<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1996
REGISTRATION NO. 333-9697
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
INTEGRATED TECHNOLOGY USA, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3577 22-3136782
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
------------------------
545 CEDAR LANE, TEANECK, NEW JERSEY 07666, (201) 907-0200
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
ALAN HABER, PRESIDENT AND CHIEF EXECUTIVE OFFICER
545 CEDAR LANE, TEANECK, NEW JERSEY 07666, (201) 907-0200
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Copies of all communications, including communications
sent to the agent for service, should be sent to:
<TABLE>
<S> <C>
JOSEPH EHRENREICH, ESQ. DAVID SCHOTTENFELS, ESQ.
EHRENREICH & KRAUSE SILBER, SCHOTTENFELS, GERBER & LEWIN
1140 AVENUE OF THE AMERICAS 29B KEREN HAYESOD
NEW YORK, NEW YORK 10036 JERUSALEM 94591, ISRAEL
212-302-8050 011-972-2-6257751
ALAN I. ANNEX, ESQ. CLIFFORD M.J. FELIG, ESQ.
CAMHY KARLINSKY & STEIN LLP HERZOG, FOX & NEEMAN
1740 BROADWAY ASIA HOUSE 4, WEIZMANN STREET
NEW YORK, NEW YORK 10019 TEL AVIV 64239, ISRAEL
212-977-6600 011-972-3-692-2020
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /x/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 19, 1996
PROSPECTUS
[LOGO]
3,000,000 SHARES OF COMMON STOCK AND
3,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
------------------------
This Prospectus relates to the offering (the 'Offering') of 3,000,000 shares
of common stock, par value $.01 per share ('Common Stock'), and 3,000,000
Redeemable Common Stock Purchase Warrants ('Warrants'), of Integrated Technology
USA, Inc. (the 'Company'). Such shares of Common Stock and Warrants are
sometimes hereinafter collectively referred to as the 'Securities.' The shares
of Common Stock and the Warrants offered hereby may only be purchased in the
Offering together, on the basis of one share of Common Stock and one Warrant,
but are separately transferable immediately upon issuance. Each Warrant entitles
the registered holder thereof to purchase one share of Common Stock at an
initial exercise price of $ per share [150% of the initial public offering
price per share of Common Stock] at any time during the four-year period
commencing one year after the date of this Prospectus. The Warrant exercise
price is subject to adjustment under certain circumstances. Commencing 18 months
after the date of this Prospectus, the Warrants are subject to redemption by the
Company, in whole but not in part, at $0.01 per Warrant on 30 days' prior
written notice to the warrantholders if the average closing bid price of the
Common Stock as reported on the American Stock Exchange equals or exceeds $
[250% of the initial public offering price per share of Common Stock] per share
for any 20 trading days within a period of 30 consecutive trading days ending on
the fifth trading day prior to the notice of redemption. See 'Description of
Securities.'
Prior to the Offering, there has been no public market for the Securities,
and there can be no assurance that such a market will develop after completion
of the Offering or, if developed, that it will be sustained. It is currently
estimated that the initial public offering price per share of Common Stock will
be between $6.00 and $8.00 and that the initial public offering price per
Warrant will be $0.10. For information regarding the factors considered in
determining the initial public offering prices of the Securities and the terms
of the Warrants, see 'Underwriting.' Application has been made to have the
Common Stock and the Warrants approved for listing on the American Stock
Exchange ('AMEX') under the symbols ITH and ITH.WS, respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE 'RISK FACTORS'
COMMENCING ON PAGE 9 AND 'DILUTION.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING DISCOUNT PROCEEDS TO THE
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................... $ $ $
Per Warrant................................. $ $ $
Total(3).................................... $ $ $
</TABLE>
(1) Excludes (i) additional compensation payable to National Securities
Corporation, the representative (the 'Representative') of the several
underwriters (the 'Underwriters'), in the form of a non-accountable expense
allowance equal to 3.0% of the gross proceeds of the Offering, and (ii) the
value of five-year warrants (the 'Representative's Warrants') to purchase an
aggregate of 300,000 shares of Common Stock and/or 300,000 Warrants, at an
exercise price equal to 120% of the Price to Public, that will be sold to
the Representative at a nominal price. In addition, the Company has agreed
to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
'Underwriting.'
(2) Before deducting estimated expenses of $950,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option exercisable within 45
days after the date of this Prospectus to purchase up to 450,000 additional
shares of Common Stock and/or 450,000 additional Warrants on the same terms
and conditions set forth above, to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Commissions, and Proceeds to the Company will be $ ,
$ and $ , respectively. See 'Underwriting.'
------------------------
The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify the
Offering and to reject any order in whole or in part. It is expected that
delivery of the Securities offered hereby will be made against payment in New
York, New York on or about , 1996.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is , 1996.
<PAGE>
[PICTURES]
COMPUNET 2000(TRADEMARK)
[In the paper version there appears a picture depicting a conference call
being conducted using CompuNet 2000 that includes both conventional telephone
and Internet telephone.]
EXPANDING THE POWER OF INTERNET TELEPHONY
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish annual reports to its stockholders, which
will include financial statements audited by its independent public accountants,
and such other periodic reports as it may determine to furnish or as may be
required by law, including Sections 13(a) and 15(d) of the Securities Exchange
Act of 1934, as amended.
CompuPhone 2000(Registered) is a registered trademark of the Company in the
United States. The Company has a United States trademark application pending for
CompuNet 2000(Trademark). This Prospectus also includes trademarks and trade
names of other companies.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, (i) all information in this Prospectus gives retroactive effect to a
760.6291 for 1 stock split and an amendment of the Company's Certificate of
Incorporation to be effected prior to completion of the Offering (as described
under 'Description of Securities') and (ii) assumes that the Underwriters will
not exercise their over-allotment option. Unless otherwise indicated, the terms
the 'Company' and 'Integrated Technology' refer collectively to Integrated
Technology USA, Inc. and its subsidiaries, and the term 'ITI USA' refers solely
to Integrated Technology USA, Inc.
THE COMPANY
Integrated Technology designs, develops and markets innovative products for
two rapidly emerging computer-related markets: the transmission of voice
communications over the Internet ('Internet Telephony') and computer/telephone
integration. The Company has also developed a wireless printing product that the
Company believes has certain advantages over products currently on the market.
With the introduction by various companies of software that enables
Internet Telephony, the Company has focused on developing add-on products that
can expand the potential benefits of Internet Telephony, make Internet Telephony
more productive and efficient, and simplify the ancillary hardware devices
required for Internet Telephony. The first product developed by the Company for
this market is CompuNet 2000. This product is a PC keyboard that also functions
as a conventional telephone and enables the conferencing together of an Internet
and conventional telephone call. This feature allows each party on an Internet
call that is using CompuNet 2000 to add an additional party that is using a
conventional telephone. In addition, a handset or optional headset attached to
CompuNet 2000 functions as the sound transmitting hardware device required for
Internet calls (rather than a microphone and external speakers which are the
devices typically being used). This feature enables CompuNet 2000 users to
employ a single handset or headset for both conventional and Internet calls,
thereby eliminating desktop clutter and enabling parties to an Internet call to
conduct private conversations. The Company expects to commence sales of CompuNet
2000 by the end of 1996 pursuant to a distribution agreement with Gemini
Industries, Inc. ('Gemini'), a supplier of consumer electronics accessories that
has been in business for over 30 years. Under the terms of this agreement,
Gemini has committed to purchase 10,000 units of CompuNet 2000 in 1996 (subject
to certain conditions relating to the Company's ability to make the product
available) and must purchase a minimum of 10,000 units per month in 1997 in
order to maintain certain exclusivity rights.
For the computer/telephone integration market, the Company currently offers
CompuPhone 2000. This product is a PC keyboard that enables users to make and
receive telephone calls using the PC keyboard (together with a headset that is
provided with the product or an optional handset) without the need for a
conventional telephone or modem. Included with CompuPhone 2000 is proprietary
telephone management software that integrates the telephone function with the
computer. This software enables a number of features for enhancing productivity
and efficiency, including the ability to dial from a screen or data base (rather
than manually dialing), automatic logging of information concerning each call,
and the ability to record notes regarding each call in a 'note box' that can
appear automatically. CompuPhone 2000 also interfaces with most widely used
personal information management programs. The Company commenced sales of
CompuPhone 2000 in early 1995.
The Company's objective is to become a leading developer and vendor of a
wide range of products for the Internet Telephony and computer/telephone
integration markets. In furtherance of this objective, the Company intends to
devote significant research and development resources in order to develop both
enhancements to its existing products and new products for its target markets.
The Company believes that its existing technology base and the substantial
experience of its product development team will provide the Company with a
significant advantage in its efforts to develop new products. While the Company
expects to rely primarily on its internal product development efforts, the
Company also intends to explore the possibility of establishing strategic
alliances with companies that can provide the Company with technology,
subsystems or complementary products
3
<PAGE>
which can be integrated into or offered with the Company's products. For
example, the Company has recently entered into a bundling agreement with
VocalTec Ltd., a publicly traded company that is a provider of software that
enables Internet Telephony. This agreement grants the Company the right to
bundle a version of VocalTec's Internet Telephony enabling software with the
Company's CompuNet 2000 product.
The Company currently markets products directly and through independent
representatives and distributors. However, the Company's marketing efforts to
date have been limited due to financial constraints. The Company intends to
increase its marketing capability by expanding the Company's internal sales
force; establishing relationships with additional independent representatives
and distributors; and significantly increasing advertising. In addition, the
Company is seeking to enter into arrangements with original equipment
manufacturers ('OEMs'), such as computer manufacturers, pursuant to which OEMs
would incorporate the Company's products into their finished hardware products.
Integrated Technology USA, Inc., was incorporated in the State of Delaware
in August 1990. Its principal executive offices are located at 545 Cedar Lane,
Teaneck, New Jersey, and its telephone number is (201) 907-0200.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered...................... 3,000,000 shares of Common Stock and 3,000,000 Warrants.
Terms of Warrants....................... Each Warrant entitles the registered holder thereof to purchase
one share of Common Stock at an initial exercise price of $
per share [150% of the initial public offering price per share of
Common Stock] at any time during the four-year period commencing
one year after the date of this Prospectus. The Warrant exercise
price is subject to adjustment under certain circumstances.
Commencing 18 months after the date of this Prospectus, the
Warrants are subject to redemption by the Company, in whole but
not in part, at $0.01 per Warrant on 30 days' prior written notice
to the warrantholders if the average closing bid price of the
Common Stock equals or exceeds $ [250% of the initial public
offering price] per share, subject to adjustment, for any 20
trading days within a period of 30 consecutive trading days ending
on the fifth trading day prior to the notice of redemption. See
'Description of Securities.'
Common Stock Outstanding Prior to the
Offering(1)........................... 2,930,178 shares of Common Stock.
Securities to be Outstanding after the
Offering(1)(2)........................ 5,930,178 shares of Common Stock and 3,000,000 Warrants.
Use of Proceeds......................... The Company intends to use approximately $1.2 million of the net
proceeds of the Offering for repayment of outstanding indebtedness
and the balance of such net proceeds for: (i) advertising and
marketing; (ii) research and development; (iii) acquisition of
equipment and new product tooling; and (iv) working capital and
general corporate purposes.
Proposed American Stock Exchange
Symbols:
Common Stock....................... ITH
Warrants........................... ITH.WS
</TABLE>
- ------------------
(1) Does not include (i) 403,189 shares issuable upon exercise of outstanding
options (257,322 of which provide for an exercise price of approximately
$.01 per share, 133,111 of which provide for an exercise price of
approximately $1.64 per share and 12,756 of which provide for an exercise
price of approximately $2.74 per share), (ii) 548,333 shares issuable upon
exercise of options to be granted prior to completion of the Offering (as
described under 'Management--Options to be Granted Prior to the Offering'),
which options will have an exercise price equal to the the initial public
offering price per share of Common stock in the Offering, (iii) 285,000
shares reserved for possible future grants of options under the Company's
1996 Stock Option Plan, (iv) shares issuable upon the exercise of certain
outstanding warrants (the 'Bridge Warrants') that were issued in connection
with a bridge financing (the 'Bridge Financing') completed by the Company in
the second and third quarters of 1996, including warrants that were issued
to certain parties that assisted the Company in connection with the Bridge
Financing. The aggregate number of shares issuable upon exercise of the
Bridge Warrants will be determined by dividing (x) $1,262,500 by (y) the
initial public offering price per share of Common stock in the Offering, and
the exercise price per share will equal 10% of such initial public offering
price. Assuming an initial public offering price per share of Common Stock
of $7.00 (the midpoint of the range of such initial public offering price
stated on the cover page hereof), the aggregate number of shares issuable
upon exercise of the Bridge Warrants would be 180,357 and the exercise price
per share would be $0.70. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Bridge Financing.'
(2) Does not include (i) 3,000,000 shares of Common Stock issuable upon exercise
of the Warrants sold in the Offering, (ii) 300,000 shares of Common Stock
issuable upon exercise of the Representative's Warrants and (iii) Warrants
to purchase 300,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 76,877 $ 85,610 $ 803,705 $ 355,202 $ 208,462
Cost of products sold......... 72,767 80,874 491,315 198,384 112,822
Selling, general and
administrative expense...... 595,004 1,723,929 1,634,164 814,046 816,300
Research and development
expenses,
net......................... 30,023 291,970 357,117 118,949 151,499
--------- ----------- ----------- --------- ---------
Loss from operations.......... (620,917) (2,011,163) (1,678,891) (776,177) (872,159)
Interest income (expense),
net......................... (935) 33,535 (4,173) 27,047 (76,998)
--------- ----------- ----------- --------- ---------
Net loss...................... (621,852) (1,977,628) (1,683,064) (749,130) (949,157)
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Net loss per share(1)......... $ (.34) $ (.71) $ (.54) $ (.24) $ (.30)
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency)................ $(330,365) $ 16,550,097
Total assets.................. 697,738 17,578,200
Total liabilities............. 980,958 595,689
Stockholders' equity (net
capital deficiency)......... (283,220) 16,982,511
</TABLE>
- ------------------
(1) For information concerning the computation of net loss per share, see Note 2
of Notes to Consolidated Financial Statements.
(2) As adjusted to give effect to the sale of the Securities offered hereby at
an assumed initial public offering price of $7.00 per share of Common Stock
(the midpoint of the range of such initial public offering price stated on
the cover page hereof) and $0.10 per Warrant.
SUMMARY RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the factors described under
'Risk Factors' in evaluating the Company. These factors include, among others,
the following:
o The Company has a limited operating history, has incurred net losses in
each year since its inception and, as of June 30, 1996, had an
accumulated deficit of $6.20 million.
o The Company is dependent on a limited number of products. The Company has
had either very limited or no sales experience with these products and,
accordingly, there can be no assurance that any of these products will
achieve market acceptance. Each of these products may contain undetected
errors or defects or require design changes. Competitors of the Company
may achieve technological advances that provide a competitive advantage
over the Company's products or that make such products obsolete.
o CompuPhone 2000 has certain functional limitations that may limit the
potential end user market for this product.
o CompuNet 2000 has the same functionality as CompuPhone 2000 when used for
conventional telephone calls and, consequently, the Company expects that
the introduction of CompuNet 2000 will reduce the market for CompuPhone
2000 somewhat. Although the Company believes that a viable potential
market
6
<PAGE>
for CompuPhone 2000 will remain because it will be priced substantially
lower than CompuNet 2000, there can be no assurance of this.
o The success of CompuNet 2000 is dependent in large part on the use of
Internet Telephony becoming widespread. However, the market for Internet
Telephony has only recently begun to develop and, as a result, the extent
to which Internet Telephony will achieve market acceptance is subject to
a high level of uncertainty.
o The Company expects that a significant portion of its revenues relating
to CompuNet 2000 will be attributable to sales made pursuant to a
distribution agreement recently entered into with Gemini. Consequently,
the Company is highly dependent on its relationship with Gemini.
o The Company has not yet commenced sales of CompuNet 2000. Although the
Company expects to commence such sales by the end of 1996, there can be
no assurance that the Company will be able to commence such sales within
the expected time frame or at all.
o The Company has not yet commenced sales of its wireless printing product.
Although the Company expects to commence such sales in the first quarter
of 1997, there can be no assurance that the Company will be able to
commence such sales within the expected time frame or at all. This
product is currently in the preproduction, prototype stage. The Company
may discover that the performance of the prototype cannot be replicated
in a mass produced product or that design changes are necessary. The
Company estimates that the potential market for this product may be
significantly reduced or eliminated in the near future (by 1998 according
to one market study).
o The Company anticipates that a significant portion of its revenues may be
accounted for by Gemini and a limited number of other key customers, the
identity of which may vary from period to period.
o The Company is exposed to the risks associated with: (i) potential
product returns, (ii) potential claims related to 'price protection
clauses' included in distribution agreements and (iii) potential warranty
claims.
o The Company depends on contract manufacturers for substantially all of
its manufacturing and assembly requirements. The Company does not have a
long-term agreement with any contract manufacturer that it uses. There
can be no assurance that the Company will be able to obtain its
requirements for any product from any contract manufacturer that it uses.
The Company estimates that six months or more would be required in order
for it to qualify an alternate manufacturer for any product.
o Shortages may occur in components required for the manufacture of the
Company's products.
o The Company's international business operations may be negatively
impacted by a variety of factors that relate generally to the conduct of
international business operations.
o The markets for the Company's products are characterized by intense
competition and rapid change.
o The Company is highly dependent on its senior management team and key
personnel.
o The Company's success depends significantly on its ability to protect its
proprietary technology.
o There can be no assurance that claims will not be made asserting that the
Company's products infringe the proprietary rights of third parties.
o The Company is subject to certain risks associated with its use of
foreign currencies.
o Management of the Company will have broad discretion in determining the
manner in which the net proceeds of the Offering are applied.
o Immediately following completion of the Offering, the executive officers
and directors of the Company (together with affiliated or related
entities) may be deemed to have effective control of the Company due to
the number of shares of Common Stock that they will continue to own.
o The Company has never paid, and has no plans to pay, any dividends on its
Common Stock.
7
<PAGE>
o Purchasers of Common Stock in the Offering will experience an immediate
and substantial dilution in the net tangible book value of the shares of
Common Stock purchased by them from the initial public offering price.
o Prior to the Offering, there has been no public market for the Common
Stock or the Warrants.
o Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for
the Securities.
o The price and liquidity of the Securities may be significantly affected
by the degree, if any, of the Representative's participation in the
market, if one develops, for the Securities.
o There can be no assurance that the market value of the Warrants will
equal or exceed the initial public offering price or that it will ever be
profitable for holders of the Warrants to exercise their Warrants.
o The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock
issuable upon exercise of the Warrants and such shares have been
registered, qualified or deemed to be exempt under the securities or
'blue sky' laws of the state of residence of the exercising holder of the
Warrants. Although the Company has undertaken to use its reasonable
efforts to have all of the shares of Common Stock issuable upon exercise
of the Warrants registered or qualified on or before the exercise date
and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there is no assurance that it will be able to
do so.
o The Board of Directors has the authority without first obtaining the
approval of the holders of Common Stock to issue from time to time
preferred stock having rights superior to the Common Stock. Such
authority may have the effect of delaying, deferring or preventing a
change of control of the Company, even if such event would be beneficial
to the stockholders of the Company.
o A substantial amount of the Company's business is conducted in the State
of Israel. Consequently, the Company is directly influenced by the
political, economic and military conditions affecting Israel.
8
<PAGE>
RISK FACTORS
An investment in the Securities involves a high degree of risk. In addition
to the other information contained in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Securities. Prospective investors should be in a
position to risk the loss of their entire investment.
CONSIDERATIONS RELATING TO THE BUSINESS OF THE COMPANY
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY;
GOING CONCERN EXPLANATORY PARAGRAPH IN INDEPENDENT ACCOUNTANT'S REPORT
Integrated Technology USA, Inc. was incorporated in 1990. The Company has
incurred net losses in each year since its inception and, as of June 30, 1996,
had an accumulated deficit of $6.20 million. There can be no assurance that the
Company will ever achieve or be able to sustain profitability. The report of
independent accountants on the Company's financial statements included elsewhere
herein contains an explanatory paragraph stating that the Company's financial
statements have been prepared assuming that the Company will continue as a going
concern while expressing substantial doubt as to the Company's ability to do so.
CERTAIN GENERAL RISKS RELATED TO PRODUCTS
Dependence on Limited Number of Products. The Company to date has
developed three products (not including a predecessor version of CompuPhone 2000
that the Company is no longer selling). These products are: (i) CompuPhone 2000,
(ii) CompuNet 2000 and (iii) WPS-1000 (a wireless printing product that is in
the preproduction, prototype stage). The Company projects that in 1996 and 1997
substantially all of the Company's revenues will be generated by the sale of
these three product lines and/or enhanced versions of these products (the
'Existing Products'). The failure by the Company to successfully market any one
of the Existing Products could have a material adverse effect on the Company's
business and financial condition.
Unproven Acceptance of the Company's Existing Products. The Company
commenced sales of CompuPhone 2000 in January 1995 and to date has made only
limited sales of such product ($804,000 in 1995 and $208,000 in the first six
months of 1996). The Company expects that it will commence initial sales of
CompuNet 2000 by the end of 1996 and commence the initial commercial
introduction of WPS-1000 in the first quarter of 1997, although there can be no
assurance that the Company will meet this expected time schedule. See '--Certain
Risks Specific to CompuNet 2000' and '--Certain Risks Specific to WPS 1000.' In
view of the fact that the Company has had either very limited or no sales
experience with each of the Existing Products, there can be no assurance that
any of the Existing Products will achieve market acceptance (or sufficient
market acceptance to make sales of the product profitable). The failure of one
or more of the Existing Products to achieve market acceptance (or sufficient
market acceptance to make sales of the product profitable), would have a
material adverse effect on the Company's business and financial condition.
Possibility of Undetected Errors. One or more of the Existing Products
offered by the Company or any new product may contain undetected errors or
defects when first introduced or as new versions are released. Introduction by
the Company of products with reliability, quality or compatibility problems
could result in product returns, reduced orders, uncollectible accounts
receivable, delays in collecting accounts receivable, product redevelopment
costs, and loss of, or delay in, market acceptance. Any such event could have a
material adverse effect on the Company's business and financial condition.
Possibility of Need For Design Change. There can be no assurance that the
technology incorporated into the Existing Products or new products will be
operational as expected in all environments. As new products are tested in the
marketplace, the Company may discover that design changes are necessary to
achieve the expected performance. There can be no assurance that any design
changes required will be developed and incorporated in a timely or economical
manner, or at all.
Need to Develop Product Enhancements and New Products; Risk of
Obsolescence. The markets for the Company's products are characterized by rapid
technological change, evolving industry standards and customer demands, and
frequent new product introductions and enhancements. As a result, the Company's
ability to
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remain competitive will depend in significant part upon its ability to
continually develop and introduce, in a timely and cost-effective manner,
enhancements for its existing products in response to both evolving demands of
the marketplace and competitive product offerings. In addition, over the
longer-term, the Company's ability to remain competitive will depend in
significant part upon its ability to develop and introduce, in a timely and
cost-effective manner, new products to expand and diversify its product
offerings. There can be no assurance that the Company will be successful in
developing and introducing, in a timely and cost-effective manner, any
enhancements or extensions for existing products or any new products. In
addition, there can be no assurance that competitors of the Company will not
achieve technological advances that provide a competitive advantage over the
Company's products or that make such products obsolete.
CERTAIN RISKS SPECIFIC TO COMPUPHONE 2000
Certain Functional Limitations. CompuPhone 2000 has certain functional
limitations described below that narrow the potential end-user markets for the
product. There can be no assurance that this will not result in the demand level
for the CompuPhone 2000 being insufficient to make sales of this product
profitable. For information concerning the end user markets for the CompuPhone
2000, see 'Business--End Users, Distribution, Sales and Marketing--End User
Markets.'
CompuPhone 2000 is currently limited to functioning as a single-line
telephone. Although the Company may seek to develop multiple-line capability for
this product, there can be no assurance that the Company will be successful in
developing this enhancement in a timely and cost-effective manner or at all.
Since many functions, particularly many business functions, require telephones
with multiple lines, the current single-line limitation of the CompuPhone 2000
limits the potential end-user market for this product.
The CompuPhone 2000 has been designed so that it can interface with the
analog port of a digital PBX system, thereby enabling the CompuPhone 2000 to be
integrated into the general PBX telephone systems being used by businesses.
However, due to the fact that CompuPhone 2000 interfaces only with the analog
port of a PBX system, many of the telephone features enabled by a PBX system may
not be available on the CompuPhone 2000 even when it is successfully integrated
with a PBX system. The features that may not be available will vary depending on
the particular PBX system being used, but may include, among others, (i)
conference call capability, (ii) one-touch speed dialing and other functions
that require memory and (iii) the ability to display incoming call information.
The limitations involved in seeking to integrate CompuPhone 2000 with PBX
systems may limit the potential end-user market for CompuPhone 2000 among
business users.
Impact of Introduction of CompuNet 2000. When used for conventional
telephone calls, CompuNet 2000 has the same functionality as CompuPhone 2000.
See 'Business--Internet Telephony Product.' As a result, the Company expects
that the introduction of CompuNet 2000 will reduce the market for CompuPhone
2000 somewhat. The Company cannot at present quantify the extent of this
reduction. However, the Company believes that a viable potential market for
CompuPhone 2000 will remain because CompuPhone 2000 will be priced substantially
lower than CompuNet 2000. Specifically, the Company believes that CompuPhone
2000 will remain attractive to users that (i) are engaged in functions that do
not require the Internet Telephony features of CompuNet 2000 (such as
telemarketing, order processing, customer service and support, market research,
and emergency dispatching) or (ii) are not willing to pay the additional cost
required to obtain such features. There can be no assurance, however, that the
introduction of CompuNet 2000 will not result in there being an insufficient
market for CompuPhone 2000 to make sales of this product profitable.
CERTAIN RISKS SPECIFIC TO THE COMPUNET 2000
Unproven Acceptance of Internet Telephony. Over the past one and one-half
years, various companies have developed and released software that enables voice
and audio communications over the Internet ('Internet Telephony'). CompuNet 2000
is designed to expand the potential benefits of Internet Telephony, make
Internet Telephony more productive and efficient, and simplify the ancillary
hardware devices required for Internet Telephony. Accordingly, the success of
this product is dependent in large part on the use of Internet Telephony
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becoming widespread. There can be no assurance, however, that this will in fact
occur due to a number of factors, including:
o The market for Internet Telephony has only recently begun to develop and
is rapidly evolving. As a result, the extent to which Internet Telephony
will achieve market acceptance is subject to a high level of uncertainty.
o The quality of conversations over the Internet is currently inferior to
the quality of those conducted on conventional telephones, mainly due to
the Internet infrastructure and each user's hardware limitations, which
may result in delays of up to a few seconds in the transmission of
speech, loss of voice packets and relatively inferior sound quality.
o In order for Internet Telephony to become widespread, the continued
expansion of the Internet and its network infrastructure will be
required. However, there can be no assurance that this will occur or that
the Internet will be able to meet additional demand or its users'
changing requirements on a timely basis, at a commercially reasonable
cost, or at all.
o The increased acceptance of Internet Telephony could result in
intervention by governmental regulatory agencies in the United States or
elsewhere in the world under existing or newly enacted legislation and in
the imposition of fees or charges on users and providers of products and
services in this area. There can be no assurance that such intervention
or imposition of fees or charges would not have a material adverse impact
upon the acceptance and attractiveness of Internet Telephony.
o Based upon current cost structures, the cost of a long distance or
international call made using Internet Telephony can be substantially
lower than the cost of a comparable conventional telephone call, making
Internet Telephony a potentially attractive alternative or supplement to
conventional telephone. However, it is possible that fees and/or taxes
will be imposed on use of the Internet that would reduce, or completely
eliminate, this price differential. If this should occur, the economic
incentive to use the Internet for voice communications would be
significantly reduced or eliminated.
Dependence on New Relationship With Gemini Industries. The Company has
entered into a distribution agreement with Gemini Industries, Inc. ('Gemini')
that provides Gemini with the exclusive right to distribute CompuNet 2000 in the
United States through retail stores to end users during the term of the
agreement. The Company has retained the right to distribute the product through
other distribution channels in the United States (such as sales to corporate
accounts) and without any limitations outside of the United States. The term of
such agreement commences on June 1, 1996 and extends until the end of 1997
(subject to extension by mutual agreement). Under the terms of the agreement,
Gemini has committed to purchase from the Company 10,000 units of CompuNet 2000
in 1996 (subject to the condition that the Company is able to make the product
available in a timely manner and in the quantities requested by Gemini for
particular time periods, including traditional selling seasons) and must
purchase a minimum of 10,000 units per month in 1997 in order to maintain
exclusivity. The Company has not yet commenced sales of CompuNet 2000 and
expects that the sales to Gemini contemplated by the distribution agreement will
be the first sales of CompuNet 2000 that the Company will make. Gemini has the
right to terminate the agreement under certain circumstances, including if (i)
the Company fails to comply with its material obligations under the agreement
(subject to specified notice provisions and cure rights) or (ii) if any
competitive product is offered in the market place and the Company fails to keep
Gemini competitive in price and quality. The Company expects that a significant
portion of revenues relating to CompuNet 2000 will be attributable to sales made
to Gemini. Consequently, the Company's business and financial condition could be
adversely affected in the event that Gemini (i) for any reason fails to purchase
the 10,000 units of CompuNet 2000 that the distribution agreement contemplates
that it will purchase in 1996, (ii) fails to effectively market CompuNet 2000,
(iii) terminates the distribution agreement for any reason or (iv) fails to
extend the term of the distribution agreement beyond 1997.
Possible Delay in Commencement of Sales. As described above, the Company
expects to commence sales of CompuNet 2000 by the end of 1996. However, the
Company's ability to commence sales within the expected time frame may be
delayed by various circumstances, including, among others, production or
shipping delays, unforeseen technical problems and/or failure by Gemini for any
reason to purchase the units of CompuNet 2000 that the Company expects Gemini to
purchase in 1996 pursuant to the distribution agreement described above. As
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described under 'Business--Manufacturing,' the Company intends to have CompuNet
2000 units initially produced by retrofitting CompuPhone 2000 units that the
Company has in inventory. The possibility that the Company may experience
production delays or unforseen technical problems is heightened by the fact that
the Company has not previously had experience with such type of retrofitting.
Consequently, there can be no assurance that the Company will be able to
commence sales of CompuNet 2000 within the expected time frame or at all. The
failure by the Company to commence sales of CompuNet 2000 within the expected
time frame would have a material adverse effect on the Company's business and
financial condition.
Possible 'Bundling' of Internet Telephony Enabling Software With
Competitive Products. There are only a limited number of software companies
that sell the software that enables Internet Telephony. One or more of these
companies may elect to bundle with its software a hardware product that competes
with the Company's CompuNet 2000 product. Any such occurrence would adversely
affect the ability of the Company to market CompuNet 2000.
Certain Functional Limitations. When used for conventional telephone
calls, CompuNet 2000 has the same functional limitations as CompuPhone 2000
described under '--Considerations Relating to the Business of the
Company--Certain Risks Specific to CompuPhone 2000.'
CERTAIN RISKS SPECIFIC TO THE WPS-1000 PRODUCT
Possible Delay in Commercial Introduction. The WPS 1000 product is
currently in the preproduction, prototype stage. The Company currently projects
that it will commence the commercial introduction of this product in the first
quarter of 1997. However, the Company's ability to commence such commercial
introduction within the projected time frame may be delayed by various
circumstances, including, among others, the risks described in the following
paragraph associated with transitioning the product from a prototype to one that
is mass produced, production or shipping delays and/or unforeseen technical
problems. Consequently, there can be no assurance that the Company will be able
commence the commercial introduction of WPS-1000 within the expected time frame
or at all. The failure by the Company to commence such commercial introduction
within the expected time frame would have a material adverse effect on the
Company's business and financial condition.
