no opinion);
In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and in rendering such opinion may either (i) rely as to all matters of
law other than the law of the United States or of the State of California upon
opinions of counsel satisfactory to you, in which case the opinion shall state
that they have no reason to believe that you and they are not entitled to so
rely or (ii) assume that the laws of any state other than the State of
California are identical to the laws of the State of California, in rendering
such opinion.
(c) All corporate proceedings and other legal matters
relating to this Agreement, the Registration Statement, the Prospectus, and
other related matters shall be reasonably satisfactory to or approved by
Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you, and you shall have
received from such counsel a signed opinion, dated as of the First Closing
Date, with respect to the validity of the issuance of the Shares, the form of
the Registration Statement and Prospectus (other than the financial statements
and other financial data contained therein), the execution of this Agreement
and other related matters as you may reasonably require. The Company shall
have furnished to counsel for you such documents as they may reasonably request
for the purpose of enabling them to render such opinion.
(d) You shall have received a letter on and as of the
Effective Date and again on and as of the First Closing Date, in each instance
describing procedures carried out to a date within five (5) days of the date of
the letter, from Ernst & Young LLP, independent public accountants for the
Company, substantially in the form approved by you.
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<PAGE> 15
(e) At each of the Closing Dates, (i) the representations
and warranties of the Company contained in this Agreement shall be true and
correct with the same effect as if made on and as of such Closing Date, and the
Company shall have performed all of its obligations hereunder and satisfied all
the conditions on its part to be satisfied at or prior to such Closing Date;
(ii) 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 Act and the Rules and Regulations, and
shall 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 statements 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 in light of the circumstances under which
they were made; (iii) there shall have been, since the respective dates as of
which information is given, no material adverse change in the business,
properties, condition (financial or otherwise), results of operations, 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
Effective Date and the Company shall not have incurred any material liabilities
nor entered into any agreement not in the ordinary course of business other
than as referred to in the Registration Statement and Prospectus; and (iv)
except as set forth in the Prospectus, no action, suit or proceeding at law
shall be pending or threatened against the Company which would be required to
be disclosed in the Registration Statement, and no proceedings shall be pending
or threatened against the Company before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, condition (financial or otherwise), results of operations or general
affairs of the Company. In addition, you shall have received, at the First
Closing Date, a certificate signed by the President and the principal financial
or accounting officer of the Company, dated as of the First Closing Date,
evidencing compliance with the provisions of this subsection (e).
(f) At the First Closing Date, you shall have received from
the Company written evidence of the agreement of Curtis Faith to vote his
shares for the representatives' designees to the Company's Board of Directors
as described in the Prospectus.
(g) Upon exercise of the option provided for in Section
2(b) hereof, your obligations to purchase and pay for the Option Shares
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain
effective at the Option Closing Date, no stop order suspending the
effectiveness thereof shall have been issued, and no proceedings for
that purpose shall have been instituted or shall be pending, or, to
your knowledge or the knowledge of the Company, shall be contemplated
by the Commission, and any reasonable request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of Freshman, Marantz, Orlanski, Cooper &
Klein, counsel to you.
(ii) At the Option Closing Date there shall have
been delivered to you the signed opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, counsel for the Company, dated as of
the Option Closing Date, in form and substance reasonably
15
<PAGE> 16
satisfactory to Freshman, Marantz, Orlanski, Cooper & Klein, counsel
to you, which opinion shall be substantially the same in scope and
substance as the opinion furnished to you at the First Closing Date
pursuant to Section 4(b) hereof, except that such opinion, where
appropriate, shall cover the Option Shares rather than the Firm
Shares. If the First Closing Date is the same as the Option Closing
Date, such opinions may be combined.
(iii) At the Option Closing Date, there shall have
been delivered to you a certificate of the President and the Chairman
of the Board of the Company dated the Option Closing Date, in form and
substance reasonably satisfactory to Freshman, Marantz, Orlanski,
Cooper & Klein, counsel to you, substantially the same in scope and
substance as the certificate furnished to you at the First Closing
Date pursuant to Section 4(e) hereof.
(iv) At the Option Closing Date, there shall have
been delivered to you a letter in form and substance satisfactory to
you from Ernst & Young LLP, dated the Option Closing Date and
addressed to you, confirming the information in their letter referred
to in Section 4(d) hereof as of the date thereof and stating that,
without any additional investigation required, nothing has come to
their attention during the period from the ending date of their review
referred to in said letter to a date not more than five (5) days prior
to the Option Closing Date which would require any change in said
letter if it were required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the
Option Closing Date in connection with the sale and issuance of the
Option Shares shall be reasonably satisfactory in form and substance
to you, and you and Freshman, Marantz, Orlanski, Cooper & Klein,
counsel to you, shall have been furnished with all such documents and
certificates as you may request in connection with this transaction in
order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company or its
compliance with any of the covenants or conditions contained therein.
(g) If any of the conditions herein provided for in this
Section shall not have been completely fulfilled as of the date indicated, this
Agreement and all obligations of the Underwriter under this Agreement may be
canceled at, or at any time prior to, each Closing Date by your notifying the
Company of such cancellation in writing or by telegram at or prior to the
applicable Closing Date. Any such cancellation shall be without liability of
any Underwriter to the Company, except as otherwise provided herein.
5. Conditions of the Obligations of the Company.
The obligation of the Company to sell and deliver the Shares
is subject to the following conditions:
(a) The Registration Statement shall have become
effective not later than 9:00 a.m. New York time, on the date of this Agreement,
or on such later date or time as you and the Company may agree in writing.
16
<PAGE> 17
(b) on the Closing Dates, no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
Act or any proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided
for in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company to sell and deliver the Option Shares
on exercise of the option provided for in Section 2(b) hereof shall be
affected.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless you
and each person, if any, who controls you, within the meaning of the Act, from
and against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys, fees), to
which you or such controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in (A) the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment thereof
or supplement thereto, (B) any blue sky application or other document executed
by the Company specifically for that purpose or based upon written information
furnished by the Company filed in any state or other jurisdiction in order to
qualify any or all of the Shares under the securities laws thereof (any such
application, document or information being hereinafter called a "Blue Sky
Application"), or arise out of or are based upon the omission or alleged
omission to state in the Registration Statement, or any supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however,
that the Company will not be liable in any such case to the extent, but only to
the extent, that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company through you specifically for use in the
preparation of the Registration Statement or any such amendment or supplement
thereof or any such Blue Sky Application or any such Preliminary Prospectus or
the Prospectus or any such amendment or supplement thereto and provided
further, that the indemnity agreement provided in this Section 6(b) with
respect to any preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any losses, claims, charges,
liabilities or litigation based upon any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state therein a
material fact purchased Shares, if a copy of the Prospectus in which such
untrue statement or alleged untrue statement or omission or alleged omission
was corrected has not been sent or given to such person within the time
required by the Act and the Rules and Regulations thereunder. This indemnity
will be in addition to any liability which the Company may otherwise have.
(b) You agree to indemnify and hold harmless the Company,
each of its directors, each nominee (if any) for director named in the
Prospectus, each of its officers who have signed the Registration Statement,
and each person, if any, who controls the Company, within the meaning of the
Act, from and against any losses, claims, damages or liabilities (which shall,
for all purposes of this Agreement, shall include, but not be limited to, all
reasonable costs of defense and investigation
17
<PAGE> 18
and all reasonable attorneys, fees) to which the Company or any such director,
nominee, officer or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged untrue statement or omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or omission or alleged untrue statement or omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with
written information furnished to the Company through you specifically for use
in preparation thereof. This indemnity agreement will be in addition to any
liability which you may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section, notify in writing the indemnifying party
of the commencement thereof, but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section. In case any such action
is brought against any indemnified party, and it notifies the indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate in and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, subject
to the provisions herein stated, 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 will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that if the indemnified party is any Underwriter or a person who controls any
Underwriter within the meaning of the Act, the fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the indemnifying
party or (ii) the named parties to any such action (including any impleaded
parties) include both such Underwriter or such controlling person and the
indemnifying party, and in your judgment, upon advice of counsel, it is
advisable for such Underwriter or controlling persons to be represented by
separate counsel (in which case the indemnifying party shall not have the right
to assume the defense of such action on behalf of such Underwriter or such
controlling person, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys). No settlement of any
action against an indemnified party shall be made without the consent of the
indemnified party, which shall not be unreasonably withheld.
