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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28556
--------------------------------
BOREALIS TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 88-0238203
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
4070 SILVER SAGE DRIVE
CARSON CITY, NV 89701
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 888-3200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $1,278,623.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price of the Common Stock on February
28, 1998, as reported on the Nasdaq Small Cap Market was approximately
$12,583,141. Shares of Common Stock held by each executive officer and director
and by each person who is known to own 5% or more of the outstanding Common
Stock have been excluded from this computation in that such persons may be
deemed to be affiliates. This determination of affiliate status is not a
conclusive determination for other purposes. As of February 28, 1998, the
Registrant had 5,879,148 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998. Annual Meeting
of Stockholders are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for the Registrants Common Stock and Related
Stockholder Matters......................................... 6
Item 6. Management's Discussion and Analyses of Financial Condition
and Results of Operations................................... 7
Item 7. Financial Statements and Supplementary Data................. 13
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 13
PART III
Item 9. Directors and Executive Officers of the Registrant.......... 14
Item 10. Executive Compensation...................................... 14
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................. 14
Item 12. Certain Relationships and Related Transactions.............. 14
Item 13. Exhibits, Financial Statements and Reports on Form 8-K...... 14
SIGNATURES.................................................. 16
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PART I
ITEM 1. 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 report.
Borealis Technology Corporation ("Borealis" or the "Company") is a provider
of enterprise-wide software solutions for the customer relationship management
market. In April 1997, Borealis began selling Arsenal, an advanced software
solution for the customer relationship management market, which enables
customers to automate customer interaction processes and information exchanges
between thousands of mobile users and central information systems containing
enterprise-wide customer databases. Borealis believes that Arsenal overcomes the
limitations of other commercially available solutions by providing pre-built
applications and rapid implementation capabilities combined with customization
and scalability features of custom solutions.
Competitive pressures are causing many organizations to seek new ways to
reduce costs and improve enterprise productivity by automating core business
processes. 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. 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
in the early 1990's 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.
ARSENAL
The Company's objective is to become the leading supplier of customer
relationship management applications to allow businesses to enhance the
productivity and effectiveness of their in-house and mobile sales personnel.
The Company's customer relationship management product, Arsenal, consists
of three separate software components: the Arsenal Designer, the Arsenal Server
and the Arsenal Client.
ARSENAL DESIGNER
Using the Arsenal Designer, an MIS administrator without modifying
Arsenal's source code is able to: 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++ modifications and 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 sales enterprise through processes
controlled by MIS administrators. The Company believes that
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the Arsenal Designer offers significant functionality not available in other
commercially available software products.
ARSENAL APPLICATION SERVER
The Application Server manages central-site administration and
synchronization, administers the implementation of enterprise wide sales
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. The Application Server is based upon a three-tier client/server
architecture and 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 APPLICATION
The Arsenal Client is designed to be installed on the computers of
enterprise-wide in-house and mobile 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.
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
expected to allow customers to easily upgrade to any new versions of Arsenal
without requiring the replacement or re-entry of data.
The Company released and began selling Arsenal, currently its only product
in April 1997. Consequently, the Company's future performance is highly
dependent on the successful commercial acceptance of Arsenal. There can be no
assurance that Arsenal will achieve market acceptance. The Company's ability to
effectuate the market acceptance of Arsenal will be substantially dependent on
the hiring and training of additional personnel, of which there can be no
assurance. Commercial acceptance of Arsenal will require the Company to
successfully establish additional sales and distribution channels, of which
there can be no assurance. Failure of the Company to achieve significant market
acceptance of the Arsenal product will have a material adverse effect on the
Company's business, financial condition and operating results.
RESEARCH AND DEVELOPMENT
The Company's research and development expenses were $2,451,544 and
$2,399,295 for the fiscal years ended December 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, or any new version of
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 intends 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 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 supporting commercially
available sales automation products.
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Arsenal is designed to be deployable and modifiable with considerably less
effort and in a more timely and cost-effective manner than current commercially
available products. Reduced design and installation time is expected to enable
third-party integrators to implement an increased number of Arsenal products
without a corresponding increase in staffing and related expenses. As a result,
the Company's objective is to establish an extensive and efficient network of
third-party integrators that will not only provide a more broad-based
implementation capacity than the Company could establish if implementing
solutions itself, but which could also function as a highly leveraged
incremental distribution channel which complements its direct sales force.
Nonetheless, third-party integrators will be 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
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 affect on the Company's
business, financial condition and results of operations. If the Company is
unable to develop or 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.
For the fiscal year ended December 31, 1997, the Company's three largest
customers accounted for 33%, 27% and 24% of the Company's revenue. The Company
expects that individual customers will continue to account for significant
percentages of the Company's revenue in the future.
COMPETITION
The customer relationship management 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 customer relationship management market;
(ii) third party integrators that design, develop and implement custom customer
relationship management solutions; (iii) the internal information technology
departments of potential customers that develop proprietary applications; and
(iv) pre-packaged products, including Personal Information Managers ("PIMs"). In
addition, the Company may experience competition from additional companies to
the extent such companies enter the market, such as "groupware" 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 market.
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, financial condition
and results of operations.
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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.
INTELLECTUAL PROPERTY, 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 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 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 material adverse effect on the Company's business,
financial condition and results of operations. Adverse determinations in 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 material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the laws of certain foreign countries treat the protection of
proprietary rights differently from 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, financial condition
and results of operations.
The Company believes that 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, and in the future expects to license,
certain software from third parties. The Company believes that it currently has
all the licensed technology that is required to complete development of Arsenal.
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.
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EMPLOYEES
As of December 31 1997, the Company employed 49 full-time employees. None
of the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes its relationship with its employees
is good. Competition for qualified personnel in the Company's industry is
intense. The Company believes that its future success will depend in part on its
continued ability to attract hire and retain qualified personnel who are in
great demand. There can be no assurance that the Company will be successful in
attracting and retaining such personnel.
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
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NAME AGE POSITION
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Pat Grady 30 President, Chief Executive Officer and Chairman of
the Board
Elizabeth Gasper 44 Executive Vice President and Chief Financial
Officer
Dave Bouchard 38 Senior Vice President of WorldWide Sales and
Services
Michael D'Eath 44 Vice President of Business Development and Product
Marketing
Ric Rodriguez 37 Vice President of Engineering Services
</TABLE>
Mr. Grady has been a director of the Company since July 1996. He was
appointed Chairman of the Board in January 1998 and assumed the roles of
President and Chief Executive Officer in March 1998. Prior to assuming the roles
of President and Chief Executive Officer, from March 1996 to March 1998 Mr.
Grady was Managing Director, Venture Capital of H.J. Meyers & Co., Inc. From
June 1993 to March 1996, Mr. Grady served as the Senior Vice President of
Corporate Finance at H.J. Meyers & Co., Inc.
Ms. Gasper joined the Company as Chief Financial Officer of the Company in
November 1996. She previously served as Controller at Scopus Technology, Inc.
from March 1993 to October 1996. From August 1992 to March 1993 she served as
Controller at Sonic Solutions. Prior thereto, she served in various management
positions at Sybase, Inc. from May 1990 to August 1992.
Mr. Bouchard joined the Company as Senior Vice President of WorldWide Sales
and Services in November 1997. From June 1995 to November 1997 he served as Vice
President of Leveraged Sales at Tivoli Systems, Inc. Prior thereto, he served as
Sales Manager of Powersoft Corporation from February 1993 to June 1995.
Mr. D'Eath joined the Company as Vice President of Business Development in
November 1997. He has assumed the additional position of Vice President of
Product Marketing as of January 1998. From May 1994 to November 1997, he served
as Director of Business Development and as General Manager of the Workgroup
Business Unit at Tivoli Systems, Inc. Prior thereto, he served as Executive
Director of Strategic Relations at Novell, Inc. from May 1989 to May 1994.
Mr. Rodriguez joined the Company as Vice President of Engineering Services
in February 1998. From November 1995 to February 1998 Mr. Rodriguez served as
Vice President of Research and Development and Chief Architect of Seagate
Software, Inc. From May 1993 to November 1995 Mr. Rodriguez was Vice President
of Development and General Manger of MobileWare Corporation. Prior thereto, he
served as Director of Strategic Development at Novell, Inc. from March 1992 to
May 1993.
ITEM 2. PROPERTIES
The Company's principal administrative, engineering, manufacturing,
marketing and sales facilities total approximately 19,000 square feet, and are
located in a single building in Carson City, Nevada under a lease which expires
in 2002. Management believes that its current facilities are adequate to meet
its needs through
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the next twelve months, and that, if required, suitable additional space will be
available to accommodate expansion of the Company's operations on commercially
reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter
ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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:
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HIGH LOW
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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 ended June 30, 1997.............................. $6.13 $4.00
Quarter ended September 30, 1997......................... $6.00 $3.75
Quarter ended December 31, 1997.......................... $5.50 $3.00
</TABLE>
At December 31, 1997, the Company had approximately 116 holders of record
of its common stock.
The Company has never paid any cash dividends on its capital stock and does
not expect to pay any such dividends in the foreseeable future. Further, an
existing bank credit agreement currently restricts the Company's ability to pay
cash dividends without the bank's consent.
During the fourth quarter of 1997 and the first quarter of 1998, Borealis
issued 1,001,000 shares of Common Stock and warrants to purchase an additional
500,500 shares of Common Stock at a strike price of $5.00 per share to certain
accredited investors. These securities were sold in units comprised of 2 shares
of Common Stock and a warrant to purchase one share of Common stock at a price
to the investor of $5.00 per unit. Net of commissions paid to H.J. Meyers & Co.,
Inc., the Company's sales agent for this private placement, Borealis received
proceeds of $2,196,200 for these issuances. The securities were sold pursuant to
Rule 506 of Regulation D promulgated under the Securities Act of 1933, as
amended.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
regarding future events and the future financial performance of Borealis
Technology Corporation (the "Company") that involve risks and uncertainties
including, but not limited to, statements related to the market acceptance of
Arsenal and the adequacy of the Company's cash reserves. 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 herein
under "Risk Factors" and elsewhere in this Report.
OVERVIEW
The Company has experienced significant operating losses in each year since
1994. 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 began shipping Arsenal in April
1997. The Company's revenues prior to the shipment of Arsenal 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. Due to the shift to the development and recent
sale of Arsenal, the Company now derives substantially all of its revenues from
the sale of Arsenal licenses and maintenance contracts for Arsenal. There can be
no assurance that the Company will ever achieve profitability.