Risks Associated with Transition From Prototype Stage to Mass
Production. In order for the Company to commence the commercial introduction of
WPS-1000, it will be necessary to transition the product from a prototype to one
that is mass produced. Such transition process involves various risks, including
that in the course of the transition process the Company may discover that (i)
the performance of the prototype cannot be replicated in a mass produced product
or (ii) design changes are necessary in order to achieve the expected
performance. Any such discovery could result in a delay in the commercial
introduction of WPS-1000 or in the Company's complete inability to commercialize
the product. Any such occurrence would have a material adverse effect on the
Company's business and financial condition.
Possible Reduction in Potential Market for the WPS-1000. The WPS-1000
enables wireless printing from a laptop computer. Although there are existing
wireless printing products, the Company believes that there is a potential
market for the WPS-1000 because the WPS-1000 offers certain advantages that the
existing products do not offer (as described under 'Business--Wireless Printing
Product'). However, the Company estimates that the potential market for the
WPS-1000 may be significantly reduced or eliminated in the near future (by 1998
according to one market study commissioned by the Company). This is primarily
due to the growing trend to include 'built-in' wireless printing capability in
new laptop computers being sold. The Company believes that, as built-in wireless
printing capability becomes the norm, the demand for separate wireless printing
products may decrease, even if these separate products can offer certain
functional advantages (such as greater range). In addition, technological
advances relating to existing wireless printing products may eliminate or reduce
the advantages that the WPS-1000 offers when compared with such existing
products. In the event that the Company succeeds in successfully commercializing
the WPS-1000 and thereafter the market for such product contracts, such
occurrence would have a material adverse effect on the Company's business and
financial condition if the Company fails to generate profits from other products
to offset any lost profits resulting from such market contraction.
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CUSTOMER CONCENTRATION
The Company anticipates that a significant portion of the Company's
revenues and accounts receivable may be accounted for by Gemini (as described
under '--Certain Risks Specific to CompuNet 2000--Dependence on New Relationship
with Gemini Industries') and by a limited number of other key customers, the
identity of which may vary from period to period. In 1995, one customer
accounted for approximately 18% of the Company's net sales. In the first half of
1996, three customers accounted for approximately 34% of net sales (one customer
11%, one 11% and one 12%). To the extent the Company continues to depend upon a
limited number of key customers for a material percentage of its net sales and
accounts receivable, the loss of one or more of these key customers or any
significant reduction in orders by such customers could have a material adverse
effect on the Company's business and financial condition. See 'Business--End
Users, Distribution, Sales and Marketing.'
RISK OF PRODUCT RETURNS AND RISK ARISING FROM PRICE PROTECTION PROVISIONS
As is common in the industry for PCs and PC peripherals, the Company is
exposed to the risk of product returns from distributors and retailers. Product
returns may be based upon a contractual right of return that a particular
customer may have. Product returns may also be based upon a determination by the
Company that it is in the Company's long-term interest to voluntarily assist
particular customers in managing inventories. The contractual right of return,
if any, that the Company grants to customers varies from customer to customer.
Such right may allow a customer to return product for any reason or only upon
the occurrence of specific events. Such specific events may include, among other
things, termination of a distributors's distribution agreement (which in many
cases can be effected by a distributor at any time or upon short notice),
inability of the customer to resell the product and/or in the event that the
Company makes technological changes to the product. Although the Company has
established reserves for product returns, there can be no assurance that such
reserves will be adequate or that future product returns will not have a
material adverse effect on the Company's business and financial condition.
The Company includes in certain of its agreements with distributors and
other customers price protection clauses, pursuant to which the Company is
required to grant specified credits to the customer in the event that the
Company reduces current selling prices on products previously purchased by such
customer. There can be no assurance that future price protection claims will not
have a material adverse effect on the Company's business and financial
condition.
The Company generally permits customers to return products for repair or
replacement if the product does not conform to the Company's warranty. The
Company seeks to limit its costs relating to warranty claims by generally
seeking to obtain a corresponding warranty from each contract manufacturer that
manufactures any of the Company's product. However, there can be no assurance
that the Company will always be successful in this regard or that a contract
manufacturer will not fail to honor its warranty. Consequently, there can be no
assurance that future warranty claims will not have a material adverse effect on
the Company's business and financial condition.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company currently outsources substantially all of its manufacturing and
assembly requirements and expects that it will continue to do so for the
foreseeable future (other than software production which the Company expects
will be done at the Company's Israeli facilities). In general, the Company's
policy is to rely upon a single contract manufacturer to produce each of its
products (or related product groups), until sales of any particular product
reach a level that would permit the Company to qualify a second contract
manufacturer and still be capable of negotiating reasonable prices based on
volume. Reflecting this policy, the Company currently uses a single contract
manufacturer with facilities in Taiwan to manufacture CompuPhone 2000 and
expects to use the same manufacturer to manufacture CompuNet 2000 (except that
initially the Company intends to use a contract manufacturer in the United
States to manufacture the product by retrofitting existing units of CompuPhone
2000). The Company expects to use a contract manufacturer with facilities in the
People's Republic of China to manufacture WPS-1000. The Company does not
currently have long-term agreements with any contract manufacturer that it uses.
Accordingly, any such contract manufacturer could elect at any time to terminate
its relationship with the Company or reduce the manufacturing
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capacity that it allocates to the Company. The Company estimates that six months
or more would be required in order for it to qualify an alternate manufacturer
for any product. There can be no assurance that the Company will be able to
obtain its requirements for any product from any contract manufacturer that the
Company uses for the manufacture of such product. The events and circumstances
that may interfere with the Company's ability to obtain its product requirements
from a contract manufacturer include: (i) the Company's requirements may
increase above the capacity that the contract manufacturer has (or that it is
willing to allocate to the Company), (ii) a contract manufacturer may terminate
its relationship with the Company or reduce the manufacturing capacity that it
allocates to the Company and/or (iii) a contract manufacturer's manufacturing
capacity may be reduced or eliminated as a result of a casualty or technical
problems. Furthe rmore, in view of the Company's use of foreign-based contract
manufacturers, the Company's ability to obtain its product requirements from a
contract manufacturer may be negatively impacted by a variety of additional
factors, including political or economic instability in a region, changes in
diplomatic and trade relationships, tariffs and other barriers and restrictions,
and restrictions on the transfer of funds. Any inability on the part of the
Company to obtain its product requirements in a timely manner and in sufficient
quantities from any contract manufacturer that it is using would have a material
adverse effect on the Company's business and financial condition, particularly
in view of the following: (i) the Company does not expect to have an alternate
contract manufacturer qualified for any product, (ii) the same contract
manufacturer is expected to manufacture both CompuPhone 2000 and CompuNet 2000,
(iii) a long lead time would be required in order for the Company to qualify an
alternate manufacturer for any product and (iv) the Company does not expect that
it will maintain sufficient inventory to allow it to fill customer orders
without interruption during the time that would be required to qualify an
alternate manufacturer. The Company's reliance on contract manufacturers
involves several other risks, including reduced control over delivery schedules,
quality assurance and costs. There can be no assurance that problems resulting
from such risks will not have a material adverse effect on the Company's
business and financial condition. See 'Business--Manufacturing.'
The process of ramping up production of a new product at a contract
manufacturer requires extensive exchange of product and process information
between the Company and the contract manufacturer, the production of prototypes
and test runs. This process is complex and can take a considerable amount of
time. The Company has not yet ramped up production of CompuNet 2000 or WPS-1000
and there can be no assurance that the Company will not encounter unanticipated
problems or delays in connection with the ramping up process that could have a
material adverse effect on the Company's business and financial condition.
POSSIBLE SHORTAGES OF COMPONENTS
A variety of components are required to manufacture the Company's products.
Although supplies for such components currently are adequate, shortages could
occur in the future in various critical components, particularly
microcontrollers, due to interruption of supply or increased industry demand.
Any such shortages could result in higher costs or production delays, any of
which could have a material adverse effect on the Company's business and
financial condition. The microcontrollers incorporated into the Company's
current products are purchased by the Company's contract manufacturers
principally from Intel Corp. and/or Philips Electronics, NV. The Company's
contract manufacturers (rather than the Company) purchase the components
required to manufacture the Company's products. The fact that the Company has no
direct relationship with such suppliers may exacerbate the risks described above
relating to potential shortages.
CERTAIN RISKS RELATED TO INTERNATIONAL SALES
International sales of the Company's products accounted for 23% of net
sales in 1995 and 35% of net sales in the first half of 1996. International
business operations may be negatively impacted by a variety of factors,
including political or economic instability in a region, changes in diplomatic
and trade relationships, tariffs and other barriers and restrictions,
restrictions on the transfer of funds, currency fluctuations, potentially
adverse tax consequences and the burdens of complying with a variety of foreign
laws. For example, the Company has been required to make certain modifications
to its CompuPhone 2000 product in order to bring it into compliance with
applicable foreign regulations (the required modifications varying depending on
the country). Although the Company has not to date experienced any material
adverse effect on its operations as a result of such factors, there can be no
assurance that such factors will not materially adversely impact the Company's
business and financial condition in the future or require the Company to modify
its current business practices.
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HIGHLY COMPETITIVE MARKETS
The markets for Company's products are characterized by intense competition
and rapid change, and the Company expects that competition will increase. The
Company's current and prospective competitors include many companies that have
substantially greater name recognition and financial, technical and marketing
resources than the Company. There can be no assurance that the Company's
competitors will not be able to develop products comparable or superior to those
offered by the Company. For example, there is a company in the Federal Republic
of Germany that is currently marketing a product outside the United States that
is substantially the same as the Company's CompuPhone 2000 product. There can
also be no assurance that the Company's competitors will not be able to offer
customers more competitive pricing or to adapt more quickly than the Company to
new technologies and evolving customer requirements. Consequently, there can be
no assurance that the Company will be able to compete successfully in its target
markets or that competition will not have a material adverse effect on the
Company's business and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant degree upon the
continued contributions of its senior management and on the continued service of
its key sales and marketing and research and development personnel. The Company
believes that its future success will also depend in large part on its ability
to attract and retain additional managerial, sales and marketing, and research
and development personnel. There is, however, considerable competition for the
services of qualified personnel in these areas and, consequently, there can be
no assurance that the Company will be able either to retain its present
personnel or to attract additional qualified personnel as and when needed. The
loss of the services of one or more of the Company's key personnel, particularly
senior management and certain hardware and software engineers, or the inability
of the Company to attract additional personnel as and when needed could have a
material adverse effect on the Company's business and financial condition. See
'Business--Employees' and 'Management--Executive Officers, Directors and Key
Employees.'
IMPORTANCE OF PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's success depends significantly upon its ability to protect its
proprietary technology. The Company relies upon a combination of patents, trade
secrets, copyright and trademark law, confidentiality procedures and contractual
provisions to protect its proprietary technology. However, there can be no
assurance that (i) such steps will be adequate to prevent misappropriation of
the Company's technology or (ii) the Company's competitors will not develop
products that are substantially equivalent or superior to the Company's products
without infringing upon the Company's proprietary rights. (As described under
'Competition,' there is a company in the Federal Republic of Germany that is
currently marketing outside the United States a product that is substantially
the same as the Company's CompuPhone 2000 product.) In addition, the laws of
certain foreign countries in which the Company's products are, or may be,
developed, manufactured or sold, including various countries in Asia, may not
protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely.
POSSIBILITY OF THIRD PARTY INFRINGEMENT CLAIMS
The Company believes that its products and their use do not infringe the
proprietary rights of third parties and, to date, there has been no litigation
commenced against the Company relating to any infringement claims. However, the
Company has from time to time in the past received, and may receive in the
future, communications from third parties claiming that the Company's products
infringe, or may infringe, the proprietary rights of third parties. There can be
no assurance (i) that any such claims will not require the Company to enter into
license arrangements or result in protracted and costly litigation, regardless
of the merits of such claims, (ii) that any necessary licenses will be available
or that, if available, such licenses can be obtained on commercially reasonable
terms or (iii) that any such claims will not be upheld.
CERTAIN RISKS ASSOCIATED WITH USE OF FOREIGN CURRENCIES
A substantial portion of the Company's business is conducted in the State
of Israel through two Israeli subsidiaries (the 'Israeli Subsidiaries'). See
'--Considerations Relating to the Company's Operations in Israel.' As a result,
the Company incurs expenses in New Israeli Shekels ('NIS'). Consequently, an
increase in the value of the NIS in relation to the dollar would increase the
Company's expenses in dollar terms. In addition,
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the Company's expenses in dollar terms could increase in the event that
inflation in Israel is not offset (or is offset on a lagging basis) by the
devaluation of the NIS in relation to the dollar. During 1995 and the first two
quarters of 1996 inflation in Israel and the change in the value of the NIS in
relation to the dollar were: 1995 (the inflation rate was 8.10% while the NIS
was devalued by 3.88%); first quarter of 1996 (the inflation rate was 2.80%, not
annualized, while the NIS appreciated by 0.76%); and second quarter of 1996 (the
inflation rate was 7.03%, not annualized, while the NIS was devalued by 2.17%).
There can be no assurance that the Company will not be materially adversely
affected in the future if inflation in Israel continues to exceed the
devaluation of the NIS against the dollar or if the timing of such devaluation
lags behind increases in inflation in Israel.
The Israeli Subsidiaries maintain their accounts in NIS, while the
Company's consolidated financial statements are reported in dollars.
Accordingly, the Israeli Subsidiaries' assets and liabilities are translated to
dollars based on the exchange rate at the end of the reporting period and their
income and expense items are translated to dollars based on the average exchange
rates prevailing during the reporting period. Such currency translations may
result in gains or losses (which are recorded directly into a separate component
of stockholders' equity). Although to date the effects of such currency
translations have not been material, there can be no assurance that in the
future such currency translations will not have a material adverse effect on the
Company's financial condition.
The Company currently denominates its international sales in dollars, but
may in the future denominate certain of such sales in foreign currencies. In
such event, fluctuations in the rates of exchange between the dollar and other
currencies may effect the Company's financial condition or results of
operations. For example, an increase in the value of a particular currency
relative to the dollar will increase the dollar reporting value for transactions
in such currency. Conversely, a decrease in the value of such currency relative
to the dollar will decrease the dollar reporting value for transactions in such
currency.
BROAD DISCRETION OVER APPLICATION OF PROCEEDS
The Company intends to use approximately $1.2 million of the net proceeds
of the Offering to repay outstanding indebtedness and the balance for the other
purposes described under 'Use of Proceeds.' Although the Company's current
estimate as to the amount of such net proceeds that will be used for each such
other purpose is set forth under 'Use of Proceeds,' the Company reserves the
right to change the amount of such net proceeds that will be used for any
purpose to the extent that management determines that such change is advisable.
Consequently, management of the Company will have broad discretion in
determining the manner in which the net proceeds of the Offering are applied.
CONSIDERATIONS RELATING TO THE SECURITIES
CONCENTRATED CONTROL
Immediately following completion of the Offering, the executive officers
and directors of the Company (together with entities affiliated with certain of
such individuals and a trust for the benefit of certain family members of one of
such individuals) will beneficially own approximately 27.01% of the outstanding
Common Stock (after giving effect to the exercise of all options held by such
persons that are currently exercisable) and may be deemed to have effective
control of the Company. See 'Principal Stockholders.'
NO DIVIDENDS
The Company has never paid any dividends on its Common Stock and has no
plans to pay dividends on its Common Stock in the foreseeable future. See
'Dividend Policy.'
DILUTION
Purchasers of shares of Common Stock in the Offering will experience an
immediate and substantial dilution in the net tangible book value of the shares
of Common Stock purchased by them in the Offering. Additional dilution to future
net tangible book value per share may occur upon exercise of outstanding stock
options and warrants (including the Warrants and the Representative's Warrants)
and may occur, in addition, if the Company issues additional equity securities
in the future. The current stockholders of the Company, including the Company's
officers and directors, acquired their shares of Common Stock for nominal
consideration or for consideration substantially less than the public offering
price of the shares of Common Stock offered hereby. As a result, new investors
will bear substantially all of the risks inherent in an investment in the
Company. See 'Dilution.'
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NO ASSURANCE OF PUBLIC TRADING MARKET; ARBITRARY DETERMINATION OF PUBLIC
OFFERING PRICE; POSSIBLE VOLATILITY OF COMMON STOCK AND WARRANT PRICES
Prior to the Offering, there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that an active trading market for
any of the Securities will develop or, if developed, be sustained after the
Offering. The initial public offering prices of the Securities offered hereby
and the terms of the Warrants have been arbitrarily determined by negotiations
between the Company and the Representative, and do not necessarily bear any
relationship to the Company's assets, book value, results of operations or any
other generally accepted criteria of value. See 'Underwriting.' The trading
price of the Securities could be subject to wide fluctuations in response to,
among other things, announcements of technological innovations or new products
by the Company or its competitors, developments or disputes concerning patents
or proprietary rights, quarterly variations in the Company's and its
competitor's quarterly results, changes in earnings estimates by analysts,
market conditions in the industry, and general economic conditions.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
Common Stock, or the availability of Common Stock for future sale, will have on
the market price of the Securities prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon exercise of
warrants or options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Securities.
The Company and certain holders of Common Stock and/or other securities of
the Company have entered into lock-up agreements as described below. See 'Shares
Eligible For Future Sale' and 'Underwriting.'
Company. The Company has agreed that, during the period commencing on the
date of this Prospectus and ending on the first anniversary of such date, the
Company will not, without the prior written consent of the Representative,
directly or indirectly issue, offer to sell, sell, grant an option for the sale
of, assign, transfer, pledge, hypothecate or otherwise encumber or dispose of
(all the foregoing being collectively referred to as 'Transfer') any securities
issued by the Company, including common stock or securities convertible into or
exchangeable or exercisable for or evidencing any right to purchase or subscribe
for any shares of common stock (the 'Covered Securities'), except that the
Company may (i) issue shares upon the exercise of the Bridge Warrants, (ii)
grant options pursuant to its 1996 Stock Option plan (described under
'Management--Stock Option Plan'), provided that the optionee is subject to (or
upon receipt of the option agrees to be subject to) one of the lock-up
arrangements described in the following two paragraphs, and (iii) issue shares
upon the exercise of stock options that are currently outstanding, or that this
Prospectus contemplates will be granted prior to completion of the Offering or
that are hereafter granted in accordance with the preceding clause.
Two-Percent Holders. Each Two-Percent Holder (as hereinafter defined) has
agreed that, until the first anniversary of the date on which the Registration
Statement (as defined under 'Available Information') is declared effective (the
'Effective Date') under the Securities Act of 1933, as amended (the 'Securities
Act'), such holder will not, without the prior written consent of the
Representative, directly or indirectly, Transfer any Covered Securities, except
that (i) a Two-Percent Holder may Transfer Covered Securities in a private
placement, provided that the transferee agrees to be bound by the terms of the
foregoing agreement; and (ii) from and after the 270th day after the Effective
Date, a Two-Percent Holder may Transfer Common Stock of the Company (in one or
more transactions), provided that the aggregate shares of Common Stock of the
Company that may be Transferred by a Two-Percent Holder pursuant to this clause
(ii) may not exceed 10% of the number of shares of Common Stock of the Company
owned by such Two-Percent Holder immediately preceding the 270th day after the
Effective Date. (For purposes of clause (ii) of the preceding sentence, the
ownership or sale of any Covered Securities convertible into or exchangeable or
exercisable for or evidencing any right to purchase or subscribe for any shares
of Common Stock is deemed the ownership or sale, as the case may be, of the
number of shares of Common Stock that may be acquired pursuant to such Covered
Securities). The Two-Percent Holders that have entered into the foregoing
agreement hold in the aggregate 1,782,561 shares of Common Stock and options to
purchase 751,973 shares of Common Stock (including the options that this
Prospectus contemplates will be issued prior to completion of the Offering). As
used herein, a 'Two-Percent Holder' means any person or entity that immediately
prior to the Offering owns a number of shares of Common Stock (calculated on a
pro forma basis giving effect to the exercise of all outstanding options and
options that this Prospectus contemplates will be granted prior to completion of
the Offering) that constitutes 2% or more of the outstanding Common Stock
immediately prior to the Offering (calculated on a pro forma basis as
aforesaid).
17
<PAGE>
Other Holders of Common Stock or Options. The Company has agreed to cause
each holder of Common Stock and/or options that is not a Two-Percent Holder to
agree that, until the 270th day following the Effective Date, such holder will
not Transfer any Covered Securities, except that any such holder may Transfer
Covered Securities in a private placement, provided that the transferee agrees
to be bound by the terms of the foregoing agreement. Such holders hold in the
aggregate 1,147,617 shares of Common Stock and options to purchase 199,549
shares of Common Stock (including the options that this Prospectus contemplates
will be issued prior to completion of the Offering).
Holders of Bridge Warrants. Prior to completion of the Offering the
Company intends to file a Registration Statement registering the resale of the
shares issuable upon exercise of the Bridge Warrants. However, each holder of
Bridge Warrants has agreed that, during the three-month period commencing on the
Effective Date, such holder will not, without the prior written consent of the
Representative, sell assign, transfer or otherwise dispose of, any such warrant
or any shares of Common Stock acquired upon exercise thereof.
REPRESENTATIVE'S INFLUENCE ON THE MARKET
A significant amount of the Securities offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of such Securities through or with the
Representative. If it participates in the market, the Representative may exert a
dominating influence on the market, if one develops, for the Securities. The
price and liquidity of the Common Stock and the Warrants may be significantly
affected by the degree, if any, of the Representative's participation in such
market. See 'Description of Securities.'
SPECULATIVE NATURE OF THE WARRANTS; POSSIBLE REDEMPTION OF WARRANTS
The Warrants do not confer any rights of Common Stock ownership on their
holders, such as voting rights or the right to receive dividends, but rather
merely represent the right to acquire shares of Common Stock at a fixed price
for a limited period of time. Specifically, commencing one year after the date
of this Prospectus, holders of the Warrants may exercise their right to acquire
Common Stock and pay an exercise price of $ per share [150% of the initial
public offering price per share of Common Stock], subject to adjustment upon the
occurrence of certain dilutive events, until five years after the date of this
Prospectus, after which date any unexercised Warrants will expire and have no
further value. Moreover, following the completion of the Offering, the market
value of the Warrants is uncertain and there can be no assurance that the market
value of the Warrants will equal or exceed their initial public offering price.
There can be no assurance that the market price of the Common Stock will ever
equal or exceed the exercise price of the Warrants, and consequently, whether it
will ever be profitable for holders of the Warrants to exercise their Warrants.
Commencing 18 months after the date of this Prospectus, the Warrants are
subject to redemption at $0.01 per Warrant on 30 days' prior written notice to
the warrantholders if the average closing bid price of the Common Stock equals
or exceeds $ [250% of the initial public offering price] per share for any
20 trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of the notice of redemption. If the Warrants
are redeemed, holders of the Warrants will lose their rights to exercise the
Warrants after the expiration of the 30-day notice period. Upon receipt of a
notice of redemption, holders would be required to: (i) exercise their Warrants
and pay the exercise price at a time when it may be disadvantageous for them to
do so, (ii) sell their Warrants at the then-prevailing market price, if any,
when they might otherwise wish to hold their Warrants, or (iii) accept the
redemption price which is likely to be substantially less than the market value
of the Warrants at the time of redemption. In the event that holders of the
Warrants elect not to exercise their Warrants upon notice of redemption, the
unexercised Warrants will be redeemed prior to exercise, and the holders thereof
will lose the benefit of the appreciated market price of the Warrants, if any,
and/or the difference between the market price of the underlying Common Stock as
of such date and the exercise price of such Warrants, as well as any possible
future price appreciation in the Common Stock. See 'Description of
Securities--Warrants.'
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS
The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants and such shares have been registered, qualified or
deemed to be exempt under the securities or 'blue sky' laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its reasonable efforts to have all of the shares of Common
Stock issuable upon exercise of the Warrants registered or qualified on or
before the exercise date and to maintain a
18
<PAGE>
current prospectus relating thereto until the expiration of the Warrants, there
is no assurance that it will be able to do so. The value of the Warrants may be
greatly reduced if a current prospectus covering the Common Stock issuable upon
the exercise of the Warrants is not kept effective or if such Common Stock is
not qualified or exempt from qualification in the states in which the holders of
the Warrants reside. The shares of Common Stock and the Warrants offered hereby
may only be purchased in the Offering together, on the basis of one share of
Common Stock and one Warrant, but the Warrants will be separately tradeable
immediately upon issuance. Although the Securities will not knowingly be sold to
purchasers in jurisdictions in which the Securities are not registered or
otherwise qualified for sale, investors residing in such jurisdictions may
purchase the Warrants in the secondary market or investors may move to a
jurisdiction in which the shares underlying the Warrants are not registered or
qualified during the period that the Warrants are exercisable. In such event,
the Company will be unable to issue shares to those persons desiring to exercise
their Warrants unless and until the shares are qualified for sale in
jurisdictions in which such purchasers reside, or an exemption from such
qualification exists in such jurisdictions, and holders of the Warrants would
have no choice but to attempt to sell the Warrants in a jurisdiction where such
sale is permissible or allow them to expire unexercised. See 'Description of
Securities--Warrants.'
POTENTIAL ISSUANCE OF PREFERRED STOCK
Although the Company has no present intention of issuing any preferred
stock (and has contractually agreed not to do so until the first anniversary of
the Effective Date), the Company's Certificate of Incorporation provides that
the Board of Directors has the authority, without first obtaining the approval
of the holders of Common Stock, to issue from time to time preferred stock
having rights superior to the Common Stock. Such authority may have the effect
of delaying, deferring or preventing a change of control of the Company, even if
such event would be beneficial to the stockholders of the Company.
CONSIDERATIONS RELATING TO THE COMPANY'S OPERATIONS IN ISRAEL
A substantial amount of the Company's business is conducted in the State of
Israel through the Israeli Subsidiaries. The functions that are primarily
conducted in Israel include research and development, international marketing
and sales, administration and finance. The net assets of the Israeli
Subsidiaries accounted for approximately 31% of the Company's consolidated net
assets as of December 31, 1995, and the net capital deficiency of the Israeli
Subsidiaries accounted for approximately 69% of the Company's consolidated net
capital deficiency as of June 30, 1996. In addition, substantially all of the
executive officers of the Company reside in the State of Israel or spend
significant amounts of time working there. Consequently, the Company is directly
influenced by the political, economic and military conditions affecting Israel,
and any major hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could have a material
adverse effect on the Company's operations. See 'Conditions in Israel.'
One of the Company's Israeli Subsidiaries participates in certain Israeli
government programs that provide certain significant tax benefits. To be
eligible for these tax benefits, such Israeli Subsidiary must continue to meet
certain conditions. These conditions include, among others, completing certain
investment programs, fulfilling certain requirements as to capitalization,
making sales to ITI USA only on market terms, and filing periodic compliance
reports. Although the Company believes that such Israeli Subsidiary will be able
to satisfy such conditions, there can be no assurance of this. Should such
Israeli Subsidiary fail to meet such conditions in the future, such tax benefits
could be canceled, in whole or in part, and such Israeli Subsidiary might be
required to refund the amount of the canceled benefits, together with certain
additional amounts and interest. There can be no assurance that such programs
and tax benefits will be continued in the future at their current levels or
otherwise. In the event that such tax benefits are no longer available to such
Israeli Subsidiary for any reason, certain income (if any) of such Israeli
Subsidiary that would otherwise have been tax-exempt will be subject to
taxation, which may have the effect of increasing the Company's effective income
tax rate. See 'Israeli Taxation' and 'Conditions in Israel.'
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $17,794,000, based upon an assumed initial public offering price
per share of Common Stock of $7.00 (the midpoint of the range of such initial
public offering price stated on the cover page hereof) and $0.10 per Warrant and
after deduction of underwriting discounts and commissions and estimated offering
expenses. The Company expects to use such net proceeds for the purposes set
forth in the table below. Pending use of the net proceeds for such purposes, the
Company intends to invest the net proceeds in high-grade, short term interest
bearing investments.
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT OF NET
PROCEEDS PROJECTED TO BE USED(1)
--------------------------------
<S> <C>
Repayment of promissory notes issued in connection
with the Bridge Financing(2).................... $1,200,000
Advertising and marketing (including expanding the
Company's
internal marketing and sales force)............. 3,325,000
Research and development (including hiring
additional research and development
personnel)...................................... 3,000,000
Acquisition of equipment and acquisition of new
product tooling
(tooling that the Company provides to its
contract manufacturers to
enable them to manufacture the Company's
products)....................................... 1,700,000
Working capital and general corporate purposes.... 8,569,000
</TABLE>
- ------------------
(1) The amount set forth with respect to each purpose represents the Company's
current estimate of the approximate amount of the net proceeds that will be
used for such purpose. However, the Company reserves the right to change the
amount of such net proceeds that will be used for any purpose to the extent
that management determines that such change is advisable. Consequently,
management of the Company will have broad discretion in determining the
manner in which the net proceeds of the Offering are applied.
(2) The Company intends to use approximately $1.2 million of the net proceeds to
pay the outstanding principal of, and accrued interest on, certain
promissory notes (the 'Bridge Notes') issued by the Company during the
period April 30, 1996, through July 30, 1996 in connection with the Bridge
Financing. Such notes accrue interest at the rate of 10% per annum and are
due and payable, together with accrued interest, 10 days after completion of
the Offering. The Company used the net proceeds of such bridge financing
($1.06 million) to fund working capital requirements, general corporate
purposes and the Company's financing plans. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Bridge
Financing.'
20
<PAGE>
DIVIDEND POLICY
The Company intends to retain all earnings for the foreseeable future for
use in the operation and expansion of its business and, accordingly, the Company
currently has no plans to pay dividends on its Common Stock. The payment of
future dividends will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings, if any, capital
requirements, financial condition and requirements, business conditions,
restrictions in financing agreements and such other factors as are considered to
be relevant by the Board of Directors from time to time.
CAPITALIZATION
The following table sets forth as of June 30, 1996: (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company
giving effect to the transactions related to the Bridge Financing (described
under 'Management's Discussion and Analysis of Financial Condition and Results
of Operations--Bridge Financing') that were completed subsequent to June 30,
1996; and (iii) such pro forma capitalization as adjusted to give effect to (x)
the sale in the Offering of 3,000,000 shares of Common Stock and 3,000,000
Warrants at an initial public offering price of $7.00 per share (the midpoint of
the range of such initial public offering price stated on the cover page hereof)
and $0.10 per Warrant and deduction from the gross proceeds of the underwriting
discounts and commissions and estimated offering expenses and (y) the
application of a portion of the net proceeds to repay the Bridge Notes and
accrued interest thereon as described under 'Use of Proceeds.'