7. Contribution.
18
<PAGE> 19
In order to provide for just and equitable contribution under
the Act in any case in which (i) the indemnified party makes claims for
indemnification pursuant to Section 6 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case,
notwithstanding the fact that the express provisions of Section 6 provide for
indemnification in such case, or (ii) contribution under the Act may be
required on the part of you, then the Company and each person who controls the
Company, in the aggregate, and you shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees) in
either such case (after contribution from others) in such proportions that such
Underwriter is responsible in the aggregate for that portion of such losses,
claims, damages or liabilities represented by the percentage that the
underwriting discount per Share appearing on the cover page of the Prospectus
bears to the public offering price per Share appearing thereon, and the Company
shall be responsible for the remaining portion, provided, however, that if such
allocation is not permitted by applicable law, then the relative fault of the
Company and you and controlling persons, in the aggregate, in connection with
the statements or omissions which resulted in such damages and other relevant
equitable considerations shall also be considered. The relative fault shall be
determined by reference to, among other things, whether in the case of an
untrue statement of a material fact or the omission to state a material fact,
such statement or omission relates to information supplied by the Company or
you, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
Company and the Underwriter agree (a) that it would not be just and equitable
if the respective obligations of the Company and you to contribute pursuant to
this Section 7 were to be determined by pro rata or per capita allocation of
the aggregate damages (even if the Underwriter has to be treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in the first sentence of
this Section 7 and (b) that the contribution of any Underwriter shall not be in
excess of its proportionate share of the portion of such losses, claims,
damages or liabilities for which you are responsible. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. As used in this paragraph, the word "Company"
within the meaning of Section 15 of the Act. Your obligations to contribute
pursuant to this Section 7 are several in proportion to their respective
underwriting obligations and not joint. If the full amount of the contribution
specified in this paragraph is not permitted by law, then you and each person
who controls you shall be entitled to contribution from the Company to the full
extent permitted by law. The foregoing contribution agreement shall in no way
affect the contribution liabilities of any persons having liability under
Section 11 of the Act other than the Company and you. No contribution shall be
requested with regard to the settlement of any matter from any party who did
not consent to the settlement; provided, however, that such consent shall not
be unreasonably withheld.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or
the sale of the Shares to you is consummated, the Company will pay all costs
and expenses incident to the performance of this Agreement by the Company,
including but not limited to the fees and expenses of counsel to the Company
and of the Company's accountants; the costs and expenses incident to the
preparation,
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<PAGE> 20
printing, filing and distribution under the Act of the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), each Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the National Association of Securities Dealers, Inc.
("NASD") in connection with the filing required by the NASD relating to the
offering of the Shares contemplated hereby; all expenses, including reasonable
fees (but not in excess of the amount set forth in Section 3(b)) and
disbursements of counsel to you, in connection with the qualification of the
Shares under the State Securities or Blue Sky Laws which you shall designate;
the cost of printing and furnishing to you copies of the Registration
Statement, each Preliminary Prospectus, the Prospectus, this Agreement, the
Warrant Agreement and the Blue Sky Memorandum; the cost of printing the
certificates representing the Shares, the expenses of Company due diligence
meetings and presentations, (but not of you or your counsel in connection
therewith) and the expense (which shall not exceed [$10,000]) of placing one or
more "tombstone" advertisements as directed by you. The Company and shall pay
any and all taxes (including any transfer, franchise, capital stock or other
tax imposed by any jurisdiction) on sales to you hereunder. The Company will
also pay all costs and expenses incident to the furnishing of any amended
Prospectus or of any supplement to be attached to the Prospectus as called for
in Section 3(a) of this Agreement except as otherwise set forth in said
Section.
(b) In addition to the foregoing expenses, the Company
shall at the First Closing Date pay to you the balance of a non- accountable
expense allowance 3% of the gross proceeds of the offering, of which $[15,000]
has been paid. In the event the over-allotment option is exercised in part or
in full, the Company shall pay to you at the Option Closing Date an additional
amount equal to 3% of the gross proceeds received upon exercise of the
overallotment option. In the event the transactions contemplated hereby are
not consummated for any reason, the Company shall be liable for your actual
accountable out-of-pocket expenses (with credit given to the $[15,000] paid),
including legal fees, provided however, that any portion of the $[15,000] paid
by the Company that has not been utilized by you in connection with the
offering on an accountable basis shall be refunded by you to the Company; and
further provided that if the contemplated transactions are not consummated by
reason of breach by the Company of this Agreement or of any representation,
warranty, covenant or condition contained herein, the Company shall be liable
for your accountable out-of-pocket expenses.
(c) No person is entitled either directly or indirectly
to compensation from the Company, from any Underwriter or from any other person
for services as a finder in connection with the proposed offering, and the
Company agrees to indemnify and hold harmless you, and you agree to indemnify
and hold harmless, the Company from and against any losses, claims, damages or
liabilities, (which shall, for all purposes of this Agreement, include, but not
be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees), to which the indemnified party may become subject
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the claim of any person (other than an
employee of the party claiming indemnity) or entity that he or it is entitled
to a finder's fee in connection wit the proposed offering by reason of such
person's or entity's influence or prior contact with the indemnifying party.
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<PAGE> 21
9. Effective Date.
The Agreement shall become effective upon its execution,
except that you may, at your option, delay its effectiveness until the earlier
to occur of 10:00 A.M., New York time on the first full business day following
the Effective Date as you in your discretion shall first commence the public
offering by you of any of the Shares. The time of the public offering shall
mean the time of release by you of the first newspaper advertisement with
respect to the Shares, or the time when the Shares are first generally offered
by you to dealers by letter or telecopier, whichever shall first occur. This
Agreement may be terminated by you at any time before it becomes effective as
provided above, except that Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 shall
remain in effect notwithstanding such termination.
10. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7, 8,
12, 13, 14 and 15, may be terminated at any time prior to the First Closing
Date, and the option referred to in Section 2(b), if exercised, may be
canceled, at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
you for the resale of the Shares agreed to be purchased hereunder, by reason of
(i) the Company having sustained a material loss, whether or not insured, by
reason of fire, earthquake, flood, accident or other calamity, or from any
labor dispute or court or government action, order or decree, (ii) trading in
securities on the New York Stock Exchange or the American Stock Exchange having
been suspended or limited, (iii) material governmental restrictions having been
imposed on trading in securities generally which are not in force and effect on
the date hereof, (iv) a banking moratorium having been declared by federal of
New York State authorities, (v) an outbreak of major international hostilities
or other national or international calamity having occurred, (vi) the passage
by the Congress of the United States or by any state legislative body of
similar impact, of any act or measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is reasonably believed likely by
you to have a material adverse impact on the business, financial condition or
financial statements of the Company, (vii) any material adverse change in the
financial or securities markets beyond normal fluctuations in the United States
having occurred since the date of this Agreement, or (viii) any material
adverse change having occurred, since the respective dates for which
information is given in the Registration Statement and Prospectus, in the
earnings, business, prospects or general condition of the Company, financial or
otherwise, whether or not arising in the ordinary course of business.
(b) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 10 or in
Section 9, the Company shall be promptly notified by you, by telephone or
facsimile transmission, confirmed by letter.
11. Underwriter's Warrant.
On the First Closing Date, the Company will issue to you, for
a consideration of $5.00 and upon the terms and conditions set forth in the
form of Underwriter's Warrant annexed as an exhibit to the Registration
Statement, an Underwriter's Warrant to purchase 160,000 Shares. In the
21
<PAGE> 22
event of conflict in the terms of this Agreement and the Underwriter's Warrant,
the language of the Underwriter's Warrant shall control.
12. Representations, Warranties and Agreements to Survive
Delivery.
The respective indemnities, agreements, representations,
warranties and other statements of the Company and you, set forth in or made
pursuant to this Agreement will remain in full force and effect regardless of
any investigation made by or on behalf of you, the Company or any of its
officers or directors or any controlling persons and will survive delivery of
and payment for the Shares and the termination of this Agreement.
13. Notice.
All communications hereunder will be in writing and, except as
otherwise expressly provided herein, if sent to you, will be mailed, delivered
or telecopied and confirmed to it at H.J. Meyers & Co., Inc., 1895 Mt. Hope
Avenue, Rochester, New York 14620-4596, with a copy sent to Thomas J. Poletti,
Esq. at Freshman, Marantz, Orlanski, Cooper & Klein, 9100 Wilshire Boulevard,
8th Floor East, Beverly Hills, California 90212-3480, or if sent to the
Company, will be mailed, delivered, or facsimiled and confirmed to Curtis Faith
of Borealis Technology Corporation, 4070 Silver Sage Drive, Carson City, Nevada
89701, with copy sent to Steven E. Bochner, Esq. of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California
94304-1050.
14. Parties in Interest.
The Agreement herein set forth is made solely for your
benefit, the Company and, to the extent expressed, the Existing Shareholders,
any person controlling the Company, or you, and directors of the Company,
nominees for directors of the Company (if any) named in the Prospectus, the
officers of the Company who have signed the Registration Statement, and their
respective executors, administrators, successors and assigns, and no other
person shall acquire for have any right under or by virtue of this Agreement.
The term "successors and assigns" shall not include any purchaser, as such
purchaser, from you of the Shares.