The Company's future operating results will depend on many factors,
including demand for Arsenal, 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, assimilating and retaining a substantial number of direct sales
personnel and third party integrators in future periods. Further, any purchase
of Arsenal will be discretionary and will generally involve a significant
commitment of capital. As a result, in the event of any downturn in any
potential customer's business or the economy in general, purchases of the
Company's products 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 and license revenue which is
not subject to significant obligations upon execution of a licensing agreement,
delivery of the software and when collection is deemed probable in accordance
with Statement of Position ("SOP") 91-1, Software Revenue Recognition. Service
revenues are recognized as services are performed while maintenance revenues are
recognized ratably over the term of the support period. In October 1997, the
AICPA issued SOP 97-2, Software Revenue Recognition, which changes the
requirements for revenue recognition effective for transactions that the Company
will enter into beginning January 1, 1998. The criteria for recognizing revenue
under SOP 97-2 are generally more rigorous than the previous accounting
standard. Due to uncertainties which exist with respect to the appropriate
interpretations and manner of implementation of SOP 97-2, the effect on the
Company is uncertain.
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RESULTS OF OPERATIONS
The following table sets forth operations data for the periods indicated
and should be read in conjunction with this "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and the financial
statements, including the notes thereto, of the independent auditor's report
included elsewhere in this report.
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YEAR ENDED DECEMBER 31,
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1997 1996
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Total revenues.................................... $ 1,278,623 $ 176,941
Total cost of revenues............................ 53,690 66,140
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Gross margin...................................... 1,224,933 110,801
Operating expenses:
Sales and marketing............................. 4,325,470 2,743,778
Research and development........................ 2,399,295 2,451,544
General and administrative...................... 1,871,631 988,092
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Total operating expenses..................... 8,596,396 6,183,414
----------- -----------
Loss from operations......................... (7,371,463) (6,072,613)
Other income (expenses), net...................... 8,496 45,532
----------- -----------
Net loss..................................... $(7,362,967) $(6,027,081)
=========== ===========
</TABLE>
REVENUES
Net revenues consist of revenue from the licensing and sale of products,
revenue from service and maintenance agreements and revenue from training
services. Net revenues increased from $176,941 to $1,278,623 between the fiscal
years ended December 31, 1996 and 1997, respectively. This increase reflects the
Company's introduction and commencement of sales of Arsenal in the second
quarter of 1997. The majority of the revenues in the fiscal year ended 1996 are
attributable to the recognition of revenues related to sales of products the
Company no longer sells.
COST OF REVENUES
Cost of revenues represents primarily amounts incurred pursuant to royalty
obligations and maintenance agreements. The cost of revenues decreased from
$66,140 to $53,690 between the fiscal years ended December 31, 1996 and 1997,
respectively. The decrease is primarily the result of the cessation of sales of
the Company's previous products. The Company believes that the ratio of cost of
revenues to revenues is not meaningful in these periods 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
$6,183,414 to $8,596,396 between the fiscal years ended December 31, 1996 and
1997, respectively. Sales and marketing expenses increased from $2,743,778 to
$4,325,470 between the fiscal years ended December 31, 1996 and 1997,
respectively. This increase was the result of the impact of increased staffing
which began in the last quarter of 1996 and continued through 1997 as well as
costs associated with the Company's attendance at several trade shows, print
advertising and public relations. Research and development expenses decreased
from $2,451,544 to $2,399,295 between the fiscal years ended December 31, 1996
and 1997, respectively. This decrease was primarily the result of lower
recruiting fees incurred in 1997 as a result of changes in staffing
requirements. General and administrative expenses increased from $988,092 to
$1,871,631 between fiscal years ended December 31, 1996 and 1997, respectively.
This increase was due primarily to the full year's impact of increased staffing
which began in the last quarter of 1996 and increases in professional fees
incurred as a result of the Company's public company reporting obligations which
commenced following the Company's IPO in June of 1996.
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The number of the Company's employees remained constant at 49 between the
fiscal years ended December 1996 and 1997, respectively. The Company anticipates
that total operating expenses will continue to increase for the foreseeable
future particularly in the areas of sales and marketing and research and
development as it continues to expand its direct sales force and hire technical
personnel for future product development.
YEAR 2000
The Company continues to review its information technology to recognize the
Year 2000 for its critical data processing systems both internally and
externally. The Company does not expect costs associated with the modification
of internal data processing systems to be significant.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
statements of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130") and No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"). The Company will adopt SFAS 130 and SFAS 131
in the first quarter of 1998 and based on current circumstances, does not
believe the effect of adoption will be significant.
LIQUIDITY AND CAPITAL RESOURCES
In July 1997, the Company completed a follow-on public offering of
1,400,000 shares of Common Stock and the sale of an additional 210,000 shares of
Common Stock pursuant to the exercise of an over-allotment option granted by the
Company to the underwriter of the Company's follow-on public offering. As a
result of these offerings, the Company recorded proceeds of $4.6 million, net of
related underwriting discounts and offering expenses.
In November 1997, the Company began a private placement, (the "Private
Placement"), to sell units comprised of two shares of Common Stock and one
warrant exercisable for one share of Common Stock at a per share price of $5.00.
As of December 1997, the Company had sold 183,640 units and recorded proceeds of
$1.0 million, net of related commissions and private placement expenses. The
Company is authorized to obtain aggregate proceeds through future closings under
the terms of this placement not to exceed $3.5 million.
Additional investing and financing activities for the fiscal year ended
December 31, 1997 included $308,067 for purchases of computer and office
equipment and a $250,000 bank line of credit secured by the assets of the
Company. As of December 31, 1997, the Company had $250,000 outstanding under
this line of credit which is payable in July 1998. In July 1997, the Company
secured a $250,000 short-term loan to finance operations until the Company
received the proceeds from its follow-on offering. This loan was fully paid off
in August 1997. In January 1998, the Company used proceeds from its certificate
of deposit to pay the $650,000 promissory note.
Subsequent to year end, the Company obtained $1.2 million, net of
commissions and private placement expenses, in a second closing of the Private
Placement in exchange for 262,500 units. In conjunction with the second closing,
the units under the agreement were retroactively re-priced, effectively
increasing the number of units issued under the first closing.
The Company's cash and short-term investments totaled $2.7 million at
December 31, 1997 representing 62% of total assets. Working capital was $1.5
million at December 31, 1997. The Company used $7.2 million of cash to fund
operations during fiscal 1997. Net cash used in operating activities was
primarily for the development, 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.
The Company's future capital requirements will depend upon many factors,
including the market acceptance of the Company's Arsenal product, the progress
of the Company's research and development, the Company's operating results and
the status of competitive products. The Company anticipates that its existing
capital resources and cash generated from operations, if any, will be sufficient
to meet the Company's cash
9
<PAGE> 12
requirements for the next three months at its anticipated level of operations.
The Company intends to seek additional funding during the next twelve months,
and will most likely seek additional funding after such time. There can be no
assurance that any additional financing will be available to the Company on
acceptable terms, or at all when required by the Company. 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 are
highly dilutive or otherwise disadvantageous to investors. The Company has in
the past, and may continue to, experience difficulties and delays in its product
development due to working capital constraints. If adequate financing sources
are insufficient or not available or the Company experiences delays in the
development of future products, if any, the Company's business, financial
position and results of operations will be materially adversely affected.
RISK FACTORS
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, 1997 and for the years ended December 31, 1996 and
1997 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
$14,152,719 at December 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.
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 for the next three
months 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 intends
to seek additional funding during the next twelve months and will most 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. 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 have a material adverse effect on the Company's business, financial
condition and results of operations.
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 market 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 hire additional personnel, market acceptance of Arsenal will require
the Company to successfully hire and retain sales personnel in a timely manner,
of which there can be no assurance. Any such failure will have a material
adverse effect on the Company's business, financial
10
<PAGE> 13
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.
Possible Liquidity of Trading Market; Penny Stock
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 no 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 listing of companies on the Nasdaq
SmallCap Market more difficult to maintain 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
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 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 then $5.00 per share, the Company may become
subject to certain penny stock rules even if still quoted on the Nasdaq SmallCap
Market. While such penny stock rules should not affect the quotation of the
Company's Common Stock on the Nasdqaq SmallCap Market, such rules may further
limit the market liquidity of the Common Stock and the ability of purchasers to
sell such Common Stock in the secondary market.
Recent Hires of Key Executives; Need to Fill Key Executive Position; Dependence
on Limited Number of Key Personnel
The Company's Chairman of the Board assumed the positions of President and
Chief Executive Officer following the resignation of its President and Chief
Executive Officer in March 1998. 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. In particular ,
the Company's Senior Vice President of World Wide Sales and Services and its
Vice President of Business Development joined the Company in November 1997 and
the Company's Vice President of Engineering joined the Company in February 1998.
Additionally, the Company is currently seeking to hire a Vice President of
Marketing. The Company's future success will require it to recruit additional
key personnel, including additional 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 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.
Dependence on Third Party Integrators
Software products that address the customer relationship management 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
11
<PAGE> 14
likely be dependent on third-party integrators to complete certain postdelivery
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
of 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.
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 the
years beginning with 1994 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 sales 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, variation in the 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 customer resource management 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.
Rapid Technological Change; Risk of Product Delays or Defects
The customer relationship management 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.
12
<PAGE> 15
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 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 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, or any new versions of 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.
Competition
The customer relationship management 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 customer relationship management market;
(ii) third party integrators that design, develop and implement custom customer
relationship management solutions; (iii) the internal information technology
departments of potential customers that develop proprietary applications; and
(iv) pre-packaged products, including Personal Information Managers ("PIMs"). In
addition, the Company may experience competition from additional companies to
the extent such companies enter the market, such as "groupware" vendors,
LAN-based application development tools vendors, remote LANaccess 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 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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements together with related notes
and the report of Ernst & Young LLP, independent auditors, are set forth at the
pages indicated at Item 13.
13
<PAGE> 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by part III is omitted from this Report on
Form 10-KSB in that the Company will file its definitive Proxy Statement for its
1998 Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities
and Exchange Act of 1934, as amended (the "Proxy Statement"), not later than 120
days after the end of the fiscal year covered by this Report, and certain
information included in the Proxy Statement is incorporated herein by reference.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section titled "Executive Officers"
in Part I, Item 1 hereof
(b) Directors -- The information required by this Item is incorporated
by reference to the section entitled "Election of Directors" in
the Proxy Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Reporting" in the Proxy
Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
14
<PAGE> 17
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
1. Financial Statements
Report of Independent Auditors F-1
Balance sheets as of December 31, 1997 F-2
Statements of Operations For the Two Years Ended
December 31, 1997 F-3
Statement of Changes in Stockholders' Equity
For the Two Years Ended December 31, 1997 F-4
Statement of Cash Flows For the Two Years Ended
December 31, 1997 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
2. Exhibits: See Exhibits and reports on Form 8-K. The Exhibits listed
in the accompanying Exhibits and Reports on form 8-K are filed or
incorporated by reference as part of this report.
(b) Reports on Form 8-K.
(c) Exhibits
See (a) above
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized in Carson City, Nevada on this 31st day
of March, 1998.