<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
-------------- -------------- ------------
<S> <C> <C> <C>
Short-term debt.............................. $ 385,269(1) $ 797,019(1) $ 51,269
Stockholders' equity:
Common Stock, $.01 par value, 40,000,000
shares authorized; 2,930,178 shares
issued and outstanding and issued and
outstanding on a pro forma basis(2);
5,930,178 shares issued and outstanding,
pro forma as adjusted(2)(3)............. 29,812 29,812 59,812
Preferred Stock, $.01 par value, 5,000,000
shares authorized; none issued and
outstanding............................. -- -- --
Additional paid in capital................. 5,861,504 6,078,685 23,842,685
Treasury stock............................. (165,000) (165,000) (165,000)
Accumulated deficit........................ (6,149,765) (6,149,765) (6,678,034)(1)
Cumulative translation adjustment.......... 140,229 140,229 140,229
-------------- -------------- ------------
Total stockholders' equity (net capital
deficiency)........................... (283,220) (66,039)(1) 17,199,692(1)
-------------- -------------- ------------
Total capitalization.................... 102,049 730,980 17,250,961
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
- ------------------
(1) Actual short-term debt includes the proceeds from the Bridge Financing
received through June 30, 1996 less the amount of such proceeds allocated to
the Bridge Warrants. Pro forma short-term debt includes the total proceeds
from the Bridge Financing of $1,175,000 (including proceeds in the amount of
approximately $675,000 received after June 30, 1996) less the amount of such
proceeds allocated to the Bridge Warrants. In connection with the Bridge
Financing, the Company recorded loan discount of $458,000 and deferred
financing costs of $103,000. Upon repayment of the Bridge Notes from the net
proceeds of the Offering prior to the scheduled maturity of such notes
(which is December 15, 1996), the unamortized portion of the loan discount
and deferred financing costs at such time will be recognized as an
extraordinary loss. The pro forma as adjusted accumulated deficit reflects
the extraordinary loss that would have been recorded had such repayment been
effected on June 30, 1996. Both pro forma stockholders' equity and pro forma
as adjusted stockholders' equity include the portion of the net proceeds of
the Bridge Financing allocated to the Bridge
(Footnotes continued on next page)
21
<PAGE>
(Footnotes continued from previous page)
Warrants. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations--Bridge Financing.'
(2) Does not include (i) 403,189 shares issuable upon exercise of outstanding
options (257,322 of which provide for a nominal exercise price, 133,111 of
which provide for an exercise price of approximately $1.64 per share and
12,756 of which provide for an exercise price of approximately $2.74 per
share), (ii) 548,333 shares issuable upon exercise of options to be granted
prior to completion of the Offering (as described under 'Management--Options
to be Granted Prior to the Offering'), which options will have an exercise
price equal to the the initial public offering price per share of Common
stock in the Offering, (iii) 285,000 shares reserved for possible future
grants of options under the Company's 1996 Stock Option Plan and (iv) shares
issuable upon the exercise of the Bridge Warrants. The aggregate number of
shares issuable upon exercise of the Bridge Warrants will be determined by
dividing (x) $1,262,500 by (y) the initial public offering price per share
of Common stock in the Offering, and the exercise price per share will equal
10% of such initial public offering price. Assuming an initial public
offering price per share of Common Stock of $7.00 (the midpoint of the range
of such initial public offering price stated on the cover page hereof), the
aggregate number of shares issuable upon exercise of the Bridge Warrants
would be 180,357 and the exercise price per share would be $0.70. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Bridge Financing.'
(3) Does not include (i) 3,000,000 shares of Common Stock issuable upon exercise
of the Warrants sold in the Offering, (ii) 300,000 shares of Common Stock
issuable upon exercise of the Representative's Warrants and (iii) Warrants
to purchase 300,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants.
22
<PAGE>
DILUTION
The negative net tangible book value of the Company at June 30, 1996, was
$(334,000), or $(0.11) per share of Common Stock. After giving effect to the
sale by the Company of the Securities offered hereby and deduction of the
underwriting discounts and commissions and estimated offering expenses, the net
tangible book value of the Company at June 30, 1996, on a pro forma basis would
have been approximately $16,933,000 or $2.86 per share. This represents an
immediate increase in net tangible book value per share of $2.97 to the
Company's existing stockholders and an immediate dilution of $4.14 per share to
new stockholders purchasing shares of Common Stock in the Offering. The
foregoing calculation and the table below assumes an initial public offering
price per share of Common Stock of $7.00 (the midpoint of the range of such
initial public offering price stated on the cover page hereof) and per Warrant
of $0.10. The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per
share...................................... $ 7.00
Negative net tangible book value per share
before the
Offering(1)............................. (0.11)
Increase per share attributable to new
investors............................... 2.97
Pro forma net tangible book value per share
after the Offering(2)...................... 2.86(4)
------
Dilution per share to new investors(3)....... $ 4.14(4)(5)
------
------
</TABLE>
- ------------------
(1) Represents (i) tangible asets less liabilities divided by (ii) the number of
shares of Common Stock issued and outstanding.
(2) Pro forma net tangible book value after the Offering gives effect to the
sale by the Company of the Securities offered hereby and deduction of the
underwriting discounts and commissions and estimated offering expenses.
(3) Dilution is determined by subtracting pro forma net tangible book value
after the Offering from the initial public offering price per share.
(4) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share after the Offering would be $3.10
and the dilution per share to new investors would be $3.90. See
'Underwriting.'
(5) The exercise prices per share provided for by the Bridge Warrants and by
certain outstanding options are substantially lower than the assumed initial
public offering price per share. See 'Description of Securities--Bridge
Warrants' and 'Description of Securities--Options.' Additional dilution to
future net tangible book value per share may occur upon exercise of such
warrants and options.
23
<PAGE>
The following table sets forth on a pro forma basis giving effect to the
sale of the Securities offered hereby: (i) the number of shares of Common Stock
purchased from the Company by its existing stockholders, (ii) the number of
shares of Common Stock purchased by investors in the Offering, (iii) the total
consideration paid to the Company by its existing stockholders and by such
investors and (iv) the average price paid per share paid by its existing
stockholders and such investors. The information in the table assumes an initial
public offering price per share of Common Stock of $7.00 (the midpoint of the
range of such initial public offering price stated on the cover page hereof) and
per Warrant of $0.10.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- --------------------------- PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.... 2,930,178 49.4% $ 4,694,248 18.1%(2) $ 1.60
New Investors............ 3,000,000(1) 50.6(1) $21,300,000(1)(2) 81.9%(2) $ 7.10
--------- ------- ----------- -------
Total............... 5,930,178 100.0% $25,994,248 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
- ------------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
of shares purchased by new investors would be 3,450,000 (or 49.5% of the
total number of shares purchased by existing stockholders and new investors)
and the total consideration paid by new investors would be 24,495,000 (or
83.9% of the total consideration paid for the Common Stock by existing
stockholders and new investors).
(2) Allocates the total gross proceeds from the Offering to the Common Stock
sold in the Offering.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The balance sheet data presented below as of December 31, 1995 and 1994 and
the income statement data presented below for each of the years in the
three-year period ended December 31, 1995 are derived from the Consolidated
Financial Statements of the Company, which have been audited by Price Waterhouse
LLP, independent accountants, and are included elsewhere in this Prospectus. The
report of Price Waterhouse LLP, which is also included elsewhere in this
Prospectus, contains an explanatory paragraph relating to the uncertainty of the
Company's ability to continue as a going concern. The balance sheet data
presented below as of June 30, 1996, and the income statement data presented
below for the six month periods ended June 30, 1996 and June 30, 1995, have not
been audited by independent accountants, but in the Company's opinion reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the financial condition and results of operations of the
Company as of the dates and for the periods presented. The information presented
below should be read in conjunction with 'Management's Discussion and Analysis
of Financial Condition and Results of Operations' and the Consolidated Financial
Statements and related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 76,877 $ 85,610 $ 803,705 $ 355,202 $ 208,462
Cost of products sold......... 72,767 80,874 491,315 198,384 112,822
Selling, general and
administrative expenses..... 595,004 1,723,929 1,634,164 814,046 816,300
Research and development
expenses, net............... 30,023 291,970 357,117 118,949 151,499
--------- ----------- ----------- --------- ---------
Loss from operations.......... (620,917) (2,011,163) (1,678,891) (776,177) (872,159)
Interest income (expense),
net......................... (935) 33,535 (4,173) 27,047 (76,998)
--------- ----------- ----------- --------- ---------
Net loss...................... (621,852) (1,977,628) (1,683,064) (749,130) (949,157)
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Net loss per share(1)......... $ (.34) $ (.71) $ (.54) $ (.24) $ (.30)
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
---------- -------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)....... $ 780,018 $179,494 $ (330,365)
Total assets....................... 1,312,029 829,546 697,738
Total liabilities.................. 400,058 531,322 980,958
Stockholders' equity (net capital
deficiency)...................... 911,971 298,224 (283,220)
</TABLE>
- ------------------
(1) For information concerning the computation of net loss per share, see Note 2
of Notes to consolidated Financial Statements.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Since it was formed in 1990, the Company has been incurring significant
expenses intended to provide benefits in future periods, as the Company executes
its strategy of developing and bringing to market new products. These expenses
include (i) research and development ('R&D') expenses incurred by the Company in
connection with developing new products, (ii) selling, general and
administrative expenses ('SG&A') incurred by the Company in connection with
establishing a portion of the management, administrative, sales and distribution
capability that it believes will be required in future periods in order to
enable it to successfully commercialize the products that it develops and (iii)
SG&A expenses incurred in connection with attempting to commercialize the three
products that the Company has developed to date: CompuPhone 2000, CompuNet 2000
and WPS-1000. During the period from January 1, 1993 through June 30, 1996, the
Company incurred aggregate R&D expenses (net of contributions by the Government
of Israel Chief Scientist) and SG&A expenses of $5.60 million ($0.83 million of
R&D and $4.77 million of SG&A).
At the same time, during the period January 1, 1993 through June 30, 1996,
the Company had only limited revenues ($1.18 million in the aggregate,
substantially all of which was generated subsequent to 1994). The Company's
limited revenues to date reflect a number of factors, including: (i) the Company
first commenced sales of CompuPhone 2000 in 1995, (ii) a predecessor version of
CompuPhone 2000 that lacked many features of the current product and was more
expensive was introduced in 1992 but did not gain market acceptance, (iii) the
Company has not yet commenced sales of CompuNet 2000 or WPS-1000 and (iv) the
Company's sales and promotional efforts relating to CompuPhone 2000 and its
ability to bring its other two products to market have been limited due to
financial constraints.
Reflecting the disparity between the Company's expenses and revenues
described above, the Company has had net losses in each period since its
inception and, as of June 30, 1996, had an accumulated deficit of $6.20 million.
Such conditions raise doubt about the Company's ability to continue as a going
concern. The report of independent accountants on the Company's financial
statements at December 31, 1994 and 1995 and for each of the three years in the
period ended December 31, 1995, contains an explanatory paragraph stating that
the Company's financial statements have been prepared assuming that the Company
will continue as a going concern while expressing substantial doubt about the
Company's ability to do so. The Company's financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
In order for the Company to achieve profitability, the Company must
significantly increase its revenues. The Company's near-term plan for increasing
revenues has two primary components. First, the Company expects to commence
sales of CompuNet 2000 by the end of 1996 and WPS-1000 in the first quarter of
1997. Second, the Company intends to use a portion of the net proceeds of the
Offering to significantly increase its advertising and marketing efforts
relating to all its products. There can be no assurance, however, that the
Company will succeed in commencing sales of CompuNet 2000 and WPS-1000 within
the contemplated time frames or at all; that any of the Company's products will
achieve market acceptance (or sufficient market acceptance to make the product
profitable); or that the allocation of significant additional resources to
advertising and marketing efforts will result in increased sales. See 'Risk
Factors--Considerations Relating to the Business of the Company.'
When used for conventional telephone calls, CompuNet 2000 has the same
functionality as CompuPhone 2000. See 'Business--Internet Telephony Product.' As
a result, the Company expects that the introduction of CompuNet 2000 will reduce
the market for CompuPhone 2000 somewhat. The Company cannot at present quantify
the extent of this reduction. However, the Company believes that a viable
potential market for CompuPhone 2000 will remain because CompuPhone 2000 will be
priced substantially lower than CompuNet 2000. Specifically, the Company
believes that CompuPhone 2000 will remain attractive to users that (i) are
engaged in functions that do not require the Internet Telephony features of
CompuNet 2000 (such as telemarketing, order processing, customer service and
support, market research, and emergency dispatching) or (ii) are not willing to
pay the additional cost required to obtain such features. There can be no
assurance, however, that the introduction of CompuNet 2000 will not result in
there being an insufficient market for CompuPhone 2000 to make sales of this
product profitable.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Net Sales. The Company sold 2,614 CompuPhone 2000 units during the first
six months of 1996 compared with 5,285 units during the first six months of
1995. Due to financial constraints, promotional activities relating to
CompuPhone 2000 were reduced in the first half of 1996 compared with the first
half of 1995. Examples of promotional means that were used in 1995 but were
discontinued, or substantially curtailed, in 1996 include (i) listing the
product in a variety of catalogues published by mail order vendors and (ii)
using independent representatives to market the product. Furthermore, the
initial introduction of CompuPhone 2000 in early 1995 generated press coverage
typically associated with a new product launch. This form of free (or low cost)
publicity was no longer available to the Company in 1996 as the product matured,
and the Company was unable to generate comparable press coverage through paid
advertising due to financial constraints. The Company believes that this
reduction in the promotional activities related to CompuPhone 2000 contributed
to the decrease in the number of units of CompuPhone 2000 sold in the first half
of 1996 compared with the first half of 1995. However, there can be no assurance
that this decrease does not reflect lack of market acceptance of the product or
that the allocation of significant additional resources to sales and promotional
efforts will result in increased sales.
CompuPhone 2000 units were sold at an average sales price of approximately
$77.00 per unit during the first six months of 1996 compared with an average
sales price of approximately $69.00 per unit during the first six months of
1995. This increase in average sales price primarily reflected the fact that the
Company made fewer promotional sales in the first half of 1996 than in the first
half of 1995.
Net sales in the first six months of 1996 were $208,000, representing a
decrease of 41.4% from net sales of $355,000 in the first six months of 1995.
This decrease reflected the decrease in unit sales of CompuPhone 2000 discussed
above.
Gross Profit. Gross profit was 45.8% of net sales in the first six months
of 1996 and 44.2% in the first six months of 1995. The Company believes that its
historical gross margins are not indicative of future gross margins for several
reasons, including the following. First, the Company's historical gross margins
do not reflect any sales of CompuNet 2000 or WPS-1000, products that the Company
expects to commence selling as described above. Second, the Company does not
have any long-term, fixed price agreements with the contract manufacturers that
manufacture (or are expected to manufacture) its products and, accordingly, its
future manufacturing costs are uncertain. Third, the prices that the Company
will be able to obtain for its products in the future will depend on future
market conditions, which cannot currently be predicted. Although the Company
cannot at present predict its gross profit margin for future periods, such gross
profit margin may be well below the Company's gross profit margin in the first
six months of 1996. See '--Certain Information Concerning Distribution Agreement
With Gemini,' for certain information concerning the gross profit margin
anticipated from sales of CompuNet 2000 expected to be made to Gemini in 1996.
SG&A. The Company had fewer employees in the first half of 1996 than in the
first half of 1995, reflecting staff reductions necessitated due to the
Company's increasing deficit. However, the costs savings associated with such
staff reductions were offset by compensation increases to remaining employees.
As a result, there was no material change in SG&A in the first half of 1996
compared with the first half of 1995.
R&D, Net. R&D expenses increased to $151,000 in the first six months of
1996 from $119,000 in the first six months of 1995. This increase primarily
reflected increased research and development activities relating to CompuNet
2000 and WPS-1000, as well as compensation increases to certain employees
involved in research and development.
Interest Income (expense). In the first six months of 1996, the Company had
interest expense of $77,000 compared with interest income of $27,000 in the
first six months of 1995. The interest expense in 1996 primarily reflected (i)
interest on the Bridge Notes and the amortization of loan discount and deferred
financing costs relating to such notes and (ii) interest on bank overdrafts. See
'--Bridge Financing.'
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YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Net Sales. Net sales in 1995 increased to $804,000 from $86,000 in 1994 and
$77,000 in 1993. This increase primarily reflected the fact that the Company
commenced sales of CompuPhone 2000 in early 1995 and sold 11,130 units of
CompuPhone 2000 at an average sales price of approximately $70.00 per unit. The
minimal net sales in 1994 and 1993 were attributable to sales of a predecessor
version of CompuPhone 2000. This predecessor version, which was introduced by
the Company in 1992, lacked many features of the current product and was more
expensive. This product did not gain market acceptance, and the Company
discontinued sales of this product in late 1994.
Gross Profit. Gross profit in 1995 was 38.8% of net sales. In view of the
fact that the Company had minimal net sales in 1994 and 1993 and such sales
related to a discontinued product, the Company believes that the gross profit
amounts for such periods are not meaningful in the context of the Company's
current business operations.
SG&A. SG&A expenses were $1.63 million, $1.72 million and $0.60 million in
1995, 1994 and 1993, respectively. The significant increase in SG&A expenses in
1995 and 1994 compared with 1993 primarily reflected expenses incurred in
anticipation of, and as a result of, the commercial introduction of CompuPhone
2000. Such expenses related primarily to (i) hiring additional staff for sales,
administration, technical support and warehouse operations, (ii) leasing
warehouse space and (iii) regulatory compliance matters. Although the Company
first commenced sales of CompuPhone 2000 in early 1995, the Company began
incurring expenses in anticipation of such sales in early 1994 because
originally the Company had planned to commence such sales in mid-1994. However,
the Company's ability to commence sales was delayed for approximately six months
due to the fact that the original contract manufacturer of the product did not
perform in accordance with the Company's expectations and, as a result, the
Company had to seek a replacement. The increase in SG&A expenses in 1995 and
1994 compared with 1993 also reflected the recognition of non-cash compensation
expense of $196,000 and $588,000 in 1995 and 1994, respectively, compared with
no such expense in 1993. Such non-cash compensation expense resulted from the
grant of options that provided for an exercise price that was less than the fair
market value of the Common Stock at the time of grant.
The Company in 1996 paid to a customer that accounted for approximately 18%
of net sales in 1995 approximately $72,000 as an allowance, and this payment is
reflected in 1995 SG&A. The Company determined to make this payment after the
customer indicated to the Company that it wished to return certain of the
CompuPhone 2000 units that it had purchased but had not yet paid for. In fact no
units were returned. Although the Company believes that the customer had no
contractual right to return the units, the Company nevertheless determined that
it would be in the Company's long-term interest to support sales of the
Company's product by this customer.
R&D, Net. R&D expenses were $357,000, $292,000 and $30,000 in 1995, 1994
and 1993, respectively. Such amounts are net of contributions by the Government
of Israel Chief Scientist in the amount of $2,000, $47,000 and $35,000 in 1995,
1994 and 1993, respectively. The significant increase in R&D expenses in 1995
and 1994 compared with 1993 primarily reflected the fact that the Company (i) in
1994 increased its research and development efforts in connection with
developing CompuPhone 2000 and WPS-1000 and (ii) in 1995 increased its research
and development efforts in connection with developing CompuNet 2000 and
potential enhancements for CompuPhone 2000. In addition, such increase reflected
compensation increases in 1994 and 1995 to certain employees involved in
research and development. The decline in the amount of contributions made in
1995 by the Government of Israel Chief Scientist reflects the fact that such
grants relate to specific approved projects that the Company has ceased to be
actively engaged in. See 'Israeli Taxation--Law for the Encouragement of
Industrial Research and Development, 1984.'
CERTAIN TAX CONSIDERATIONS
A substantial amount of the Company's business is conducted in the State of
Israel through the Company's Israeli Subsidiaries. For certain information
concerning the taxation of the Israeli Subsidiaries under Israeli law, see
'Israeli Taxation.'
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Each of the Israeli Subsidiaries will be a controlled foreign corporation
(a 'CFC') for United States tax purposes. As a result, ITI USA will be required
to include in its income its pro rata share of each such subsidiary's subpart F
income, and may also be required to include certain additional amounts if such
subsidiary has investments in United States property or passive assets in excess
of certain levels (in each case irrespective of whether such subsidiary has made
any distributions to ITI USA). For this purpose 'subpart F income' includes
certain income derived from transactions with related parties and certain types
of passive income such as dividends, interest, rents, royalties, and annuities,
but does not include, among other things, rents and royalties derived in the
active conduct of a trade or business. The Company does not currently expect
that any of the Israeli Subsidiaries will have any material amount of subpart F
income, or any material investments in United States property or any passive
assets materially in excess of the prescribed levels. However, no assurance can
be given in this regard. If any Israeli Subsidiary were to have any subpart F
income, or any investments in the United States property or passive assets in
excess of the prescribed levels, ITI USA could be subject to income tax relating
to an Israeli Subsidiary's earnings or assets, irrespective of whether such
subsidiary has made any distributions to ITI USA. This may have the effect of
increasing the Company's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
As described above, the Company has had only limited revenues to date and
had an accumulated deficit of $6.20 million as of June 30, 1996. As a result,
the Company has had negative cash flow from operations during each year since it
commenced operations and during the first half of 1996. The amount of cash used
by the Company for operating activities was $0.60 million, $1.40 million, $1.72
million and $0.53 million during 1993, 1994, 1995 and the first six months of
1996, respectively. The Company has funded its cash requirements primarily
through the private placement of Common Stock. In addition, the Company funded a
portion of its cash requirements during 1996 through the bridge financing
described under '--Bridge Financing.'
The Company expects that following the Offering its principal cash
requirements will be to fund operating activities and working capital. The
Company expects that the cash required for such purposes will increase
significantly following the Offering primarily as a result of the Company's
plans to (i) commence production and sales of CompuNet 2000 and WPS-1000, (ii)
increase its sales and marketing personnel and research and development
personnel and (iii) increase advertising. To the extent that the Company does
not generate sufficient cash flow from operations to fund the Company's cash
requirements, the Company expects to fund such requirements from the net
proceeds of the Offering. The Company does not have any bank or other lines of
credit available to it at present.
The Company estimates that the net proceeds of the Offering and cash
generated from operations will be sufficient to fund its cash requirements for
at least 12 months following completion of the Offering, although there can be
no assurance of this. As described under 'Risk Factors,' there are numerous
future developments or events that may have a material adverse effect on the
Company's business and financial condition. The occurrence of one or more of
these events or developments, as well as the occurrence of other unanticipated
events or developments may cause the foregoing estimate to be inaccurate. In
addition, management may determine that it is in the best interest of the
Company to expand more rapidly than currently intended, in which case additional
financing may be required. If additional financing is required, there can be no
assurance that the Company will be able to obtain such additional financing on
terms acceptable to the Company and at the times required by the Company, or at
all.
BRIDGE FINANCING
During the period April 30, 1996, through July 30, 1996, the Company
completed a bridge financing (the 'Bridge Financing'). The gross proceeds from
the Bridge Financing were $1,175,000 and the net proceeds to the Company from
such financing (after deduction of commissions and the estimated expenses of
such financing) were approximately $1.06 million. The Company used the net
proceeds of the Bridge Financing to fund working capital requirements, general
corporate purposes and the Company's financing plans.
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In connection with the Bridge Financing, the Company issued promissory
notes (the 'Bridge Notes') in the aggregate principal amount of $1,175,000. The
Bridge Notes accrue interest at the rate of 10% per annum and are due and
payable, together with accrued interest, on the earlier of (i) 10 days after
completion of the Offering or (ii) December 15, 1996. The Company plans to repay
the Bridge Notes from the net proceeds of the Offering. See 'Use of Proceeds.'
In connection with the Bridge Financing, the Company also issued certain
warrants (the 'Bridge Warrants'). The Bridge Warrants include warrants (the
'Investor Bridge Warrants') issued to each recipient of a Bridge Note to
purchase a number of shares of Common Stock determined by dividing (i) the
aggregate principal amount of the Bridge Note issued to such recipient by (ii)
the initial public offering price per share of Common Stock in the Offering. The
Bridge Warrants also include warrants (the 'Other Bridge Warrants') issued to
certain parties (including the Representative) that assisted the Company in
connection with the Bridge Financing. The aggregate number of shares issuable
upon exercise of the Other Bridge Warrants will be determined by dividing (i)
$87,500 by (ii) the initial public offering price per share of Common Stock in
the Offering. Approximately 28.6% of the Other Bridge Warrants were issued to
the Representative. The Bridge Warrants provide for an exercise price per share
equal to 10% of the initial public offering price per share of Common Stock in
the Offering.
The gross proceeds from the Bridge Financing were allocated 61% to the
Bridge Notes and 39% to the Investor Bridge Warrants based on their relative
fair values at the dates of such Bridge Financing. The fair value of the Bridge
Notes represents the present value of the future cash flows related to such
notes calculated using a discount rate of 10%. The fair value of the Bridge
Warrants represents $7.00 (the midpoint of the range of the initial public
offering stated on the cover page hereof) less a twenty-five percent discount
less the exercise price of the Warrants. Management of the Company believes that
the aforementioned 25% discount used in valuing the Bridge Warrants is
appropriate to reflect the limited market for the Common Stock at the time the
Bridge Warrants were sold and the fact that at such time there could be no
assurance that the Offering would be completed.
In connection with the Bridge Financing, the Company recorded (i) loan
discount of $458,000 (representing the portion of the gross proceeds from the
Bridge Financing that was allocated to the Bridge Warrants) and (ii) deferred
financing costs of $103,000 (representing the portion of the expenses of the
Bridge Financing that was allocated to the Bridge Notes). Such loan discount and
deferred financing costs are being amortized over the estimated terms of the
Bridge Notes, and for the six months ended June 30, 1996, the Company recognized
$33,000 of non-cash interest expense. Upon repayment of the Bridge Notes from
the net proceeds of the Offering, the unamortized portion of the loan discount
and deferred financing costs at such time will be recognized as an extraordinary
loss. As of August 31, 1996, such unamortized portion of the loan discount and
the deferred financing costs amounted to $354,000.
CERTAIN INFORMATION CONCERNING DISTRIBUTION AGREEMENT WITH GEMINI
The Company has entered into a distribution agreement with Gemini
Industries, Inc. ('Gemini'). Gemini is a supplier of consumer electronics
accessories, including an extensive line of computer and telephone products,
that has been in business for over 30 years and had consolidated sales of over
$150 million in 1995. (The foregoing is based upon information provided by
Gemini to the Company.) The distribution agreement with Gemini provides Gemini
with the exclusive right to distribute CompuNet 2000 in the United States
through retail stores to end users during the term of the agreement. The Company
has retained the right to distribute the product through other distribution
channels in the United States and without any limitations outside the United
States. Under the terms of the distribution agreement, Gemini has committed to
purchase from the Company a minimum of 10,000 units of CompuNet 2000 in 1996
(subject to the condition that the Company is able to make the product available
in a timely manner and in the quantities requested by Gemini for particular time
periods, including traditional selling seasons). Thereafter, Gemini must
purchase at least 10,000 units per month in order to maintain its exclusivity
right (but it is not contractually obligated to do so). The term of this
agreement commences on June 1, 1996 and extends until the end of 1997 (subject
to extension by mutual agreement). Gemini has the right to terminate the
agreement under certain circumstances, including if (i) the Company fails to
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comply with its material obligations under the agreement (subject to specified
notice provisions and cure rights) or (ii) if any competitive product is offered
in the market place and the Company fails to keep Gemini competitive in price
and quality.
The Company estimates that the gross profit margin from sales to Gemini in
1996 will be approximately 23% with respect to units that are produced through
retrofitting existing units of CompuPhone 2000 and approximately 38% with
respect to units that are originally produced as CompuNet 2000 units. (The
Company estimates that approximately 5,000 of the units to be sold to Gemini in
1996 will be produced through such retrofitting as described under
'Business--Manufacturing.') There can be no assurance, however, that the gross
profit margin from such sales will not be significantly lower. Factors that may
cause such gross profit margin to be lower include, among others, (i)
unanticipated manufacturing problems or delays, (ii) the failure of a contract
manufacturer used by the Company to fulfill its commitments or (iii) the need
for design changes due to the discovery of heretofore undetected errors. See
'Risk Factors--Considerations Relating to the Business of the Company--Certain
General Risks Related to Products' and 'Risk Factors--Considerations Relating to
the Business of the Company--Dependence on Contract Manufacturers.'
The Company cannot at present predict the gross profit margin that will
result from any sales to Gemini subsequent to 1996. Such gross profit margin
will be affected by the Company's future manufacturing costs, which depend on
various factors that are currently not known. Such factors include, among
others, future market conditions relating to prices charged by contract
manufacturers, future costs for components, and the volume of product that the
Company will have manufactured in the future. Such gross profit margin will also
be affected by the price that the Company will be able to obtain in respect of
future sales to Gemini. As described above, the distribution agreement with
Gemini provides that Gemini may terminate the agreement if any competitive
product is offered in the market place and the Company fails to keep Gemini
competitive in price and quality. Furthermore, the distribution agreement
contemplates that the Company will exercise its best efforts to reduce the price
at which it sells CompuNet 2000 to Gemini. Although the Company cannot at
present predict the gross profit margin that will result from any sales to
Gemini subsequent to 1996, such gross profit margin may be well below the
Company's gross profit margin in the first six months of 1996.
CERTAIN INFORMATION CONCERNING INTERNATIONAL SALES
International sales of the Company's products accounted for 23% of net
sales in 1995 and 35% of net sales in the first half of 1996. International
business operations may be negatively impacted by a variety of factors,
including political or economic instability in a region, changes in diplomatic
and trade relationships, tariffs and other barriers and restrictions,
restrictions on the transfer of funds, currency fluctuations, potentially
adverse tax consequences and the burdens of complying with a variety of foreign
laws. For example, the Company has been required to make certain modifications
to its CompuPhone 2000 product in order to bring it into compliance with
applicable foreign regulations (the required modifications varying depending on
the country). Although the Company has not to date experienced any material
adverse effect on its operations as a result of such factors, there can be no
assurance that such factors will not materially adversely impact the Company's
business and financial condition in the future or require the Company to modify
its current business practices.
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BUSINESS
Integrated Technology designs, develops and markets innovative products for
two rapidly emerging computer-related markets: Internet Telephony (the
transmission of voice communications over the Internet) and computer/telephone
integration. The Company has also developed a wireless printing product that the
Company believes has certain advantages over products currently on the market.
With the introduction by various companies of software that enables
Internet Telephony, the Company has focused on developing add-on products that,
when used with such software, can expand the potential benefits of Internet
Telephony, make Internet Telephony more productive and efficient, and simplify
the ancillary hardware devices required for Internet Telephony. The first
product developed by the Company for this market is CompuNet 2000. This product
is a PC keyboard that also functions as a conventional telephone and enables the
conferencing together of an Internet and conventional telephone call. This
feature allows each party on an Internet call that is using CompuNet 2000 to add
an additional party that is using a conventional telephone. In addition, a
handset or optional headset attached to CompuNet 2000 functions as the sound
transmitting hardware device required for Internet Telephony (rather than a
microphone and external speakers which are the devices typically being
utilized). This feature enables CompuNet 2000 users to employ a single handset
or headset for both conventional and Internet calls, thereby eliminating desktop
clutter and enabling parties to an Internet call to conduct private
conversations. Furthermore, when used for conventional telephone calls, CompuNet
2000 has the same functionality as the Company's CompuPhone 2000 product
described below.
For the computer/telephone integration market, the Company has developed
CompuPhone 2000. This product is a PC keyboard that enables users to make and
receive telephone calls using the PC keyboard (together with a headset that is
provided with the product or an optional handset) without the need for a
conventional telephone or modem. Included with CompuPhone 2000 is proprietary
telephone management software that integrates the telephone function with the
computer. This software enables a number of features for enhancing productivity
and efficiency, including the ability to dial from a screen or data base (rather
than manually dialing), automatic logging of information concerning each call,
and the ability to record notes regarding each call in a 'note box' that can
appear automatically. CompuPhone 2000 also interfaces with most widely used
personal information management programs.
BACKGROUND
INTERNET TELEPHONY
Over the past one and one-half years, various companies have developed and
released software that enables voice and audio communications over the Internet.