15. Applicable Law.
This Agreement will be governed by, and construed in
accordance with, the laws of the State of New York applicable to agreements
made and to be entirely performed within New York.
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<PAGE> 23
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this Underwriting Agreement, whereupon it
will become a binding agreement between the Company and you in accordance with
its terms.
Very truly yours,
Borealis Technology Corporation
Dated: _____________, 1997 By:________________________________
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written. H.J. Meyers & Co., Inc.
Dated: _____________, 1997 By:________________________________
Authorized Officer
<PAGE> 24
SCHEDULE I
Underwriting Agreement dated ___________, 1997
<TABLE>
<CAPTION>
Number of Firm
Shares
Underwriter to be Purchased
---------------
<S> <C>
H.J. Meyers & Co., Inc. 1,600,000
</TABLE>
24
<PAGE> 1
EXHIBIT 4.5
Warrant to Purchase 160,000
Shares of Common Stock
UNDERWRITER'S WARRANT
Dated: ___________, 1997
THIS CERTIFIES THAT H.J. Meyers & Co., Inc. (herein sometimes called
the "Holder" or the "Underwriter") is entitled to purchase from BOREALIS
TECHNOLOGY CORPORATION, a Delaware corporation (the "Company"), at the price
and during the period as hereinafter specified, up to One Hundred Sixty
Thousand (160,000) shares of Common Stock, $0.001 par value per share (the
"Common Stock") at a purchase price of $_______ per share, subject to
adjustment as described below, at any time during the four-year period
commencing one (1) year from the effective date of the Registration Statement
(as defined below) ("Effective Date").
This Underwriter's Warrant (the "Underwriter's Warrant") is issued
pursuant to an Underwriting Agreement between the Company and H.J. Meyers &
Co., Inc. in connection with a public offering, through the Underwriter, of
1,600,000 shares of Common Stock as therein described (and up to 240,000
additional shares of Common Stock covered by an over-allotment option granted
by the Company to the Underwriter), and in consideration of $5.00 received by
the Company for the Underwriter's Warrant. Except as specifically otherwise
provided herein, the Common Stock issued pursuant to the Underwriter's Warrant
shall bear the same terms and conditions as described under the caption
"Description of Securities" in the Registration Statement on Form SB-2, File
No. 333-27299 (the "Registration Statement") except that the Holder shall have
registration rights under the Securities Act of 1933, as amended (the "Act"),
for issuance pursuant thereto, the Underwriter's Warrant and the Common Stock
issuable pursuant thereto, as more fully described in paragraph 6 herein.
1. The rights represented by the Underwriter's Warrant shall be
exercised at the price, subject to adjustment in accordance with Section 8
hereof (the "Exercise Price"), and during the periods as follows:
(a) During the period from the Effective Date to and
through __________, 1998 (the "First Anniversary
Date"), inclusive, the Holder shall have no right to
purchase any Common Stock hereunder, except that in
the event of any merger, consolidation or sale of
substantially all the assets of the Company as an
entirety prior to the First Anniversary Date (other
than (i) a merger or consolidation in which the
Company is the continuing corporation and which does
not result in
1
<PAGE> 2
any reclassification or reorganization of an
outstanding shares of Common Stock or (ii) any
sale/leaseback, mortgage or other financing
transaction), the Holder shall have the right to
exercise the Underwriter's Warrant concurrently with
such event and into the kind and amount of shares of
stock and other securities and property (including
cash) receivable by a holder of the number of shares
of Common Stock into which the Underwriter's Warrant
were exercisable immediately prior thereto.
(b) Between ___________, 1998 and _______, 2002, (five
(5) years from the Effective Date, i.e. the
"Expiration Date") inclusive, the Holder shall have
the option to purchase Common Stock hereunder at a
price of $_______ per share (120% of public offering
price per share of Common Stock pursuant to the
Registration Statement).
(c) After the Expiration Date, the Holder shall have no
right to purchase any Common Stock hereunder.
2. (a) The rights represented by the Underwriter's Warrant may
be exercised at any time within the periods above specified, in whole or in
part, by (i) the surrender of the Underwriter's Warrant (with the purchase form
at the end hereof properly executed) at the principal executive office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company); (ii) payment to the Company of the exercise price then
in effect for the number of shares of Common Stock specified in the
above-mentioned purchase form together with applicable stock transfer taxes, if
any; and (iii) delivery to the Company of a duly executed agreement signed by
the person(s) designated in the purchase form to the effect that such person(s)
agree(s) to be bound by the provisions of paragraph 6 and subparagraphs (b),
(c) and (d) of paragraph 7 hereof. The Underwriter's Warrant shall be deemed
to have been exercised, in whole or in part to the extent specified,
immediately prior to the close of business on the date the Underwriter's
Warrant is surrendered and payment is made in accordance with the foregoing
provisions of this paragraph 2, and the person or persons in whose name or
names the certificates for shares of Common Stock shall be issuable upon such
exercise shall become the holder or holders of record of such Common Stock at
that time and date. The Common Stock and the certificates for the Common Stock
so purchased shall be delivered to the Holder within a reasonable time, not
exceeding ten (10) business days, after the rights represented by this
Underwriter's Warrant shall have been so exercised.
(b) Notwithstanding anything to the contrary contained in
paragraph 2(a), the Holder may elect to exercise this Under-
2
<PAGE> 3
writer's Warrant in whole or in part by receiving shares of Common Stock equal
to the value (as determined below) of this Underwriter's Warrant, or any part
hereof, upon surrender of the Underwriter's Warrant at the principal office of
the Company together with notice of such election in which event the Company
shall issue to the Holder a number of shares of Common Stock computed using the
following formula:
X = Y(A-B)
------
A
Where X = the number of shares of Common Stock to be
issued to the Holder;
Y = the number of shares of Common Stock to be
exercised under this Underwriter's Warrant
(the "Shares");
A = the current fair market value of one share of
Common Stock;
B = the Exercise Price of the Underwriter's
Warrant;
As used herein, current fair market value of
Common Stock shall mean with respect to each share of
Common Stock the average of the closing prices of the
Company's Common Stock sold on the principal national
securities exchanges on which the Common Stock is at
the time admitted to trading or listed, or, if there
have been no sales of any such exchange on such day,
the average of the highest bid and lowest ask price
on such day as reported by Nasdaq, or any similar
organization if Nasdaq is no longer reporting such
information, either (i) on the date which the form of
election is deemed to have been sent to the Company
(the "Notice Date") or (ii) over a period of five (5)
trading days preceding the Notice Date, whichever of
(i) or (ii) is greater. If on the date for which
current fair market value 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, the current fair market
value of 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 shares of 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 binding agreement for a merger,
acquisition or other consolidation pursuant to which
the Company is not
3
<PAGE> 4
the surviving party, in which case the current fair
market value of the Common Stock shall be deemed to
be the value to be received by the holders of the
Company's Common Stock for each share thereof
pursuant to the Company's acquisition.
3. The Underwriter's Warrant shall not be transferred, sold,
assigned, or hypothecated for a period of one year commencing on the Effective
Date except that it may be transferred to successors of the Holder, and may be
assigned in whole or in part to any person who is an officer of the Holder.
This Underwriter's Warrant must be executed immediately upon its transfer at
any time after one year from the Effective Date, and if not so executed, shall
lapse. Any such assignment shall be effected by the Holder by (i) executing
the form of assignment at the end hereof and (ii) surrendering the
Underwriter's Warrant for cancellation at the office or agency of the Company
referred to in paragraph 2 hereof, accompanied by a certificate (signed by an
officer of the Holder if the Holder is a corporation) stating that each
transferee is a permitted transferee under this paragraph 3; whereupon the
Company shall issue, in the name or names specified by the Holder (including
the Holder), a new Underwriter's Warrant or Warrants of like tenor and
representing in the aggregate rights to purchase the same number of shares of
Common Stock as are purchasable hereunder at such time.
4. The Company covenants and agrees that all shares of Common
Stock which may be purchased hereunder will, upon issuance and delivery against
payment therefor of the requisite purchase price, be duly and validly issued,
fully paid and nonassessable. The Company further covenants and agrees that,
during the periods within which the Underwriter's Warrant may be exercised, the
Company will at all times have authorized and reserved a sufficient number of
shares of its Common Stock to provide for the exercise of the Underwriter's
Warrant.
5. The Underwriter's Warrant shall not entitle the Holder to any
voting rights or other rights, including without limitation notice of meetings
or other actions or receipt of dividends, as a stockholder of the Company.