BOREALIS TECHNOLOGY CORPORATION
By: /s/ PATRICK GRADY
------------------------------------
Patrick Grady
Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Patrick Grady and Elizabeth Gasper
and each of them acting individually, as his or her attorney-in-fact, each with
full power of substitution, for him or her in any and all capacities to sign any
and all amendments to this Report on Form 10-KSB, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming our signatures as them may be signed by our said
attorney to any and all amendments to this Report on Form 10-KSB.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report on Form 10-KSB has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PATRICK GRADY Chairman, President and March 31, 1998
- ----------------------------------------------------- Chief Executive
Patrick Grady
/s/ ELIZABETH GASPER Chief Financial Officer, March 31, 1998
- ----------------------------------------------------- (Principal Financial and
Elizabeth Gasper Accounting Officer)
/s/ PETER PITSKER Director March 31, 1998
- -----------------------------------------------------
Peter Pitsker
/s/ EDWARD ESBER Director March 31, 1998
- -----------------------------------------------------
Edward Esber
/s/ CURTIS FAITH Director March 31, 1998
- -----------------------------------------------------
Curtis Faith
/s/ JOE MARENGI Director March 31, 1998
- -----------------------------------------------------
Joe Marengi
</TABLE>
16
<PAGE> 19
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, 1997 and 1996, and the related
statements of operations, stockholders' equity (deficit), and cash flows for
each of the two years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1997,
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 has had recurring operating losses and
faces uncertainty with regard to future revenues from its new product. Further,
the Company believes that additional financing will be necessary in 1998 and
there can be no assurance that the additional financing will occur. These
conditions 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 16, 1998
F-1
<PAGE> 20
BOREALIS TECHNOLOGY CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,080,095 $ 3,921,506
Short-term investment..................................... 650,000 --
Accounts receivable....................................... 353,580 2,000
Other current assets...................................... 290,667 136,073
------------ -----------
Total current assets.............................. 3,374,342 4,059,579
Property and equipment, net................................. 819,417 856,653
Long-term investment........................................ -- 650,000
Note receivable from an employee............................ 156,988 --
Other assets................................................ 52,511 40,850
------------ -----------
Total assets...................................... $ 4,403,258 $ 5,607,082
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Promissory notes.......................................... $ 900,000 $ --
Accounts payable.......................................... 80,887 258,377
Accrued employee compensation and benefits................ 596,450 298,492
Other accrued liabilities................................. 110,350 60,375
Deferred revenue.......................................... 113,448 81,550
Current portion of capital lease obligations.............. 67,336 178,814
------------ -----------
Total current liabilities......................... 1,868,471 877,608
Capital lease obligations................................... 35,597 88,800
Long-term promissory note................................... -- 650,000
------------ -----------
1,904,068 1,616,408
Commitments and contingency (Notes 10 and 1)
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: 5,245,428 at December 31, 1997 and 3,184,506
at
December 31, 1996.................................... 5,245 3,185
Additional paid-in capital................................ 16,739,788 10,777,241
Note receivable from stockholder.......................... (93,124) --
Accumulated deficit....................................... (14,152,719) (6,789,752)
------------ -----------
Total stockholders' equity........................ 2,499,190 3,990,674
------------ -----------
Total liabilities and stockholders' equity........ $ 4,403,258 $ 5,607,082
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 21
BOREALIS TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Licenses.................................................. $ 1,171,554 $ 35,170
Service and maintenance................................... 107,069 141,771
----------- -----------
Total revenues......................................... 1,278,623 176,941
Cost of revenues:
Licenses.................................................. 7,764 2,310
Service and maintenance................................... 45,926 63,830
----------- -----------
Total cost of revenues................................. 53,690 66,140
----------- -----------
Gross margin................................................ 1,224,933 110,801
Operating expenses:
Sales and marketing....................................... 4,325,470 2,743,778
Research and development.................................. 2,399,295 2,451,544
General and administrative................................ 1,871,631 988,092
----------- -----------
Total operating expenses............................... 8,596,396 6,183,414
----------- -----------
Loss from operations................................... (7,371,463) (6,072,613)
Interest expense............................................ (113,519) (134,107)
Interest income............................................. 134,288 179,639
Other expenses.............................................. (12,273) --
----------- -----------
Net loss............................................... $(7,362,967) $(6,027,081)
=========== ===========
Basic and diluted net loss per common share................. $ (1.88) $ (3.11)
=========== ===========
Shares used in computing basic and diluted net loss per
common share.............................................. 3,912,190 1,935,984
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 22
BOREALIS TECHNOLOGY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTE TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
------------------- PAID-IN FROM ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL STOCKHOLDER DEFICIT (DEFICIT)
--------- ------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
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
Conversion 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
Issuance of common stock and
warrants in a follow-on public
offering, net of issuance costs
of $1,242,262.................. 1,610,000 1,610 4,592,378 (18,125) -- 4,575,863
Issuance of common stock and
warrants through a private
placement offering, net of
issuance costs of $145,324..... 367,280 367 1,044,308 -- -- 1,044,675
Common stock issued under employee
stock option and purchase
plans.......................... 83,642 83 325,861 (74,999) -- 250,945
Net loss.......................... -- -- -- -- (7,362,967) (7,362,967)
--------- ------- ----------- --------- ------------ -----------
Balances at December 31, 1997....... 5,245,428 $ 5,245 $16,739,788 $ (93,124) $(14,152,719) $ 2,499,190
========= ======= =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 23
BOREALIS TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(7,362,967) $(6,027,081)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 345,249 157,387
Common stock issued for compensation...................... 86,506 --
Net loss on disposal of fixed assets...................... 14,993 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (351,580) 34,188
Other current assets................................... (154,594) (128,993)
Accounts payable....................................... (177,490) 176,067
Accrued employee compensation and benefits............. 297,958 223,274
Other accrued liabilities.............................. 49,975 45,330
Deferred revenue....................................... 31,898 (47,478)
----------- -----------
Net cash used in operating activities....................... (7,220,052) (5,567,306)
INVESTING ACTIVITIES
Purchase of investment...................................... -- (650,000)
Purchases of property and equipment......................... (308,067) (515,707)
Proceeds from disposal of property and equipment............ 250 6,602
Increase in employee note receivable........................ (156,988) (40,850)
Increase in other assets.................................... (11,661) --
----------- -----------
Net cash used in investing activities....................... (476,466) (1,199,955)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net................. 5,784,977 9,589,572
Proceeds from issuance of convertible promissory notes...... -- 675,570
Proceeds from issuance of promissory notes.................. 500,000 650,000
Payment of promissory note.................................. (250,000) --
Proceeds from issuance of notes payable to stockholder and
related parties........................................... -- 750,000
Payment on notes payable to stockholder and related
parties................................................... -- (971,311)
Payments under capital lease obligations.................... (179,870) (163,904)
----------- -----------
Net cash provided by financing activities................... 5,855,107 10,529,927
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (1,841,411) 3,762,666
Cash and cash equivalents at beginning of year.............. 3,921,506 158,840
----------- -----------
Cash and cash equivalents at end of year.................... $ 2,080,095 $ 3,921,506
=========== ===========
Cash paid during the year for:
Interest.................................................. $ 110,400 $ 173,087
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 24
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Borealis Technology Corporation (the "Company") was originally incorporated
in Nevada in 1988. (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 net losses totaling $7,362,967 and $6,027,081
in 1996 and 1997, respectively, and at December 31, 1997, had an accumulated
deficit of $14,152,719. In addition, substantially all of the Company's current
year revenues result from sales of Arsenal, the Company's only product, which
was introduced during the second quarter of 1997. In 1997, the Company issued
1,977,280 shares of its common stock through a follow-on public offering and a
private placement, raising net cash proceeds of $5,620,538. Additional funding
through follow-on closings of the private placement is anticipated in the first
quarter of 1998 (Note 13). However, the Company believes that additional
financing will be necessary in 1998 to fund its operations. There can be no
assurance that the additional financing will occur. In addition, the Company has
not complied with certain financial ratio covenants of a loan agreement with a
bank, on which the Company has borrowed $250,000 at December 31, 1997. A waiver
of the loan covenant was obtained subsequent to year end and certain covenant
ratios have been adjusted. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company generally recognizes license revenues upon shipment of a
product following the execution of a licensing agreement provided there are no
significant post delivery obligations and collection is deemed probable.
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, typically one year.
In October 1997, the AICPA issued SOP 97-2, Software Revenue Recognition
("SOP 97-2"), which changes the requirements for revenue recognition effective
for transactions that the Company will enter into beginning January 1, 1998. The
criteria for recognizing revenue under SOP 97-2 are generally more rigorous than
the previous accounting standard. Due to uncertainties which exist with respect
to the appropriate interpretations and manner of implementation of SOP 97-2, the
effect on the Company is uncertain.
Research and Development
Research and development expenditures are 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 amounts have been insignificant and have been charged to research and
development expenses in the period incurred.
F-6
<PAGE> 25
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Advertising
Advertising costs are charged in the period the costs are incurred.
Advertising expense totaled $222,911 and $389,517, for the years ended December
31, 1997 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.
Basic and Diluted Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to fully diluted earnings per share as previously computed
under APB 15. Loss per share amounts for all periods have been presented, and
where appropriate, the presentation has been restated to conform to the
requirements under Statement 128. As the Company has incurred net losses in both
1997 and 1996, restatement of net loss per share has not been necessary. Basic
and diluted net loss per share are calculated as the net loss divided by the
weighted average number of shares outstanding during the respective years.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist primarily of cash on deposit with banks and high quality money market
instruments. The short term investment consists of a certificate of deposit with
a bank maturing in January 1998. Management determines the appropriate
classification of investment securities at the time of purchase. At December 31,
1997 and 1996, the Company's certificate of deposit was classified as held-to-
maturity as the Company intends to hold the security to maturity as collateral
for a promissory note (Note 4). Held-to-maturity securities are stated at
amortized cost. Accrued interest is included in interest income and interest
receivable. The carrying values for cash equivalents and the certificate of
deposit approximate their respective fair values at December 31, 1997 and 1996.
F-7
<PAGE> 26
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Notes Receivable from an Employee
The note receivable from an employee represents the outstanding balance of
a loan extended to an executive officer in November 1997. The loan is contingent
upon the executive officer's continued employment with the Company and will be
forgiven ratably over 3 years. The loan is not secured.
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 shorter of the asset life or the life of the
lease.
During the years ended December 31, 1997 and 1996, the Company financed,
under capital lease obligations, the acquisition of property and equipment for
$15,189 and $375,946, respectively.
Significant Customers
Sales are not concentrated geographically. The Company received significant
portions of its revenues from Heidelburg USA, Inc. (33%), American Microsystems,
Inc. (27%) and Maersk, Inc. (24%) during 1997 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.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130") and Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is comprised of net income (loss), changes in the value of
available-for-sale securities and foreign currency translation adjustments, and
other such items disclosed in the statement of stockholders' equity (deficit).
SFAS 131 revises the manner in which public companies report segment information
in annual financial statements. The Company will adopt SFAS 130 and SFAS 131 in
the first quarter of 1998, and based on current circumstances, does not believe
the effect of adoption will be significant.