By employing this type of software, users can conduct unlimited long distance
and international conversations over the Internet for the price of an Internet
connection. Based upon current cost structures, the cost of a long distance or
international Internet call can be substantially lower than the cost of a
comparable conventional telephone call, making Internet Telephony a potentially
attractive alternative or supplement to a conventional telephone call. In view
of the emergence of Internet Telephony as a potentially significant medium for
voice communications, the Company believes that the market for products that can
broaden and expand the potential of Internet Telephony, make Internet Telephony
more productive and efficient, and simplify the ancillary hardware devices
required for Internet Telephony has the potential for significant growth. The
CompuNet 2000 developed by the Company is an example of this type of product.
COMPUTER/TELEPHONE INTEGRATION
There has emerged in recent years a growing market for products that
integrate computers with telephones. This market has been driven by the
recognition that such integration has the potential to enhance user productivity
and efficiency in a wide range of activities. For example, in connection with
many activities involving telephone communications it is important that a caller
have the ability to place calls accurately and quickly and/or that one party to
a call have the ability to access or collect data concerning the other party.
These include activities such as telemarketing, order processing, customer
service and support, market research, and emergency dispatching. The efficiency
and productivity of the personnel involved in these activities can
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potentially be significantly increased by solutions that (i) integrate computer
data base capabilities and other computer capabilities with the telephone
function and/or (ii) integrate and simplify the hardware required in order to
place and receive telephone calls while simultaneously working with a computer.
The CompuPhone 2000 developed by the Company is an example of a product that
provides both of these solutions.
STRATEGY
The Company's objective is to become a leading developer and vendor of a
wide range of products for the Internet Telephony and computer/telephone
integration markets. To achieve this objective, the Company is pursuing a
strategy that involves the following key elements:
Continue to Enhance Existing Products. The Company intends to devote
significant research and development resources in order to continue to
develop enhancements to its existing products and extensions of these
products. The Company's principal focus is on enhancements and extensions
that will provide its existing products with additional functionality and
expand the potential end user market for these products.
Leverage Existing Technology Base to Develop Additional Products. The
Company also intends to devote significant research and development
resources in order to develop new products for its target markets. The
Company believes that its existing technology base and the substantial
experience gained by the Company's product development team in connection
with developing its existing products will provide the Company with a
significant advantage in its efforts to develop new products.
Establish Strategic Alliances. While the Company relies primarily on
its internal product development efforts, it may determine from time to
time that the acquisition or licensing of certain technology or components
is more economically feasible than internal development. Accordingly, the
Company intends to explore the possibility of establishing strategic
alliances with companies that can provide the Company with technology,
subsystems or complementary products which can be integrated into or
offered with the Company's products. For example, the Company has recently
entered into an agreement with VocalTec Ltd. that grants the Company the
right to bundle an OEM (original equipment manufacturer) version of
VocalTec's Internet Telephony enabling software with the Company's CompuNet
2000 product. See '--End Users, Distribution Sales and Marketing.'
Increase Marketing. The Company currently markets products directly
and through independent representatives and distributors. However, the
Company's marketing efforts to date have been limited due to financial
constraints. The Company intends to increase its marketing capability by
expanding the Company's internal sales force; establishing relationships
with additional independent representatives and distributors; and
significantly increasing advertising. In addition, the Company is seeking
to enter into arrangements with OEMs, such as computer manufacturers,
pursuant to which OEMs will incorporate the Company's products into their
finished hardware products.
Leverage Third-Party Manufacturing Expertise. The Company currently
outsources substantially all of its manufacturing requirements and expects
that it will continue to do so for the foreseeable future (other than
software production which the Company expects will be done at the Company's
Israeli facilities). The Company believes that outsourcing the
manufacturing function enables the Company to gain access to advanced
production technologies and reduces the Company's capital requirements.
Outsourcing also allows the Company to focus more of its resources on its
core competencies--product design and development and marketing.
INTERNET TELEPHONY PRODUCT
BACKGROUND
In order to make an Internet call using Internet Telephony enabling
software, a user must employ hardware devices that transmit sound from the user
to a sound card in the computer (or other device in the computer providing audio
capability) and from the computer to the user. The hardware devices that are
typically being employed to perform these functions are a microphone for
transmitting sound and speakers for receiving sound. However, the use of these
devices as the enabling hardware for Internet Telephony has significant
limitations.
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First, the use of a microphone and speakers for Internet Telephony does not
permit the easy conferencing of an Internet telephone call with a conventional
telephone call. Second, three separate hardware devices (a conventional
telephone, a microphone and speakers) are required in order for a user to have
both conventional telephone and Internet Telephony capability. This leads to
clutter and confusion on the desktop and requires the user to switch between
different devices, leading to reduced productivity. Third, the use of a
microphone and speakers does not permit the parties to conduct a private
conversation.
COMPUNET 2000
CompuNet 2000 is a new product that the Company has developed in order to
address the limitations that are inherent in using a microphone and speakers as
the enabling hardware for Internet Telephony. The Company expects to commence
sales of this product by the end of 1996 pursuant to a distribution agreement
with Gemini Industries, Inc. See ' --End Users, Distribution, Sales and
Marketing--Distribution Channels.'
CompuNet 2000 is a PC keyboard that has special features specifically
designed for use in connection with Internet Telephony. In addition, CompuNet
2000 allows users to make and receive conventional telephone calls using the PC
keyboard (without the need for a conventional telephone or modem) in the same
manner as the Company's CompuPhone 2000 product. CompuNet 2000 also includes the
same telephone management software as the Company's CompuPhone 2000 product.
(For a description of CompuPhone 2000 and the Company's proprietary telephone
management software, see '--Computer/Telephone Integration Product' below.)
CompuNet 2000 is designed to operate with IBM and IBM compatible PCs.
The CompuNet 2000 has the following features that are designed specifically
for use in connection with Internet Telephony.
Enables Conferencing of Internet and Conventional Calls. The CompuNet
2000 enables the conferencing together of an Internet and conventional
telephone call. This feature allows each party on an Internet call that is
using CompuNet 2000 to conference in an additional party that is using a
conventional telephone. Such conferencing can be effected by the CompuNet
2000 user employing the keyboard/telephone to either place a conventional
telephone call to the party to be added or answering an incoming
conventional telephone call from such party.
Enables Elimination of Multiple Hardware Devices and Enables Private
Conversations. The CompuNet 2000 enables a handset or headset that is
plugged into the keyboard/telephone to transmit and receive sound from the
computer's sound card (in addition to being able to function directly with
a conventional telephone line). This allows the CompuNet 2000 to be used,
instead of a microphone and speakers, as the sound transmitting hardware
required for Internet Telephony. This feature, coupled with the
conventional telephone capabilities of CompuNet's keyboard/telephone,
enables a CompuNet 2000 user to employ a single hardware device for both
conventional and Internet telephone calls (rather than requiring a
conventional telephone, a microphone and speakers). This simplifies the
making of both types of calls and eliminates clutter and confusion on the
desktop. In addition, the use of a handset or headset (rather than a
microphone and speakers) as the sound transmitting hardware for Internet
Telephony enable the parties to an Internet call to conduct a private
conversation.
The Company believes that these features have the potential to broaden and
expand the uses of Internet Telephony; make Internet Telephony more productive
and efficient; and simplify the ancillary hardware devices required for Internet
Telephony.
PRODUCT ENHANCEMENTS AND EXTENSIONS
The Company intends to devote significant research and development
resources in order to continue to develop enhancements to its CompuNet 2000
product and extensions of this product. Among the new features and functions
that the Company may seek to develop are:
o multiple-party conferencing capability (the current product allows each
CompuNet user to conference in a single party);
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o enhanced telephone management software that is integrated with both
Internet and conventional telephone calls (the Company's proprietary
telephone management software that is included with CompuNet 2000
currently works only with conventional telephone calls); and
o remote access capability (i.e., the ability to access Internet Telephony
features remotely).
In addition, certain of the enhancements that the Company is considering
developing for CompuPhone 2000 (as described under '--Computer/Telephone
Integration Product--Product Enhancements and Extensions') may, if successfully
developed, also be incorporated into CompuNet 2000.
The Company is currently in the process of evaluating which product
enhancements and/or extensions it will seek to develop and has not made any
final determination with regard thereto. No assurance can be given that the
Company will seek to develop any of the above-described new features or
functions or that it will succeed in developing any new feature or function that
it seeks to develop.
COMPUTER/TELEPHONE INTEGRATION PRODUCT
For the computer/telephone integration market, the Company has developed
CompuPhone 2000. The Company commenced sales of this product in early 1995.
CompuPhone 2000 is a PC keyboard that enables users to make and receive
telephone calls using the PC keyboard (together with a headset that is provided
with the product or an optional handset) without the need for a conventional
telephone or modem. Included with CompuPhone 2000 is telephone management
software (named 'Autodial Software') developed by the Company to integrate the
telephone function with the computer. CompuPhone 2000 also interfaces with most
widely used Windows-based personal information manager programs ('PIMs'). The
CompuPhone 2000 is designed to operate with IBM and IBM compatible PCs.
A CompuPhone 2000 keyboard generally has the same appearance as a
conventional keyboard but has two additional keys (one labeled 'phone' and one
labeled 'line'). The keyboard (together with a headset or handset) performs all
the functions of a conventional, single-line telephone, as well as all the
normal PC keyboard functions. Incoming calls are indicated by ringing (or, at
the user's option, by only a flashing light on the keyboard). Pressing the
'line' key answers an incoming call. Pressing the 'line' key also hangs up a
completed call. An outgoing telephone call can be initiated by pressing the
'phone' key and manually dialing with the keyboard's numeric keypad (which is
designed to resemble the keys of a conventional telephone). In addition, a call
may be initiated through use of the Autodial Software (Windows version) as
follows:
Highlighting Number. A call can be initiated by highlighting a
telephone number in any Windows or Windows 95 application and pressing
designated keys on the keyboard.
Dialing From Card File. Any number stored in 'Cardfile' (an accessory
included with Windows 3.X) can be dialed by opening Cardfile, choosing the
card containing the desired number and pressing a designated key. The
'CompuPhone 2000 Autodial Box' then appears with the selected number
inserted and the call can be completed by choosing 'OK'.
Dialing Using CompuPhone 2000 Autodial Box. Pressing specified keys
causes the 'CompuPhone 2000 Autodial Box' to appear. Once this box appears,
a call can be initiated by typing the number to be dialed and choosing
'OK'.
Dialing Using Personal Information Manager Programs. By making
certain adjustments through Autodial Software, any call that is placed
through most Windows-based PIMs or other contact management programs (using
the normal procedures for placing calls with these programs) will dial
through the CompuPhone 2000 telephone line rather than through a modem.
The CompuPhone 2000 keyboard also enables the following telephone features
to be controlled through pressing a designated key (or keys) on the keyboard:
volume; redial; mute; call forwarding; and call waiting. (The call forwarding
and call waiting features only work to the extent that the local telephone line
being used enables these features.)
The Autodial Software, in addition to facilitating dialing, automatically
creates a log that records the date, time, duration and telephone number of each
telephone call that is initiated through CompuPhone 2000. A similar
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log is created for incoming calls, except that the number of the caller is not
recorded. The Autodial software also enables a user to enter notes regarding a
call in a 'note box' that appears whenever a call is made or received.
The use of the CompuPhone 2000 keyboard to conduct a telephone call does
not interfere with the simultaneous running of other applications (except during
the time when the call is being dialed or disconnected). In order for a user to
employ the keyboard to enter data while simultaneously using it to conduct a
telephone conversation, the user simply presses the 'phone' key. This enables
the user to access all conventional keyboard functions while continuing the
telephone conversation without interruption.
Installation of CompuPhone 2000 involves a simple process: (i) unplug the
existing keyboard from the computer and substitute the CompuPhone 2000 keyboard,
(ii) connect one end of a telephone cable to the CompuPhone 2000 keyboard and
the other to any single-line, analog telephone outlet, (iii) plug a headset or
handset into the CompuPhone 2000 keyboard and (iv) install the Autodial
Software.
The Company believes that its CompuPhone 2000 keyboard/telephone and
related Autodial Software offers users many potential advantages, including:
Improves Productivity and Customer Service. There are many business
activities that require high-volume telephone contacts and the simultaneous
use of a computer. These include activities such as telemarketing, order
processing, customer service and support, market research, and emergency
dispatching. The use of CompuPhone 2000, rather than a conventional
telephone, in connection with these activities offers several benefits,
including:
o Use of CompuPhone 2000 eliminates the need to continuously switch between
two separate devices (i.e., the keyboard and the telephone). This saves
time and reduces stress.
o The features of the Autodial Software that enable dialing from the screen
or a data base (rather than manually dialing) speeds the dialing process
and reduces dialing errors that waste time and resources.
o Conducting a telephone call via the CompuPhone 2000 keyboard does not
interfere with the running of computer applications or the use of the
keyboard for conventional keyboard functions. As a result, a user of
CompuPhone 2000 can conveniently conduct a telephone conversation while
simultaneously accessing or entering data relevant to the conversation.
In addition, the 'note box' feature of the Autodial Software enables a
user to enter notes regarding each call.
Enables Call Pattern Monitoring. The call logging feature of the
Autodial Software can provide a user with information concerning call
patterns. This information can be a valuable asset for business planning
and decision making. In addition, this information can assist management in
reducing waste by providing a simple mechanism for monitoring employee
calling records.
Saves Desktop Space. Because CompuPhone 2000 performs all of the
functions of a conventional, single-line telephone, a user may have no need
to maintain a separate telephone instrument on the desktop.
Allows Use of Touch Tones. Interactive voice response applications
(such as a voice mail) enable callers to use 'touch tones' to navigate
through a process or data base. Because CompuPhone 2000 works directly
through conventional telephone lines without use of a modem, it has the
same touch tone capability as a conventional telephone. By contrast, if a
telephone call is placed through use of a modem, touch tone capability
generally is lost.
The above description of CompuPhone 2000 and the related Autodial Software
is based upon the Windows version of the software. The Company also makes
available a DOS version of the software. The DOS version operates differently
than the Windows version (e.g., the mechanics and instructions for dialing using
the software are different) but overall it provides substantially the same
general functionality as the Windows version (with certain exceptions, including
that it does not support interfacing with PIMs or other contact management
programs).
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PRODUCT ENHANCEMENTS AND EXTENSIONS
The Company intends to devote significant research and development
resources in order to continue to develop enhancements to its CompuPhone 2000
product and extensions of this product. Among the new features and functions
that the Company may seek to develop are:
o multiple-line capability (the current product is a single-line
telephone);
o a speaker phone option;
o a standby power supply that will enable the product to be used even when
the computer is shut down;
o automatic call answering and message recording capability;
o integrated caller-ID and 'screen popping' capability (i.e., caller-ID
identifies the caller and relevant data base information then
automatically 'pops' up on the screen);
o automatic dialing capability for telemarketing and similar functions; and
o enhanced capability to be integrated with PBX and other telephone systems
(the current product can only be used on the analog port of PBX systems).
The Company is currently in the process of evaluating which product
enhancements and/or extensions it will seek to develop and has not made any
final determination with regard thereto. No assurance can be given that the
Company will seek to develop any of the above-described new features or
functions or that it will succeed in developing any new feature or function that
it seeks to develop.
WIRELESS PRINTING PRODUCT
The Company has developed a relatively low-priced product that enables
wireless printing from a laptop computer (i.e., printing without the need to
attach cables between the computer and the printer). The Company plans to market
this product under the name WPS-1000. This product, which uses diffuse infrared
technology, is effective at a distance of approximately 15 feet and does not
require line-of-sight alignment with the printer. Although there are existing
products that enable wireless printing, the Company believes that these products
are either significantly more expensive (such as products based on RF
technology) or are only effective at much shorter distances (approximately three
feet for products based on IRDA technology). The WPS-1000 is currently in the
preproduction, prototype stage. The Company expects to commence the commercial
introduction of this product in the first quarter of 1997, although there can be
no assurance of this. See 'Risk Factors--Considerations Relating to the
Business of the Company--Certain Risks Specific to the WPS-1000 Product.'
The WPS-1000 is comprised of two small devices, a receiver (approximately
4.5' by 4.25' by 2.75') and a transmitter (approximately 4.5' by 3' by 1'). When
the receiver is plugged into a printer and the transmitter into a laptop
computer's parallel port and PS/2 port, a user can print wirelessly by executing
the normal print command. No special software drivers or additional
configuration is required. The back of the receiver is equipped with a port into
which a printer cable can be plugged. This feature permits a user to keep the
receiver permanently plugged into the printer, while retaining the ability to
link the printer and a desktop computer via a conventional cable. Consequently,
the WPS-1000 can be used as a 'printer sharing device' that enables a single
printer to print wirelessly from one computer and via a cable from a second
computer.
END USERS, DISTRIBUTION, SALES AND MARKETING
END USER MARKETS
The end user markets for the Company's CompuPhone 2000 product include home
PC users (both for personal and business functions) and small offices. In
addition, such end user markets include large corporations that can benefit from
using CompuPhone 2000 in connection with selected activities that involve
high-volume telephone contacts and simultaneous computer use, but do not require
a multi-line system. These may include activities such as telemarketing, order
processing, customer service and support, market research, and emergency
dispatching. The corporate customers that have purchased CompuPhone 2000 include
Lucent Technologies Inc.
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and AT&T Atlantic, which together have purchased an aggregate of approximately
600 units of CompuPhone 2000 for use in telemarketing operations.
The Company believes that the potential end user markets for CompuNet 2000
and WPS-1000 include home PC users (both for personal and business functions),
small offices and large corporations. However, sales of these products has not
yet commenced and, consequently, there is no historical data upon which to base
an assessment as to the nature of the end user markets, if any, that will
develop for these products.
DISTRIBUTION CHANNELS
The Company currently markets its products directly and through independent
representatives and distributors. The Company's independent representatives
market the Company's products to customers, but any sales that are generated by
independent representatives are made directly by the Company to the customer.
The Company's distributors purchase products from the Company on a wholesale
basis for resale to customers. Both the Company and its distributors may sell
products (i) directly to end user customers and (ii) to retailers and mail order
vendors for resale to end user customers. The Company's CompuPhone 2000 product
is presently carried by several leading United States retailers of PC
peripherals and is also presently advertised in a number of catalogues
distributed by mail order vendors.
The Company's objective is to expand its distribution capability, which to
date been limited due to financial constraints. In order to achieve this
objective, the Company intends to increase its marketing capability by expanding
the Company's internal sales and marketing force, establishing relationships
with additional independent representatives and distributors, and significantly
increasing advertising. In addition, the Company is seeking to enter into
arrangements with OEMs (original equipment manufacturers), such as computer
manufacturers, pursuant to which OEMs will incorporate the Company's products
into their finished hardware products.
The Company plans to commence sales of CompuNet 2000 by the end of 1996. In
furtherance of such plan, the Company has recently entered into a distribution
agreement with Gemini Industries, Inc. ('Gemini'), and a bundling agreement with
VocalTec, Ltd. ('VocalTec'), relating to CompuNet 2000. Additional information
concerning these agreements is provided below.
Distribution Agreement with Gemini. The Company has entered into a
distribution agreement with Gemini. Gemini is a supplier of consumer electronics
accessories, including an extensive line of computer and telephone products,
that has been in business for over 30 years and had consolidated sales of over
$150 million in 1995. (The foregoing information has been provided by Gemini to
the Company.) The distribution agreement with Gemini provides Gemini with the
exclusive right to distribute CompuNet 2000 in the United States through retail
stores to end users during the term of the agreement. The Company has retained
the right to distribute the product through other distribution channels in the
United States and without any limitations outside the United States. Under the
terms of the distribution agreement, Gemini has committed to purchase 10,000
units of CompuNet 2000 in 1996 from the Company (subject to the condition that
the Company is able to make the product available in a timely manner and in the
quantities requested by Gemini for particular time periods, including
traditional selling seasons). Thereafter, Gemini must purchase at least 10,000
units per month in order to maintain it exclusivity right (but it is not
contractually obligated to do so). The term of this agreement commences on June
1, 1996 and extends until the end of 1997 (subject to extension by mutual
agreement). Gemini has the right to terminate the agreement under certain
circumstances, including if (i) the Company fails to comply with its material
obligations under the agreement (subject to specified notice provisions and cure
rights) or (ii) if any competitive product is offered in the market place and
the Company fails to keep Gemini competitive in price and quality.
Bundling Agreement with VocalTec. The Company has entered into a bundling
agreement with VocalTec that extends until January 3, 1998. VocalTec is a
publicly traded company that is a provider of software that enables Internet
Telephony. The shares of VocalTec are quoted through the Nasdaq Stock Markets'
National Market. Under the terms of the bundling agreement with VocalTec, the
Company may bundle an OEM version of VocalTec's Internet Telephony enabling
software with CompuNet 2000 and is required to pay VocalTec a fee for each unit
of such software that it bundles. The OEM version of VocalTec's software does
not have all the functionality of more advanced versions of such software that
VocalTec markets. The Company expects that it will include with CompuNet 2000 a
'coupon' that will allow the purchaser to upgrade to a more advanced
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version of VocalTec's software by paying a specified fee to VocalTec. The
Company is entitled to receive a sales assistance fee from VocalTec with regard
to each purchaser of CompuNet 2000 that pays for such an upgrade.
SALES
The Company sells its products both in the United States and in
international markets. Sales in the United States accounted for approximately
77% and 65% of the Company's net sales in 1995 and the first six months of 1996,
respectively, and international sales for the balance.
The Company anticipates that a significant portion of the Company's
revenues and accounts receivable may be accounted for by a limited number of key
customers, the identity of which may vary from period to period. In 1995,
Neostar Retail Group Inc. (the parent of the Software Etc. Stores, Inc. and
Babbage's, Inc. retail chains) accounted for approximately 18% of net sales. In
the first six months of 1996, Staples, Inc., Lucent Technologies Inc., and
Future Shop, Inc. accounted for approximately 12%, 11%, and 11% of net sales,
respectively. Except for the customers identified above, no single customer
accounted for 10% or more of the Company's net sales in 1995 or the first six
months of 1996.
MARKETING
In view of the recent introduction of the Company's products and the
innovative nature of the technology incorporated therein, the Company believes
that in order to drive end user demand it is critical that the Company devote
significant resources to increasing awareness of its products and the many
advantages which they provide. However, to date the Company's promotional
efforts have been limited due to financial constraints. Following the Offering,
the Company intends to significantly increase it promotional efforts through
multiple channels. These may include general advertising, advertising in trade
publications, in-store advertising, catalogue advertising, targeted direct mail
campaigns, participation in trade shows, and advertising on the Internet. In
addition, the Company plans to increase its sales and marketing staff. Based
upon the Company's current marketing plans, the Company has budgeted for the one
year period following completion of the Offering approximately $2.2 million for
promotional efforts and increasing its sales and marketing staff. However, the
actual amount that the Company spends for such purposes may differ significantly
from the amount currently budgeted due to various factors, including the need to
respond to changing market and business conditions, unanticipated developments,
and changes in the Company's business plan.
MANUFACTURING
The Company currently outsources substantially all of its manufacturing and
assembly requirements and expects that it will continue to do so for the
foreseeable future (other than software production which the Company expects
will be done at the Company's Israeli facilities). The Company believes that
outsourcing the manufacturing function provides the Company with several
potential advantages, including (i) enabling the Company to gain access to
advanced production technologies, (ii) reducing the Company's capital
requirements and (iii) allowing the Company to focus more of its resources on
its core competencies--product design and development and marketing. However,
there are also significant risks associated with such outsourcing. See 'Risk
Factors--Dependence on Contract Manufacturers.'
The Company currently employs Monterey International Corp. ('Monterey'), a
contract manufacturer with facilities in Taiwan, to manufacture CompuPhone 2000.
The Company expects that it will also use Monterey to manufacture CompuNet 2000
(except as described in the following paragraph). An independent testing company
retained by the Company performs final product testing prior to the shipping of
the products by Monterey.
As described under '--End Users, Distribution, Sales and
Marketing--Distribution Channels,' the Company has entered into a distribution
agreement with Gemini that contemplates that the Company will sell 10,000 units
of CompuNet 2000 in 1996 (during the period August 15, 1996 through December 31,
1996). In order to enable the Company to meet this schedule, the Company intends
to have CompuNet 2000 units initially produced by retrofitting CompuPhone 2000
units that the Company has in inventory. The Company expects to use a contract
manufacturer in the United States for such retrofitting process.
The Company expects to use General Research of Electronics, Inc. (a
Japanese-based contract manufacturer that uses manufacturing facilities in The
People's Republic of China) to manufacture the Company's WPS-1000 wireless
printing product. This product is currently in the preproduction, prototype
stage. See 'Risk Factors--Considerations Relating to the Business of the
Company--Certain Risks Specific to the WPS-1000 Product.'
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The Company does not currently have long-term agreements with any contract
manufacturer that it uses or expects to use as described above. Accordingly, any
such contract manufacturer could elect at any time to terminate its relationship
with the Company or reduce the manufacturing capacity that it allocates to the
Company. The Company estimates that six months or more would be required in
order for it to qualify an alternate manufacturer for any product.
RESEARCH AND DEVELOPMENT
The Company intends to devote significant research and development
resources in order to develop enhancements to its existing products, extensions
of these products, and new products for its target markets. See '--Strategy,'
'--Internet Telephony Product--Product Enhancements and Extensions' and '--
Computer/Telephone Integration Product--Product Enhancements and Extensions.'
The Company's research and development team is principally located in
Israel and, as of June 30, 1996, was comprised of six hardware and software
engineers (including one independent consultant working for the Company) and
support staff. The Company expects that it will use a portion of the net
proceeds of the Offering to hire additional research and development personnel
and to purchase tools and equipment required in connection with its research and
development activities. See 'Use of Proceeds.'
COMPETITION
The markets for Company's products are characterized by intense competition
and rapid change, and the Company expects that competition will increase. The
Company's current and prospective competitors include many companies that have
substantially greater name recognition and financial, technical and marketing
resources than the Company. There can be no assurance that the Company's
competitors will not be able to develop products comparable or superior to those
offered by the Company. For example, there is a company in the Federal Republic
of Germany that is currently marketing outside the United States a product that
is substantially the same as the Company's CompuPhone 2000 product. There can
also be no assurance that the Company's competitors will not be able to offer
customers more competitive pricing or to adapt more quickly than the Company to
new technologies and evolving customer requirements. Consequently, there can be
no assurance that the Company will be able to compete successfully in its target
markets or that competition will not have a material adverse effect on the
Company's business and financial condition.
PROPRIETARY RIGHTS
The Company relies upon a combination of patents, trade secrets, copyright
and trademark law, confidentiality procedures and contractual provisions to
protect its proprietary rights. Certain of the specific steps taken by the
Company to protect its proprietary rights are described below.
The Company has secured a United States patent covering certain features of
the Company's CompuPhone 2000 product and has filed patent applications, which
are pending, relating to such features in certain foreign countries. The Company
has also filed applications, which are pending, for a United States patent
covering certain of the technology underlying the Company's CompuNet 2000
product and for a United States patent covering certain of the technology
underlying the Company's WPS-1000 product. However, no assurance can be given
that any patents will be issued on the basis of any such applications or, if
patents are issued, that the claims allowed will be sufficiently broad to
protect the Company's technology. In addition, no assurance can be given that
any patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted under the patents will provide
significant benefits to the Company.
In order to safeguard its unpatented proprietary knowhow, trade secrets and
technology, the Company relies primarily upon trade secret protection. In that
connection, the Company generally enters into non-disclosure agreements with
employees and other persons to whom it reveals its proprietary information.
The Company has obtained a trademark registration in the United States for
the name CompuPhone 2000. In addition, the Company has filed an application,
which is pending, for a trademark registration for the name CompuNet 2000. No
assurance can be given that any trademark registration will be obtained on the
basis of such application.
Although the Company has taken the steps described above to protect its
proprietary information, there can be no assurance that (i) such steps will be
adequate to prevent misappropriation of the Company's technology or
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(ii) the Company's competitors will not develop products that are substantially
equivalent or superior to the Company's products without infringing upon the
Company's proprietary rights. (As described under 'Competition,' there is a
company in the Federal Republic of Germany that is currently marketing outside
the United States a product that is substantially the same as the Company's
CompuPhone 2000 product.) In addition, the laws of certain foreign countries in
which the Company's products are, or may be, developed, manufactured or sold,
including various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely.
The Company believes that its products and their use do not infringe the
proprietary rights of third parties. However, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that any such claims, if asserted, will not be upheld. See 'Risk
Factors--Considerations Relating to the Business of the Company--Possibility of
Third Party Infringement Claims.'
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
EMPLOYEES
At June 30, 1996, the Company had 15 employees, including five in research
and development, five in finance and administration and five in sales and
marketing. Approximately 10 of such employees are based in Israel. The Company,
from time to time, retains independent consultants with specialized engineering
or scientific expertise to work as part of its research and development team. At
June 30, 1996, one consultant was working for the Company. The Company considers
its relationship with its employees to be satisfactory. The Company expects that
it will use a portion of the net proceeds of the Offering to hire additional
sales and marketing personnel and research and development personnel. See 'Use
of Proceeds,' '--End Users, Distribution, Sales and Marketing,' and '--Research
and Development.'
The Company's Israeli Subsidiaries are subject to various Israeli labor
laws and labor practices, and may be subject to administrative orders extending
certain provisions of collective bargaining agreements between the Histadrut
(Israel's General Federation of Labor) and the Coordinating Bureau of Economic
Organizations (the Israeli federation of employers' organizations) to private
sector employees. For example, mandatory cost of living adjustments, which
compensate Israeli employees for a portion of the increase in the Israeli
consumer price index, are determined on a nationwide basis. Israeli law also
requires the payment of severance benefits upon the termination, retirement or
death of an employee. The Company covers a portion (but not all) of the
potential costs to the Company of paying such severance benefits by contributing
on an ongoing basis towards 'managers' insurance' funds with respect to certain
of its employees. Such funds combine severance pay benefits, tax-efficient
savings plans and disability insurance. In addition, Israeli employers and
employees are required to pay specified percentages of wages to the National
Insurance Institute, which is similar to the United States Social Security
Administration. The payments to the National Insurance Institute are
approximately 14% of wages (up to a specified amount), of which the employee
contributes approximately 66% and the employer approximately 34%.
PROPERTIES
The Company leases the following properties: (i) approximately 1,000 square
feet of space in Teaneck, New Jersey, which is used primarily for office space,
(ii) approximately 1,000 square feet of space in Teaneck, New Jersey, which is
used primarily for warehouse space, (iii) approximately 200 square feet of space
in Dallas, Texas, which is used primarily for a sales office and (iv)
approximately 3,780 square feet of space in Jerusalem, Israel, which is used
primarily for office space and for research and development activities. All of
the foregoing premises are currently leased on a month-to-month basis, except
for the premises in Jerusalem, Israel, which are leased until May 31, 1997. The
Company does not lease any such properties from a lessor that is affiliated with
the Company or any of its officers or directors.
The Company believes that its facilities are adequate for its current and
immediately foreseeable operations and that additional facilities are available
on competitive market terms for such future expansion of the Company's
operations as may be warranted.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---------------------------------------- --- ------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Alan P. Haber........................... 40 Chairman of the Board; President; Chief
Executive Officer and Director
Barry L. Eisenberg...................... 49 Secretary; Treasurer and Director
Simon M. Kahn(1)........................ 40 Executive Vice President; Chief Financial
Officer; Director of Research and Development
and Director
Bernard S. Appel........................ 64 Vice Chairman of the Board and Director
Nicole R. Kubin(1)(2)................... 42 Director
Morton L. Landowne(1)................... 48 Director
Noah Perlman(1)......................... 45 Director
Morris J. Smith......................... 39 Director
William Spier(1)........................ 61 Director
KEY EMPLOYEES:
Edward Y. Abramson...................... 49 Director of Communications
Betsy Mehlman........................... 37 Senior Vice President for Sales and Marketing
</TABLE>
- ------------------
(1) Mr. Kahn, Ms. Kubin, Mr. Landowne, Mr. Perlman and Mr. Spier are not
currently directors, but will become directors following completion of the
Offering. The Company anticipates that one additional person will become a
director following completion of the Offering, but has not yet identified
such person.