6. (a) The Company shall advise the Holder or its permitted
transferee, whether the Holder holds the Underwriter's Warrant or has exercised
the Underwriter's Warrant and holds shares of Common Stock relating thereto, by
written notice at least four weeks prior to the filing of any new registration
statement thereto under the Act, or the filing of a notification on Form 1-A
under the Act for a public offering of securities, covering any securities of
the Company, for its own account or for the account of others, except for any
registration statement filed on Form S-4 or S-8 (or other comparable form), and
will, during the five (5) year period from the Effective Date, upon the request
of the Holder, include in any such new registration
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<PAGE> 5
statement (or notification as the case may be) such information as may be
required to permit a public offering of, all or any of the shares of Common
Stock underlying the Underwriter's Warrant (the "Registrable Securities").
(b) At any time during the four (4) year period beginning
one (1) year after the Effective Date, a 50% Holder (as defined below) may
request, on up to an aggregate of two occasions, that the Company register
under the Act any and all of the Registrable Securities held by such 50%
Holder. Upon the receipt of any such notice, the Company will promptly, but no
later than four weeks after receipt of such notice (subject to the last
sentence of this Section 6(b)), file a post-effective amendment to the current
Registration Statement or a new registration statement pursuant to the Act, so
that such designated Registrable Securities may be publicly sold under the Act
as promptly as practicable thereafter and the Company will use reasonable
efforts to cause such registration to become and remain effective (including
the taking of such reasonable steps as are necessary to obtain the removal of
any stop order) within 120 days (subject to the provision of the last sentence
of this Section 6 (b)) after the receipt of such notice, provided, that such
Holder shall furnish the Company with appropriate information in connection
therewith as the Company may reasonably request in writing. The 50% Holder
may, at its option, request the registration of any of the Common Stock
underlying the Underwriter's Warrant in a registration statement made by the
Company as contemplated by Section 6(a) or in connection with a request made
pursuant to this Section 6(b) prior to acquisition of the shares of Common
Stock issuable upon exercise of the Underwriter's Warrant. The 50% Holder may,
at its option, request such post-effective amendment or new registration
statement during the described period with respect to the Underwriter's Warrant
or separately as to the Common Stock, and such registration rights may be
exercised by the 50% Holder prior to or subsequent to the exercise of the
Underwriter's Warrant. Within ten days after receiving any such notice
pursuant to this subsection (b) of paragraph 6, the Company shall give notice
to any other Holders of the Underwriter's Warrant, advising that the Company is
proceeding with such post-effective amendment or registration statement and
offering to include therein the securities underlying that part of the Warrant
held by the other Holders, provided that they shall furnish the Company with
such appropriate information (relating to the intentions of such Holders) in
connection therewith as the Company shall reasonably request in writing. All
costs and expenses of the first post-effective amendment or new registration
statement shall be borne by the Company, except that the Holder(s) shall bear
the fees of their own counsel and any other advisors retained by them and any
underwriting discounts or commissions applicable to any of the securities sold
by them. All costs and expenses of the second such post-effective amendment or
new registration statement shall be borne by the Holder(s). The Company will
use its best efforts to maintain such registration statement or post-effective
amend-
5
<PAGE> 6
ment current under the Act for a period of at least six months (and for up to
an additional three (3) months if so requested by the Holder(s)) from the
effective date thereof. The Company shall supply prospectuses, and such other
documents as the Holder(s) may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities, use its best
efforts to register and qualify any of the Registrable Securities for sale in
such states (i) as such Holder(s) designate and (ii) with respect to which the
Company obtained a qualification in connection with its initial public offering
and furnish indemnification in the manner provided in paragraph 7 hereof.
Notwithstanding the foregoing set forth in this paragraph 6(b), the Company
shall not be required to include in any registration statement any Registrable
Securities which in the opinion of counsel to the Company (which opinion is
reasonably acceptable to counsel to the Underwriter) would be saleable
immediately without restriction under Rule 144 (or its successor) if the
Underwriter's Warrant was exercised pursuant to paragraph 2(b) herein.
Notwithstanding anything to the contrary, if the Company shall
furnish to the Holders requesting a registration or filing of a post-effective
amendment pursuant to this Section 6 a certificate signed by the President of
the Company stating that, in the good faith judgement of the board of Directors
of the Company, it would be materially detrimental to the Company and its
stockholders for such registration statement or post-effective amendment to be
filed and it is therefore in the best interests of the Company to defer such
filing, the Company shall have a right to defer such filing for a period not to
exceed 30 after the date on which the Company would be required to so file such
registration statement or post-effective amendment, provided, however, that the
Company shall not be entitled to provide such notice to such Holder or Holders
more than once in any 12-month period.
(c) The term "50% Holder" as used in this paragraph 6
shall mean the Holder(s) of at least 50% of the Underwriter's Warrant and/or
the Common Stock underlying the Underwriter's Warrant (considered in the
aggregate).
7. (a) Whenever pursuant to paragraph 6 a registration
statement relating to any Common Stock issued upon exercise of (or issuable
upon the exercise of any Warrants purchasable under) the Underwriter's Warrant
is filed under the Act, amended or supplemented, the Company will indemnify and
hold harmless each Holder of the Common Stock covered by such registration
statement, amendment or supplement (such Holder being hereinafter called the
"Distributing Holder"), and each person, if any, who controls (within the
meaning of the Act) the Distributing Holder, and each underwriter (within the
meaning of the Act) of such Common Stock and each person, if any, who controls
(within the meaning of the Act) any such underwriter, against any losses,
claims, damages or liabilities, joint or several, to which the
6
<PAGE> 7
Distributing Holder, any such controlling person or any such underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities, or actions in respect thereof, arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any such registration statement as declared effective or any
final prospectus constituting a part thereof or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading and will reimburse the Distributing
Holder or such controlling person or underwriter for any legal or other expense
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder or any other Distributing
Holder for use in the preparation thereof and provided further, that the
indemnity agreement provided in this Section 7(a) with respect to any
preliminary prospectus shall not inure to the benefit of any Distributing
Holder, controlling person of such Distributing Holder, underwriter or
controlling person of such underwriter from whom the person asserting any
losses, claims, charges, liabilities or litigation based upon any untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state therein a material fact, received such preliminary
prospectus, if a copy of the prospectus in which such untrue statement or
alleged untrue statement or omission or alleged omission was corrected has not
been sent or given to such person within the time required by the Act and the
Rules and Regulations thereunder.
(b) The Distributing Holder will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed said registration statement and such amendments and supplements thereto,
and each person, if any, who controls the Company (within the meaning of the
Act) against any losses, claims, damages or liabilities, joint or several, to
which the Company or any such director, officer or controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities, or actions in respect thereof, arise out of or are
based upon any untrue or alleged untrue statement of any material fact
contained in said registration statement, said preliminary prospectus, said
final prospectus, or said amendment or supplement, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such loss,
claim,
7
<PAGE> 8
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder for use in the preparation
thereof; and will reimburse the Company or any such director, officer or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under
this paragraph 7 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party, give the indemnifying party notice of the commencement
thereof, but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this paragraph 7.
(d) In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in and, to the
extent that it may 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 will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. The Exercise Price in effect at the time and the number and
kind of securities purchasable upon the exercise of this Underwriter's Warrant
shall be subject to adjustment from time to time upon the happening of certain
events as follows:
(a) In case the Company shall (i) declare a dividend or
make a distribution on its outstanding shares of Common Stock in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of Common
Stock into a greater number of shares, (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, or (iv)
enter into any transaction whereby the outstanding shares of Common Stock of
the Company are at any time changed into or exchanged for a different number or
kind of shares or other security of the Company or of another corporation
through reorganization, merger, consolidation, liquidation or recapitalization,
then appropriate adjustments in the number of Shares (or other securities for
which such Shares have previously been exchanged or converted) subject to this
Underwriter's Warrant shall be made and the Exercise Price in effect at the
time of the record date for such dividend or
8
<PAGE> 9
distribution or of the effective date of such subdivision, combination,
reclassification, reorganization, merger, consolidation, liquidation or
recapitalization shall be proportionately adjusted so that the Holder of this
Underwriter's Warrant exercised after such date shall be entitled to receive
the aggregate number and kind of Shares which, if this Underwriter's Warrant
had been exercised by such Holder immediately prior to such date, he would have
been entitled to receive upon such dividend, distribution, subdivision,
combination, reclassification, reorganization, merger, consolidation,
liquidation or recapitalization. For example, if the Company declares a 2 for
1 stock distribution and the Exercise Price hereof immediately prior to such
event was $7.20 per share and the number of Shares purchasable upon exercise of
this Underwriter's Warrant was 225,000, the adjusted Exercise Price immediately
after such event would be $3.60 per share and the adjusted number of Shares
purchasable upon exercise of this Underwriter's Warrant would be 450,000. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock entitling
them to subscribe for or purchase shares of Common Stock (or securities
convertible into Common Stock) at a price (the "Subscription Price") (or having
a conversion price per share) less than the Exercise Price on a per share basis
(the "Per Share Exercise Price") on such record date, the Exercise Price shall
be adjusted so that the same shall equal the price determined by multiplying
the Per Share Exercise Price in effect immediately prior to the date of
issuance by a fraction, the numerator of which shall be the sum of the number
of shares outstanding on the record date mentioned below and the number of
additional shares of Common Stock which the aggregate offering price of the
total number of shares of Common Stock so issued (or the aggregate conversion
price of the convertible securities so issued) would purchase at the Per Share
Exercise Price in effect immediately prior to the date of such issuance, and
the denominator of which shall be sum of the number of shares of Common Stock
outstanding on the record date mentioned below and the number of additional
shares of Common Stock so issued (or into which the convertible securities so
offered are convertible). Such adjustment shall be made successively whenever
such rights or warrants are issued and shall become effective immediately after
the record date for the determination of shareholders entitled to receive such
rights or warrants; and to the extent that shares of Common Stock are not
delivered (or securities convertible into Common Stock are not delivered) after
the expiration of such rights 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 or warrants been made upon
the basis of deliver of only the number of shares of Common Stock (or
securities convertible into Common Stock) actually delivered.