F-8
<PAGE> 27
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Computer equipment and software..................... $ 805,578 $ 690,802
Furniture and equipment............................. 351,072 260,125
Leasehold improvements.............................. 180,926 158,296
---------- ----------
1,337,576 1,109,223
Less accumulated depreciation and amortization...... (518,159) (252,570)
---------- ----------
Total property and equipment, net................... $ 819,417 $ 856,653
========== ==========
</TABLE>
4. PROMISSORY NOTES
At December 31, 1997, the Company has a promissory note payable to a bank
for $650,000. The note is collateralized by the $650,000 short-term investment
and places certain business and borrowing restrictions on the Company. The note
matured on January 1, 1998 and bore interest at 7.55% per annum. In January
1998, the Company paid the outstanding $650,000 note.
In July 1997, the Company issued a $250,000 promissory note which bore
interest at 10% per annum. The note was due on demand following the Company's
secondary public offering and was paid in full in August 1997. In connection
with this note, the Company issued a warrant (Note 5).
On July 15, 1997, the Company issued a second promissory note payable to a
bank for $250,000. The note matures on July 14, 1998 and bears interest at the
Bank's Prime Rate plus 1.75 percentage points (10.25% at December 31, 1997). The
note evidences a revolving line of credit for which interest incurred is payable
monthly. The note is collateralized by the Company's assets. In connection with
this promissory note, the Company is subject to certain financial ratio
covenants. At December 31, 1997, the Company did not fully comply with the
covenants. The Company obtained a waiver of the covenant violation subsequent to
December 31, 1997.
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. 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.
Re-incorporation and Stock Split
In May 1996, the Board of Directors and stockholders approved the
re-incorporation of the Company in Delaware and a split of the Company's common
stock of 1.294 to one. With the re-incorporation, the authorized shares of
common stock were increased to 10,000,000 and the authorized shares of preferred
stock 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.
Equity Financings
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.
F-9
<PAGE> 28
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
In July 1997, the Company sold 1,610,000 shares of common stock in a
follow-on public offering which generated net proceeds of $4,575,863 after
deducting underwriting discounts and expenses. In December 1997, the Company
issued 367,280 shares of common stock and 183,640 warrants in the First Closing
of a private placement transaction which generated net proceeds of $1,044,675
after deducting commissions and private placement expenses. Under the terms of
the placement, subsequent sales of units (comprised of two shares of common
stock and one warrant) were authorized at a price per unit of $6.48 (Note 13).
Aggregate proceeds from the private placement are not to exceed $3,493,454.
Warrants
As part of its initial public offering, the Company issued 200,000 warrants
to its underwriter at an exercise price of $7.75 expiring in June 2000, and
3,000 warrants to its legal firm at an exercise price of $5.00 expiring in June
2000.
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 expiring in
2001. In 1997, the Company issued 5,000 warrants to a consultant at an exercise
price of $5.44 expiring in 2001. The fair value associated with these warrants
was not material.
In 1997, in connection with the issuance of the $250,000 promissory note
(Note 4), a warrant to purchase up to 50,000 shares of common stock was issued
to the lender at an exercise price of $4.00 per share. The warrant expires in
July 2002. The fair value calculated using the Black Scholes method has been
expensed to interest expense in 1997.
As part of the Company's follow-on public offering, the Company issued
140,000 warrants to its underwriter at an exercise price of $5.075 expiring in
July 2001.
In connection with the December 1997 private placement, 183,640 warrants
were issued to the unit holders. The warrants are exercisable at $6.00 at any
time prior to December 2000. The warrants are subject to redemption by the
Company at $0.05 per warrant subject to a market value in excess of $9 per
share. At the final closing, the Company will issue a warrant to the sales agent
to purchase one unit for every ten units sold in the placement. The sales
agent's warrant will be exercisable until December 2002, at $5.00 per share. At
December 31, 1997, units issuable under the contingent sales warrant total
18,364.
6. COMPENSATION AND BENEFIT PLANS
401(k) Retirement Savings Plan
In September 1997, the Company instituted a 401(k) retirement savings plan
to provide retirement benefits for substantially all of its employees.
Participants in the plan may elect to contribute up to 15% of their annual
compensation to the plan, limited to the maximum amount allowed by the Internal
Revenue Code. The Company, at its discretion, may make annual contributions to
the plan. Through December 31, 1997, the Company has not made any contributions
to the plan.
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 649,304
shares of
F-10
<PAGE> 29
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 over four years.
In 1997, the Company granted options to purchase 300,000 shares of common
stock at $4.50 per share outside of the 1996 Plan. These options vest over four
years. At December 31, 1997, these options remained outstanding.
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>
1997 1996
------------------------- -------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year................ 178,662 $2.35 151,495 $2.29
Granted...................................... -- -- 34,284 2.71
Exercised.................................... (55,135) 2.71 -- --
Forfeited.................................... (14,741) 2.71 (7,117) 2.71
------- ----- ------- -----
Outstanding-end of year...................... 108,786 $2.31 178,662 $2.35
======= ===== ======= =====
Exercisable at end of year................... 75,455 $2.43 83,991 $1.95
Weighted-average fair value of options
granted during the year.................... $ -- $2.09
</TABLE>
Exercise prices for options outstanding, under the 1994 Plan, as of
December 31, 1997, ranged from $1.55 to $2.71. The weighted-average remaining
contractual life of those options is 6.6 years.
A summary of the Company's 1996 Plan's stock option activity, combined with
the 300,000 shares issued outside the Plan, and related information for the
years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year................ 140,903 $4.15 -- $ --
Granted...................................... 870,580 4.38 146,726 4.14
Exercised.................................... (9,856) 4.69 -- --
Forfeited.................................... (89,237) 4.20 (5,823) 4.00
------- ----- ------- -----
Outstanding-end of year...................... 912,390 4.36 140,903 $4.15
======= ===== ======= =====
Exercisable at end of year................... 47,934 $4.21 472 $4.00
Weighted-average fair value of options
granted during the year.................... $2.49 $2.60
</TABLE>
Exercise prices for options outstanding, under the 1996 Plan, as of
December 31, 1997 ranged from $3.81 to $5.50. The weighted-average remaining
contractual life of those options is 9.5 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
F-11
<PAGE> 30
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 115,000 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 years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year................ 75,000 4.73 -- $ --
Granted....................................... 20,000 4.00 75,000 4.73
Exercised..................................... -- -- -- --
Forfeited..................................... (20,000) 5.00 -- --
------- ----- ------ -----
Outstanding, end of year...................... 75,000 4.47 75,000 $4.73
======= ===== ====== =====
Exercisable at end of year.................... 29,165 4.58 -- --
Weighted-average fair value of options granted
during the year............................. 1.99 $3.01
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$4.00 to $5.00. The weighted-average remaining contractual life of those options
is 8.8 years.
1997 Employee Stock Purchase Plan
In May 1997, the Board of Directors and stockholders adopted the 1997
Employee Stock Purchase Plan (the Purchase Plan) and reserved 200,000 shares for
issuance. Under the Purchase Plan, employees are granted the right to purchase
shares of common stock at a price per share that is 85% of the lesser of: (i)
the fair market value of the shares at the participant's entry date into the one
year offering period, or (ii) the end of each six-month segment within such
offering period. During fiscal 1997, shares totaling 18,651 were issued under
the Purchase Plan at an average of $4.20 per share.
7. STOCK-BASED COMPENSATION
The Company has four stock-based compensation plans: the 1994 Stock Plan,
the 1996 Stock Plan, the 1996 Director Option Plan and the 1997 Employee Stock
Purchase Plan, all of which are described in Note 6. In addition, the Company
has granted options to certain executives outside of the stock-based
compensation plans.
Pro forma information regarding net loss and net 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 1997
and 1996, respectively: risk-free interest rates of 6.1% and 6.2%; dividend
yields of zero; volatility factors of the expected market price of the Company's
common stock of .689 and .823; and a weighted-average expected life of the
options of 3.6 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,
F-12
<PAGE> 31
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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>
1997 1996
----------- -----------
<S> <C> <C>
Pro forma net loss................................ $(7,862,538) $(6,141,084)
Pro forma net loss per share...................... $ (2.01) $ (3.17)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until fiscal
2000.
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 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, 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 the contingent shares will be issued if
certain events involving a change of control, as defined, occur. The Contingent
Shares expire no later than 1999.
9. INCOME TAXES (SECTION 382) LOSS LIMITATIONS
There is no provision for income taxes for the years ended December 31,
1997 and 1996, 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-13
<PAGE> 32
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
accounting for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts payable and other accruals............. $ 267,813 $ 209,863
Deferred revenue................................ 38,572 27,727
Net operating loss carryforwards................ 4,480,785 2,061,304
----------- -----------
Total deferred tax assets......................... 4,787,170 2,298,894
Valuation allowance............................... (4,613,117) (2,261,905)
----------- -----------
Net deferred tax assets........................... 174,053 36,989
Deferred tax liabilities:
Receivables and prepaid expenses................ (174,053) (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 $2,351,212 and $2,046,490 during
1997 and 1996, respectively.
The principal reasons for the difference between the effective tax rate and
the federal statutory income tax rate are presented in the following table for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Federal benefit expected at statutory rates....... $(2,503,409) $(2,049,208)
Net operating loss with no current benefit........ 2,503,409 2,049,208
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
At December 31, 1997 and 1996, the Company had federal net operating loss
carryforwards of approximately $13,179,000 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 facility under an operating lease expiring in
February 2002. The Company has an option to extend its facility lease 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 $482,703 and
$502,531 at December 31, 1997 and 1996, respectively. Related accumulated
amortization was $230,486 and $111,541 at December 31, 1997 and 1996,
respectively. In addition, the capital leases are secured by the related
equipment, and the Company is required to maintain liability and property
F-14
<PAGE> 33
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
damage insurance. Future minimum lease payments under noncancelable capital and
operating leases are as follows at December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
1998.................................................. $79,209 $ 340,715
1999.................................................. 29,640 284,065
2000.................................................. 6,537 285,243
2001.................................................. -- 122,524
------- ----------
Total minimum payments................................ 115,386 $1,032,547
==========
Less amount representing interest..................... (12,453)
-------
Present value of minimum lease payments............... 102,933
Less current obligations.............................. (67,336)
-------
Long-term obligations................................. $35,597
=======
</TABLE>
Total rental expense for 1997 and 1996 was approximately $359,970 and
$103,109, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments which include the
short-term investment and the promissory notes approximate their recorded book
values at December 31, 1997 and 1996. The fair values are based on quoted market
prices and discounted cash flow analyses using the Company's incremental
borrowing rate.
12. RELATED PARTY TRANSACTION
The Company earned revenues on product sales and services negotiated with
the assistance of a former director of the Company's Board in the amount of
$310,000. In addition, deferred revenue of $40,000 was recorded. Related
commissions earned by the former director totaled $51,420.