(2) As described under 'Underwriting,' the Company has agreed that, for a period
of three years after the date of this Prospectus, the Company will use its
best effort to cause an individual designated by the Representative to be
elected to the Company's Board of Directors. The Representative has
designated Ms. Kubin to be elected to the Company's Board of Directors.
Alan P. Haber, has been Chairman of the Board, President and Chief
Executive Officer of the Company since its inception in 1990. From 1989 to 1990,
Mr. Haber was Chief Executive Officer of an Israeli subsidiary of Intafile
International Incorporated, a computer research and development company. Prior
to 1989, Mr. Haber founded and served as President of an import/export company
dealing in stationery and entertainment products (1985-1989) and as President of
a company that operated a chain of restaurants in New York and New Jersey
(1979-1985).
Bernard S. Appel has been a Director of the Company since 1993. Since 1993,
Mr. Appel has been President of Appel Associates, a marketing consulting firm.
Prior thereto, for a period of more than five years, Mr. Appel held a series of
positions at Tandy Corporation and its Radio Shack division, including Senior
Vice President of Tandy Corporation and President and Chairman of Radio Shack.
Barry L. Eisenberg has been a Director of the Company since 1990 and
Secretary and Treasurer of the Company since 1993. Since 1995, Mr. Eisenberg has
been an active investor and director of private companies in Israel. Prior
thereto, Mr. Eisenberg was, for a period of more than five years, a partner in
the Roseland, New Jersey law firm of Lasser, Hochman, Marcus, Guryan & Kuskin.
Simon M. Kahn has been Executive Vice President and Chief Financial Officer
of the Company since March 1996 and Director of Research and Development of the
Company since 1993. Mr. Kahn will become a director of the Company following
completion of the Offering. From 1982 to 1992, Mr. Kahn was Chief Financial
Officer of
42
<PAGE>
Empire Steel Trading Co., Inc., a metals trading company. Prior thereto, Mr.
Kahn was an engineer at Loral Electronic Systems. Mr. Kahn holds a M.S. degree
from the Columbia University School of Engineering and an M.B.A. degree in
corporate finance from the Columbia University School of Business.
Nicole R. Kubin will become a director of the Company following completion
of the Offering. Ms. Kubin is President of Cornerstone Capital Advisors, a
corporate advisory firm and, since 1993, Ms. Kubin has been an active investor
and a consultant to public and private companies. For more than two years prior
to 1993, Ms. Kubin was a marketing consultant to various Fortune 500 companies.
Ms. Kubin was formerly Vice President, International Sales for Salomon Brothers,
Inc.
Morton L. Landowne will become a director of the Company following
completion of the Offering. Since 1984, Mr. Landowne has been Director of Sales
and Marketing of Plaza Packaging Corp., a manufacturer of set-up boxes for the
cosmetics industry.
Noah Perlman will become a director of the Company following completion of
the Offering. Since 1982, Mr. Perlman has been Vice President for Research and
Development and Marketing of Total Systems Support/Semtech Ltd., an Israel-based
developer of systems software.
Morris J. Smith has been a member of the Board of Directors since January
1994. Since 1993, Mr. Smith has been a private investor and investment
consultant. Prior thereto, Mr. Smith was employed for a period of more than five
years by Fidelity Investments as a portfolio manager.
William Spier will become a director of the Company following completion of
the Offering. Since 1991, Mr. Spier has been Chairman and Chief Executive
Officer of DeSoto, Inc., a manufacturer and distributor of cleaning products.
Since 1989, Mr. Spier has also been Chairman and President of Sutton Holding
Corp., a private investment company. From 1980 to 1981, Mr. Spier was Vice
Chairman of Salomon Inc. Mr. Spier also serves as a Director of Geotek
Communications, Inc., EA Industries, Inc., Holmes Protection Group, Inc. and
Video Lottery Technologies, Inc.
Edward Y. Abramson has been Director of Communications of the Company since
1991. Mr. Abramson holds a B.A. in English from Yeshiva College.
Betsy Mehlman has been Senior Vice President for Sales and Marketing for
the Company since March 1996. From 1993 to 1995, Ms. Mehlman was Director of
International Marketing for the Company. From 1989 to 1991 Ms. Mehlman was
Director of International Business Development for Crown Products, Inc., a
manufacturer of plastics processing machinery.
Upon completion of the Offering, the number of directors comprising the
Board of Directors will be increased from four to ten.
All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualify. Executive officers hold office
until their successors are chosen and qualify, subject to earlier removal by the
Board of Directors.
Pursuant to the listing requirements of AMEX, the Company is required to
maintain a minimum of two independent directors and to establish an audit
committee, a majority of whose members are independent directors. A failure by
the Company to comply with these requirements may result in the delisting of the
shares from AMEX. The Company intends to comply with these requirements.
Upon completion of the Offering, the Board of Directors will appoint an
audit committee. The responsibilities of the audit committee will include
reviewing the scope and results of the audits conducted by the Company's
independent accountants. The Company also intends to establish a compensation
committee. The responsibilities of the compensation committee will include
establishing and reviewing employee compensation policies and related matters.
COMPENSATION OF DIRECTORS
Directors do not currently receive any compensation for attendance at Board
of Directors meetings, other than reimbursement of out-of-pocket expenses. After
completion of the Offering, directors who are not employees of the Company will
receive $500 for attendance (in person or by telephone) at meetings of the Board
43
<PAGE>
and all directors will be reimbursed for out-of-pocket expenses incurred in
connection with attendance at Board meetings.
The Company has heretofore granted to directors of the Company options to
purchase Common Stock as follows: Mr. Haber (options to purchase 133,111 shares
at an exercise price of approximately $1.64 per share); Mr. Eisenberg (options
to purchase 38,032 shares at an exercise price of approximately $.01 per share);
Mr. Appel (options to purchase 99,933 shares at an exercise price of
approximately $.01 per share and options to purchase 12,756 shares at an
exercise price of approximately $2.74 per share); and Mr. Smith (options to
purchase 83,533 shares at an exercise price of approximately $.01 per share).
All of such options were granted in 1994 and are currently exercisable or have
been exercised. As described under '--Options to be Granted Prior to the
Offering,' the Company intends to grant additional options prior to the
completion of the Offering. Such options will include options to purchase an
aggregate of 405,001 shares that will be granted to current directors of the
Company (including directors who are executive officers) and to the persons who
will become directors of the Company upon completion of the Offering. All such
additional options will have an exercise price per share equal to the initial
public offering price per share of Common Stock in the Offering and will vest in
two installments: (one-half in November 1997 and one-half in February 1999).
Mr. Appel provided consulting services to the Company from August 1993
though November 1995. He received compensation for such services at the rate of
$24,000 per annum, during the period from August 1993 through June 1994, and at
the rate of $30,000 per annum thereafter through November 1995. He also received
options from the Company as described above.
Since February 1996, Mr. Eisenberg has been providing consulting services
to the Company under an arrangement pursuant to which he is compensated by the
Company at the rate of $80,000 per annum. Such arrangement can be terminated by
the Company or Mr. Eisenberg at any time. Mr. Eisenberg does not receive any
additional compensation for serving as Secretary and Treasurer of the Company.
Prior to February 1996, Mr. Eisenberg provided consulting services to the
Company from time to time. In connection therewith, he received options from the
Company as described above.
EXECUTIVE COMPENSATION
The following table provides certain information concerning the
compensation earned by the Company's Chief Executive Officer for services
rendered in all capacities to the Company during 1994 and 1995. No other
executive officer of the Company received compensation in excess of $100,000
during 1994 or 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
NAME AND PRINCIPAL ------------------------------------------ NUMBER OF ALL OTHER
POSITION YEAR SALARY OPTIONS COMPENSATION
- ------------------------- ------------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Alan P. Haber............ 1995 $ 116,900 -- $2,488(1)
Chairman and Chief 1994 $ 105,047 133,111 2,864(1)
Executive Officer
</TABLE>
- ------------------
(1) Represented contributions to severance and pension funds.
No options were granted in 1995 to the individual named in the above table.
44
<PAGE>
The following table sets forth certain information with respect to stock
options held by the officer named in the above table at the end of 1995. There
were no option exercises by such officer in 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT FISCAL
FISCAL YEAR-END(#): YEAR-END($)(1):
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alan P. Haber....... 133,111 -- $ 713,076(1) --
</TABLE>
- ------------------
(1) Solely for purposes of calculating the value of the indicated options at the
end of 1995 as required by this table, the Company has assigned to the
Common Stock a value of $7.00 per share (representing the midpoint of the
range of the initial public offering price stated on the cover page hereof).
However, the Company has not actually valued the Common Stock as of the end
of 1995 and, accordingly, the actual value of the Common Stock as of such
time may in fact have been significantly less than $7.00 per share.
EMPLOYMENT CONTRACTS
The Company has entered into an employment agreement (the 'Employment
Agreement') with Mr. Haber. Certain information regarding the Employment
Agreement is set forth below:
Term. The scheduled term of the Employment Agreement commences upon
completion of the Offering and extends through December 31, 1999. However,
the salary and benefits described below will be paid retroactive to July 1,
1996.
Base Salary. Base salary is payable at a rate per annum equal to the
NIS equivalent of $190,000 (calculated as of the date the Offering is
completed). Such base salary is linked to the Israeli cost of living index.
Bonus. The Employment Agreement does not provide for a specific
bonus, but contemplates that the Company will adopt a bonus plan based upon
performance goals to be established.
Benefits. The Company is required to (i) pay an amount equal to
15.83% of Mr. Haber's gross salary to obtain for Mr. Haber a 'manager's
insurance policy' (which provides certain severance and disability benefits
and a savings plan), (ii) pay an amount equal to 7.5% of such gross salary
into a savings fund for Mr. Haber's benefit, (iii) provide Mr. Haber with
use of an automobile and pay the maintenance and other expenses related
thereto and (iv) pay any taxes that Mr. Haber may be liable for as a result
of receiving any of the foregoing benefits (other than the car). Upon
cessation of Mr. Haber's employment with the Company for any reason
(including resignation or firing), Mr. Haber has the right to retain the
insurance policy, savings fund and automobile referred to in the preceding
sentence (except that if his employment is terminated for Cause, as defined
in the Employment Agreement, he has no right to the automobile). Mr. Haber
may, at his option, agree to forego one or more of the benefits
contemplated by the Employment Agreement. In such event, the Company would
be required (subject to certain exceptions) to increase Mr. Haber's salary
by the amount of the savings (including tax savings) that the Company
realizes as a result of not having to provide such benefit.
Termination Compensation. The Company is required to pay Mr. Haber
specified compensation in the event that (i) at the end of the term of the
Employment Agreement, Mr. Haber desires to extend the term and the Company
elects not to do so, (ii) Mr. Haber terminates his employment with the
Company for Good Reason (as defined in the Employment Agreement) or (iii)
the Company terminates Mr. Haber's employment for any reason other than
Cause or Disability (as such terms are defined in the Employment
Agreement). Such specified compensation consists of (a) a lump-sum payment
equal to 150% of Mr. Haber's annual base compensation in effect in the year
during which the event giving rise to the obligation to make such payment
occurs, (ii) an additional payment in the amount of $25,000 for legal fees
to be used
45
<PAGE>
as Mr. Haber sees fit and (iii) payment (not in excess of $10,000) for an
appropriate office for Mr. Haber and his secretary for a period of six
months.
Right of Company to Terminate Employment Agreement. Subject to the
Company's obligation to pay termination compensation to the extent provided
in the preceding paragraph, the Company may terminate Mr. Haber's
employment at any time (i) for Cause or Disability (as defined in the
Employment Agreement) or (ii) at will if such termination is approved by a
two-thirds majority (simple majority after October 1, 1997) of the entire
membership of the Board of Directors at a meeting called and held for such
purpose.
Indemnification. The Company is required to indemnify Mr. Haber
against various liabilities and expenses that arise in connection with his
being made, or threatened to be made, a party in any civil or criminal
action or proceeding by reason of the fact that he is or was a director or
officer of the Company or served any other enterprise in any capacity at
the request of the Company (subject to certain exceptions). In addition,
the Company is required to advance certain expenses as incurred by Mr.
Haber pending the final disposition of any such action or proceeding.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation contains a provision that eliminates the personal
liability of directors to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except that the foregoing does not
apply to any such breach that involves (i) a breach of the director's duty of
loyalty to the Company, (ii) any act or omission not in good faith or which
involves intentional misconduct or a knowing violation of law, (iii) a
transaction from which the director derives an improper personal benefit or (iv)
the payment of dividends or the approval of stock repurchases or redemptions
that are unlawful under Delaware law.
The Company's Certificate of Incorporation and By-laws require the Company
to indemnify its directors and officers to the fullest extent permitted by the
Delaware General Corporation Law.
The Company has not entered into indemnification agreements with any of its
directors and officers (except with Mr. Haber as described under '--Employment
Contracts'). The Company may in the future enter into separate indemnification
agreements with its directors and officers containing provisions which may in
some respects be broader than the specific indemnification provisions contained
in the Company's Certificate of Incorporation and By-laws. Such indemnification
agreements may require the Company, among other things, to indemnify such
directors and officers against certain liabilities that may arise by reason of
their status as directors and officers (other than liabilities arising from
wilful misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified, and
to obtain directors' and officers' liability insurance, if available on
reasonable terms.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
STOCK OPTION PLAN
In July 1996, the Board of Directors adopted the Company's 1996 Stock
Option Plan (the 'Stock Option Plan') which provides for the granting of options
to purchase not more than an aggregate 833,333 shares of Common Stock. Some or
all of such options may be 'incentive stock options' within the meaning of the
Internal Revenue Code of 1986, as amended. All officers, directors and employees
of the Company and other persons who perform services on behalf of the Company
are eligible to participate in the Stock Option Plan. No options may be granted
under the Stock Option Plan after July 29, 2006.
The Stock Option Plan provides that it is to be administered by the Board
of Directors (or by a committee appointed by the Board). The Board of Directors
(or any such committee) has full power and authority to interpret the
provisions, and supervise the administration, of the Stock Option Plan. The
Board of Directors (or any such committee) determines, subject to the provisions
of the Stock Option Plan, to whom options shall be granted, the number of shares
of Common Stock subject to an option, whether an option shall be incentive or
non-qualified, the exercise price of each option (which, other than in the case
of incentive stock options, may be
46
<PAGE>
less than the fair market value of the shares on the date of grant), the period
during which each option may be exercised and the other terms and conditions of
each option.
OPTIONS TO BE GRANTED PRIOR TO THE OFFERING
Immediately prior to completion of the Offering, the Company intends to
grant options, pursuant to the Stock Option Plan, to purchase an aggregate of
approximately 548,333 shares of Common Stock. Such options will have an exercise
price per share equal to the initial public offering price per share of Common
Stock in the Offering and will vest in two installments: (one-half in November
1997 and one-half in February 1999). Of such options to be granted, options with
respect to 405,001 shares will be granted to current directors of the Company
(including directors who are executive officers) and to persons who will become
directors upon completion of the Offering as follows: Mr. Haber (options for
133,333 shares), Mr. Eisenberg (options for 66,667 shares), Mr. Kahn (options
for 66,667 shares), Mr. Appel (options for 31,667 shares), Ms. Kubin (options
for 15,000 shares), Mr. Landowne (options for 15,000 shares), Mr. Perlman
(options for 15,000 shares), Mr. Smith (options for 31,667 shares), Mr. Spier
(options for 15,000 shares), and an additional person (not identified as yet)
who the Company anticipates will become a director upon completion of the
Offering (options for 15,000 shares).
CERTAIN TRANSACTIONS
Mr. Eisenberg's father-in-law and a brother-in-law of Mr. Eisenberg
purchased $50,000 and $100,000, respectively, of Bridge Notes in the Bridge
Financing on the same terms as the other participants in the Bridge Financing.
Mr. Eisenberg is a director and executive officer of the Company and
beneficially owns more than 5% of the outstanding Common Stock of the Company.
Certain relatives of Alan P. Haber are employed by the Company. Alan P.
Haber is a director and chief executive officer of the Company and beneficially
owns more than 5% of the outstanding Common Stock of the Company. Philip Haber,
a brother of Alan Haber, has served as warehouse manager since January 1995 and,
in addition, as accounts receivable manager since June 1996. Philip Haber
received compensation of $41,000 in 1995 and has been receiving compensation at
the rate of $48,000 per annum in 1996. Deena Haber,a sister-in-law of Alan
Haber, has served as assistant controller since December 1994. Deena Haber
received compensation of $28,000 in 1995 and has been receiving compensation at
the rate of $40,000 per annum in 1996. Carol Haber, Alan Haber's wife, serves as
a graphic artist and is receiving compensation at a rate per annum of
approximately $12,000.
The Company has issued options to purchase Common Stock to certain of its
directors and executive officers. See 'Management--Compensation of Directors.'
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership (as defined in Item 403 of Regulation S-B under the
Securities Act) of the Company's Common Stock as of June 30, 1996 by (i) each
executive officer of the Company, (ii) each director of the Company (including
each identified person who will become a director upon completion of the
Offering as described under 'Management--Executive Officers, Directors and Key
Employees'), (iii) all directors and executive officers of the Company as a
group (including each identified person who will become a director upon
completion of the Offering), and (iv) each
47
<PAGE>
person or entity known by the Company to be the beneficial owner of more than
five percent of the Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1) PERCENTAGE OWNED(1)
NAME AND ADDRESS OF ------------------- ---------------------------------
BENEFICIAL OWNER(2) NUMBER BEFORE OFFERING AFTER OFFERING
- ------------------------------ ------------------- --------------- --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
Alan P. Haber................. 986,972(3) 32.20% 16.27%
Barry L. Eisenberg............ 284,839(4) 9.60%(4) 4.77%(4)
Simon M. Kahn................. 40,928(5) 1.38% *
Bernard S. Appel.............. 112,689(6) 3.70% 1.86%
Nicole R. Kubin............... 3,571(7) * *
Morton L. Landowne............ 11,410(8) * *
Noah Perlman.................. 30,426(9) 1.04% *
Morris J. Smith............... (10) --(10) --(10)
William J. Spier.............. 54,669(9) 1.87% *
All directors and executive
officers as a group (9
persons).................... 1,525,504(11) 46.90% 24.40%
OTHER 5% STOCKHOLDERS:
Jack Nash
c/o Odyssey Partners
31 W. 52nd Street
New York, NY 10019.......... 160,048(9) 5.46% 2.70%
Gila Green
Ulmbergstrasse 7
8002 Zurich
Switzerland................. 190,158(9) 6.49% 3.21%
Brook Road Nominee Trust
1752 Gerritsen Avenue
Brooklyn, NY 11229.......... 163,653(12) 5.59% 2.76%
</TABLE>
- ------------------
* Less than 1%
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated. For purposes of this table, a
person or group of persons is deemed to have 'beneficial ownership' as of a
given date of any shares which such person has the right to acquire within
60 days after such date. For purposes of computing the percentage of
outstanding shares held by each person or group of persons named above on a
given date, any security which such person or persons has the right to
acquire within 60 days after such date is deemed to be outstanding for the
purpose of computing the percentage ownership of such person or persons,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Where no address is indicated, the address is in care of the Company.
(3) Consists of (i) 830,471 shares held by Mr. Haber, (ii) 133,111 shares
underlying currently exerciseable options held by Mr. Haber, (iii) 21,298
shares held by Mr. Haber's wife and (iv) 2,092 shares underlying currently
exerciseable options held by Mr. Haber's wife. Mr. Haber disclaims any
beneficial ownership of any stock owned by his wife.
(4) Consists of 246,807 currently outstanding shares and 38,032 shares
underlying currently exerciseable options held by 241 Associates LLC, a
limited liability company. Shafrira Wiener is the sole manager of 241
Associates LLC and as such has voting and investment power with respect to
such shares. Ms. Wiener is the daughter of Barry L. Eisenberg. A majority
of the ownership interest of 241 Associates LLC is owned by Mr. Eisenberg
and his wife and, as a result of such ownership interests, Mr. Eisenberg
may influence the
(Footnotes continued on next page)
48
<PAGE>
(Footnotes continued from previous page)
voting and disposition of the shares of Common Stock held by 241 Associates
LLC. Mr. Eisenberg disclaims beneficial ownership of such shares.
(5) Consists of (i) 7,607 currently outstanding shares held by Mr. Kahn and
(ii) 33,321 shares underlying currently exerciseable options held by Mr.
Kahn.
(6) Consists of shares underlying currently exerciseable options held by the
indicated person.
(7) Consists of shares underlying Bridge Warrants held by Ms. Kubin. As
described under 'Management Discussion and Analysis of Financial Condition
and Results of Operations--Bridge Financing,' the aggregate number of
shares of Common Stock issuable upon exercise of the Bridge Warrants will
be a function of the price that is established as the initial public
offering price per share of Common Stock in the Offering. The indicated
number of shares assumes an initial public offering price per share of
Common Stock of $7.00.
(8) Consists of currently outstanding shares held by Landowne & Co., a
corporation controlled by Mr. Landowne.
(9) Consists of currently outstanding shares held by the indicated person.
(10) See footnote 12 below for information concerning 163,653 shares of Common
Stock the beneficial ownership of which is disclaimed by Mr. Smith.
(11) Does not include 163,653 shares that Mr. Smith disclaims beneficial
ownership of as described in footnote 12 below.
(12) Consists of 163,653 currently outstanding shares held by the Brook Road
Nominee Trust, nominee for the Morris Smith Family Trust. Esther Smith, the
mother of Morris J. Smith, is the sole trustee of the Morris Smith Family
Trust and as such has voting and investment power with respect to such
shares. The Morris Smith Family Trust is a discretionary trust, the
potential beneficiaries of which are Mr. Smith and members of his family.
Mr. Smith disclaims any beneficial ownership of any and all shares owned by
the Brook Road Nominee Trust.
DESCRIPTION OF SECURITIES
AMENDMENT OF CERTIFICATE OF INCORPORATION
Prior to the completion of the Offering, the Company will amend its
Certificate of Incorporation to (i) authorize the issuance of 40,000,000 shares
of Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred
Stock, par value $.01 per share, and (ii) convert each outstanding share of
common stock, without par value, of the Company into 760.6291 shares of Common
Stock, par value $.01 per share. All information set forth below gives effect to
such amendment.
GENERAL
The Company is authorized by its Certificate of Incorporation to issue an
aggregate of 40,000,000 shares of Common Stock, par value $.01 per share, and
5,000,000 shares of preferred stock, par value $.01 per share (the 'Preferred
Stock'), which Preferred Stock may be issued with such rights, designations and
privileges (including redemption and voting rights) as the Board of Directors
may from time to time determine.
COMMON STOCK
As of the date of this Prospectus, there were outstanding 2,930,178 shares
of Common Stock. These shares were held of record by approximately 54 record
holders.
Holders of the Common Stock are entitled to one vote per share and, subject
to the rights of the holders of the Preferred Stock, if and when issued, to
receive dividends when and as declared by the Board of Directors, and
49
<PAGE>
to share ratably in the assets of the Company legally available for distribution
in the event of the liquidation, dissolution or winding up of the Company.
Holders of the Common Stock do not have subscription, redemption or conversion
rights, nor do they have any preemptive rights. In the event the Company were to
elect to sell additional shares of its Common Stock following the Offering,
investors in the Offering would have no preemptive right to purchase such
additional shares. As a result, their percentage equity interest in the Company
could be diluted. The shares of Common Stock offered hereby will be, when issued
and paid for, fully-paid and not liable for further call or assessment. Holders
of the Common Stock do not have cumulative voting rights, which means that
(subject to the rights of the holders of the Preferred Stock, if any) the
holders of a majority of the shares voting for election of directors can elect
all of the Company's directors, if they choose to do so. In such event, the
holders of the remaining shares would not be able to elect any directors.
PREFERRED STOCK
The Company is authorized by its Certificate of Incorporation to issue a
maximum of 5,000,000 shares of Preferred Stock, in one or more series and
containing such rights, privileges and limitations, including voting rights,
conversion privileges and/or redemption rights, as may from time to time be
determined by the Board of Directors of the Company. Preferred Stock may be
issued in the future in connection with acquisitions, financings or such other
matters as the Board of Directors deems to be appropriate. In the event that any
such shares of Preferred Stock shall be issued, a Certificate of Designation,
setting forth the series of such Preferred Stock and the relative rights,
privileges and limitations with respect thereto, is required to be filed with
the Secretary of State of the State of Delaware. The effect of having such
Preferred Stock authorized is that the Company's Board of Directors alone,
within the bounds and subject to the federal securities laws and the Delaware
General Corporation Law, may be able to authorize the issuance of Preferred
Stock, which may adversely affect the voting and other rights of holders of
Common Stock. The issuance of Preferred Stock may also have the effect of
delaying or preventing a change in control of the Company.
WARRANTS
The following is a brief summary of certain provisions of the Warrants. For
a more complete description of the Warrants, reference is made to the actual
text of the Warrant Agreement between the Company and American Stock Transfer &
Trust Company (the 'Warrant Agent'), a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. See
'Additional Information.'
Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time during the four year period commencing one year
after the date of this Prospectus, one share of Common Stock at a price of
$ per share [150% of the initial public offering price per share of
Common Stock], subject to adjustment in accordance with the anti-dilution and
other provisions referred to below. The holder of any Warrant may exercise such
Warrant by surrendering the certificate representing the Warrant to the Warrant
Agent, with the subscription form thereon properly completed and executed,
together with payment of the exercise price. Commencing one year after the date
of this Prospectus, the Warrants may be exercised at any time in whole or in
part at the applicable exercise price until expiration of the Warrants. No
fractional shares will be issued upon the exercise of the Warrants.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock. Additionally, an
adjustment would be made in the case of a reclassification or exchange of Common
Stock, consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the surviving
corporation) or sale of all or substantially all of the assets of the Company,
in order to enable Warrant holders to acquire the kind and number of shares of
stock or other securities or property receivable in such event by a holder of
the number of shares of Common Stock that might have been purchased upon the
exercise of the Warrant.
Redemption Provisions. Commencing 18 months after the date of this
Prospectus, the Warrants are subject to redemption by the Company, in whole but
not in part, at $0.01 per Warrant on 30 days' prior written notice to the
warrantholders, if the average closing bid price of the Common Stock as reported
on AMEX equals or
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exceeds $ per share [250% of the initial public offering price per share
of Common Stock] (subject to adjustment for stock dividends, stock splits,
combinations or reclassifications of the Common Stock) for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. In the event that the Company
exercises the right to redeem the Warrants, such Warrants will be exercisable
until the close of business on the business day immediately preceding the date
for redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants will become wholly void and of no value.
If a market for the Warrants develops, the holder may sell the Warrants instead
of exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.
Warrantholder Not a Stockholder. The Warrants do not confer upon holders
thereof any voting, dividends, or other rights as stockholders of the Company.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than 30 days' prior written notice to the
warrantholders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price (other than
lowering the exercise price as provided in the preceding sentence) and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the warrantholders. No other modifications may be made to the Warrants,
without the consent of two-thirds of the warrantholders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities or 'blue sky' laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its reasonable best efforts to have all of the shares of
Common Stock issuable upon exercise of the Warrants registered or qualified on
or before the exercise date and to maintain a current prospectus relating
thereto until the expiration of the Warrants, there can be no assurance that it
will be able to do so.
The Warrants are separately transferable immediately upon issuance.
Although the Securities will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, investors in such jurisdictions may purchase Warrants in the secondary
market or investors may move to jurisdictions in which the shares underlying the
Warrants are not so registered or qualified during the period that the Warrants
are exercisable. In such event, the Company would be unable to issue shares to
those persons desiring to exercise their Warrants, and holders of Warrants would
have no choice but to attempt to sell Warrants in a jurisdiction where such sale
is permissible or allow them to expire unexercised.
BRIDGE WARRANTS
As described under 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Bridge Financing,' the Company issued
Bridge Warrants in connection with a Bridge Financing completed by the Company
during the period April 30, 1996, through July 30, 1996. The aggregate number of
shares issuable upon exercise of the Bridge Warrants will be determined by
dividing (x) $1,262,500 by (y) the initial public offering price per share of
Common Stock in the Offering, and the exercise price per share will equal 10% of
such initial public offering price. Assuming an initial public offering price
per share of Common Stock of $7.00 (the midpoint of the range of such initial
public offering price stated on the cover page hereof), the aggregate number of
shares issuable upon exercise of the Bridge Warrants would be 180,357 and the
exercise price per share would be $0.70.
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REPRESENTATIVE'S WARRANTS
In connection with the Offering, the Company has agreed to sell to the
Representative for nominal consideration, Representative's Warrants to purchase
from the Company up to 300,000 shares of Common Stock and/or 300,000 Warrants.
For a description of the terms of the Representative's Warrants, see
'Underwriting.'
OPTIONS
There are currently outstanding options to purchase an aggregate of 403,189
shares of Common Stock, 257,322 of which provide for an exercise price of
approximately $.01 per share, 133,111 of which provide for an exercise price of
approximately $1.64 per share, and 12,756 of which provide for an exercise price
of approximately $2.74 per share. All outstanding options are currently
exercisable or will become exercisable upon completion of the Offering. Prior to
the Offering, the Company intends to grant options to purchase an additional
548,333 shares under the Company's Stock Option Plan. Such options will provide
for an exercise price per share equal to the initial public offering price per
share of Common Stock in the Offering and will vest in two installments
(one-half in November 1997 and one-half in February 1999). The Company has also
reserved 285,000 shares of Common Stock for possible future grants of options
under the Stock Option Plan.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Warrants is American Stock Transfer & Trust Company, 40 Wall Street, New
York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
No prediction can be made as to the effect, if any, that future sales of
Common Stock, or the availability of Common Stock for future sale, will have on
the market price of the Securities prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon exercise of
warrants or options), or the perception that such sales could occur, could
adversely effect prevailing market prices for the Securities. Set forth below is
certain information concerning certain shares of Common Stock that will
potentially be available for sale following the Offering.
Shares of Common Stock Sold in the Offering. The 3,000,000 shares of
Common Stock sold in the Offering will be immediately freely tradeable without
restriction under the Securities Act, except for any shares purchased by
'affiliates' of the Company, as that term is defined under the rules and
regulations of the Securities Act ('Affiliates'), which will be subject to the
resale limitations of Rule 144 under the Act. For information concerning Rule
144, see '--Rule 144.'
Shares Underlying Warrants sold in the Offering. The Warrants are not
exercisable until the first anniversary date of this Prospectus. Thereafter, up
to 3,000,000 shares may be issued upon exercise of the Warrants (subject to
adjustment as described under 'Description of Securities--Warrants'). Any shares
of Common Stock acquired upon exercise of the Warrants will generally be freely
tradeable to the same extent as the shares of Common Stock sold in the Offering
(as described above).
Currently Outstanding Shares of Common Stock. There are currently
outstanding 2,930,178 shares of Common Stock. Such shares are 'restricted
securities' for purposes of Rule 144 under the Securities Act and may not be
resold in a public distribution except pursuant to Rule 144 or in compliance
with the registration requirements of the Securities Act. Certain holders of
such currently outstanding shares have entered into lock-up agreements as
described below under '--Lock-up Agreements.' Approximately 2,430,749 of such
shares have been held for the two-year holding period prescribed by Rule 144 and
will, subject to such lock-up agreements, be eligible for sale in accordance
with Rule 144 approximately 90 days after the date of this Prospectus.
Substantially all of the balance of such currently outstanding shares will,
subject to such lock-up agreements, be eligible for sale in accordance with Rule
144 in the first four months of 1997.