9
<PAGE> 10
(c) In case the Company shall hereafter distribute to all
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above, then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the Per Share Exercise
Price in effect immediately prior thereto by a fraction, the numerator of which
shall be the total number of shares of Common Stock then outstanding multiplied
by the current market price per share of Common Stock (as defined in Subsection
(e) below), less the fair market value (as determined by the Company's Board of
Directors) of said assets, or evidences of indebtedness so distributed or of
such rights or warrants, and the denominator of which shall be the total number
of shares of Common Stock outstanding multiplied by such current market price
per share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
distribution.
(d) Whenever the Exercise Price payable upon exercise of
the Underwriter's Warrant is adjusted pursuant to Subsections (a), (b) or (c)
above, the number of Shares purchasable upon exercise of this Underwriter's
Warrant shall simultaneously be adjusted by multiplying the number of Shares
issuable upon exercise of this Underwriter's Warrant by the Exercise Price in
effect on the date hereof and dividing the product so obtained by the Exercise
Price, as adjusted.
(e) For the purpose of any computation under Subsection
(c) above, the current market price per share of Common Stock at any date shall
be deemed to be the average of the daily closing prices of the Common Stock for
30 consecutive business days before such date. The closing price for each day
shall be the last sale price regular way or, in case no such reported sale
takes place on such day, the average of the last reported bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is admitted to trading or listed, or, if not listed or
admitted to trading on such exchange, the average of the highest reported bid
and lowest reported asked prices as reported by Nasdaq, or other similar
organization if Nasdaq is no longer reporting such information, or if not so
available, the fair market price as determined by the 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 ($0.05) in such price; provided, however, that any adjustments which may
by reason of this Subsection (f) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 8 shall be made to the nearest
cent or to the nearest one-hundredth of a
10
<PAGE> 11
share, as the case may be. Anything in this Section 8 to the contrary
notwithstanding, the Company shall be entitled, but shall not be required, to
make such changes in the Exercise Price, in addition to those required by this
Section 8, as it shall determine, in its sole discretion, to be advisable in
order that any dividend or distribution in shares of Common Stock, or any
subdivision, reclassification or combination of Common Stock, hereafter made by
the Company shall not result in any Federal income tax liability to the holders
of the Common Stock or securities convertible into Common Stock.
(g) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly cause a notice setting forth the adjusted
Exercise Price and adjusted number of Shares issuable upon exercise of the
Underwriter's Warrant to be mailed to the Holder, at its address set forth
herein, and shall cause a certified copy thereof to be mailed to the Company's
transfer agent, if any. The Company may retain a firm of independent certified
public accountants selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by this
Section 8, and a certificate signed by such firm shall be conclusive evidence
of the correctness of such adjustment.
(h) In the event that at any time, as a result of an
adjustment made pursuant to the provisions of this Section 8, the Holder of the
Underwriter's Warrant thereafter shall become entitled to receive any shares of
the Company other than Common Stock, thereafter the number of such other shares
so receivable upon exercise of the Underwriter's 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 Common Stock contained in
Subsections (a) to (f), inclusive, above.
9. This Agreement shall be governed by and in accordance with the
laws of the State of New York without regard to conflict of laws provision.
11
<PAGE> 12
IN WITNESS WHEREOF, BOREALIS TECHNOLOGY CORPORATION has caused this
Underwriter's Warrant to be signed by its duly authorized officers under its
corporate seal, and this Underwriter's Warrant to be dated ____________, 1997.
BOREALIS TECHNOLOGY CORPORATION
By: __________________________
Name:
Title:
(Corporate Seal)
Attest:
______________________________
Name:
Title:
12
<PAGE> 13
PURCHASE FORM
(To be signed only upon exercise of Warrant)
The undersigned, the holder of the foregoing Underwriter's Warrant,
hereby irrevocably elects to exercise the purchase rights represented by such
Warrant for, and to purchase thereunder, _______________ shares of no par value
Common Stock of BOREALIS TECHNOLOGY CORPORATION and herewith makes payment of
$_______ therefor, and requests that the certificates for the shares of Common
Stock be issued in the name(s) of, and delivered to _________________, whose
address(es) is (are):
Dated: _______________, 19__
By:________________________________
____________________________________
____________________________________
Address
<PAGE> 14
TRANSFER FORM
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto ______________________________ the right to purchase shares of
Common Stock represented by the foregoing Underwriter's Warrant to the extent
of __________ shares of no par value Common Stock, and appoints
_________________________ attorney to transfer such rights on the books of
____________ _________________, with full power of substitution in the
premises.
Dated: _______________, 19__
By:________________________________
___________________________________
___________________________________
In the presence of:
<PAGE> 1
[LETTERHEAD]
WILSON SONSINI GOODRICH & ROSATI
June 30, 1997
Borealis Technology Corporation Exhibit 5.1
4070 Silver Sage Drive
Carson City, Nevada 89701
Re: Registration Statement on Form SB-2
-----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement (the "Registration Statement")
on Form SB-2 (Registration No. 333-27299) filed by you (the "Company") with the
Securities and Exchange Commission, as amended on June 18, 1997 and June 30,
1997, in connection with the registration under the Securities Act of 1933, as
amended, of up to 1,760,000 shares (including 160,000 shares issuable upon
exercise of an over-allotment option granted to the underwriter of the
offering) of your Common Stock, $0.001 par value per share (the "Shares"), a
warrant to purchase 160,000 shares of such Common Stock to be issued to the
underwriter of the offering (the "Warrant"), and the shares of Common Stock
issuable upon exercise of the Warrant (the "Warrant Shares" and together with
the Shares and the Warrant, the "Securities"). We understand that the Shares
are to be sold to the underwriter of the offering for resale to the public as
described in the Registration Statement. As your legal counsel, we have
examined the proceedings taken, and are familiar with the proceedings proposed
to be taken, by you in connection with the sale and issuance of the Securities.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Securities, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Securities, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
------------------------------------
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
Exhibit 10.13
BOREALIS SP AGREEMENT NUMBER 101
BOREALIS TECHNOLOGY CORPORATION
NORTH AMERICAN SOLUTION PROVIDER AGREEMENT
This North American Solution Provider Agreement (the "Agreement") is
made and entered into as of October 2, 1996, (the "Effective Date") by and
between Borealis Technology Corporation, a Delaware corporation with offices at
923 Tahoe Boulevard, Suite 211, Incline Village, NV 89451 ("Borealis"), and
American Technology Corporation, a Missouri corporation with offices at 1400 N.
Providence Road, Suite 105, Media, PA 19063-2053 ("Solution Provider").
RECITALS
A. Borealis Technology Corporation owns certain computer software
known as Arsenal Designer, Arsenal Client and Arsenal Application Server which
provides a Sales Automation development and runtime environment for the
development and execution of application programs used in connection with Sales
Automation.
B. Borealis desires to permit Provider and Solution Providers duly
authorized Implementation Agents to use such software, to develop such
application programs for Borealis and Solution Provider's customers, in
accordance with the terms and conditions of this Agreement.
NOW THEREFORE, Borealis and Solution Provider agree as follows:
1. DEFINITIONS
1.1 "Application" means a computer software program that is
developed and implemented by the Solution Provider using the Software. An
Application must consist of significant and material functionality separate
and independent of the functionality provided by the Software itself, and must
add significant commercial value independent of the Software. An Application
does not include any of the Software.
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1.2 "Arsenal Designer" means the portion of the Software that
defines and administers the Arsenal development, roll-out and system
administration environment.
1.3 "Arsenal Client" means the portion of the Software that
runs the compiled application developed with the Arsenal Designer.
1.4 "Arsenal Application Server" means the portion of the
Software that manages synchronization, roll-out and client server connections.
1.5 "Intellectual Property Rights" means patent rights,
copyright rights, trade secret rights, and any other intellectual property
rights recognized by the laws of an applicable jurisdiction.