13. SUBSEQUENT EVENTS (UNAUDITED)
The Company's Board of Directors approved the repricing of substantially
all options outstanding at January 30, 1998 to $2.63, the closing price of the
Company's stock at January 30, 1998. Options re-priced will not be exercisable
for six months. After such time, the options will vest in accordance with the
vesting terms of the original option grant.
In February 1998, the Company issued 525,000 shares of common stock and
262,500 warrants in a Second Closing of the private placement transaction (Note
5). Proceeds totaled $1,151,525 net of commissions and private placement
expenses of $157,026.
The price per Unit was reduced from $6.48 in the First Closing to $5.00.
Units issued in the First Closing have been recalculated subsequent to year end
to reflect the revised Unit price, increasing the number of common shares issued
to 476,000 from 367,280 and the number of warrants issued to 238,000 from
183,640.
In addition, the exercise price of warrants issued to the Unit holders was
reduced from $6.00 to $5.00, which exceeds the market value of the Company's
common stock at the date of repricing.
F-15
<PAGE> 34
EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------- ------------
<S> <C> <C>
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(2) Form of Warrant issued to H.J. Meyers & Co., Inc. in
connection with the Registrant's July 1997 public
offering....................................................
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......................................................
10.3(1) 1994 Stock Plan.............................................
10.4(1) 1996 Stock Plan.............................................
10.5(1) 1996 Director Option Plan...................................
10.6(1) Form of Indemnification Agreement...........................
10.7(1) Asset License and Purchase Agreement between the Registrant
and Sales Technologies, Inc., dated April 15, 1994..........
10.8(1) Lease between the Registrant and DBB Holdings, Inc., dated
June 11, 1996...............................................
10.9(3) Promissory Note between the Registrant and US Bank dated
July 11, 1996...............................................
10.10(4) 1997 Employee Stock Purchase Plan...........................
10.11(1) Form of Warrant for 2,000 shares granted to Peter Pitsker on
June 11, 1996...............................................
10.12(1) Form of Warrant for 7,000 shares granted to Jerry brooks on
June 11, 1996...............................................
10.13(2) Solution Provider Agreement between the Registrant and
American Technology Corporation, dated October 4, 1996......
10.14(2) Promissory Note issued to Oxbow LLC.........................
10.15(2) Warrant issued to Oxbow LLC.................................
10.16(2) Rights Agreement between the Registrant and Oxbow LLC.......
10.17 Form of Unit Purchase Agreement for 1997-98 private
placement...................................................
10.18 Form of Warrant for 1997-98 private placement...............
23.1 Consent of Ernst & Young LLP, independent auditors..........
27.1 Financial Data Schedule.....................................
</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 with Registrant's Registration
Statement on Form SB-2 which became effective on July 21, 1997.
(3) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 10-QSB filed August 13, 1996.
(4) Incorporated by reference to annex filed with Registrant's Definitive Proxy
Statement on Schedule 14A filed April 11, 1997.
(b) Reports on Form 8-K
None.
<PAGE> 1
EXHIBIT 10.17
UNIT PURCHASE AGREEMENT
Borealis Technology Corporation
4070 Silver Sage Drive
Carson City, NV 89701
Ladies & Gentlemen:
The undersigned, ______________ (the "Purchaser"), hereby confirms its
agreement with you as follows:
1. This Unit Purchase Agreement (the "Agreement") is made as of _______
___, 19 __ between Borealis Technology Corporation, a Delaware corporation (the
"Company"), and the Purchaser.
2. The Company has authorized the sale and issuance of units up to an
amount whose aggregate purchase price shall not exceed $2,426,010 (the "Units"),
each Unit consisting of two (2) shares (the "Shares") of Common Stock of the
Company and one warrant (a "Warrant") to purchase one (1) share of Common Stock
of the Company.
3. The purchase price per Unit (the "Price per Unit") will be $5.00. The
Company and the Purchaser agree that the Purchaser will purchase and the Company
will sell, at such Price per Unit, the number of Units whose aggregate purchase
price equals $_________ pursuant to the Terms and Conditions for Purchase of
Units attached hereto as Annex I and incorporated herein by reference as if
fully set forth herein. Unless otherwise requested by the Purchaser,
certificates representing the Shares and the Warrants purchased by the Purchaser
will be registered in the Purchaser's name and address as set forth below.
Please confirm that the foregoing correctly sets forth the agreement
between us by signing in the space provided below for that purpose.
_________________________________________
PURCHASER
By: _____________________________________
Title: __________________________________
Address: ________________________________
Tax ID No.: _____________________________
AGREED AND ACCEPTED:
___________________________________
BOREALIS TECHNOLOGY CORPORATION
By: _______________________________
Title: ____________________________
<PAGE> 2
ANNEX I
TERMS AND CONDITIONS FOR PURCHASE OF UNITS
1. Authorization and Sale of Units
1.1 Authorization. The Company has authorized the sale and issuance of
units up to an amount whose aggregate purchase price shall not exceed $2,426,010
(the "Units"), each Unit consisting of two (2) shares of Common Stock of the
Company (the "Shares") and one warrant to purchase one (1) share of Common Stock
of the Company (a "Warrant"), pursuant to the Unit Purchase Agreement to which
this Annex I is attached (the "Agreement"). The shares of Common Stock of the
Company to be issued upon exercise of the Warrants are hereinafter referred to
as the "Warrant Shares".
1.2 Sale of Units. Subject to the terms and conditions of the Agreement,
the Company agrees to issue and sell to each Purchaser and each Purchaser
severally agrees to purchase from the Company the number of Units set forth in
the Agreement.
2. Closing Dates; Delivery
2.1 Closings. The first closing of the purchase and sale of the Units
hereunder (the "First Closing") shall be conditioned upon receipt of capital
contributions from investors of at least $200,000 (the "Minimum Condition"). The
First Closing shall be held immediately following the satisfaction of the
Minimum Condition at the offices of Wilson, Sonsini, Goodrich & Rosati, P.C.,
650 Page Mill Road, Palo Alto, California, or at such other time and place as
shall be mutually agreed upon by the Company and the Purchasers purchasing a
majority of the units at the First Closing. The Company may at its option
schedule additional closings of the purchase and sale of up to the balance of
the Units not sold at the First Closing (the "Subsequent Closings," each,
together with the First Closing, referred to herein as a "Closing") on such date
or dates as the Company may determine.
2.2 Delivery. At each Closing, the Company will deliver to each
Purchaser (a) a certificate, registered in the Purchaser's name and address as
shown in the Agreement, representing the number of Shares to be purchased by the
Purchaser and (b) a Warrant certificate, substantially in the form attached
hereto as Exhibit A, representing the Warrant to be purchased by such Purchaser.
Such delivery shall be against payment therefor by wire transfer of the
aggregate purchase price of the Units set forth in the Agreement to an escrow
account established by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, escrow agent for the Company (the "Escrow Agent"). All payments
received by the Escrow Agent prior to each date of Closing (each a "Closing
Date") shall be held in a trust account for the benefit of the Purchasers
pending such Closing.
<PAGE> 3
3. Representations and Warranties of the Company
The Company represents and warrants to the Purchasers as of the date of
the Agreement as follows:
3.1 Organization; Standing; Qualification to Do Business. The Company is
a corporation duly organized and validly existing under, and by virtue of, the
laws of the State of Delaware and is in good standing as a domestic corporation
under the laws of said state. The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing is not reasonably likely to have a material adverse effect on the
Company.
3.2 Corporate Power; Authorization. The Company has all requisite legal
and corporate power and has taken all requisite corporate action to execute and
deliver the Agreement, to sell and issue the Units and to carry out and perform
all of its obligations under the Agreement. The Agreement constitutes the legal,
valid and binding obligation of the Company, enforceable in accordance with its
terms, except (a) as rights to indemnification and contribution hereunder may be
limited by applicable law, equitable principles or public policy, (b) as limited
by applicable bankruptcy, insolvency, reorganization or similar laws relating to
or affecting the enforcement of creditors' rights generally and (c) as limited
by equitable principles generally. To the Company's knowledge, the execution and
delivery of the Agreement does not, and the performance of the Agreement and the
compliance with the provisions hereof and the issuance, sale and delivery of the
Units by the Company will not materially conflict with, or result in a material
breach or violation of the terms, conditions or provisions of, or constitute a
material default under the Certificate of Incorporation or Bylaws of the Company
or any statute, law, rule or regulation to which the Company or any of its
properties is subject.
3.3 Issuance and Delivery of the Shares, Warrants and Warrant Shares.
The Shares and the Warrants, when issued in compliance with the provisions of
the Agreement, and the Warrant Shares, when issued in compliance with the
Agreement and the Warrants, will be validly issued, fully paid and
nonassessable.
3.4 Private Placement Offering Memorandum; SEC Documents; Financial
Statements. The Company has filed in a timely manner all documents that the
Company was required to file with the Securities and Exchange Commission (the
"SEC") under Sections 13, 14(a) and 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the 12 months preceding the date
of the Agreement. As of their respective filing dates, all documents filed by
the Company with the SEC (the "SEC Documents") complied in all material respects
with the requirements of the Exchange Act or the Securities Act of 1933, as
amended (the "Securities Act"), as applicable. Neither the Agreement nor any of
the SEC Documents as of their respective dates included an untrue statement of a
material fact or omitted to state a material fact necessary in
-2-
<PAGE> 4
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The financial statements of the Company
included in the SEC Documents (the "Financial Statements") comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto. The Financial
Statements have been prepared in accordance with generally accepted accounting
principles consistently applied and fairly present the consolidated financial
position of the Company and any subsidiaries at the dates thereof and the
consolidated results of their operations and consolidated cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal,
recurring adjustments).
3.5 Governmental Consents. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company is
required in connection with the consum mation of the transactions contemplated
by the Agreement, except for (a) compliance with the securities and blue sky
laws in the states in which Units are offered and/or sold, (b) the filing of a
registration statement and any amendments thereto with the SEC as contemplated
by Section 7.1 of the Agreement and (c) the filing of a Notification Form For
the Listing of Additional Shares with The Nasdaq Stock Market and a Form 10-C
with the SEC.
3.6 No Material Adverse Change. Except as otherwise disclosed herein or
in the Company's Private Placement Offering Memorandum prepared on November 18,
1997 (such Private Placement Offering Memorandum, including all exhibits
thereto, being hereinafter referred to as the "Memorandum"), since September 30,
1997, there has not been (a) any changes in the assets, liabilities, financial
condition, business prospects or operations of the Company which, individually
and in the aggregate, have had a material adverse effect on the Company or (b)
any declaration or payment of any dividend or other distribution of assets of
the Company.
3.7 Litigation. Except as set forth in the Memorandum, there are no
actions, suits, proceedings or investigations pending or, to the best of the
Company's knowledge, threatened against the Company or any of its properties
before or by any court or arbitrator or any governmental body, agency or
official that (a) might have a material adverse effect on the Company and its
subsidiaries considered as one enterprise or (b) might impair the ability of the
Company to perform in any material respect its obligations under the Agreement.