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Shares Underlying Options. Upon completion of the Offering, there will be
outstanding options to purchase an aggregate of 951,522 shares of Common Stock.
Of such options, 403,189 will be fully vested upon completion of the Offering
and the balance will vest in two installments (one-half in November 1997 and
one-half in February 1999). Certain holders of such outstanding options have
entered into lock-up agreements as described below under '--Lock-up Agreements.'
Shortly after the completion of the Offering, the Company plans to file a
Registration Statement on Form S-8 registering (i) the issuance by the Company
of up to 1,236,522 shares of Common Stock that may be issued upon exercise of
the stock options (representing the 951,522 shares underlying the currently
outstanding options plus 285,000 shares reserved for possible future grants of
stock options under the Company's Stock Option Plan) and (ii) the resale of such
shares by the holders thereof (to the extent that registering such resale is
required by the Securities Act). Such Registration Statement will become
effective immediately upon filing. Upon the effectiveness of such Registration
Statement, shares of Common Stock covered by such Registration Statement that
are acquired upon the exercise of options will, subject to the lock-up
agreements described below, either be freely tradeable without restriction under
the Securities Act (in the case of shares that are acquired by persons who are
not Affiliates of the Company) or eligible for resale in the public market
pursuant to such Registration Statement (in the case of shares that are acquired
by Affiliates of the Company).
Shares Underlying Bridge Warrants. As described under 'Management
Discussion and Analysis of Financial Condition and Results of Operations--Bridge
Financing,' the aggregate number of shares of Common Stock issuable upon
exercise of the Bridge Warrants will be a function of the price that is
established as the initial public offering price per share of Common Stock in
the Offering. Assuming an initial public offering price per share of Common
Stock of $7.00 (the midpoint of the range of such initial public offering price
stated on the cover page hereof), there would be an aggregate of 180,357 shares
issuable upon exercise of the Bridge Warrants. Prior to the completion of the
Offering, the Company plans to file a Registration Statement registering the
resale of the shares issuable upon exercise of the Bridge Warrants. Subject to
the lock-up agreement described in the following sentence, shares of Common
Stock issued upon exercise of Bridge Warrants will be eligible for resale in the
public market pursuant to such Registration Statement. Each holder of Bridge
Warrants has agreed that, during the three-month period commencing on the date
of this Prospectus, such holder will not, without the prior written consent of
the Representative, sell assign, transfer or otherwise dispose of, any such
warrant or any shares of Common Stock acquired upon exercise thereof.
Shares Underlying Representative's Warrants. The Representative's Warrants
are not exercisable until the first anniversary of the date of this Prospectus.
Thereafter, up to 300,000 shares of Common Stock may be issued upon exercise of
the Representative's Warrants (subject to adjustment as described under
'Underwriting') and up to an additional 300,000 shares may be issued (subject to
adjustment as described under 'Description of Securities--Warrants') upon
exercise of Warrants that may be acquired pursuant to the Representative's
Warrants. All such shares may be eligible for resale in the public market
pursuant to certain registration rights provided for in the Representative's
Warrants.
RULE 144
In general, under Rule 144, as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned for at
least two years shares of Common Stock which are treated as 'restricted
securities,' including persons who may be deemed Affiliates of the Company,
would be entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the then outstanding shares of Common
Stock (59,302 shares immediately after completion of the Offering) or the
average weekly reported trading volume in the Common Stock during the four
calendar weeks preceding the date on which notice of such sale is given,
provided certain manner of sale and notice requirements and requirements as to
the availability of current public information about the Company are satisfied
(which requirements as to the availability of current public information are
expected to be satisfied commencing 90 days after the date of this Prospectus).
In addition, Affiliates of the Company must comply with the restrictions and
requirements of Rule 144, other than the two-year holding period requirement, in
order to sell shares of Common Stock which are not 'restricted securities' (such
as shares acquired by Affiliates in the Offering). Under Rule 144(k), a
stockholder who is deemed not to have been an affiliate of the Company at any
time during the 90 days preceding a sale by him, and who has beneficially owned
for at least three years shares of Common Stock which are treated
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as 'restricted securities,' would be entitled to sell such shares, without
regard to the foregoing restrictions and requirements.
LOCK-UP AGREEMENTS
The Company and certain holders of Common Stock and/or other securities of
the Company have entered into lock-up agreements as described below.
Company. The Company has agreed that, during the period commencing on the
date of this Prospectus and ending on the first anniversary of such date, the
Company will not, without the prior written consent of the Representative,
directly or indirectly, issue, offer to sell, sell, grant an option for the sale
of, assign, transfer, pledge, hypothecate or otherwise encumber or dispose of
(all the foregoing being collectively referred to as 'Transfer') any securities
issued by the Company, including common stock or securities convertible into or
exchangeable or exercisable for or evidencing any right to purchase or subscribe
for any shares of common stock (the 'Covered Securities'), except that the
Company may (i) issue shares upon the exercise of the Bridge Warrants, (ii)
grant options pursuant to its 1996 Stock Option plan (described under
'Management--Stock Option Plan'), provided that the optionee is subject to (or
upon receipt of the option agrees to be subject to) one of the lock-up
arrangements described in the following two paragraphs, and (iii) issue shares
upon the exercise of stock options that are currently outstanding, or that this
Prospectus contemplates will be granted prior to completion of the Offering or
that are hereafter granted in accordance with clause (ii) immediately above.
Two-Percent Holders. Each Two-Percent Holder (as hereinafter defined) has
agreed that, until the first anniversary of the date on which the Registration
Statement (as defined under 'Available Information') is declared effective (the
'Effective Date') under the Securities Act, such holder will not, without the
prior written consent of the Representative, directly or indirectly, Transfer
any Covered Securities, except that (i) a Two-Percent Holder may Transfer
Covered Securities in a private placement, provided that the transferee agrees
to be bound by the terms of the foregoing agreement; and (ii) from and after the
270th day after the Effective Date, a Two-Percent Holder may Transfer Common
Stock of the Company (in one or more transactions), provided that the aggregate
shares of Common Stock of the Company that may be Transferred by a Two-Percent
Holder pursuant to this clause (ii) may not exceed 10% of the number of shares
of Common Stock of the Company owned by such Two-Percent Holder immediately
preceding the 270th day after the Effective Date. (For purposes of clause (ii)
of the preceding sentence, the ownership or sale of any Covered Securities
convertible into or exchangeable or exercisable for or evidencing any right to
purchase or subscribe for any shares of Common Stock is deemed the ownership or
sale, as the case may be, of the number of shares of Common Stock that may be
acquired pursuant to such Covered Securities). The Two-Percent Holders that have
entered into the foregoing agreement hold in the aggregate 1,782,561 shares of
Common Stock and options to purchase 751,973 shares of Common Stock (including
the options that this Prospectus contemplates will be issued prior to completion
of the Offering). As used herein, a 'Two-Percent Holder' means any person or
entity that immediately prior to the Offering owns a number of shares of Common
Stock (calculated on a pro forma basis giving effect to the exercise of all
outstanding options and options that this Prospectus contemplates will be
granted prior to completion of the Offering) that constitutes 2% or more of the
outstanding Common Stock immediately prior to the Offering (calculated on a pro
forma basis as aforesaid).
Other Holders of Common Stock or Options. The Company has agreed to cause
each holder of Common Stock and/or options who is not a Two-Percent Holder to
agree that, until the 270th day following the Effective Date, such holder will
not Transfer any Covered Securities, except that any such holder may Transfer
Covered Securities in a private placement, provided that the transferee agrees
to be bound by the terms of the foregoing agreement. Such holders hold in the
aggregate 1,147,617 shares of Common Stock and options to purchase 199,549
shares of Common Stock (including the options that this Propectus contemplates
will be issued prior to completion of the Offering).
Holders of Bridge Warrants. For information concerning certain lock-up
agreements applicable to holders of Bridge Warrants, see '--General--Shares
Underlying Bridge Warrants.'
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ISRAELI TAXATION
A substantial portion of the Company's business is conducted in the State
of Israel through two Israeli subsidiaries: I.T.I. Innovative Technology Ltd.
('Innovative') and CompuPrint Ltd. ('Compuprint'). See 'Conditions in Israel.'
Set forth below is a summary of certain Israeli laws and regulations currently
in effect that are applicable (or potentially applicable) to such subsidiaries
(the 'Israeli Subsidiaries') relating to certain tax matters, government
programs and currency controls. Such summary is not intended, and should not be
construed as, legal or professional advice and does not purport to cover all
considerations relating to the matters discussed. Since such summary is based on
legislation and regulation subject to judicial or administrative interpretation,
there can be no assurance that the views expressed herein will accord with any
such interpretation in the future. The Company cannot at present predict the
portion of future income (if any) that will be allocable to the Israeli
Subsidiaries as opposed to ITI USA.
ISRAELI TAXATION OF INCOME OF THE ISRAELI SUBSIDIARIES
Israeli taxation of income of the Israeli Subsidiaries will vary depending
on the source of the income. Income not derived from an Approved Enterprise (as
defined below) will be subject to different treatment than income derived from
an Approved Enterprise. The Company cannot at present predict the portion of
future income (if any) of the Israeli Subsidiaries that will be derived from an
Approved Enterprise.
INCOME NOT FROM AN APPROVED ENTERPRISE
Israeli companies are subject to income tax at the rate of 36% on income
not derived from an Approved Enterprise. Retained income is not subject to
further taxation. Under the Income Tax Law (Adjustment for Inflation), 1985,
income for tax purposes is measured in terms of earnings in NIS adjusted for the
increase in the Israeli consumer price index.
INCOME FROM AN APPROVED ENTERPRISE
The Law for the Encouragement of Capital Investments, 1959, as amended (the
'Investment Law') provides that an investment program may, upon application to
the Israel Investments Center, be designated as an 'Approved Enterprise.' Each
certificate of approval for an Approved Enterprise relates to a specific
investment program delineated both by its financial scope, including its capital
sources, and its physical characteristics (e.g., the equipment to be purchased
and utilized pursuant to the program).
Innovative's investment program relating to the software component of its
keyboard telephone products has been granted Approved Enterprise status under
the Investment Law. Innovative's Approved Enterprise is in the so-called 'state
guarantees' benefits path. Approved Enterprises in that path are potentially
entitled to state-guaranteed commercial loans (as described under '--Approved
Enterprise Benefits Other than Tax Benefits') and to certain tax benefits. Such
tax benefits are limited to taxable income attributable to the specific Approved
Enterprise (which, in Innovative's case, is the software component of
Innovative's keyboard telephone products). Such tax benefits are further limited
in any year to the portion of such taxable income that is attributable to sales
of such software component that are in excess of the amount of such sales in the
year immediately preceding the year in which the Approved Enterprise commences
operation. (Any reference herein to income derived from Innovative's Approved
Enterprise refers only to the portion of such income to which the tax benefits
apply as described above.)
The tax and other benefits available to an Approved Enterprise are
contingent upon the fulfillment of various conditions, including (i) conditions
stipulated by the Investment Law and (ii) conditions stipulated by the
certificate of approval for the specific investment program relating to the
Approved Enterprise (including various conditions relating to capitalization).
In the case of Innovative, such conditions include, among others, completing
certain investment programs, fulfilling certain requirements as to
capitalization, making sales to ITI USA only on market terms, and filing
periodic compliance reports. In the event of Innovative's failure to comply with
such conditions, the tax and other benefits could be canceled, in whole or in
part, and the Company might be required to refund the amount of the canceled
benefits, plus inflation adjustments and interest.
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The undistributed income derived from Innovative's Approved Enterprise is
tax-exempt for a ten year consecutive period, beginning with the first year in
which it generates otherwise taxable income provided that (i) 12 years have not
elapsed from the year of commencement of production and (ii) 14 years have not
elapsed from the year during which the Approved Enterprise status was granted.
Distributed income derived from Innovative's Approved Enterprise will be
subject to Company income tax at the rates described below. Such income tax is
in addition to the withholding tax applicable to dividends as described under
'--Israeli Taxation on Dividends Received from the Israeli Subsidiaries by ITI
USA.' Company income tax will be imposed on distributed income which is derived
from Innovative's Approved Enterprise at the reduced rate of 25% (or lower if
Innovative is deemed to be a Foreign Investors' Company, as described below),
until the earlier of (i) seven consecutive years (or ten in the case of a
Foreign Investors' Company) commencing in the year in which the Approved
Enterprise first generates taxable income, (ii) 12 years from the year of
commencement of production or (iii) 14 years from the year during which the
Approved Enterprise status was granted. The year in which the Approved
Enterprise first generates taxable income will be determined by isolating the
income and expense from the software component of Innovative's keyboard
telephone products from the other income and expenses of the Israeli
Subsidiaries. The Company income tax rate on distributed income derived from
Innovative's Approved Enterprise will be lower than 25% if Innovative qualifies
as a 'Foreign Investors' Company.' Subject to certain conditions, a 'Foreign
Investors' Company' is a company which has more than 25% of its combined
shareholders' investment in share capital (in terms of rights to profits, voting
and the appointment of directors) and in long-term shareholders' loans made by
persons who are not residents of Israel. Foreign investment in the Israeli
Subsidiaries will be determined by looking to the foreign investment in ITI USA.
The Investment Law also provides that an Approved Enterprise is entitled to
accelerated depreciation on its property and equipment that are included in an
approved investment program.
ISRAELI TAXATION ON DIVIDENDS RECEIVED BY ITI USA FROM THE ISRAELI SUBSIDIARIES
Dividends paid by the Israeli Subsidiaries to ITI USA will be subject to
Israeli withholding tax at the rate of 12 1/2%, unless the dividends are
attributable to income derived from an Approved Enterprise, in which case the
rate of withholding will be 15%.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
Pursuant to the Law for the Encouragement of Industry (Taxes), 1969 (the
'Industry Law'), a company qualifies as an 'Industrial Company' if it is a
resident of Israel and at least 90% of its gross income in any tax year
(exclusive of income from defense loans, capital gains, interest and dividends)
is derived from an 'Industrial Enterprise' that it owns. An 'Industrial
Enterprise' is defined for purposes of the Industry Law as an enterprise the
major activity of which, in a given tax year, is industrial production.
Both of the Israeli Subsidiaries qualify as Industrial Companies. As
Industrial Companies, the Israeli Subsidiaries are entitled to certain tax
benefits, including a deduction of 12.5% per annum on the purchase of patents or
certain other intangible property rights (other than goodwill) beginning with
the year in which such rights were first used and a deduction of 33% per annum
on expenses incurred in connection with a public stock issuance.
Eligibility for benefits under the Industry Law is not contingent upon the
approval of any Government agency. No assurance can be given that the Israeli
Subsidiaries will continue to qualify as Industrial Companies, or will be able
to take advantage of any benefits under the Industry Law in the future or that
Industrial Companies will continue to enjoy such tax benefits in the future.
LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984
Under the Law for the Encouragement of Industrial Research and Development
(the 'Research Law'), research and development programs approved by the Research
Committee of the Office of the Chief Scientist of the Ministry of Industry and
Trade of the State of Israel ('OCS') are eligible for grants in return for the
payment of royalties from the sale of the product developed in accordance with
the program. Once a project is approved,
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OCS will award grants of up to 50% of the project's expenditures in return for
royalties, usually at the rate of 3% of sales of products developed with such
grants, up to a dollar-linked amount equal to 100% or 150% of such grants. There
is no further liability for payment. Recipients of funding from the OCS are
restricted from transferring any knowhow derived from research and development
funded by the OCS without the consent of the OCS. In addition, such recipients
must manufacture in Israel any products that are developed as a result of
research and development funded by the OCS, unless they receive the consent of
the OCS to manufacture elsewhere.
In the past, the Israeli Subsidiaries have received funding from the OCS
for two research and development projects. One project involved the development
of a device that would be located between the keyboard and a personal computer
and enable the computer to perform certain telephone functions. The other
project involved the development of a wireless printing product that uses radio
frequency technology (in contrast to the Company's WPS-1000 product that uses
diffuse infrared technology). The Company has not commercialized either of these
projects and is currently not actively engaged in these projects. The Company
may in the future determine to apply for grants under the Research Law for
additional projects. There can be no assurance, however, that any such
application will be approved in whole or in part.
APPROVED ENTERPRISE BENEFITS OTHER THAN TAX BENEFITS
In addition to providing tax-benefits for income derived from Approved
Enterprises (some of which benefits are described above under '--Israeli
Taxation of Income of the Israeli Subsidiaries'), the Investment Law also
provides for various other benefits to Approved Enterprises, where such benefits
vary according to the benefits path chosen. As noted above, Innovative has an
Approved Enterprise with regard to the software component of its keyboard
telephone products and it has chosen the 'state guarantees' path. Approved
Enterprises in that path are entitled to commercial loans (at interest rates
somewhat higher than market), 70% of which are guaranteed by the State of
Israel. Such guarantees may be given for up to 59.5% of the total approved
project expenditures (the total project expenditure approved in the case of
Innovative was $1,215,000). The entitlement to such guarantees is contingent on
the conditions of the certificate of approval and of the law being met. However,
in practice, many companies with Approved Enterprises which are entitled to
state guarantees have found it difficult to get the loans to which they are in
principle entitled. Innovative has encountered such difficulties, though it is
still in negotiations with several commercial banks as to the possibility of
receiving such state guaranteed loans. No assurance can be given that it will be
successful in receiving such state guaranteed loans from any of the commercial
banks with which it is in contact.
FOREIGN CURRENCY REGULATIONS
Israel maintains a series of regulations that are designed, among other
things, to limit outflow of foreign currency. However, in general, a foreign
resident, such as ITI USA, which has paid foreign currency for the shares it
received in an Israeli company, such as each of the Israeli Subsidiaries, is
entitled to receive dividends in foreign currency and is further entitled to
convert to foreign currency any payments that it receives in NIS upon the sale
of its shares in the Israeli company or as a result of the liquidation of such
company.
CONDITIONS IN ISRAEL
A substantial amount of the Company's business is conducted in the State of
Israel through the Israeli Subsidiaries. The functions that are primarily
conducted in Israel include research and development, international marketing
and sales, administration and finance. The net assets of the Israeli
Subsidiaries accounted for approximately 27% of the Company's consolidated net
assets as of December 31, 1995, and the net capital deficiency of the Israeli
Subsidiaries accounted for approximately 71% of the Company's consolidated net
capital deficiency as of June 30, 1996. In addition, substantially all of the
executive officers of the Company reside in the State of Israel or spend
significant amounts of time working there. Consequently, the Company is directly
influenced by the political, economic and military conditions affecting Israel,
and any major hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could have a material
adverse effect on the Company's operations. Set forth below is certain
information concerning certain conditions in Israel.
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Economic Conditions in Israel. During 1994 and 1995 Israel's gross
domestic product increased by 3.4% and 6.5%, respectively, and during the first
six months of 1996 Israel's gross domestic product increased by 1.5% (not
annualized). During 1995 and the first two quarters of 1996 inflation in Israel
and the change in the value of the NIS in relation to the dollar were: 1995 (the
inflation rate was 8.10% while the NIS was devalued by 3.88%); first quarter of
1996 (the inflation rate was 2.76%, not annualized, while the NIS appreciated by
0.77%); and second quarter of 1996 (the inflation rate was 4.14%, not
annualized, while the NIS was devalued by 2.87%). There can be no assurance that
economic growth and relative price and exchange rate stability in Israel will
continue.
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. In response to these problems, the Israeli Government has
intervened in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
controls of wages, prices and foreign currency exchange rates. The Israeli
Government frequently has changed its policies in all these areas.
Political Environment. Since the establishment of the State of Israel in
1948, a state of hostility has existed, varying in degree and intensity, between
Israel and the Arab countries. In addition, Israel and companies doing business
with Israel have been the subject of an economic boycott by the Arab countries
since Israel's establishment. Furthermore, following the Six-Day War in 1967,
Israel commenced administering the territories of the West Bank and the Gaza
Strip and, since December 1987, increased civil unrest has existed in those
territories. Although Israel has entered into various agreements with Arab
countries and the Palestine Liberation Organization and various declarations
have been signed in connection with efforts to resolve some of the
aforementioned problems, no prediction can be made as to whether a full
resolution of these problems will be achieved or as to the nature of any such
resolution. To date, these problems have not had a material adverse impact on
the financial condition or operation of the Company, although there can be no
assurance that continuation of these problems will not have such an impact in
the future.
Army Service. All male adult permanent residents of Israel under the age
of 50 are, unless exempt, obligated to perform approximately up to 48 days of
military reserve duty annually. Additionally, all such residents are subject to
being called to active duty at any time under emergency circumstances. Some of
the employees of the Company (including its Chief Executive Officer) currently
are obligated to perform annual reserve duty. While the Company has operated
effectively under these requirements in the past, no assessment can be made of
the full impact of such requirements on the Company in the future, particularly
if emergency circumstances occur.
Demographics. Since the beginning of 1990, Israel has been experiencing a
new wave of immigration, primarily from the former Soviet Union. Although the
increased immigration to Israel from the former Soviet Union may benefit Israel
and its economy in the long term by providing highly educated, cost-competitive
labor and by stimulating economic growth, it has placed an increased strain on
government services and national resources. The Israeli Government has found it
necessary to raise additional revenue and to dedicate substantial funds to
support programs, including housing, education and job training, designed to
assist in the absorption of new immigrants. No prediction can be made as to the
policies that will be adopted in the future or their effect on these and other
government spending programs.
Assistance from the United States. The State of Israel receives
approximately $3 billion of annual grants for economic and military assistance
from the United States and has received approximately $10 billion of United
States Government loan guarantees, subject to reduction in certain
circumstances. The United States Government loan program guarantees were granted
over a period of five years ($2 billion per annum) commencing in 1993. The
Israeli economy could suffer material adverse consequences if such aid or
guarantees are reduced significantly. There is no assurance that foreign aid
from the United States will continue at or near amounts received in the past.
Trade Agreements. Israel is a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia, Canada and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.
58
<PAGE>
Israel and the European Economic Community (known now as the 'European
Union') signed a Free Trade Agreement, which became effective on July 1, 1975.
Pursuant to such agreement and subject to rules of origin, Israel's industrial
exports to the European Union are exempt from custom duties and other non-tariff
barriers (e.g., import restrictions). In 1985, Israel and the United States
entered into an agreement to establish a Free Trade Area ('FTA') which is
intended ultimately to eliminate all tariff and certain nontariff barriers on
most trade between the two countries. Under the FTA agreement, most products
(except with respect to certain agricultural products) received duty-free status
as of January 1, 1995. On January 1, 1993, an agreement between Israel and the
European Free Trade Association ('EFTA'), which presently includes Austria,
Norway, Finland, Sweden, Switzerland, Iceland, and Liechtenstein, established a
free-trade zone between Israel and the EFTA nations. Under the agreement with
the existing EFTA countries, manufactured goods and some agricultural goods and
processed foods are exempt from customs duties, while duties on other goods have
been reduced. Israel is the only country which has free-trade area agreements
with the United States as well as with the European Union and the EFTA states.
UNDERWRITING
The Underwriters named below (the 'Underwriters') have agreed, subject to
the terms and conditions of the Underwriting Agreement between the Company and
National Securities Corporation, as the Representative of the several
Underwriters (the 'Underwriting Agreement'), to purchase from the Company, and
the Company has agreed to sell to the Underwriters on a firm commitment basis,
the respective number of Shares of Common Stock and Warrants set forth opposite
their names:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF NUMBER OF
UNDERWRITER COMMON STOCK WARRANTS
- ----------------------------------- ------------ ---------
<S> <C> <C>
National Securities Corporation....
------------ ---------
Total............................ 3,000,000 3,000,000
------------ ---------
------------ ---------
</TABLE>
The Underwriters are committed to purchase all the Shares of Common Stock
and Warrants offered hereby, if any of such Securities are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions of not in excess of $ per share of
Common Stock and $ per Warrant. Such dealers may re-allow a concession not
in excess of $ per share of Common Stock and $ per Warrant to certain
other dealers. After the commencement of the Offering, the public offering
prices, concession and reallowance may be changed by the Representative.
The Representative has informed the Company that it does not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representative an expense allowance on a nonaccountable
basis equal to 3.0% of the gross proceeds derived from the sale of the
Securities underwritten, of which $25,000 has been paid to date.
The Company has granted to the Underwriters an over-allotment option,
exercisable within 45 days of the date of this Prospectus, to purchase up to an
additional 450,000 shares of Common Stock and/or 450,000 additional Warrants at
the public offering price per share of Common Stock and Warrant, respectively,
offered hereby, less underwriting discounts and the non-accountable expense
allowance. Such option may be exercised only for the purpose of covering
over-allotments, if any, incurred in the sale of the Securities offered hereby.
To
59
<PAGE>
the extent such option is exercised, in whole or in part, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase the number of
the additional Securities proportionate to its initial commitment.
In connection with the Offering the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
up to 300,000 shares of Common Stock and\or 300,000 Warrants (the
'Representative's Warrants'). The Representative's Warrants are initially
exercisable at a price of $ per share of Common Stock [120% of the initial
public offering price per share of Common Stock] and $0.12 per Warrant for a
four-year period commencing on the first anniversary of the issuance of such
warrants. The Representative's Warrants may not be sold, transferred, assigned
or hypothecated for a period of one year following the date of this Prospectus,
except to officers or directors of the Representative, Underwriters or members
of the selling group. The Representative's Warrants provide for adjustments in
the number of shares of Common Stock and Warrants issuable upon the exercise
thereof and in the exercise price of the Representative's Warrants as a result
of certain events, including subdivisions and combinations of the Common Stock.
The Representative's Warrants grant to the holders thereof certain rights of
registration for the securities issuable upon exercise of the Representative's
Warrants.
The Company and certain holders of its Common Stock and other securities
have entered into lock-up agreements. See 'Shares Eligible for Future Sale.'
The Company has agreed that, for a period of three years after the date of
this Prospectus, the Company shall use its best efforts to cause an individual
designated by the Representative to be elected as a member of the Board of
Directors of the Company. Such person may be a director, officer, employee or
affiliate of the Representative. It is anticipated that Nicole R. Kubin will be
the individual initially designated by the Representative to be elected to the
Board of Directors of the Company. See 'Management--Executive Officers,
Directors and Key Employees.' In the event that the Representative elects not to
designate a person to serve on the Board of Directors of the Company, the
Representative shall have the right to designate one person to attend meetings
of the Board of Directors of the Company. Such person shall be entitled to
attend all such meetings and to receive all notices and other correspondence and
communications sent by the Company to members of its Board of Directors. The
Company has agreed to reimburse the designee of the Representative for such
designee's out-of-pocket expenses incurred in connection with such designee's
attendance of meetings of the Company's Board of Directors.
Prior to the Offering, there has been no public market for the Common Stock
or the Warrants. Consequently, the initial public offering price of the
Securities has been determined by negotiation between the Company and the
Representative and does not necessarily bear any relationship to the Company's
asset value, net worth, and other established criteria of value. The factors
considered in such negotiations, in addition to prevailing market conditions,
include the history of and prospects for the industry in which the Company
competes, an assessment of the Company's management and the prospects of the
Company, the Company's capital structure and certain other factors as were
deemed relevant.
LEGAL MATTERS
The validity of the Common Stock and the Warrants offered hereby will be
passed upon for the Company by Ehrenreich & Krause, New York, New York, who have
acted as counsel to the Company in connection with the Offering. Certain legal
matters in connection with the Offering with respect to Israeli law will be
passed upon for the Company by Silber, Schottenfels, Gerber & Lewin, Jerusalem,
Israel. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Camhy, Karlinsky & Stein LLP, New York, New York,
with respect to matters of United States law, and by Herzog, Fox & Neeman, Tel
Aviv, Israel with respect to matters of Israeli law.
60
<PAGE>
EXPERTS
The consolidated financial statements of the Company as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995, included in this Prospectus have been so included in reliance on the
report (which contains an explanatory paragraph relating to the Company's
ability to continue as a going concern as described in Note 1 to such financial
statements) of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') in Washington, D.C. a Registration Statement on Form SB-2
(together with all amendments thereto, the 'Registration Statement'), under the
Securities Act with respect to the Securities offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement and
the exhibits and schedules filed therewith, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Securities offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any contract or other document referred to are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being deemed to be qualified in its entirety by such reference. The
Registration Statement, including all exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission located at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Midwest Regional
Office of the Commission located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and at the Northeast Regional office of
the Commission located at Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Room 1204, Washington, D.C.
20549, at prescribed rates.
61
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30,
1996 (Unaudited)....................................................... F-3
Consolidated Statement of Operations for the years ended December 31,
1993, 1994 and 1995 and the six-month periods ended June 30, 1995 and
1996 (Unaudited)....................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity for the years
ended December 31, 1993, 1994 and 1995 and the six-month period ended
June 30, 1996 (Unaudited).............................................. F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the six-month periods ended June 30, 1995 and
1996 (Unaudited)....................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Integrated Technology USA, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statement of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Integrated Technology USA, Inc. and its subsidiaries
at December 31, 1995 and 1994 and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audits 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered recurring
losses from operations and has experienced a net cash outflow from
operations since its formation that raise substantial doubt about its
ability to continue as a going concern. As such, the Company is dependent
upon capital infusions from existing and from new investors to fund
operations. Management's plans with regard to these matters are also
described in Note 1. The accompanying consolidated financial statements, do
not include any adjustments that might result from the outcome of this
uncertainty.