1.6 "Software" means the Arsenal Designer, Arsenal Client,
Arsenal Application Server and other software generally made available to
customers as shown on the North American Price List and related documentation
listed on Exhibit A, including any bug fixes, modifications and updates thereto
provided by Borealis to Solution Provider or generally made available to its
customers.
1.7 "The North American Price List" means the standard list
price document generally made available to customers stating general terms and
conditions and list price for Borealis products and services attached hereto
and made a part hereof in Exhibit A.
1.8 "Products" means the software, manuals, brochures,
maintenance agreements and promotional items generally made available to
Borealis customers as shown on the North American Price List and related
documentation listed on Exhibit A.
1.9 "Implementation Agent" means a non-Solution Provider
employee that has been trained by Borealis in the implementation of Arsenal
Software. The Implementation Agent shall act as a contract employee/consultant
working for the Solution Provider. Solution Provider agrees that all
Implementation Agents will have current, signed contracts and confidentiality
agreements with Solution Provider. Solution Provider shall have complete
responsibility to maintain contractual, customer project management and
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customer interface responsibilities with all Solution Provider and/or Borealis
customers. Implementation Agents are not authorized to sell Borealis products.
2. LICENSE
2.1 Development License. Subject to the terms and conditions
of this Agreement, Borealis grants Solution Provider a non-exclusive,
non-transferable (except as specified in Section 2.2) license to use the
Software solely for the purpose of selling to Solution Provider and/or Borealis
customers and developing, demonstrating, testing, implementing, and maintaining
Applications for Borealis' and Solution Provider's end-user customers.
Solution Provider may modify the Arsenal Client and configure the Arsenal
Application Server solely as necessary to use the Software in accordance with
the license rights granted under this Section 2.1. Solution Provider may not
modify the Arsenal Designer or any Software except for the Arsenal Client.
2.2 Distribution and Software License Agreement. Subject to
the terms and conditions of this Agreement, Borealis grants Solution Provider a
non-exclusive, non-transferable license to distribute copies of the Software
ordered by Solution Provider to Solution Provider's end user customers, in
machine-readable, compiled object code format only, along with transferring the
license rights to use such copies of the Software only for such customers'
internal business purposes, only in connection with the sale or license of an
Application developed and implemented for such customer, according to the terms
of the standard Borealis North American Software License Agreement, as
attached hereto and made a part hereof in Exhibit C (the "North American
Software License Agreement"). Solution Provider acknowledges and agrees that,
prior to such transfer, Solution Provider shall obtain from such end user
customer an executed copy of the North American Software License Agreement.
For each such transfer, Solution Provider will promptly submit to Borealis an
executed North American Software License Agreement, as attached hereto and made
a part hereof in Exhibit C. Solution Provider shall have no right to
sublicense the rights granted hereunder. Solution Provider shall not
distribute or market the Software in any manner except as expressly provided in
this Section 2.2. Solution Provider specifically acknowledges and agrees that
Solution Provider shall only distribute Software to customers for use by each
such customer on computers at least forty percent (40%) of which are located in
North America, as provided in the North American Software
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License Agreement. Solution Provider agrees to use reasonable commercial
efforts to enforce violations, infringements and breaches under the North
American Software License Agreements and to inform Borealis promptly of any
known violations, infringements and breaches.
3. LICENSE RESTRICTIONS
3.1 No Unauthorized Transfers. Solution Provider will not
transfer, sublicense, sell, lease, or otherwise distribute or make available
the Software to any third party, except as expressly authorized in this
Agreement.
3.2 No Reverse Engineering. Solution Provider will not
disassemble, decompile, reverse engineer or otherwise attempt to determine the
source code or structure of the Software nor permit any third party to do so.
3.3 No Unauthorized Modifications. Solution Provider will not
modify the Software, except as expressly authorized in Section 2.1 hereof.
3.4 No Unauthorized Use. Solution Provider will not use the
Software, except as expressly authorized in Section 2.1 hereof.
3.5 No Copying. Solution Provider will not copy the Software,
except as necessary to use the Software in accordance with the license granted
under Section 2, and except for a reasonable number of copies for backup and
archival and a reasonable number of copies of customer applications required to
support a Solution Provider or Borealis customer implementation of Arsenal.
Solution Provider will reproduce any copyright notice or other proprietary
notice or legend of Borealis on each copy Solution Provider makes of the
Software.
3.6 Limited Rights. No license or other right is granted, by
implication, estoppel or otherwise, to Solution Provider, under any Intellectual
Property Rights now or hereafter owned or controlled by Borealis except for the
licenses expressly granted in Section 2. Borealis reserves all rights and
licenses to the Software not expressly granted to Solution Provider hereunder.
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4. INTELLECTUAL PROPERTY OWNERSHIP
4.1 Borealis' Rights. Borealis has and will at all times retain
sole and exclusive ownership of all Intellectual Property Rights and all other
right, title and interest worldwide in and to the Software, whether or not the
Software is incorporated in or combined with any other product.
4.2 Solution Provider's Rights. Subject to Borealis' rights in
the Software, Solution Provider has and will at all times retain sole and
exclusive ownership of all Intellectual Property Rights, and all other right,
title and interest worldwide in all modification made by Solution Provider to
the Arsenal Client as expressly authorized herein, and to any Application
developed by Solution Provider using the Software.
5. ORDERING
5.1 Orders. Solution Provider will order Products from Borealis
by purchase order. Solution Provider may order copies of the Software for use
by Solution Provider in accordance with its license rights granted under
Section 2.1 or for distribution to Borealis' and Solution Provider's end-user
customers for use in connection with such customers' use of Application
developed by Solution Provider, as authorized in Section 2.2.
5.2 Acceptance. All purchase orders shall require customer end
user information and are subject to acceptance by Borealis, at its sole
discretion. Each purchase order submitted by Solution Provider will specify
whether such copy will be used by Solution Provider or transferred to a
Solution Provider end user customer. In the latter case, Solution Provider
shall attach a completed Borealis North American Software License Agreement
with such purchase order. Any terms and conditions of any such purchase order
which are in addition to or inconsistent with the terms and conditions of this
Agreement will be deemed stricken from such purchase order.
5.3 Shipment. Orders will be shipped F.O.B. Borealis' site
freight paid. Unless specified in Solution Provider's purchase order, Borealis
will select the mode of shipment and the carrier. Borealis will use its
reasonable efforts to ship ordered products
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to the Solution Provider in accordance with delivery schedules specified in the
purchase order as accepted by Borealis. Solution Provider will be solely
responsible for shipping to Solution Provider's customers copies of Products
ordered by Solution Provider for such customers under this Agreement.
6. PAYMENTS
6.1 Prices and Payments for Products. During the term of this
Agreement, the prices for Products ordered by Solution Provider pursuant to
Section 5.1 will be determined by Borealis' then-current North American Price
List, adjusted by the Solution Provider Product discounts set forth in Exhibit
B. Borealis' prices for the Products are subject to change upon thirty (30)
days written notice to Solution Provider. Multiple user pricing is on a per
customer basis only. Customer orders cannot be combined to achieve lower per
user licensing cost. All shipping, insurance and other similar charges for
delivery of the Products to Solution Provider will be paid by the Solution
Provider.
6.2 Payment Terms. Solution Provider will make all payments to
Borealis due under this Agreement within thirty (30) days of the invoice date
of each invoice from Borealis. Any payment not paid within thirty (30) days of
the invoice date shall be subject to an interest charge, computed on the unpaid
daily balance, of the lesser of (i) one and one-half percent (1.5%) per month
and (ii) the maximum rate permitted by law. Solution Provider shall pay all of
Borealis' costs and expenses (including reasonable attorney's fees) to enforce
and preserve Borealis' rights under this Section 6.2.
6.3 Taxes. All amounts payable under this Agreement are
exclusive of all sales, use, value-added, withholding, and other taxes and
duties. Solution Provider will pay all taxes and duties assessed in connection
with this Agreement and its performance by any authority within or outside of
the U.S., except for taxes payable on Borealis' net income. Borealis will be
promptly reimbursed by Solution Provider for any and all taxes or duties that
Borealis may be required to pay in connection with this Agreement and its
performance.
7. SOLUTION PROVIDER PRICING FREEDOM. Solution Provider is and
will remain entirely free to determine its own resale prices and license fees
for the Software and Applications at its own discretion.