3.8 Private Placement. Assuming the accuracy of the representations and
warranties of the Purchasers, and compliance by the Purchasers of all of their
covenants and agreements contained in the Agreement, the offer, sale and
issuance by the Company of the Units to the Purchasers as contemplated in the
Agreement constitute transactions exempt from the registration requirements of
Section 5 of the Securities Act.
-3-
<PAGE> 5
4. Representations, Warranties and Covenants of the Purchasers
Each Purchaser hereby severally represents and warrants, and covenants
and agrees with, to the Company, as of the Closing Date, as follows:
4.1 Authorization. Purchaser has all requisite legal and corporate or
other power and capacity and has taken all requisite corporate or other action
to execute and deliver the Agreement, to purchase the Units to be purchased by
it and to carry out and perform all of its obligations under the Agreement. The
Agreement constitutes the legal, valid and binding obligation of the Purchaser,
enforceable in accordance with its terms, except (a) as rights to
indemnification and contribution hereunder may be limited by applicable law,
equitable principles or public policy, (b) as limited by applicable bankruptcy,
insolvency, reorganization or similar laws relating to or affecting the
enforcement of creditors' rights generally and (c) as limited by equitable
principles generally.
4.2 Investment Experience. Purchaser is an "accredited investor" as
defined in Rule 501(a) under the Securities Act. Purchaser is aware of the
Company's business affairs and financial condition and has had access to and has
acquired sufficient information about the Company to reach an informed and
knowledgeable decision to acquire the Units. Purchaser has such business and
financial experience as is required to give it the capacity to protect its own
interests in connection with the purchase of the Units. Purchaser is not a
"broker" or a "dealer" as defined in the Exchange Act and is not an "affiliate"
of the Company as defined in the Securities Act.
4.3 Investment Intent. Purchaser is purchasing the Units for its own
account as principal, for investment purposes only, and not with a present view
to, or for, resale, distribution or fractionalization thereof, in whole or in
part, within the meaning of the Securities Act. Purchaser understands that its
acquisition of the Units has not been registered under the Securities Act or
registered or qualified under any state securities law in reliance on specific
exemptions therefrom, which exemptions may depend upon, among other things, the
bona fide nature of Purchaser's investment intent as expressed herein. Purchaser
has, in connection with its decision to purchase the number of Units set forth
in the Agreement, relied solely upon the representations and warranties of the
Company contained herein. Purchaser will not, directly or indirectly, offer,
sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy,
purchase or otherwise acquire or take a pledge of) any of the Shares, Warrants
or Warrant Shares except in compliance with the Securities Act and the rules and
regulations promulgated thereunder.
4.4 Registration or Exemption Requirements. Purchaser further
acknowledges and understands that the Shares, the Warrants and the Warrant
Shares may not be resold or otherwise transferred except in a transaction
registered under the Securities Act or unless an exemption from such
registration is available. Purchaser understands that the certificates
evidencing the Shares and the Warrant Shares, and the Warrants, will be
imprinted with a legend that prohibits the transfer of
-4-
<PAGE> 6
the Shares, the Warrants or the Warrant Shares unless (a) such transaction is
registered or such registration is not required, and (b) if the transfer is
pursuant to an exemption from registration other than Rule 144 under the
Securities Act, and if the Company shall so request in writing, an opinion
reasonably satisfactory to the Company of counsel reasonably satisfactory to the
Company is obtained to the effect that the transaction is so exempt.
4.5 Restriction on Sales, Short Sales and Hedging Transactions.
Purchaser will not, prior to the effectiveness of the Registration Statement,
sell, offer to sell, solicit offers to buy, dispose of, loan, pledge, or grant
any right with respect to (collectively, a "Disposition"), the Common Stock of
the Company, nor will Purchaser engage in any hedging or other transaction which
is designed to or could reasonably be expected to lead to or result in a
Disposition of Common Stock of the Company by the Purchaser or any other person
or entity. Such prohibited hedging or other transactions would include without
limitation effecting any short sale or having in effect any short position
(whether or not such sale or position is against the box and regardless of when
such position was entered into) or any purchase, sale or grant of any right
(including without limitation any put or call option) with respect to the Common
Stock of the Company or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from the Common Stock of the Company.
4.6 No Legal, Tax or Investment Advice. Purchaser understands that
nothing in the Memorandum, the Agreement or any other materials presented to
Purchaser in connection with the purchase and sale of the Units constitutes
legal, tax or investment advice. Purchaser has consulted such legal, tax and
investment advisors as it, in its sole discretion, has deemed necessary or
appropriate in connection with its purchase of the Units.
5. Conditions to Closing of Purchasers
Each Purchaser's obligation to purchase the Units at the Closing is, at
the option of such Purchaser, subject to the fulfillment or waiver as of the
Closing Date of the following conditions:
5.1 Representations and Warranties. The representations and warranties
made by the Company in Section 3 hereof shall be true and correct in all
material respects when made and shall be true and correct in all material
respects on the Closing Date with the same force and effect as if they had been
made on and as of the Closing Date.
5.2 Covenants. All covenants, agreements and conditions contained in the
Agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with in all respects.
5.3 Blue Sky. The Company shall have obtained all necessary blue sky law
permits and qualifications, or secured exemptions therefrom, required by any
state or foreign or other jurisdiction for the offer and sale of the Units.
-5-
<PAGE> 7
5.4 Minimum Purchase. The Company shall have received executed
Agreements with respect to not fewer than the number of Units whose aggregate
purchase price is equal to $200,000.
6. Conditions to Closing of Company
The Company's obligation to sell and issue the Units at the Closing is,
at the option of the Company, subject to the fulfillment or waiver of the
following conditions:
6.1 Representations and Warranties. The representations and warranties
made by each Purchaser in Section 4 hereof shall be true and correct in all
material respects when made and shall be true and correct in all material
respects on the Closing Date with the same force and effect as if they had been
made on and as of the Closing Date.
6.2 Covenants. All covenants, agreements and conditions contained in the
Agreement to be performed by the Purchasers on or prior to the Closing Date
shall have been performed or complied with in all material respects.
6.3 Blue Sky. The Company shall have obtained all necessary blue sky law
permits and qualifications, or secured exemptions therefrom, required by any
state or foreign or other jurisdiction for the offer and sale of the Units.
6.4 Minimum Purchase. The Company shall have received executed
Agreements with respect to not fewer than the number of Units whose aggregate
purchase price is equal to $200,000.
7. Affirmative Covenants
The Company and the Purchasers hereby respectively covenant and agree as
follows:
7.1 Registration Requirements.
(a) The Company shall use its commercially reasonable efforts to
secure the effectiveness, not later than the date which is 90 days following the
last Closing hereunder, of a registration statement on Form S-3 filed with the
SEC under the Securities Act (the "Registration Statement") to register the
resale of the Shares and the Warrant Shares (collectively, the "Registerable
Securities").
(b) The Company shall pay all Registration Expenses (as defined
below) in connection with any registration, qualification or compliance
hereunder, and each Purchaser shall pay all Selling Expenses (as defined below)
and other expenses that are not Registration Expenses relating to the
Registerable Securities resold by such Purchaser. "Registration Expenses" shall
-6-
<PAGE> 8
mean all expenses, except for Selling Expenses, incurred by the Company in
complying with the registration provisions herein described, including, without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses and the expense of any special audits incident to or required by
any such registration. "Selling Expenses" shall mean all selling commissions,
underwriting fees and stock transfer taxes applicable to the Registerable
Securities and all fees and disbursements of counsel for any Purchaser.
(c) In connection with the registration effected by the Company
pursuant to these registration provisions, the Company will use its commercially
reasonable efforts to: (i) keep such registration effective until the earlier of
(A) the second anniversary of the First Closing, (B) such date as all of the
Registerable Securities have been resold or (C) such time as all of the
Registerable Securities held by the Purchasers can be sold within a given
three-month period without compliance with the registration requirements of the
Securities Act pursuant to Rule 144 promulgated thereunder ("Rule 144"); (ii)
prepare and file with the SEC such amendments and supplements to the
Registration Statement and the prospectus used in connection with the Regis
tration Statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by the
Registration Statement; (iii) furnish such number of prospectuses and other
documents incident thereto, including any amendment of or supplement to the
prospectus, as a Purchaser from time to time may reasonably request; (iv) cause
the Shares and the Warrant Shares to be listed on each securities exchange and
quoted on each quotation service on which similar securities issued by the
Company are then listed or quoted; (v) provide a transfer agent and registrar
for all securities registered pursuant to the Registration Statement; (vi)
otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC; and (vii) file the documents required of the Company and
otherwise use its commercially reasonable efforts to maintain requisite blue sky
clearance in (X) all jurisdictions in which any of the Units are originally sold
and (Y) all other states specified in writing by a Purchaser, provided, however,
that the Company shall not be required to qualify to do business or consent to
service of process in any state in which it is not now so qualified or has not
so consented.
(d) If any Purchaser shall propose to sell any Registerable
Securities pursuant to the Registration Statement, it shall notify the Company
of its intent to do so at least three (3) full business days prior to such sale.
Such notice shall be deemed to constitute a representation that any written
information previously supplied by such Purchaser (including without limitation
the information referred to in Section 8.4 hereof) is accurate as of the date of
such notice. At any time within such three (3) business-day period, the Company
may require that such Purchaser delay such sale of any Registerable Securities
pursuant to the Registration Statement for an initial period not to exceed sixty
(60) days; provided, however, that in order to exercise this right, the Company
must deliver a certificate in writing to the Purchaser to the effect that a
delay in such sale is necessary because a sale pursuant to such Registration
Statement in its then-current form would not be in the best interests of the
Company and its shareholders due to disclosure obligations of the Company.
Notwithstanding the foregoing, the Company shall not be entitled to exercise its
right
-7-
<PAGE> 9
to delay a sale more than three (3) times in any calendar year. Each Purchaser
hereby covenants and agrees that it will not sell any Registerable Securities
pursuant to the Registration Statement during the periods the Registration
Statement is withdrawn as set forth in this Section 7.1(d).
7.2 Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Purchaser
from and against any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) to which such Purchaser may become subject
(under the Securities Act or otherwise) insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon, any untrue statement of a material fact or omission to state a
material fact in the Registration Statement on the effective date thereof, or
arise out of any failure by the Company to fulfill any undertaking included in
the Registration Statement, and the Company will, as incurred, reimburse such
Purchaser for any legal or other expenses reasonably incurred in investigating,
defending or preparing to defend any such action, proceeding or claim; provided,
however, that the Company shall not be liable in any such case to the extent
that such loss, claim, damage or liability arises out of, or is based upon (i)
an untrue statement or omission in such Registration Statement in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of such Purchaser specifically for use in preparation of the Registration
Statement, (ii) the failure of such Purchaser to comply with the covenants and
agreements contained in Sections 7.1(d), 8.3 or 8.4 hereof, or (iii) an untrue
statement or omission in any prospectus that is corrected in any subsequent
prospectus, or supplement or amendment thereto, that was delivered to the
Purchaser prior to the pertinent sale or sales by the Purchaser.