PRICE WATERHOUSE LLP
New York, New York
March 29, 1996, except as to the recapitalization
described in Note 10, which is as of September 10, 1996
F-2
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 893,997 $ 33,473 $ 28,275
Accounts receivable (net of allowance
for doubtful accounts and sales
returns of approximately $11,000,
$17,000 and $12,000 at December 31,
1994 and 1995 and June 30, 1996,
respectively)...................... 18,105 146,875 120,710
Inventories........................... 212,234 467,562 356,676
Deferred financing costs.............. -- -- 50,938
Prepaid expenses and other current
assets............................. 25,410 34,514 17,263
---------- ---------- -----------
Total current assets.......... 1,149,746 682,424 573,862
Fixed assets, net..................... 142,120 127,109 102,577
Security deposits..................... 20,163 20,013 21,299
---------- ---------- -----------
Total assets.................. $1,312,029 $ 829,546 $ 697,738
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft and short-term loans... $ 10,173 $ 21,026 $ 51,269
Accounts payable...................... 204,816 239,015 104,410
Notes payable......................... -- -- 334,000
Payables to officers.................. 6,499 30,949 --
Customer deposits..................... -- -- 17,450
Accrued expenses...................... 128,529 199,258 379,706
Other current liabilities............. 19,711 12,682 17,392
---------- ---------- -----------
Total current liabilities..... 369,728 502,930 904,227
Provision for severance payments........ 30,330 28,392 76,731
---------- ---------- -----------
Total liabilities............. 400,058 531,322 980,958
---------- ---------- -----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock $.01 par value,
5,000,000 shares authorized; none
issued and outstanding............. -- -- --
Common stock, $.01 par value;
40,000,000 shares authorized;
2,430,753, 2,930,178, and 2,930,178
shares issued and outstanding at
December 31, 1994, 1995, and June
30, 1996, respectively............. 24,818 29,812 29,812
Additional paid-in capital............ 4,524,924 5,535,863 5,861,504
Treasury stock........................ (165,000) (165,000) (165,000)
Accumulated deficit................... (3,517,544) (5,200,608) (6,149,765)
Cumulative translation adjustment..... 44,773 98,157 140,229
---------- ---------- -----------
Total stockholders' equity
(net capital deficiency).... 911,971 298,224 (283,220)
---------- ---------- -----------
Total liabilities and
stockholders' equity........ $1,312,029 $ 829,546 $ 697,738
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... $ 76,877 $ 85,610 $ 803,705 $ 355,202 $ 208,462
Cost of products sold......... 72,767 80,874 491,315 198,384 112,822
---------- ----------- ----------- ---------- ----------
Gross profit........ 4,110 4,736 312,390 156,818 95,640
Operating expenses:
Selling, general and
administrative.............. 595,004 1,723,929 1,634,164 814,046 816,300
Research and development,
net......................... 30,023 291,970 357,117 118,949 151,499
---------- ----------- ----------- ---------- ----------
Total costs and
expenses............ 625,027 2,015,899 1,991,281 932,995 967,799
---------- ----------- ----------- ---------- ----------
Loss from
operations.......... (620,917) (2,011,163) (1,678,891) (776,177) (872,159)
Interest income (expense),
net......................... (935) 33,535 (4,173) 27,047 (76,998)
---------- ----------- ----------- ---------- ----------
Net loss............ $ (621,852) $(1,977,628) $(1,683,064) $ (749,130) $ (949,157)
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
Net loss per share............ $ (.34) $ (.71) $ (.54) $ (.24) $ (.30)
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
Weighted average shares
outstanding................. 1,846,237 2,798,907 3,095,361 3,109,093 3,132,214
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK CUMULATIVE
------------------- PAID-IN SUBSCRIPTION TREASURY ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL RECEIVABLE STOCK DEFICIT ADJUSTMENT
--------- ------- ---------- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993......... 1,407,378 $14,074 $1,247,843 $ (340,000) -- $ (918,064) $ 18,278
Issuance of common stock, net of
expenses......................... 40,923 409 169,591 -- -- -- --
Issuance of stock pursuant to anti-
dilution provisions.............. 6,028 -- -- -- -- -- --
Proceeds from 1992 stock
subscriptions.................... -- -- -- 340,000 -- -- --
Repurchase of common stock......... (8,086) -- -- -- $ (35,000) -- --
Change in cumulative translation
adjustment....................... -- -- -- -- -- -- 21,496
Net loss for 1993.................. -- -- -- -- -- (621,852) --
--------- ------- ---------- ------------ --------- ----------- ----------
BALANCE AT DECEMBER 31,
1993............................. 1,446,243 14,483 1,417,434 -- (35,000) (1,539,916) 39,774
Issuance of common stock, net of
expenses......................... 1,033,472 10,335 2,519,736 -- -- -- --
Repurchase of common stock......... (48,962) -- -- -- (130,000) -- --
Compensatory stock options issued
to officers, directors and
employees........................ -- -- 587,754 -- -- -- --
Change in cumulative translation
adjustment....................... -- -- -- -- -- -- 4,999
Net loss for 1994.................. -- -- -- -- -- (1,977,628)
--------- ------- ---------- ------------ --------- ----------- ----------
BALANCE AT DECEMBER 31,
1994............................. 2,430,753 $24,818 $4,524,924 -- $(165,000) $(3,517,544) $ 44,773
Issuance of common stock, net of
expenses......................... 415,892 4,159 815,991 -- -- -- --
Exercise of compensatory stock
options.......................... 83,533 835 (725) -- -- -- --
Compensatory stock options issued
to officers, directors and
employees........................ -- -- 195,673 -- -- -- --
Change in cumulative translation
adjustment....................... -- -- -- -- -- -- 53,384
Net loss for 1995.................. -- -- -- -- -- (1,683,064) --
--------- ------- ---------- ------------ --------- ----------- ----------
BALANCE AT DECEMBER 31,
1995............................. 2,930,178 29,812 5,535,863 -- (165,000) (5,200,608) 98,157
Compensatory stock options issued
to officers, directors and
employees........................ -- -- 135,403 -- -- -- --
Proceeds from issuance of Bridge
Warrants, net of expenses........ -- -- 190,238 -- -- -- --
Change in cumulative translation
adjustment....................... -- -- -- -- -- -- 42,072
Net loss for the six months ended
June 30, 1996.................... -- -- -- -- -- (949,157) --
--------- ------- ---------- ------------ --------- ----------- ----------
BALANCE AT JUNE 30, 1996
(Unaudited)...................... 2,930,178 $29,812 $5,861,504 -- $(165,000) $(6,149,765) $140,229
--------- ------- ---------- ------------ --------- ----------- ----------
--------- ------- ---------- ------------ --------- ----------- ----------
<CAPTION>
TOTAL
STOCKHOLDER'S
EQUITY (NET
CAPITAL
DEFICIENCY)
-------------
<S> <C>
BALANCE AT JANUARY 1, 1993......... $ 22,131
Issuance of common stock, net of
expenses......................... 170,000
Issuance of stock pursuant to anti-
dilution provisions.............. --
Proceeds from 1992 stock
subscriptions.................... 340,000
Repurchase of common stock......... (35,000)
Change in cumulative translation
adjustment....................... 21,496
Net loss for 1993.................. (621,852)
-------------
BALANCE AT DECEMBER 31,
1993............................. (103,225)
Issuance of common stock, net of
expenses......................... 2,530,071
Repurchase of common stock......... (130,000)
Compensatory stock options issued
to officers, directors and
employees........................ 587,754
Change in cumulative translation
adjustment....................... 4,999
Net loss for 1994.................. (1,977,628)
-------------
BALANCE AT DECEMBER 31,
1994............................. $ 911,971
Issuance of common stock, net of
expenses......................... 820,150
Exercise of compensatory stock
options.......................... 110
Compensatory stock options issued
to officers, directors and
employees........................ 195,673
Change in cumulative translation
adjustment....................... 53,384
Net loss for 1995.................. (1,683,064)
-------------
BALANCE AT DECEMBER 31,
1995............................. 298,224
Compensatory stock options issued
to officers, directors and
employees........................ 135,403
Proceeds from issuance of Bridge
Warrants, net of expenses........ 190,238
Change in cumulative translation
adjustment....................... 42,072
Net loss for the six months ended
June 30, 1996.................... (949,157)
-------------
BALANCE AT JUNE 30, 1996
(Unaudited)...................... $ (283,220)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows used for operating
activities:
Net loss......................... $(621,852) $(1,977,628) $(1,683,064) $ (749,130) $(949,157)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and
amortization................ 2,235 24,465 41,541 21,504 25,239
Amortization of loan
discount.................... -- -- -- -- 33,300
Non-cash compensation
expense..................... -- 587,754 195,673 80,380 135,403
Changes in assets and
liabilities:
Accounts receivable........... (22,444) 9,768 (128,760) (189,871) 27,832
Inventories................... 3,573 (158,187) (256,790) (322,051) 116,899
Deferred financing costs...... -- -- -- -- (25,000)
Customer deposits............. -- -- -- -- 17,450
Other assets.................. (46,887) 3,877 (5,557) (44,563) 13,222
Accounts payable.............. (29,419) 113,964 35,314 (73,161) (134,045)
Accrued expenses and other
liabilities................. 122,993 6,566 83,486 1,497 206,711
--------- ----------- ----------- ----------- ---------
Net cash used for
operating activities... (591,801) (1,389,421) (1,718,157) (1,275,395) (532,146)
--------- ----------- ----------- ----------- ---------
Cash flows used for investing
activities:
Capital expenditures............. (18,150) (145,400) (30,872) (27,908) (2,914)
--------- ----------- ----------- ----------- ---------
Net cash used for
investing activities... (18,150) (145,400) (30,872) (27,908) (2,914)
--------- ----------- ----------- ----------- ---------
Cash flows from financing
activities:
Increase (decrease) in bank
overdraft..................... 41,878 (31,606) 11,695 15,572 31,028
Proceeds from bridge financing
net of expenses............... -- -- -- -- 465,000
Repurchase of treasury stock..... (35,000) (130,000) -- -- --
Proceeds from issuance of stock,
net of expenses............... 510,035 2,570,071 820,260 769,280 --
--------- ----------- ----------- ----------- ---------
Net cash provided by
financing activities... 516,913 2,408,465 831,955 784,852 496,028
--------- ----------- ----------- ----------- ---------
Effect of exchange rate changes on
cash............................. 16,067 5,027 56,550 (25,434) 33,834
Net increase (decrease) in cash and
cash equivalents................. (76,971) 878,671 (860,524) (543,885) (5,198)
Cash and cash equivalents,
beginning
of year.......................... 92,297 15,326 893,997 893,997 33,473
--------- ----------- ----------- ----------- ---------
Cash and cash equivalents, end of
year............................. $ 15,326 $ 893,997 $ 33,473 $ 350,112 $ 28,275
--------- ----------- ----------- ----------- ---------
--------- ----------- ----------- ----------- ---------
Supplemental schedule of cash paid
during the period for interest... $ 1,481 $ 4,029 $ 14,014 $ 307 $ 1,704
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995
AND FOR EACH SIX MONTH PERIOD THEN ENDED)
1. ORGANIZATION
Integrated Technology USA, Inc. (the 'Company') was incorporated in 1990.
The Company designs, develops and markets products for two emerging
computer-related markets: the transmission of voice communications over the
Internet and computer/telephone integration. To date the Company has generated
revenues from the sale of its products, CompuPhone 2000(Registered) and a
predecessor product (the 'products'), which integrate a computer keyboard and a
telephone. The Company currently outsources substantially all of its
manufacturing and assembly requirements.
The Company has incurred substantial, recurring losses and a net cash
outflow from operations since its incorporation. These losses have been funded
primarily from the sale of the Company's common stock. The Company is in the
process of attempting to raise additional funds through the sale of its common
stock, either by means of a public offering or private placements or a
combination thereof, and the private placement of its debt. There is no
assurance that the Company will be able to obtain sufficient funds to support
its operations. As a result of the foregoing, there remains substantial doubt as
to the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, I.T.I. Innovative Technology Ltd.
('Innovative') and CompuPrint Ltd. ('Compuprint'), both of which are
incorporated and conduct business in Israel. All significant intercompany
transactions and account balances have been eliminated in consolidation.
Assets and liabilities of the Company's Israeli subsidiaries are translated
to United States dollars based on exchange rates at the end of the reporting
period. Income and expense items are translated at average exchange rates
prevailing during the reporting period. Translation adjustments are accumulated
in a separate component of stockholder's equity. Transaction gains or losses are
included in the determination of income.
Approximately 6%, and 10% of consolidated net sales for the year ended
December 31, 1995 and for the six months ended June 30, 1995, respectively, are
comprised of sales in Israel. There were no significant sales in Israel for the
years ended December 31, 1993 and 1994 and the six months ended June 30, 1996.
The net assets of the Company's Israeli subsidiaries accounted for 35%, 31%,
19%, of the consolidated net assets at December 31, 1994, 1995 and June 30,
1995, respectively. The net capital deficiency of the Company's Israeli
subsidiaries accounted for 69% of the consolidated net capital deficiency at
June 30, 1996.
Revenue Recognition and Warranties
Revenues are recognized on shipment of the products. For products shipped
on consignment, revenues are recognized when the products are sold by the
consignee. The Company provides for estimated returns on all sales.
The Company provides purchasers of CompuPhone 2000(Registered) with certain
warranties. The Company covers the potential costs associated with such
warranties by obtaining corresponding warranties from the contract manufacturer
that manufactures CompuPhone 2000(Registered) for the Company.
Cash Equivalents
The Company considers all money market accounts and investments with
original maturities of three months or less to be cash equivalents. Included in
cash and cash equivalents are $676,851, $7,619 and $7,988 of time deposits at
December 31, 1994 and June 30, 1995 and 1996, respectively.
F-7
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995
AND FOR EACH SIX MONTH PERIOD THEN ENDED)
Fair Values of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable and
payable, accrued expenses, bank overdraft and short-term loans approximate fair
value due to the short-term maturities of these assets and liabilities.
Inventory
Inventory is valued at the lower of cost or market and is principally
comprised of CompuPhone 2000(Registered) units. Cost is determined by the
first-in, first-out method.
Depreciation and Amortization
Fixed assets are recorded at cost and depreciated, using the straight-line
method, over the assets' estimated useful lives ranging from 5 to 17 years.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121-Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of ('SFAS
121')-was adopted in 1995. Assessment of the recoverability of long-lived assets
are conducted when events or changes in circumstances occur that indicate that
the carrying value of the asset may not be recoverable. The measurement of
possible impairment is based on the ability to recover such carrying value from
the future undiscounted cash flows of related operations. The policy on
impairment prior to the adoption of SFAS 121 was not materially different.
Research and Development
Research and development costs are expensed as incurred and are reported
net of contributions by the Government of Israel Chief Scientist which amounted
to $34,807, $46,714, $2,477 and $2,477 for the years ended December 31, 1993,
1994, 1995 and for the six months ended June 30, 1995, respectively. There were
no contributions for the six month period ended June 30, 1996.
Income Taxes
The Company follows the asset and liability approach for deferred income
taxes. This method provides that deferred tax assets and liabilities are
recorded, using currently enacted tax rates, based upon the difference between
the tax bases of assets and liabilities and their carrying amounts for financial
statement purposes.
Net Loss per Share
Net loss per share is computed using the weighted average number of common
shares outstanding and dilutive common share equivalents. Common shares issued,
and options and warrants granted, by the Company during the twelve months
preceding the proposed IPO (see Note 9) have been included in the calculation of
common and common equivalent shares outstanding as if they were outstanding for
all periods presented using the treasury stock method and an assumed initial
public offering price of $7.00 per share in the proposed IPO. Options and
warrants granted prior to the aforementioned twelve month period have been
included in the calculation of common and common equivalent shares outstanding
when dilutive.
F-8
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995
AND FOR EACH SIX MONTH PERIOD THEN ENDED)
Stock-Based Compensation
The Company continues to measure compensation cost using the accounting
prescribed by Accounting Principles Board Opinion No. 25-Accounting for Stock
Issued to Employees. However, the Company has adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123-Accounting
for Stock Based Compensation ('SFAS 123').
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reported period. Actual results could differ from these
estimates.
Concentration of Credit Risk
Financial instruments which subject the Company to concentration of credit
risk consist principally of trade receivables. At December 31, 1994 and 1995 and
June 30, 1996, trade receivables from retailers accounted for approximately 25%,
63% and 93% of total trade receivables, respectively.
Interim Financial Information
The consolidated financial information presented as of June 30, 1996 and
for each of the six months ended June 30, 1995 and 1996 is unaudited, but in the
opinion of management contains all adjustments (which consist of only normal
recurring adjustments) necessary for a fair presentation of such financial
information. Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Computer equipment................. $140,253 $155,231 $157,010
Furniture and fixtures............. 19,603 32,229 31,629
Vehicles........................... 41,753 40,195 39,341
Leasehold improvements............. 52,043 50,101 49,037
-------- -------- --------
253,652 277,756 277,017
Less: accumulated depreciation..... 111,532 150,647 174,440
-------- -------- --------
$142,120 $127,109 $102,577
-------- -------- --------
-------- -------- --------
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1995 and 1996 was $2,235, $24,465, $41,541,
$21,504 and $25,239, respectively.
F-9
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995
AND FOR EACH SIX MONTH PERIOD THEN ENDED)
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Accrued payroll and benefits....... $ 44,552 $ 75,431 $189,431
Accrued professional fees.......... 40,000 83,828 131,446
Finders fee payable................ 40,000 40,000 30,000
Other.............................. 23,688 12,681 46,221
-------- -------- --------
$148,240 $211,940 $397,098
-------- -------- --------
-------- -------- --------
</TABLE>
5. PROVISION FOR SEVERANCE PAYMENTS
Under Israeli law, Innovative and Compuprint are obligated to make
severance payments to dismissed employees and employees leaving employment in
certain other circumstances, on the basis of the employee's latest monthly
salary and years of service. Payment is made on termination of the employees'
services. Such obligations are partially funded by the payment of premiums to
insurance companies under approved plans (the 'Plans'). The amounts so funded
are not reflected on the balance sheet since they are controlled by the
insurance companies and are not under the control of Innovative and Compuprint.
The liability for severance payments in these financial statements represents
the obligations of Innovative and Compuprint not funded under the plans. For the
years ended December 31, 1993, 1994 and 1995 and the six months ended June 30,
1995 and 1996, estimated expenses/(recoveries) relating to employees' severance
rights were $10,698, $20,140, $(1,203), $(837) and $55,494, respectively.
6. INCOME TAXES
There was no provision for income taxes at December 31, 1993, 1994 and 1995
and June 30, 1995 and 1996.
Losses before United States and Israeli income taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ JUNE 30,
1993 1994 1995 1996
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
United States...................... 395,757 1,347,761 1,014,362 376,835
Israel............................. 226,095 629,867 691,679 568,835
-------- ---------- ---------- --------
621,852 1,977,628 1,706,041 945,670
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>
Deferred income tax assets comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Compensatory stock options......... $ 272,650 $ 259,285 $ 313,408
Net operating loss
carryforwards--U.S............... 739,812 1,140,622 1,265,022
Net operating loss
carryforwards--Israel............ 284,000 315,000 480,000
Other.............................. 83,490 119,378 94,895
---------- ---------- ----------
1,379,952 1,834,285 2,153,325
Valuation allowance................ (1,379,952) (1,834,285) (2,153,325)
---------- ---------- ----------
-- -- --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Net operating loss carryforwards of approximately $3,000,000 at June 30,
1996, are due to expire in the years 2006 to 2011. Internal Revenue Code Section
382 places a limitation on the utilization of Federal net operating loss
carryforwards when an ownership change, as defined by tax law, occurs.
Generally, an ownership
F-10
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995
AND FOR EACH SIX MONTH PERIOD THEN ENDED)
change, as defined, occurs when a greater than 50 percent change in ownership
takes place. The annual utilization of net operating loss carryforwards
generated prior to such changes in ownership will be limited, in any one year,
to a percentage of fair market value of the Company at the time of the ownership
change. Such an ownership change will most likely occur upon completion of the
proposed IPO (see Note 9) and may have already resulted from the additional
equity financing obtained by the Company since its formation.
At June 30, 1996, the net operating loss carryforwards for Innovative and
Compuprint in the State of Israel, which do not expire, amounted to $772,000 and
$560,000, respectively.
Financial Accounting Standard No. 109-'Accounting for Income
Taxes'-requires that a valuation allowance be recorded when it is more likely
than not that deferred tax assets will not be realized. Since the Company has
incurred significant losses since its formation and future income is uncertain,
and due to the possible limitation in the utilization of the net operating loss
carryforwards described above, the Company has recorded a valuation allowance
against all deferred tax assets at December 31, 1994, 1995 and June 30, 1996.
7. COMMON STOCK
Stock Options
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE FAIR
OF SHARES PER SHARE VALUE
--------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding at December 31, 1993..... 11,410 $0.01 $3.00
Granted in 1994.............................. 133,111 1.643 3.00
Granted in 1994.............................. 12,756 2.744 3.00
Granted in 1994.............................. 283,110 0.01 2.00 - 3.00
---------
Options outstanding at December 31, 1994..... 440,387 0.01 - 2.744 2.00 - 3.00
Exercised in 1995............................ (83,533)
---------
Options outstanding at December 31, 1995..... 356,854 0.01 - 2.744 2.00 - 3.00
Granted in 1996.............................. 46,335 0.01 5.25
---------
Options outstanding at June 30, 1996......... 403,189 0.01 - 2.744 2.00 - 5.25
---------
---------
</TABLE>
11,410, 283,404, 329,010 and 375,345 options were exercisable at December
31, 1993, 1994, 1995 and June 30, 1996, respectively.
Fair value of options granted in 1994 were determined, by the Board of
Directors, primarily on the basis of the price received from the issuance of the
Company's common stock to unrelated purchasers on or about the dates of grant of
such options. Such options are all currently vested, except for options with
respect to 27,844 shares which vest on the earlier of completion of the proposed
IPO and January 1, 1997.
For options granted in 1996, fair value of such options approximated the
market value (equal to 75% of the proposed IPO price) of the Company's common
stock at the date of grant as determined by the Board of Directors. Accordingly,
had the Company adopted the accounting provisions of SFAS 123, no additional
non-cash compensation would be required to be recorded by the Company. In
determining fair value, the Company assumed zero volatility, no expected growth,
no expected dividends and a risk free interest rate of five and one half
percent. Such options were immediately exercisable and expire two years after
completion of the proposed IPO (see Note 9).
The Company recognized $587,754, $195,673, $80,380 and $135,403 in non-cash
compensation expense with respect to the granting of stock options for the years
ended December 31, 1994 and 1995, and the six months ended June 30, 1995 and
1996, respectively.
F-11
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995
AND FOR EACH SIX MONTH PERIOD THEN ENDED)
8. MAJOR CUSTOMERS AND EXPERT SALES
For the year ended December 31, 1993, sales to two customers were 26% and
18% of consolidated net sales. For the year ended December 31, 1994, sales to
four customers were 12%, 13%, 23% and 16% of consolidated net sales. For the
year ended December 31, 1995, sales to one customer was 18% of consolidated net
sales. For the six months ended June 30, 1995 sales to two customers were 11%
and 9% of consolidated net sales. For the six months ended June 30, 1996 sales
to three customers were 11%, 11% and 12% of consolidated net sales.
Export sales, excluding sales by the Company's Israeli subsidiaries,
Innovative and Compuprint, aggregated approximately 28%, 16%, 16%, 16% and 34%
of consolidated net sales for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1995 and 1996, respectively.
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Purchase Commitments
At December 31, 1995 and June 30, 1996, the Company had outstanding
purchase orders for the Compuphone 2000(Registered) and a wireless printing
product amounting to approximately $1,600,000 for delivery in 1996 and 1997.
Leases
The Company leases all of its facilities under operating lease agreements.
None of the leases contain renewal options. All facilities are leased on a month
to month basis except for the Jerusalem, Israel facility which is leased until
May 31, 1997 and which lease provides for future minimum rental payments at June
30, 1996 as follows:
<TABLE>
<S> <C>
1996................ $21,600
1997................ 18,000
-------
$39,600
-------
-------
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1995 and 1996 was $24,479, $42,912, $75,713, $38,900
and $43,794, respectively.
Proposed Initial Public Offering
On March 27, 1996, the Company entered into a letter of intent with an
underwriter to sell shares, and warrants to acquire shares, of the Company's
common stock in a public offering (the 'IPO'). There is no assurance that the
IPO will be consummated. In connection therewith, the Company anticipates
incurring expenses which, if the IPO is not consummated, will be charged to
operations in 1996.
10. RECAPITALIZATION
In connection with the proposed IPO, the Company amended its Certificate of
Incorporation to, among other matters, change the authorized share capital of
the Company from 10,000 shares of common stock, no par value, to 40,000,000
shares of common stock, par value of $.01 per share, and 5,000,000 shares of
preferred stock, par value $.01 per share. The Company also converted each
outstanding share of its common stock, no par value, into 760.6291 shares of
common stock, par value $.01 per share.
All applicable share and per share data have been adjusted for the above
recapitalization.
F-12
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995
AND FOR EACH SIX MONTH PERIOD THEN ENDED)
11. SUBSEQUENT EVENTS (UNAUDITED)
Bridge Financing
During the period from April 30, 1996, through July 30, 1996, the Company
completed a bridge financing (the 'Bridge Financing'). The gross proceeds from
the Bridge Financing was $1,175,000 and the net proceeds to the Company from
such financing (after deduction of commissions and the estimated expenses of
such financing) was approximately $1,063,000 ($597,000 of which was received
subsequent to June 30, 1996).
In connection with the Bridge Financing, the Company issued promissory
notes (the 'Bridge Notes') in the aggregate principal amount of $1,175,000. The
Bridge Notes accrue interest at the rate of 10% per annum and are due and
payable, together with accrued interest, on the earlier of (i) 10 days after
completion of the IPO or (ii) December 15, 1996.
In connection with the Bridge Financing, the Company also issued certain
warrants (the 'Bridge Warrants'). The Bridge Warrants include warrants (the
'Investor Bridge Warrants') issued to each recipient of a Bridge Note to
purchase a number of shares of Common Stock determined by dividing (i) the
aggregate principal amount of the Bridge Note issued to such recipient by (ii)
the IPO price. The Bridge Warrants also include warrants (the 'Other Bridge
Warrants') issued to certain parties that assisted the Company in connection
with the Bridge Financing. The aggregate number of shares issuable upon exercise
of the Other Bridge Warrants will be determined by dividing (i) $87,500 by (ii)
the IPO price. The Bridge Warrants provide for an exercise price per share equal
to 10% of the IPO price and contain certain demand and piggyback registration
rights.
The gross proceeds from the Bridge Financing were allocated to the Bridge
Notes and to the Investor Bridge Warrants based on their relative fair values at
the dates of such Bridge Financing. The fair value of the Bridge Notes
represents the present value of the future cash flows related to such notes
calculated using a discount rate of 10%. The fair value of the Bridge Warrants
represents the assumed IPO price less a twenty-five percent discount (which
management of the Company has determined is appropriate to reflect the limited
market for the Common Stock prior to the IPO and the fact that there is no
assurance that the IPO will be completed) less the exercise price of the
warrants. In connection with the Bridge Financing, the Company recorded (i) loan
discount of $458,000, representing the portion of the gross proceeds from the
Bridge Financing that was allocated to the Bridge Warrants, and (ii) deferred
financing costs of approximately $103,000, representing the portion of the
expenses of the Bridge Financing that was allocated to the Bridge Notes. Such
loan discount and deferred financing costs are being amortized over the
estimated terms of the Bridge Notes. For the six months ended June 30, 1996, the
Company recognized approximately $33,000 of non-cash interest expense. Upon
repayment of the Bridge Notes from the net proceeds of the IPO, the unamortized
portion of the loan discount and deferred financing costs will be recognized as
an extraordinary loss.
1996 Stock Option Plan
In July 1996, the Board of Directors adopted the Company's 1996 Stock
Option Plan (the 'Stock Option Plan') which provides for the granting of options
to purchase not more than an aggregate of 833,333 shares of Common Stock. All
officers, directors and employees of the Company and other persons who perform
services for the Company are eligible to participate in the Stock Option Plan.
Some or all of the options may be 'incentive stock options' within the meaning
of the Internal Revenue Code of 1986, as amended. The Company plans to grant
options to purchase approximately 548,333 shares under the Stock Option Plan
immediately prior to completion of the proposed IPO, including an aggregate of
approximately 405,001 options to executive officers and directors of the
Company. These options will have an exercise price equal to the IPO price.
The Stock Option Plan provides that it is to be administered by the Board
of Directors, or by a committee appointed by the Board, which will be
responsible for determining, subject to the provisions of the Stock Option Plan,
to whom options are granted, the number of shares of Common Stock subject to an
option, whether an
F-13
<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995
AND FOR EACH SIX MONTH PERIOD THEN ENDED)
option shall be incentive or non-qualified, the exercise price of each option
(which, other than in the case of incentive stock options, may be less than the
fair market value of the shares on the date of grant), the period during which
each option may be exercised and the other terms and conditions of each option.
No options may be granted under the Stock Option Plan after July 29, 2006.
AGREEMENT TO LICENSE SOFTWARE PRODUCTS
Effective July 3, 1996, the Company entered into a 'Bundling and Sales
License Fee Agreement' (the 'Agreement') with a software company that provides
for the bundling of certain software (the 'software') with one of the Company's
products. Pursuant to the Agreement the Company is required to pay such software
company a fee with respect to each unit of the software that it bundles. Upon
execution of the Agreement, the Company was committed to place an order for
software units for which the Company is obligated to pay $30,000 in three equal
installments commencing with the shipment of such order. The Agreement expires
on January 3, 1998.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement (the 'Employment
Agreement') with an officer of the Company, contingent upon the completion of
the IPO prior to December 31, 1996. The Employment Agreement is retroactive to
July 1, 1996 and the scheduled term of the Employment Agreement extends to
December 31, 1999. The Employment Agreement provides for payment of a minimum
salary of $190,000 per annum and certain benefits over the term of the
Employment Agreement as follows:
(i) insurance premiums equal to approximately 16% of the officer's
gross salary
(ii) contributions to a savings plan equal to approximately 8% of the
officer's gross salary
(iii) the use of an automobile and the payment by the Company of
associated maintenance expenses
(iv) the payment by the Company of any taxes payable by the officer as
a result of receiving any of the foregoing benefits
In addition, pursuant to the Agreement, the officer is entitled to receive
severance payments (under certain circumstances provided in the Agreement) equal
to 150% of the officer's minimum annual salary in the year of severance, $25,000
in legal fees, and payment not in excess of $10,000 for office space for a
period of six months after termination.
F-14
<PAGE>
================================================================================
No Underwriter, dealer, salesperson or any other person has been authorized to
give any information or to make any representations other than those contained
in this Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or any
Underwriter. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 9
Use of Proceeds.................................. 20
Dividend Policy.................................. 21
Capitalization................................... 21
Dilution......................................... 23
Selected Consolidated Financial Data............. 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 26
Business......................................... 32
Management....................................... 42
Certain Transactions............................. 47
Principal Stockholders........................... 47
Description of Securities........................ 49
Shares Eligible for Future Sale.................. 52
Israeli Taxation................................. 55
Conditions in Israel............................. 57
Underwriting..................................... 59
Legal Matters.................................... 60
Experts.......................................... 61
Available Information............................ 61
Index to Consolidated Financial Statements....... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
INTEGRATED
TECHNOLOGY USA, INC.
3,000,000 SHARES OF
COMMON STOCK
AND
3,000,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
------------------------------
PROSPECTUS
------------------------------
NATIONAL SECURITIES
CORPORATION
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to specific authority granted by Section 102 of the Delaware
General Corporation Law (the 'DGCL'), the Registrant's Certificate of
Incorporation contains the following provision regarding limitation of liability
of directors and officers:
The personal liability of the directors of the corporation is hereby
eliminated to the fullest extent permitted by Paragraph (7) of subsection
(b) of Section 102 of the General Corporation Law of the State of Delaware,
as the same may be amended and supplemented, or any corresponding provision
of the General Corporation Law of the State of Delaware.
The Registrant, as a Delaware corporation, is empowered by Section 145 of
the DGCL, subject to the procedures and limitation stated therein, to indemnify
any person against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with any threatened, pending or completed action, suit or proceeding in which
such person is made a party by reason of his being or having been a director,
officer, employer or agent of the Registrant. The statute provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors, or otherwise. The Registrant's
Certificate of Incorporation and the Registrant's By-laws both provide for
indemnification of its officers and directors to the full extent permitted by
the DGCL.
The foregoing description of certain provisions of the Registrant's
Certificate of Incorporation and By-laws gives effect to certain amendments
thereto to be effected prior to completion of the Offering.
The Company may seek to obtain directors' and officers' liability
insurance. Such insurance may insure against any liability asserted against any
present or past director or officer incurred in the capacity of director or
officer arising out of such status, whether or not the Company would have the
power to indemnify such person.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement contains representations and warranties by the Company as to the
accuracy of the Registration Statement and the Prospectus included therein and
provides for indemnification and contribution by the Underwriters with respect
to certain liabilities of directors, officers and controlling persons of the
Registrant.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth various expenses, other than, the
underwriters' fees, discounts and commissions, which will be incurred in
connection with the Offering. All amounts except the SEC registration fee and
the NASD filing fee are estimates. Items which are not included will be supplied
by amendment.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 26,030
NASD filing fee.................................................. 8,083
American Stock Exchange listing fee.............................. 50,000
Blue Sky fees and expenses....................................... 25,000
Transfer Agent's fees and expenses............................... 5,000
Printing and engraving expenses.................................. 90,000
Accounting fees and expenses..................................... 225,000
Legal fees and expenses (other than Blue Sky fees and
expenses)...................................................... 225,000
Travel and road show expenses.................................... 200,000
Miscellaneous.................................................... 95,887
--------
Total.......................................................... $950,000
--------
--------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning sales by the Company of
unregistered securities within the past three years. Such information with
respect to the Company's Common Stock has been adjusted for a 760.6291 for 1
stock split to be effected prior to completion of the Offering. The issuances by
the Company of the securities sold in the transactions referenced below were not
registered under the Securities Act, pursuant to the exemption contemplated in
Section 4(2) thereof for transactions not involving a public offering. The
Company believes that each of the issuances made pursuant to Section 4(2) was
made to a sophisticated investor, who had the financial resources to bear the
risk of the investment and who had the means and opportunity to obtain
information concerning the Company. The consideration paid to the Company in
respect of each issuance was cash, unless otherwise indicated.