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8. CONFIDENTIALITY
8.1 Confidentiality Obligations. Solution Provider
acknowledges that the Software (including without limitation the source code
for the Software) and any other technical, financial or business information
disclosed by Borealis to Solution Provider ("Confidential Information")
contains valuable confidential and proprietary information and trade secrets
that belong to Borealis, and that the unauthorized use or disclosure of any
such Confidential Information would cause irreparable financial and other
damages to Borealis. Solution Provider will not disclose to any third party or
use or duplicate any Confidential Information for any purpose, except as
expressly authorized in this Agreement. Solution Provider will limit the
disclosure of Confidential Information to those employees of Solution Provider
who have a need to access Confidential Information for the performance of this
Agreement and who have executed a non-disclosure agreement consistent with the
terms of this Agreement. Solution Provider further agrees to take all
reasonable measures to maintain the confidence of all Confidential Information
in Solution Provider's possession or control, which measures will in no event
be less than the measures Solution Provider takes to protect its own
confidential and proprietary information of similar importance.
8.2 Exceptions. Confidential Information does not include
information that: (a) is now or subsequently becomes generally available to the
public through no fault or breach on the part of Solution Provider; (b)
Solution Provider can demonstrate was rightfully in its possession without an
obligation of confidentiality prior to disclosure to Solution Provider by
Borealis; (c) is independently developed by Solution Provider without use of
any Confidential Information, as evidenced by written documentation; or (d)
Solution Provider rightfully obtains from a third party, without restriction as
to use or disclosure.
8.3 Injunctive Relief. The parties acknowledge that (i) the
restrictions and obligations contained in this Section 8 are reasonable and
necessary to protect Borealis' legitimate interests, (ii) in the event of a
violation of these restrictions, remedies at law may be inadequate and such
violation may cause irreparable damages to Borealis within a short period of
time, and (iii) that Borealis will be entitled to seek injunctive relief
against each and every violation without the necessity of posting a bond.
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8.4 Licensing Agreement. All details of this Solution Provider
agreement (pricing, terms, etc.) is confidential information between Borealis
and Solution Provider.
9. MAINTENANCE AND SUPPORT
9.1 By Borealis. Except as otherwise agreed to in writing by
the parties, Borealis shall not be responsible for providing support to
Solution Provider's end-user customers in connection with such customers' use
of Applications or with such customers use of the Software. Subject to receipt
by Borealis of all payments for maintenance of the Software, Borealis will
provide Solution Provider with: (i) software updates, revisions and error
corrections for the Software in accordance with Borealis' standard maintenance
and support policies and procedures; (ii) updates and enhancements for the
Software to the extent that Borealis generally provides such updates and
enhancements to Borealis' system Solution Provider customers without separately
charging for such updates and enhancements; and (iii) access to Borealis'
"hot-line" for inquiries from Solution Provider relating to the Software on
Borealis' normal business days and access to standard product training and
implementation training.
9.2 By Solution Provider. Solution Provider acknowledges that
it is solely responsible for providing first-line technical support to its
end-user customers in connection with such customers' use of Applications and
Software, at a level consistent with generally-accepted industry standards for
such support. At a minimum, Solution Provider will: (a) provide prompt pre- and
post-sales support for Software and for all Applications developed by Solution
Provider for its customers; (b) provide installation assistance and
consultation on the use of Applications and Software; (c) timely respond to
customers' general questions concerning use of Applications and Software; and
(iv) assist customers in the diagnosis and correction of problems encountered
in using Applications and Software. Borealis reserves the right to amend the
prices charged by Borealis for such maintenance and support services if
Borealis determines in its reasonable discretion, that Solution Provider has
failed to provide maintenance and support services to Solution Provider's
end-user customers consistent with the terms and conditions set forth in
Section 9.2. In addition, Solution Provider agrees to establish Borealis
dedicated support persons
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that will be available during normal Solution Provider business hours to
support customer inquiries, questions and problems, etc. At a minimum, Solution
Provider further agrees to support customers with the call back response times
and capabilities described by Exhibit D.
10. LIMITED WARRANTY
10.1 Limited Warranty. Borealis warrants that, for a period of
one hundred eighty (180) days after shipment of the Software to Solution
Provider, such Software will substantially conform with the applicable
documentation in all material respects. Borealis does not warrant that the
operation of the Software will be uninterrupted or error free. Solution
Provider's sole remedy for any failure of the Software to conform to such
warranty shall be to notify Borealis of the problem, in which event Borealis
shall use all reasonable and diligent efforts to promptly correct such problem
or provide a workaround or replacement for such Software.
10.2 Disclaimer. THE PROVISIONS OF THIS SECTION 10 SET FORTH
SOLUTION PROVIDER'S SOLE REMEDY AND BOREALIS' SOLE LIABILITY WITH RESPECT TO
THE PERFORMANCE OF THE SOFTWARE, REGARDLESS OF WHETHER THIS REMEDY FAILS OF ITS
ESSENTIAL PURPOSE. BOREALIS HEREBY DISCLAIMS ALL OTHER WARRANTIES TO SOLUTION
PROVIDER OR ITS CUSTOMERS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, INCLUDING
BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NONINFRINGEMENT. THE EXPRESS LIMITED WARRANTY STATED
ABOVE IS IN LIEU OF ALL LIABILITIES OR OBLIGATIONS OF BOREALIS FOR DAMAGES
INCLUDING, BUT NOT LIMITED TO, INCIDENTAL OR CONSEQUENTIAL DAMAGES OCCURRING
OUT OF OR IN CONNECTION WITH THE USE OR PERFORMANCE OF THE PRODUCTS.
11. LIMITATIONS OF LIABILITY
11.1 General Limitation. REGARDLESS OF WHETHER ANY REMEDY SET
FORTH HEREIN FAILS OF ITS ESSENTIAL PURPOSE, BOREALIS SHALL NOT BE LIABLE TO
SOLUTION PROVIDER OR TO ANY THIRD PARTY FOR ANY
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LOST PROFITS, LOSS OF USE OR LOSS OF DATA, INTERRUPTION OF BUSINESS, OR ANY
OTHER SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND
WHETHER UNDER THIS AGREEMENT OR OTHERWISE AND WHETHER UNDER THEORY OF CONTRACT,
TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE, EVEN IF ADVISED OF
THE POSSIBILITY OF SUCH LOSS OR DAMAGE.
11.2 Overall Liability. BOREALIS' TOTAL LIABILITY UNDER THIS
AGREEMENT SHALL IN NO EVENT EXCEED THE AMOUNT PAID BY SOLUTION PROVIDER TO
BOREALIS FOR THE ITEM OR THE PRODUCT THAT GIVES RISE TO THE LIABILITY.
12. INDEMNIFICATION
12.1 Borealis Indemnity. Borealis shall defend, at its
expense, any claim (or suit) brought against Solution Provider alleging that
the Software furnished hereunder infringes any United States Intellectual
Property Rights (excluding patent rights) of any third party, and will pay all
costs (including reasonable attorney's fees) and damages finally awarded
against Solution Provider in any such suit, provided that Borealis is given
prompt written notice of such claim and is given information, reasonable
assistance and sole authority to defend or settle the claim. Should the
Software become, or in Borealis' opinion be likely to become, the subject of a
claim infringement, Borealis may (a) obtain for Solution Provider the right to
continue using the Software, (b) replace or modify the Software so that it
becomes non-infringing, or (c) should either of the foregoing not be reasonably
available in Borealis' reasonable judgment, terminate this Agreement without
liability and return to Solution Provider an amount calculated based on the sum
of payments made pursuant to this Agreement to Borealis during the three (3)
years prior to termination, in each case reduced on a pro-rated monthly basis
from the date of such payment.
12.2 Exceptions. Borealis will have no liability under
Section 12.1 above if the alleged infringement arises from: (a) the
combination, operation or use of the Software with programs or data not
supplied by Borealis or (b) modifications of the Software not made by Borealis.
Solution Provider will defend, at its expense, any claim
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(suit) brought against Borealis as a result of infringement or alleged
infringement covered by this section 12.2 and will pay all costs and damages
finally awarded in any such suit.
12.3 Solution Provider Indemnity. Except for Borealis'
obligations under Section 12.1, Solution Provider shall defend, at its expense,
any claim (or suit) brought against Borealis arising out of any acts, omissions
or negligence of Solution Provider, its employees or agents, in connection with
the use of the Software, and will pay all costs (including reasonable
attorney's fees) and damages finally awarded in any such suit, provided that
Solution Provider is given prompt written notice of such claims and is given
information, reasonable assistance and sole authority to defend or settle the
claim.
12.4 Exclusive Remedy. THE PROVISIONS OF THIS SECTION 12 SET
FORTH SOLUTION PROVIDER'S SOLE REMEDY AND BOREALIS' SOLE LIABILITY WITH RESPECT
TO CLAIMS OF INFRINGEMENT OR MISAPPROPRIATION OF INTELLECTUAL PROPERTY RIGHTS.
13. TERM AND TERMINATION
13.1 Term. This Agreement will become effective on the
Effective Date and will continue in full force and effect until December 31,
1999 (the "Initial Period"), unless terminated earlier in accordance with the
terms of this Agreement. At the end of the Initial Period, this Agreement will
automatically renew for successive one year periods ("Renewal Periods") unless
either party provides written notice to the other party, at least thirty (30)
days prior to the end of the Initial or any Renewal Period of its intent to
terminate this Agreement, in which case this Agreement shall terminate at the
end of such period.