(b) Each Purchaser, severally and not jointly, agrees to indemnify
and hold harmless the Company from and against any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) to which the Company
may become subject (under the Securities Act or otherwise) insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of, or are based upon (i) an untrue statement of a material
fact or omission to state a material fact in the Registration Statement in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of such Purchaser specifically for use in preparation of
the Registration Statement, (ii) the failure of such Purchaser to comply with
the covenants and agreements contained in Sections 7.1(d), 8.3 or 8.4 hereof, or
(iii) an untrue statement or omission in any prospectus that is corrected in any
subsequent prospectus, or supplement or amendment thereto, that was delivered to
the Purchaser prior to the pertinent sale or sales by the Purchaser, and each
Purchaser, severally and not jointly, will, as incurred, reimburse the Company
for any legal or other expenses reasonably incurred in investigating, defending
or preparing to defend any such action, proceeding or claim.
-8-
<PAGE> 10
(c) Promptly after receipt by any indemnified person of a notice of
a claim or the beginning of any action in respect of which indemnity is to be
sought against an indemnifying person pursuant to this Section 7.2, such
indemnified person shall notify the indemnifying person in writing of such claim
or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and the indemnifying person shall have been notified thereof,
the indemnifying person shall be entitled to participate therein, and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified person. After notice from the
indemnifying person to such indemnified person of the indemnifying person's
election to assume the defense thereof, the indemnifying person shall not be
liable to such indemnified person for any legal expenses subsequently incurred
by such indemnified person in connection with the defense thereof.
(d) If the indemnification provided for in this Section 7.2 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and the Purchasers on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or a Purchaser on the other and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Purchasers agree that it would not be just and equitable if
contribution pursuant to this subsection (d) were determined by pro rata
allocation (even if the Purchasers were treated as one entity for such purpose)
or by any other method of allocation which does not take into account the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Purchasers' obligations in this subsection (d) to
contribute are several in proportion to their respective sales of Shares or
Warrant Shares, as the case may be, to which such loss relates and not joint.
-9-
<PAGE> 11
8. Restrictions on Transferability of Shares, Warrants and Warrant
Shares; Compliance with Securities Act
8.1 Restrictions on Transferability. The Shares, the Warrants and the
Warrant Shares shall not be transferable in the absence of registration under
the Securities Act or an exemption therefrom or in the absence of compliance
with any term of the Agreement. The Company shall be entitled to give stop
transfer instructions to its transfer agent with respect to the Shares, the
Warrants and the Warrant Shares in order to enforce the foregoing restrictions.
8.2 Restrictive Legend. Each certificate representing the Shares, the
Warrants and the Warrant Shares shall bear substantially the following legends
(in addition to any legends required under applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
ADDITIONALLY, THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS SPECIFIED IN A UNIT
PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL PURCHASER, AND
NO TRANSFER OF SECURITIES SHALL BE VALID OR EFFECTIVE ABSENT COMPLIANCE
WITH SUCH RESTRICTIONS. ALL SUBSEQUENT HOLDERS OF THIS CERTIFICATE WILL
HAVE AGREED TO BE BOUND BY CERTAIN OF THE TERMS OF THE AGREEMENT,
INCLUDING SECTIONS 7.1, 8.3 AND 8.4 OF THE AGREEMENT. A COPY OF THE
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
REGISTERED HOLDER OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.
8.3 Transfer of Shares, Warrants and Warrant Shares. Each Purchaser
hereby covenants with the Company not to make any sale of the Shares, the
Warrants or the Warrant Shares except either (a) a sale of Shares or Warrant
Shares in accordance with the Registration Statement, in which case the
Purchaser covenants to comply with the requirement of delivering a current
prospectus, (b) a sale of Shares, Warrants or Warrant Shares in accordance with
Rule 144, in which case the Purchaser covenants to comply with Rule 144, or (c)
subject to such conditions as the Company in its sole discretion shall impose,
in accordance with another exemption from the registration requirements of the
Securities Act. Each Purchaser further acknowledges and agrees that such Shares,
Warrants and Warrant Shares are not transferable on the books of the Company
unless the certificate submitted to the Company's transfer agent evidencing such
Shares, Warrants or Warrant Shares is accompanied by such additional
certification, documentation or information
-10-
<PAGE> 12
as the Company in its sole discretion shall require in order to effect such sale
in accordance with the Registration Statement, Rule 144 or such other exemption
from the registration requirements of the Securities Act. The legend set forth
in Section 8.2 will be removed from a certificate representing Shares, Warrants
or Warrant Shares following and in connection with any sale of Shares, Warrants
or Warrant Shares, as the case may be, pursuant to subsection (a) or (b) hereof
but not in connection with any sale of Shares, Warrants or Warrant Shares, as
the case may be, pursuant to subsection (c) or (d) hereof.
8.4 Purchaser Information. Each Purchaser covenants that it will
promptly furnish to the Company such information, including information
regarding such Purchaser, the Registerable Securities held by such Purchaser,
and the distribution proposed, as the Company shall reasonably request in
writing to enable the Company to comply with the provisions hereof in connection
with any registration, qualification or compliance referred to in this
Agreement.
9. Miscellaneous
9.1 Waivers and Amendments. The terms of the Agreement may be waived or
amended with the written consent of the Company and the record holders of more
than 50% of the Shares then outstanding and held by Purchasers (including, for
purposes of such calculation, outstanding Warrant Shares and shares of Common
Stock issuable upon exercise of outstanding Warrants), the terms of the
Agreement may be waived or amended and any such amendment or waiver shall be
binding upon the Company and all holders of Shares, Warrants or Warrant Shares.
9.2 Broker's Fee. Each Purchaser acknowledges that the Company intends
to pay a fee and issue warrants to H.J. Meyers & Co., Inc. or certain dealers
selected by it ("H.J. Meyers") in respect of the sale of the Units to the
Purchasers as described in the Memorandum. Each of the parties hereto hereby
represents that, on the basis of any actions and agreements by it, there are no
other brokers or finders entitled to compensation in connection with the sale of
the Units to the Purchasers.
9.3 Governing Law. The Agreement shall be governed in all respects by
and construed in accordance with the laws of the State of Delaware without
regard to conflicts of laws principles.
9.4 Survival. The representations, warranties, covenants and agreements
made in the Agreement shall survive any investigation made by the Company or the
Purchasers and shall survive the Closing.
9.5 Successors and Assigns. The provisions hereof shall inure to the
benefit of, and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties to the Agreement, provided, however, that the
provisions hereof shall not inure to the benefit of subsequent holders of
Shares, Warrants or Warrant Shares purchasing pursuant to Section 8.3(a)
-11-
<PAGE> 13
or 8.3(b).. Notwithstanding the foregoing, no Purchaser shall assign the
Agreement without the prior written consent of the Company.
9.6 Entire Agreement. The Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof.
9.7 Indemnification of Escrow Agent. The Company and each of the
Purchasers jointly and severally agree to indemnify and hold harmless Wilson,
Sonsini, Goodrich & Rosati, Professional Corporation and all partners,
employees, agents and affiliates thereof ("WSG&R") against any and all losses,
claims, damages, liabilities, costs, expenses and disbursements (including fees
and expenses of counsel) (collectively, "Losses") arising out of or in
connection with WSG&R's services hereunder. Each of the Company and the
Purchasers further agree that WSG&R shall not have any liability whatsoever
(whether direct or indirect, in contract or tort or otherwise) to the Company or
any Purchaser (or any party claiming through either of them) arising out of or
in connection with its services hereunder. The Company and the Purchasers
further agree that WSG&R shall be entitled to rely on their respective
representations, warranties, covenants and agreements herein and pursuant
hereto. The Company and the Purchasers acknowledge and agree that WSG&R is an
intended third-party beneficiary of this Section 9.7.
9.8 Notices, etc. All notices and other communications required or
permitted under the Agreement shall be in writing and may be delivered in
person, by telecopy, overnight delivery service or United States mail, addressed
to the Company or the Purchasers, as the case may be, at their respective
addresses set forth in the Agreement, or at such other address as the Company or
the Purchasers shall have furnished to the other party in writing. All notices
and other communications shall be effective upon the earlier of (a) actual
receipt thereof by the person to whom notice is directed or (b) (i) in the case
of notices and communications sent by personal delivery or telecopy, the time
such notice or communication arrives at the applicable address or is
successfully sent to the applicable telecopy number, (ii) in the case of notices
and communications sent by overnight delivery service, at noon (local time) on
the second business day following the day such notice or communication is sent,
and (iii) in the case of notices and communications sent by United States mail,
five days after such notice or communication is deposited in the United States
mail.
9.9 Severability of the Agreement. If any provision of the Agreement
shall be judicially determined to be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
9.10 Counterparts. The Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
9.11 Further Assurances. Each party to the Agreement shall do and
perform or cause to be done and performed all such further acts and things and
shall execute and deliver all such other
-12-
<PAGE> 14
agreements, certificates, instruments and documents as the other party hereto
may reasonably request in order to carry out the intent and accomplish the
purposes of the Agreement and the consummation of the transactions contemplated
hereby.
9.12 Termination. In the event that the First Closing shall not have
occurred on or before January 31, 1998, the Agreement shall terminate at the
close of business on such date.
9.13 Expenses. The Company and each such Purchaser shall bear its own
expenses incurred on its behalf with respect to the Agreement and the
transactions contemplated hereby, including fees of legal counsel.
9.14 Currency. All references to "dollars" or "$" in the Agreement shall
be deemed to refer to United States dollars.
-13-
<PAGE> 1
EXHIBIT 10.18
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED PURSUANT TO
THE EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SECURITIES MAY NOT
BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY
RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH
SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT UNLESS SOLD PURSUANT TO RULE 144 PROMULGATED UNDER SAID
ACT.
BOREALIS TECHNOLOGY CORPORATION
WARRANT TO PURCHASE SHARES OF COMMON STOCK
This Warrant is being issued to ___________________ (the "Holder") in
connection with the Unit Purchase Agreement dated ___________ ___, 19__ between
the Holder and Borealis Technology Corporation, a Delaware corporation (the
"Company"). This Warrant entitles the Holder to subscribe for and purchase up to
_______ shares (the "Maximum Number of Shares") of fully paid and nonassessable
Common Stock of the Company (the "Shares") (as adjusted pursuant to Section 3
hereof) at the price of $5.00 per share (the "Exercise Price") (as adjusted
pursuant to Section 3 hereof) subject to the provisions and upon the terms and
conditions hereinafter set forth.
1. Method of Exercise; Payment; Issuance of New Warrant. This Warrant
may be exercised by the Holder hereof at any time on or prior to December 18,
2000. Exercise shall be made, in whole or in part, by the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A duly
executed) at the principal office of the Company and by the payment to the
Company of an amount equal to the Exercise Price multiplied by the number of
Shares being purchased, which amount may be paid in cash or by check. In the
event of any exercise of the rights represented by this Warrant, certificates
for the Shares so purchased shall be delivered to the Holder hereof within a
reasonable time and, unless this Warrant has been fully exercised or expired, a
new Warrant representing that portion of the Shares, if any, with respect to
which this Warrant shall not then have been exercised, shall also be issued to
the Holder within such reasonable time.
2. Stock Fully Paid; Reservation of Shares. All of the Shares issuable
upon the exercise of the rights represented by this Warrant will, upon issuance
and receipt of the Exercise Price therefor, be fully paid and nonassessable.
During the period within which the rights represented by this Warrant may be
exercised, the Company shall at all times have authorized and reserved for
issuance sufficient shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
3. Adjustment of Exercise Price and Number of Shares. Subject to the
provisions of Section 1 hereof, the number and kind of securities purchasable
upon the exercise of this Warrant and the Exercise Price therefor shall be
subject to adjustment from time to time upon the occurrence of certain events,
as follows:
(a) In the event the Company shall at any time subdivide the
outstanding shares of Common Stock, or shall issue a stock dividend on its
outstanding Common Stock, the number of Shares issuable upon exercise of this
Warrant immediately prior to such subdivision or to the issuance of such stock
dividend shall be proportionately increased, and the Exercise Price shall be
proportionately decreased, and in the event the Company shall at any time
combine the outstanding shares of Common Stock, the number of shares issuable
upon exercise of this Warrant immediately prior to such combination shall be
proportionately decreased, and the Exercise Price
<PAGE> 2
will be proportionately increased, effective at the close of business on the
date of such subdivision, stock dividend or combination, as the case may be.
(b) If the Company is recapitalized through the subdivision or
combination of its outstanding shares of Common Stock into a larger or smaller
number of shares, the number of shares of Common Stock for which this Warrant
may be exercised shall be increased or reduced in the same proportion as the
increase or decrease in the outstanding shares of Common Stock and the then
applicable Exercise Price shall be adjusted by multiplying such number of shares
of Common Stock purchasable upon exercise hereof immediately prior to such
subdivision or combination and the denominator of which shall be the number of
shares of Common Stock purchasable immediately following such subdivision or
combination.
(c) Whenever the number of shares shall be adjusted as required by
the provisions of this Section 3, the Company forthwith shall file in the
custody of its secretary or an assistant secretary, at its principal office, an
Officer's Certificate showing the adjusted number of shares and setting forth in
reasonable detail the circumstances requiring the adjustment. Each such
Officer's Certificate shall be made available at all reasonable times during
reasonable hours for inspection by the Holder.
4. Fractional Shares. No fractional Shares will be issued in connection
with an exercise hereunder, but in lieu of such fractional Shares the Company
shall make a cash payment therefor upon the basis of the Exercise Price then in
effect.
5. Redemption Rights.
(a) In the event that either (i) the average last sale price of the
Company's Common Stock as quoted on the Nasdaq SmallCap Market (or such other
automatic quotation system, over-the-counter market or exchange upon which the
Company's Common Stock may then be traded) over a period of 20 consecutive
trading days shall be equal to or greater than $9.00 per share (as equitably
adjusted for stock splits and the like) or (ii) the Company shall receive the
prior written consent of H.J. Meyers & Co., Inc. or any successor in interest
thereto (the "Sales Agent"), in its sole discretion, then the Company may, in
its sole discretion, notify the Holder in writing of its intention to redeem
this Warrant (the "Redemption Notice"). Notwithstanding anything herein to the
contrary, if the Redemption Notice is delivered pursuant to subsection (i) of
the preceding sentence, the Redemption Notice shall be void and of no force
unless sent by the Company to the Holder no later than fifteen days after the
last of the 20 trading days referred to in such subsection (i). The Redemption
Notice shall set forth (i) the date upon which the Company shall redeem this
Warrant (the "Redemption Date") which date shall be no earlier than thirty days
following the date the Company sends the Redemption Notice and (ii) the place at
which payment may be obtained.
(b) On the Redemption Date, the Holder shall surrender to the Company
this Warrant (unless earlier exercised in full) in the manner and at the place
designated in the Redemption Notice, and thereupon, $0.05 shall be payable to
the order of the Holder and this Warrant shall be canceled. From and after 5:00
p.m., Nevada time, on the day immediately preceding the Redemption Date, all
rights of the Holder hereunder (other than rights to receive payment pursuant to
this Section 5) shall cease, and this Warrant shall not thereafter be
transferred on the books of the Company or be deemed to be outstanding for any
purpose whatsoever.
(c) The Holder acknowledges that the Sales Agent is under no
obligation to grant or withhold its consent to a redemption of the Warrants
under any circumstances, regardless of the potential effect of such potential
redemption on the Company, the stockholders of the Company or the Holder. The
Holder further acknowledges that if the Company seeks to exercise its right to
redeem this Warrant at a time that is not
-2-
<PAGE> 3
advantageous to the Holder that there can be no assurance that the Sales Agent
will withhold its consent to such exercise.
6. Transfer, Exchange, Assignment or Loss of Warrant.
(a) This Warrant may not be assigned or transferred except as
provided in this Section 6 and in accordance with and subject to the provisions
of the Securities Act of 1933, as amended, and the Rules and Regulations
promulgated thereunder (said Act and such Rules and Regulations being
hereinafter collectively referred to as the "Act"). Any purported transfer or
assignment made other than in accordance with this Section 6 shall be null and
void and of no force and effect.
(b) Prior to any transfer of this Warrant, other than in an offering
registered under the Act, the Holder shall notify the Company of its intention
to effect such transfer, indicating the circumstances of the proposed transfer
and upon request furnish the Company with an opinion of counsel, in form and
substance reasonably satisfactory to counsel for the Company, to the effect that
the proposed transfer may be made without registration under the Act or
qualification under any applicable state securities law.
(c) Each certificate for Shares or for any other security issued or
issuable upon exercise of this Warrant shall contain a legend substantially to
the following effect:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY
NOT BE TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS
IN EFFECT AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL, SUCH
TRANSFER MAY BE MADE PURSUANT TO RULE 144 OR REGISTRATION UNDER THE
ACT IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE
ACT."
(d) Any assignment permitted hereunder shall be made by surrender of
this Warrant to the Company at its principal office with the Assignment Form
attached hereto as Exhibit B duly executed. In such event the Company shall,
without charge for any issuance or transfer tax or other cost incurred by the
Company with respect to such transfer, execute and deliver a new Warrant in the
name of the assignee named in such instrument of assignment and this Warrant
shall promptly be canceled. This Warrant may be divided or combined with other
warrants which carry the same rights upon presentation thereof at the principal
office of the Company together with a written notice signed by the Holder
thereof, specifying the names and denominations in which new warrants are to be
issued.
(e) Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and of indemnity
satisfactory to it, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will execute and deliver a new Warrant of like tenor and
date and any such lost, stolen, or destroyed Warrant shall thereupon become
void.
7. Rights of Shareholders. No holder of this Warrant shall be entitled,
as a Warrant holder, to vote or receive dividends or be deemed the holder of
Common Stock or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything contained
herein be construed to confer upon the holder of this Warrant, as such, any of
the rights of a shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any meeting
thereof, or to give or withhold consent to any corporate action (whether upon
any recapitalization, issuance of stock, reclassification
-3-
<PAGE> 4
of stock, change of par value or change of stock to no par value, consideration,
merger, conveyance, or otherwise) or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until the Warrant shall
have been exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable, as provided herein.
8. Notices, Etc. All notices and other communications from the Company
to the Holder shall be mailed by first class registered or certified mail,
postage prepaid, sent by facsimile or delivered personally by hand or by a
nationally recognized courier addressed to the Holder at the address last shown
on the records of the Company for the Holder. All such notices and other written
communications shall be effective on the earlier of the date of mailing,
confirmed facsimile transfer, delivery to the Holder or delivery to a nationally
recognized courier.
9. Governing Law, Headings. This Warrant is being delivered in the State
of Delaware and shall be construed and enforced in accordance with and governed
by the laws of such State. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect any of the terms hereof.
Issued this ______ __, 19__.
BOREALIS TECHNOLOGY CORPORATION
By: _____________________________________
Name: ___________________________________
Title: __________________________________
ACCEPTED AND AGREED
By: _____________________________________
Name: ___________________________________
Title: __________________________________
-4-
<PAGE> 5
EXHIBIT A
NOTICE OF EXERCISE
TO: Borealis Technology Corporation
4070 Silver Sage Drive
Carson City, NV 89701
Attn: Chief Financial Officer
The undersigned hereby elects to purchase __________ shares of Common
Stock of Borealis Technology Corporation pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
Name: _______________________________
Address: ____________________________
_____________________________________
_____________________________________
The undersigned hereby represents and warrants that the aforesaid shares
of Common Stock are being acquired for the account of the undersigned for
investment and not with a view to, or, for resale in connection with the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares.
By: _____________________________________
Name: ___________________________________
Title: __________________________________
Date: ___________________________________
<PAGE> 6
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED, ______________________________ hereby sells, assigns
and transfers to _______________________________________________________ (Name
and Address) the right to purchase Shares represented by this Warrant to the
extent of __________ shares of Common Stock and does hereby irrevocably
constitute and appoint ______________________________________
____________________, attorney, to transfer the same on the books of the Company
with full power of substitution in the premises.
Dated: __________, ____
By: _____________________________________
Name: ___________________________________
Title: __________________________________
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1997 Employee Stock Purchase Plan, the 1996 Stock Plan,
and the 1996 Director Option Plan and in the Registration Statement (Form S-8)
pertaining to the 1994 Stock Plan of Borealis Technology Corporation of our
report dated January 16, 1998, with respect to the financial statements of
Borealis Technology Corporation included in the Annual Report (Form 10-KSB) for
the year ended December 31, 1997.
/s/Ernst & Young LLP
Reno, Nevada
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ANNUAL AUDIT REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,080,095
<SECURITIES> 650,000
<RECEIVABLES> 353,580
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,374,342
<PP&E> 1,337,576
<DEPRECIATION> 518,159
<TOTAL-ASSETS> 4,403,258
<CURRENT-LIABILITIES> 1,868,471
<BONDS> 0
0
0
<COMMON> 5,245
<OTHER-SE> 2,493,945
<TOTAL-LIABILITY-AND-EQUITY> 4,403,258
<SALES> 1,171,554
<TOTAL-REVENUES> 1,278,623
<CGS> 7,764
<TOTAL-COSTS> 53,690
<OTHER-EXPENSES> 2,399,295
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,519
<INCOME-PRETAX> (7,362,967)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,362,967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,362,967)
<EPS-PRIMARY> (1.88)
<EPS-DILUTED> (1.88)
</TABLE>