13.2 Termination for Material Breach. Either party may
terminate this Agreement at any time if the other party commits a material
breach of any of the material terms or conditions of this Agreement and fails
to remedy such breach within thirty (30) days after receiving written notice
from the other party of such breach.
13.3 Automatic Termination. To the extent permitted by
applicable law, this Agreement will automatically terminate without notice if
either party: (a) becomes insolvent, or unable to pay its debts as they mature;
(b) makes an assignment for the benefit
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of its creditors; (c) is liquidated or dissolved; or (d) has proceedings
commenced against it (whether voluntary or involuntary) under any bankruptcy,
insolvency or debtors' relief law and, in the case of involuntary proceedings,
such proceedings are not vacated or set aside within (60) days from the date of
commencement thereof.
13.4 Termination for Convenience. Borealis shall not
terminate this agreement for convenience prior to December 31, 1999. After
December 31, 1999 Borealis may terminate this Agreement upon one hundred eighty
(180) days written notice to Solution Provider.
13.5 Effect of Termination.
(a) Upon the expiration or termination of this Agreement,
the rights and license granted to Solution Provider under this Agreement will
automatically cease and Solution Provider will immediately return to Borealis,
or at Borealis' option, to another solution provider, all of Solution Provider's
copies of the Software and all materials and other items relating to the
Software (except as specified in Section 13.5(b), below), including, without
limitation, the Confidential Information of Borealis, all portions thereof and
all copies of the same. At the Solution Providers option, Solution Provider
shall be permitted to convert consigned Software to licensed software at the
equivalent list price of said software, less the Solution Providers standard
discount in effect at the time of termination. The Solution Providers initial
consignment fee shall be applied to the purchase of said software. In addition,
Solution Provider shall immediately transfer to Borealis, or at Borealis'
option, to another solution provider, all additional materials and information
necessary to enable Borealis or another solution provider to support Solution
Provider's end-user customer's use of the Software and Applications. At
Borealis' option and upon the prior written approval of Borealis, Solution
Provider may destroy all such items instead of returning them, provided Solution
Provider gives Borealis written certification by an officer of Solution Provider
that all such items have been destroyed.
(b) Notwithstanding Section 13.5(a), upon the expiration
or termination of this Agreement, for a period not to exceed one hundred and
eighty (180) days after termination, Solution Provider shall continue to have
sole responsibility for supporting its existing end-user customers until the
transfer of all technology and information set forth in Section 13.5(a), has
been completed and Borealis or another
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solution provider is able to provide such support. During such period, Solution
Provider may receive support from Borealis in connection with such end-user
customers; provided, however, that Solution Provider pays Borealis a percentage
(to be determined by the parties) of any maintenance fees received by Solution
Provider from all such end-users who pay maintenance fees to Solution Provider.
Notwithstanding the foregoing, Solution Provider agrees that Borealis will have
the right to amend such percentage if Borealis determines, in its reasonable
discretion, that Solution Provider has failed to provide maintenance and
support services to Solution Provider's end-user customers consistent with the
terms and conditions set forth in Section 9.2.
(c) All copies of the Software transferred to Solution
Provider end-user customers shall remain subject to the End-User License
Agreements between Borealis and such end-user customers.
13.6 No Damages for Termination. Neither party will be liable
to the other for damages of any type solely as a result of terminating this
Agreement in accordance with its terms.
13.7 Survival. The rights and obligations of the parties under
Sections 4, 6, 8, 10.2, 11, 13.5, 13.6, 14 and 15 will survive the termination
or expiration of this Agreement for any reason.
14. EXPORT CONTROL. Borealis Products are not for export outside
of North America defined as Canada, Mexico and the United States. Solution
Provider agrees to comply with all export laws and restrictions and regulations
of the United States Department of Commerce or other United States or other
sovereign agency or authority, and not to export, or allow the export or
re-export of any technical data or any direct product thereof in violation of
any such restrictions, laws or regulations, or unless and until all required
licenses and authorizations are obtained to the countries specified in the
current U.S. Export Administration Regulations (or any successor supplement or
regulations). Solution Provider further agrees to provide Borealis with any and
all letters of assurance or other articles required by the United States
Department of Commerce or other United States or other sovereign agency or
authority.
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15. GENERAL TERMS
15.1 Assignment. This Agreement will bind and inure to the
benefit of each party's permitted successors and assigns. Solution Provider may
not assign, sublicense or transfer any of its rights or obligations hereunder
either in whole or in part, without the prior written consent of Borealis. Any
attempt to assign this Agreement without such consent will be null and void.
15.2 Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the State of Nevada, except that body
of law concerning conflicts of law. The parties agree that any disputes arising
under this Agreement will be resolved in the state or federal courts located in
Reno, Nevada and the parties expressly consent to personal jurisdiction therein.
15.3 Severability. If for any reason a court of competent
jurisdiction finds any provision of this Agreement invalid or unenforceable,
that provision of the Agreement will be enforced to the maximum extent
permissible and the other provisions of this Agreement will remain in full
force and effect.
15.4 Arbitration. Any controversy or claim arising out of, or
relating to this Agreement, or the breach thereof, will be settled by binding
arbitration in English in Reno, Nevada before a single arbitrator reasonably
familiar with the technology and business pertaining to the products covered by
this Agreement, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The parties
agree that this Section 15.4 does not apply to breaches of confidentiality or
Intellectual Property Rights provisions and that either party may petition a
court of law for injunctive relief and such other rights and remedies as it may
have at law or equity against such breaches.
15.5 Force Majeure. Neither party will be responsible for any
failure or delay in its performance under this Agreement (except of payment for
money owed) due to causes beyond its reasonable control (each a "Force
Majeure"), including, but not limited to, acts of God, war, riot, embargoes,
acts of civil or military authorities, fire, floods, earthquakes, accidents,
strikes, or fuel crises, provided that the delayed party (i) gives
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prompt written notice thereof to the other party, and in any event within
fifteen (15) days of discovery thereof; and (ii) uses its reasonable efforts to
correct such failure or delay in its performance. The delayed party's time for
performance or cure under this Section 15.5 shall be extended for a period
equal to the duration of the Force Majeure.
15.6 Notices. All notices under this Agreement will be deemed
given when delivered personally, sent by confirmed facsimile transmission, sent
by certified or registered U.S. mail, return receipt requested, postage
prepaid, or sent by nationally-recognized express courier to the address listed
above or as may otherwise be specified by either party to the other in
accordance with this section.
15.7 Relationship of Parties. Solution Provider is an
independent contractor. Neither Solution Provider nor Solution Provider's
employees, consultants, contractors or agents are agents, employees, partners
or joint ventures of Borealis, nor do they have any authority to bind Borealis
by contract or otherwise to any obligation.
15.8 Waiver. No failure of either party to exercise or enforce
any of its rights under this Agreement will act as a waiver of such rights.
15.9 Entire Agreement. This Agreement and its exhibition are the
complete and exclusive agreement between the parties with respect to the subject
matter hereof, superseding and replacing any and all prior Agreements,
communications, and understandings (both written and oral), regarding such
subject matter. This Agreement may only be modified, or any rights under it
waived, by a written document executed by both parties.
15.10 Equitable Relief. Solution Provider acknowledges that any
breach of its obligations under this Agreement with respect to the Intellectual
Property Rights or Confidential Information of Borealis will cause Borealis
irreparable harm and significant
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injury which would be difficult to ascertain and which would not be compensable
by damages alone, and, therefore, that Borealis will be entitled to equitable
relief in addition to all other remedies provided by this Agreement or available
at law.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the Effective Date by their duly authorized representatives.
<TABLE>
<S> <C>
SOLUTION PROVIDER BOREALIS
By /s/ SHEKAR SWAMY By: /s/ RICHARD E. MELLOR
------------------- -----------------------
Name: Shekar Swamy Name: Richard E. Mellor
Title: President Title: Chief Operating Officer
Address: 1400 N. Providence Road, Suite 105 Address: 923 Tahoe Blvd., Suite 211
Media, PA 19063-2052 Incline Village, Nevada 89451
Phone: (610) 891-6660 Phone: (702) 832-0300
Fax: (610) 891-6662 Fax: (702) 832-7753
Contact: Shekar Swamy Contact: Stanley "Skip" King
</TABLE>
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EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 20,
1997 in the Amendment No. 2 to the Registration Statement (Form SB-2 No.
333-27299) and related Prospectus of Borealis Technology Corporation for the
registration of 1,600,000 shares of its common stock, warrant and 240,000 shares
of common stock issuable upon exercise of the warrant.
/s/ ERNST & YOUNG LLP
Reno, Nevada
June 27, 1997