A. Common Stock
<TABLE>
<CAPTION>
NUMBER OF
DATE SHARES CONSIDERATION PURCHASER
- -------------------- ---------- ------------------------------ --------------------------------------
<S> <C> <C> <C>
December 31, 1993 2,412 No consideration--issued Bernard Friedson
pursuant to antidilution
rights relating to earlier
purchase
1,206 No consideration--issued Bjorn Banberger
pursuant to antidilution
rights relating to earlier
purchase
2,412 No consideration--issued Carol Katz
pursuant to antidilution
rights relating to earlier
purchase
</TABLE>
<TABLE>
<S> <C> <C> <C>
January 1994 18,223 $50,000 Berl Eckstein
18,223 50,000 Richard Fentin
18,223 50,000 Stanley & Saradee Fortgang
190,158 521,750 Gila Green
36,511 100,176 David Hauser
54,669 150,000 Arnold Hiatt
19,016 52,175 Richard Hochstein
19,016 52,175 Michael Hochstein
54,669 150,000 Robert Kraft
36,446 100,000 Lerna, Inc.
19,016 52,175 Nathan Low
9,111 25,000 Ellen Marcus
6,086 16,696 Matthew Maryles IRA
12,931 35,479 Maot Group Partners
72,892 200,000 Ezra Merkin
109,339 300,000 Jack Nash
72,892 200,000 George Noble
38,032 104,350 Raphael Pfeffer
15,213 41,740 Laurie Shahon
54,766 150,264 Brook Road Nominee Trust
54,669 150,000 William Spier
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
DATE SHARES CONSIDERATION PURCHASER
- -------------------- -------------------- --------------------------------------
30,426 $ 83,480 Tertiare Investissement
<S> <C> <C> <C> <C>
36,446 100,000 Manny Weiss
36,511 100,176 Michael Weiss
February 1995* 25,355 50,000 Kane Management
(originally sold to FMR Computers &
Software LTD.)
25,355 50,000 Yecheskiel Gonczarowski
50,709 100,000 Peach Management
50,709 100,000 Kane Management
April 1995* 10,583 20,870 241 Associates
(originally sold to Barry Eisenberg)
10,583 20,870 Alan Haber
12,678 25,000 Stanley & Saradee Fortgang
20,284 40,000 Shmuel Brandman
25,761 50,802 Nathan Kahn
12,678 25,000 Robert Kraft
31,749 62,610 Clayton Lewis
25,355 50,000 Marc Mazur
12,678 25,000 Ezra Merkin
50,709 100,000 Jack Nash
25,355 50,000 George Noble
25,355 50,000 Brook Road Nominee Trust
November 1995 83,533 110 Brook Road Nominee Trust
</TABLE>
- ------------------
* 28.1265% of these shares were issued in December 1995 without additional
consideration pursuant to an agreement that provided for such issuance due to
the failure of the Company to meet specified goals.
B. Bridge Financing
As described in Part I of the Registration Statement (under 'Management's
Discussion and Analysis of Financial Condition and results of Operations--Bridge
Financing'), during the period April 30, 1996, through July 30, 1996, the
Company sold certain promissory notes in connection with a bridge financing.
Certain information concerning the sale of such notes is set forth below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NOTES PURCHASED PURCHASER
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
$ 25,000........................................... Julius Hess
125,000........................................... CPS Capital, Ltd.
100,000........................................... Sentex Sensing Technology
400,000........................................... Union Bancaire Privee
25,000........................................... Nicole R. and Michael Kubin
50,000........................................... Central Investments Ltd.
50,000........................................... Forward Issue Ltd.
100,000........................................... Alcamin Anstalt
50,000........................................... Charles H. Bendheim
50,000........................................... Linton Lake S.A.
100,000........................................... J.C. Bendheim
50,000........................................... Mates Ventures
50,000........................................... Gottdiener Associates, L.P.
</TABLE>
As described in the above-referenced section of Part I of the Registration
Statement, each purchaser of such notes also received Bridge Warrants (as
defined in such section). In addition, as described in such section, the Company
issued Bridge Warrants to certain parties that assisted the Company in
connection with the Bridge Financing. These parties are National Securities
Corporation and Mr. Paul Morris (a registered representative registered with
Gaines, Berland Inc.)
II-3
<PAGE>
C. Options
The Company has heretofore issued options to purchase an aggregate of
403,189 shares of Common Stock to directors, employees and consultants.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement between the Company and National Securities Corporation, as
Representative of the several Underwriters listed therein (the 'Representative')**
3.1 Amended and Restated Certificate of Incorporation of the Registrant*
3.2 Amended and Restated By-Laws of the Registrant*
4.1 Specimen Common Stock Certificate*
4.2 Form of Representative's Warrant Agreement between the Company and National Securities Corporation, as
representative of the several Underwriters (the 'Representative'), including form of Representative's
Warrant Certificate*
4.3 Form of Warrant Agreement between the Company, the Representative and American Stock Transfer & Trust
Company, including form of Warrant Certificate*
5.1 Opinion of Ehrenreich & Krause*
10.1 Form of the Subscription Agreement entered into by the Registrant with each person or entity that
provided funds to the Company in connection with the Bridge Financing (as defined in the Registration
Statement), having attached thereto the form of Bridge Note and Bridge Warrant (as such terms are
defined in the Registration Statement)
10.3 Employment Agreement dated as of July 1, 1996 between the Registrant and Alan Haber***
10.4 Distribution Agreement entered into in 1996 between the Registrant and Gemini Industries, Inc.*
10.5 Bundling and Sales License Fee Agreement dated July 3, 1996 between the Registrant and VocalTec Ltd.*
10.6 Registrant's 1996 Stock Option Plan*
11.1 Statement re: computation of per share earnings*
21.1 List of Subsidiaries of the Registrant***
23.1 Consent of Price Waterhouse LLP*
23.2 Consent of Ehrenreich & Krause (included in the Opinion filed as Exhibit 5.1)*
23.3 Consent of Simon Kahn***
23.4 Consent of Nicole R. Kubin***
23.5 Consent of Morton L. Landowne***
23.6 Consent of Noah Perlman***
23.7 Consent of William Spier***
27.1 Financial Data Schedule*
</TABLE>
- ------------------
* Filed herewith
** To be filed by amendment.
*** Previously Filed
ITEM 28. UNDERTAKINGS.
(a) Rule 415 Offerings.
The undersigned small business issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-4
<PAGE>
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
'Calculation of Registration Fee' table in the effective registration
statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Equity offerings of nonreporting small business issuers.
The undersigned small business issuer hereby undertakes to provide to the
Representative, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Representative to permit prompt delivery to each purchaser.
(c) Request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Act'), may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceedings) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(d) Reliance upon Rule 430A under the Securities Act.
The undersigned small business issuer hereby undertakes that it will:
(1) For determining any liability under the Securities Act of 1933, as
amended, treat the information omitted from the form of prospectus filed as
part of the registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act of 1933, as
amended, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in
the registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2, and has authorized this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned in
Jerusalem, Israel, on the 13th day of September, 1996.
INTEGRATED TECHNOLOGY USA, INC.
By: _________/s/ ALAN P. HABER________
Alan P. Haber
President and Chief Executive
Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<C> <S> <C>
/s/ ALAN P. HABER Chairman of the Board; President; September 13, 1996
- ------------------------------------------ Chief Executive Officer and Director
Alan P. Haber (Principal Executive Officer)
/s/ BARRY L. EISENBERG Director September 13, 1996
- ------------------------------------------
Barry L. Eisenberg
Director September , 1996
- ------------------------------------------
Bernard S. Appel
/s/ MORRIS J. SMITH Director September 16, 1996
- ------------------------------------------
Morris J. Smith
/s/ SIMON KAHN Chief Financial Officer September 13, 1996
- ------------------------------------------ (Principal Financial and Principal
Simon Kahn Accounting Officer)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------------------------------- ----
<S> <C> <C>
1.1 Form of Underwriting Agreement between the Company and National Securities Corporation, as
Representative of the several Underwriters listed therein (the 'Representative')**
3.1 Amended and Restated Certificate of Incorporation of the Registrant*
3.2 Amended and Restated By-Laws of the Registrant*
4.1 Specimen Common Stock Certificate*
4.2 Form of Representative's Warrant Agreement between the Company and National Securities
Corporation, as representative of the several Underwriters (the 'Representative'), including form
of Representative's Warrant Certificate*
4.3 Form of Warrant Agreement between the Company, the Representative and American Stock Transfer &
Trust Company, including form of Warrant Certificate*
5.1 Opinion of Ehrenreich & Krause*
10.1 Form of the Subscription Agreement entered into by the Registrant with each person or entity that
provided funds to the Company in connection with the Bridge Financing (as defined in the
Registration Statement), having attached thereto the form of Bridge Note and Bridge Warrant (as
such terms are defined in the Registration Statement)
10.3 Employment Agreement dated as of July 1, 1996 between the Registrant and Alan Haber***
10.4 Distribution Agreement entered into in 1996 between the Registrant and Gemini Industries, Inc.*
10.5 Bundling and Sales License Fee Agreement dated July 3, 1996 between the Registrant and VocalTec
Ltd.*
10.6 Registrant's 1996 Stock Option Plan*
11.1 Statement re: computation of per share earnings*
21.1 List of Subsidiaries of the Registrant***
23.1 Consent of Price Waterhouse LLP*
23.2 Consent of Ehrenreich & Krause (included in the Opinion filed as Exhibit 5.1)*
23.3 Consent of Simon Kahn***
23.4 Consent of Nicole R. Kubin***
23.5 Consent of Morton L. Landowne***
23.6 Consent of Noah Perlman***
23.7 Consent of William Spier***
27.1 Financial Data Schedule*
</TABLE>
- ------------------
* Filed herewith.
** To be filed by amendment.
*** Previously Filed.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
INTEGRATED TECHNOLOGY USA, INC.
INTEGRATED TECHNOLOGY USA, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is INTEGRATED TECHNOLOGY USA, INC., and
the original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on August 30, 1990.
2. Pursuant to Sections 242 and 245 of the Delaware General Corporation
Law, this Amended and Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the Corporation's Certificate of
Incorporation.
3. The terms and provisions of this Amended and Restated Certificate of
Incorporation have been duly adopted pursuant to the provisions of Sections 242
and 245 of the Delaware General Corporation Law and has been approved by written
consent of the required number of shares of outstanding stock of the Corporation
pursuant to Section 228 of the Delaware General Corporation Law and written
notice pursuant to Subsection 228(d) of the Delaware General Corporation Law has
been given to those stockholders whose written consent has not been obtained.
4. The text of the Amended and Restated Certificate of Incorporation is
as hereby restated and further amended to read in its entirety as follows:
ARTICLE I
The name of the corporation is Integrated Technology USA, Inc.
ARTICLE II
The address of the corporation's registered office in the State of
Delaware is United Corporate Services, Inc., 15 East North Street, Dover,
Delaware 19901, County of Kent. The name of its registered agent at such address
is United Corporate Services, Inc.
ARTICLE III
A. The corporation is authorized to issue two classes of stock to be designated,
respectively, "Common Stock" and "Preferred Stock". The amount of the total
authorized capital stock of the corporation is 45,000,000 shares, divided into
(a) 40,000,000 shares of Common Stock having a par value of $0.01 per share, and
(b) 5,000,000 shares of Preferred Stock having a par value of $0.01 per share.
<PAGE>
B. The Preferred Stock may be issued from time to time in one or more series.
Subject to the restrictions prescribed by law, the Board of Directors is
authorized to fix by resolution or resolutions the number of shares of any
series of Preferred Stock and to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series of Preferred Stock, to increase (but not above
the total number of authorized shares of Preferred Stock) or decrease (but not
below the number of shares of any such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series.
The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, determination of the
following: (a) the number of shares constituting that series and the distinctive
designation of that series; (b) the dividend rate on the shares of that series,
whether dividends shall be cumulative, and if so, from which date or dates, and
the relative rights of priority, if any, of payment of dividends on shares of
that series; (c) whether that series shall have voting rights in addition to the
voting rights provided by law, and if so, the terms of such voting rights; (d)
whether that series shall have conversion privileges, and if so, the terms and
conditions of such privileges, including provision for adjustment of the
conversion rate in such events as the Board of Directors shall determine; (e)
whether or not the shares of that series shall be redeemable, and if so, the
terms and conditions of such redemption, including the date or dates upon or
after which they shall be redeemable, and the amount per share payable in case
of redemption, which amount may vary under different conditions and at different
redemption dates; (f) whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and if so, the terms and the
amount of such sinking funds; (g) the rights of the shares of that series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
corporation, and the relative rights of priority, if any, of payment of shares
of that series; and (h) any other relative rights, preferences and limitations
of that series.
C. Effective at the time of filing with the Secretary of State of the State of
Delaware of this Amended and Restated Certificate of Incorporation (the
"Effective Time"), each single share of the corporation's Common Stock no par
value that is issued and outstanding or held in treasury at the Effective Time
shall, automatically and without any action on the part of the respective
holders thereof, be converted into 760.6291 shares of the corporation's Common
Stock, par value $0.01 per share; provided, however, that if a stockholder would
be entitled to receive a fractional share of Common Stock based upon the
foregoing conversion ratio, such stockholder shall receive a whole share of
Common Stock in lieu of such fractional share.
ARTICLE IV
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may now or hereafter be organized under the
Delaware General Corporation Law.
2
<PAGE>
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, adopt, alter,
amend or repeal the bylaws of the corporation.
ARTICLE VI
The election of directors need not be by written ballot unless the
bylaws of the corporation shall so provide.
ARTICLE VII
Meetings of stockholders may be held within or without the State of
Delaware, as the bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statute) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the corporation.
ARTICLE VIII
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be duly executed this 9th day of
September, 1996.
INTEGRATED TECHNOLOGY USA, INC.
By: /s/ Alan P. Haber
-------------------------------------------------
Alan P. Haber, Chief Executive Officer
3
AMENDED AND RESTATED BY-LAWS
-OF-
INTEGRATED TECHNOLOGY USA, INC.
(a Delaware corporation hereinafter called the "Corporation")
Adopted , 1996
ARTICLE I
Offices
SECTION 1.01. Offices. The Corporation may have offices both
within and without the State of Delaware as the Board of Directors may from time
to time determine.
ARTICLE II
Meetings of Stockholders
SECTION 2.01. Place of Meetings. Meetings of stockholders may be
held at any place, either within or without the State of Delaware, designated
by the Board of Directors.
SECTION 2.02. Annual Meeting. The annual meeting of stockholders for
election of directors shall be held on such date and at such time as shall be
designated by the Board of Directors. Any other proper business may be
transacted at the annual meeting.
SECTION 2.03. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, may be called by the Board of Directors, the
Chairman of the Board of Directors, the Chief Executive Officer, the
President or the Secretary.
SECTION 2.04. Quorum. The holders of a majority of the shares entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
SECTION 2.05. Organization. Meetings of stockholders shall be presided
over by the Chairman of the Board, if any, or in his absence by the Vice
Chairman of the Board, if any, or in his absence by the President, or in his
absence by a Vice President, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
SECTION 2.06. Conduct of Meetings. The Board of Directors may adopt
such rules and regulations for the conduct of the meeting of stockholders as it
shall deem appropriate. Except to the extent inconsistent with such rules and
regulations as adopted by the Board of Directors, the chairman of any meeting of
stockholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are appropriate for the proper conduct of the meeting. Such rules,
regulations or procedures, whether adopted by the Board of Directors or
prescribed by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and the
safety of those present; (iii) limitations on attendance at or participation in
the meeting to stockholders of record of the Corporation, their duly authorized
and constituted proxies or such other persons as the chairman of the meeting
shall determine; (iv) restrictions on entry to the meeting after the time fixed
for the commencement thereof; and (v) limitations on the time allotted to
questions or comments by participants. Unless and to the extent determined by
the Board of Directors or the chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with the rules of parliamentary
procedure.
ARTICLE III
Directors
SECTION 3.01. Number of Directors. The number of directors which shall
constitute the entire Board of Directors shall be ten or such other number as
shall be set by the Board of Directors from time to time. No reduction in the
number of directors constituting the entire Board of Directors shall have the
effect of removing any director before that director's term of office expires.
SECTION 3.02. Term of Office. Each director, including a director
elected to fill a vacancy, shall hold office until such director's successor is
elected and qualified or the earlier resignation or removal of such director.
SECTION 3.03 Meetings. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman of the Board of Directors, the Chief Executive Officer, the
President or any director. Notice of the time and place of special meetings
shall be delivered to each director either (i) personally (either orally or in
writing), (ii) by telephone, (iii) by telex, telecopy or other facsimile
transmission, or (iv) by first-class mail, postage prepaid, addressed to a
director at that director's address as it is shown on the records of the
Corporation. If the notice is mailed, it shall be deposited in the United States
mail at least four days before the time of the holding of the meeting (ten days
in the case of a director whose address as shown on the records of the
Corporation is outside of the United State of America). If the notice to a
director is delivered in any other manner it shall be delivered (which shall for
this purpose mean received by the director) at least 48 hours before the time of
the holding of the meeting.
SECTION 3.04. Quorum. At all meetings of the Board of Directors, a
majority of the entire Board shall be necessary and sufficient to constitute a
quorum for the transaction of business.
SECTION 3.03. Meetings by Conference Telephone or Similar Device.
Members of the Board of Directors, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors, or any
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
SECTION 3.04. Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in the absence of the foregoing persons
by a chairman chosen at the meeting. The Secretary shall act as secretary of the
meeting, but in his absence the chairman of the meeting may appoint any person
to act as secretary of the meeting.
SECTION 3.05. Board Action by Written Consent Without a Meeting. Any
action required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee. Written consents representing actions taken by the board
or committee may be executed by telex, telecopy or other facsimile transmission,
and such facsimile shall be valid and binding to the same extent as if it were
an original.
ARTICLE IV
Officers
SECTION 4.01. General. The officers of the Corporation shall be chosen
by the Board of Directors and shall be a Chief Executive Officer, a President, a
Secretary and a Treasurer. The Board of Directors, in its discretion, may also
choose one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers
and other officers. The Board of Directors, in its discretion, may also choose a
Chairman of the Board and a Vice Chairman of the Board from among its members.
The Chairman and Vice Chairman of the Board of Directors, in such capacity,
shall not be considered officers of the Corporation. Each such officer shall
hold office until his resignation or removal. Any officer may resign at any time
upon written notice to the Corporation. The Board of Directors may remove any
officer with or without cause at any time, but such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation.
SECTION 4.02. Powers and Duties of Executive Officers. The officers of
the Corporation shall have such powers and duties in the management of the
Corporation as may be prescribed in a resolution by the Board of Directors and,
to the extent not so provided, as generally pertain to their respective offices,
subject to the control of the Board of Directors. Without limiting the
foregoing, the Secretary shall have the duty to record the proceedings of the
meetings of the stockholders and directors in a book to be kept for that
purpose. The Board of Directors may require any officer, agent or employee to
give security for the faithful performance of his duties.
ARTICLE V
Miscellaneous
SECTION 5.1. Waivers of Notice. Whenever any notice is required by law,
the Certificate of Incorporation or these By-laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, and, in the case of a waiver of notice of a meeting, whether or
not the business to be transacted at or the purposes of such meeting is set
forth in such waiver, shall be deemed equivalent thereto. The attendance of any
person at any meeting, in person or, in the case of the meeting of stockholders,
by proxy, shall constitute a waiver of notice of such meeting except where such
person attends such meeting for the express purpose of objecting at the
beginning of such meeting to the transaction of any business on the grounds that
such meeting is not duly called or convened.
SECTION 5.2. Fiscal Year. The fiscal year of the Corporation shall be
fixed from time to time by the Board of Directors.
SECTION 5.3. Seal. The corporate seal shall have inscribed thereon
the name of the Corporation and shall be in such form as may be approved from
time to time by the Board of Directors.
SECTION 5.4. Entire Board. As used in these bylaws, "entire Board of
Directors" means the total number of directors which the Corporation would have
if there were no vacancies in the Board of Directors.
[LOGO]
INTEGRATED TECHNOLOGY USA, INC.
INCORPORATED UNDER THE LAWS CUSIP 45813T 10 8
OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
INTEGRATED TECHNOLOGY USA, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney, upon surrender of this Certificate, properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed
by the facsimile signatures of its duly authorized officers and to be sealed
with the facsimile seal of the Corporation.
Dated:
[SEAL]
Secretary President
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, NY)
Transfer Agent and Registrar
By
Authorized Signature
<PAGE>
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ___________ Custodian ___________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ______________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
____________________________
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ---------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Company with full
power of substitution in the premises.
Dated ___________________
-------------------------------------------------------------
NOTICE: The signature to this assignment must correspond with
the name as written upon the face of the certificate in
every particular without alteration or enlargement or any
change whatever. The signature of the person executing this
power must be guaranteed by an Eligible Guarantor Institution
such as a Commercial Bank, Trust Company, Securities
Broker/Dealer, Credit Union, or a Savings Association
participating in a Medallion program approved by the
Securities Transfer Association, Inc.
<PAGE>
DRAFT 09/09/96
-------------------------------
INTEGRATED TECHNOLOGY USA, INC.
AND
NATIONAL SECURITIES CORPORATION
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of September __, 1996
-------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of September __, 1996, between
INTEGRATED TECHNOLOGY USA, INC., a Delaware corporation (the "Company"), and
NATIONAL SECURITIES CORPORATION and its assignees or designees (each hereinafter
referred to variously as a "Holder" or "Representative").
W I T N E S S E T H :
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof and entered
into between the Company and the Representative, to act as the representative of
the several underwriters listed therein (the "Underwriters") in connection with
the Company's proposed public offering of 3,000,000 shares of Common Stock (as
hereinafter defined) at a public offering price of $________ per share and
3,000,000 redeemable warrants (the "Redeemable Warrants") to purchase one (1)
share of Common Stock at an exercise price of $____, per share [150% of the
initial public offering price per share of Common Stock] (the "Public
Offering").
WHEREAS, pursuant to the Underwriting Agreement, the Company proposes to
issue warrants (the "Representative's Warrants") to the Representative to
purchase up to an aggregate of 300,000 shares of Common Stock of the Company
and/or 300,000 Redeemable Warrants.
WHEREAS, the Representative's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date (as such term is defined in the
Underwriting Agreement) by the Company to the Representative in consideration
for, and as part of the
<PAGE>
Underwriters' compensation in connection with, the Representative acting as the
representative pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate of three hundred dollars ($300),
the agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Representative is hereby collectively granted the right to
purchase, at any time from September __, 1997 (one year from the Closing Date
until 5:30 p.m., New York time, on September __, 2001 (5 years from the Closing
Date), at which time the Representative's Warrants expire, up to an aggregate of
300,000 shares of Common Stock, $0.01 par value per share (the "Common Stock"),
and/or 300,000 Redeemable Warrants at the Exercise Price (as defined in Section
8 hereof). One Redeemable Warrant is exercisable to purchase one additional
share of Common Stock at an initial exercise of $____ [150% of the initial
public offering price per share] from September __, 1997 [one year from the
Effective Date of the Registration Statement] until 5:30 p.m. New York time on
September __, 2001 [5 years from the Effective Date of the Registration
Statement], at which time the Redeemable Warrants shall expire. Except as set
forth herein, the shares of Common Stock and the Redeemable Warrants issuable
upon exercise of the Representative's Warrants are in all respects identical to
the shares of Common Stock and the Redeemable Warrants being purchased by the
Underwriters for resale to the public pursuant to the terms and provisions of
the Underwriting
-2-
<PAGE>
Agreement. The shares of Common Stock and the Redeemable Warrants issuable upon
exercise of the Representative's Warrants are sometimes hereinafter referred to
collectively as the "Securities."
2. Representative's Warrant Certificates. The Representative's warrant
certificates (the "Warrant Certificates") delivered and to be delivered pursuant
to this Agreement shall be in the form set forth in Exhibit A, attached hereto
and made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
3. Registration of Warrant. The Representative's Warrants shall be numbered
and shall be registered on the books of the Company when issued.
4. Exercise of Representative's Warrant.
The Representative's Warrants initially are exercisable at an aggregate
Exercise Price (subject to adjustment as provided in Section 11 hereof) per
share of Common Stock and Redeemable Warrant as set forth in Section 8 hereof
payable by certified or official bank check in New York Clearing House funds.
Upon surrender of a Representative's Warrant Certificate with the annexed Form
of Election to Purchase duly executed, together with payment of the Exercise
Price for the Securities purchased at the Company's principal offices in the
United States (presently located at 545 Cedar Lane, Teaneck, New Jersey 07666),
the registered holder of a Representative's Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
shares of Common Stock and/or Redeemable Warrants
-3-
<PAGE>
so purchased. The purchase rights represented by each Representative's Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional shares of Common Stock and/or Redeemable Warrants
underlying the Representative's Warrants). Representative's Warrants may be
exercised to purchase all or part of the shares of Common Stock together with an
equal or unequal number of the Redeemable Warrants represented thereby. If the
Company redeems all of the Redeemable Warrants sold in the Public Offering, then
thereafter the Representative's Warrants may not be exercised to purchase any
Redeemable Warrants unless such exercise is accompanied by the simultaneous
exercise of all such Redeemable Warrants being purchased. In the case of the
purchase of less than all of the shares of Common Stock and/or Redeemable
Warrants purchasable under any Representative's Warrant Certificate, the Company
shall cancel said Representative's Warrant Certificate upon the surrender
thereof and shall execute and deliver a new Representative's Warrant Certificate
of like tenor for the balance of the shares of Common Stock and/or Redeemable
Warrants purchasable thereunder.
5. Issuance of Certificates. Upon the exercise of the Representative's
Warrant, the issuance of certificates for shares of Common Stock and/or
Redeemable Warrants or other securities, properties or rights underlying such
Representative's Warrant shall be made forthwith (and in any event within five
(5) business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Sections 7
and 9 hereof) be issued in the name of, or in such names as may be directed by,
the Holder thereof; provided, however, that
-4-
<PAGE>
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Representative's Warrant Certificates and the certificates representing
the shares of Common Stock and/or Redeemable Warrants or other securities,
property or rights issued upon exercise of the Representative's Warrant shall be
executed on behalf of the Company by the manual or facsimile signature of the
then present President or any Vice President of the Company under its corporate
seal reproduced thereon, attested to by the manual or facsimile signature of the
then present Secretary or any Assistant Secretary of the Company.
Representative's Warrant Certificates shall be dated the date of execution by
the Company upon initial issuance, division, exchange, substitution or transfer.
6. Transfer of Representative's Warrant. The Representative's Warrant shall
be transferable only on the books of the Company maintained at its principal
office, where its principal office may then be located, upon delivery thereof
accompanied by a Form of Assignment (the form of which is included in Exhibit A
hereto) duly endorsed by the Holder or by its duly authorized attorney or
representative accompanied by proper evidence of succession,
-5-
<PAGE>
assignment or authority to transfer. Upon any registration of transfer, the
Company shall execute and deliver the new Representative's Warrant to the person
entitled thereto.
7. Restriction On Transfer of Representative's Warrant. The Holder of a
Representative's Warrant Certificate, by its acceptance thereof, covenants and
agrees that the Representative's Warrant is being acquired as an investment and
not with a view to the distribution thereof, and that the Representative's
Warrant may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for one year from the date hereof, except to
officers or partners of the Underwriters or members of the selling group, or by
operation of law.
8. Exercise Price.
8.1 Initial and Adjusted Exercise Price. Except as otherwise provided
in Section 11 hereof, the initial exercise price of each Representative's
Warrant shall be $____ per share of Common Stock [120% of the initial public
offering price per share of Common Stock] and $.12 per Redeemable Warrant. The
adjusted exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in accordance with
the provisions of Section 11 hereof. Any transfer of a Representative's Warrant
shall constitute an automatic transfer and assignment of the registration rights
set forth in Section 9 hereof with respect to the Securities or other
securities, properties or rights underlying the Representative's Warrants.
-6-
<PAGE>
8.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
9. Registration Rights.
9.1 Registration Under the Securities Act of 1933. Each
Representative's Warrant Certificate and each certificate representing shares of
Common Stock and/or Redeemable Warrants and any of the other securities issuable
upon exercise of the Representative's Warrant (collectively, the "Warrant
Shares") shall bear the following legend unless (i) such Representative's
Warrant or Warrant Shares are distributed to the public or sold to the
underwriters for distribution to the public pursuant to Section 9 hereof or
otherwise pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Act"), or (ii) the Company has received an opinion of
counsel, in form and substance reasonably satisfactory to counsel for the
Company, that such legend is unnecessary for any such certificate:
THE REPRESENTATIVE'S WARRANT REPRESENTED BY
THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY
SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF
-7-
<PAGE>
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT
AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESEN-
TATIVE'S WARRANT REPRESENTED BY THE
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH
THE REPRESENTATIVE'S WARRANT AGREEMENT
REFERRED TO HEREIN.
9.2 Piggyback Registration. If, at any time commencing after the
effective date of the Registration Statement relating to the Public Offering and
expiring five (5) years thereafter, the Company proposes to register any of its
securities under the Act (other than in connection with a merger, or the
offering of debt, or pursuant to Form S-4 or Form S-8, or pursuant to any form
that does not permit the registration of the Warrants and/or the Warrant Shares)
it will give written notice by registered mail, at least twenty (20) days prior
to the filing of each such registration statement, to the Holders of the
Representative's Warrants and/or the Warrant Shares of its intention to do so
(except that the foregoing shall not apply with respect to the registration
statement relating solely to the resale of shares underlying Bridge Warrants
that the Company proposes to file as described in the Registration Statement
relating to the Public Offering). If any of the Holders of the Representative's
Warrants and/or Warrant Shares notify the Company within ten (10) days after
mailing of any such notice of its or their desire to include any such securities
in such proposed registration statement, the Company shall afford such Holders
of the Representative's Warrants and/or Warrant Shares the opportunity to have
any such Representative's Warrants and/or Warrant Shares registered under such
registration statement. In the event that the managing underwriter for said
offering advises the Company
-8-
<PAGE>
in writing that in its opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such offering
without causing a diminution in the offering price or otherwise adversely
affecting the offering, the Company will include in such registration (a) first,
the securities the Company proposes to sell, (b) second, the securities held by
the entities, if any, that made the demand for registration, (c) third, the
Representative's Warrants and/or Warrant Shares requested to be included in such
registration which in the opinion of such underwriter can be sold, pro rata
among all proposed selling shareholders.
Notwithstanding the provisions of this Section 9.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 9.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing but prior to the
effective date thereof.
9.3 Demand Registration.
(a) At any time commencing one (1) year after the effective date of
the Registration Statement relating to the Public Offering (the "Registration
Statement") and expiring five (5) years from the effective date of the
Registration Statement, the Holders of the Representative's Warrants and/or
Warrant Shares representing a "Majority" (as hereinafter defined) of the
Representative's Warrants and/or Warrant Shares shall have the right (which
right is in addition to the registration rights under Section 9.2 hereof),
exercisable by written notice to the Company, to have the Company prepare and
file with the Securities and Exchange
-9-
<PAGE>
Commission (the "Commission"), on one occasion, a registration statement and
such other documents, including a prospectus, as may be necessary in the opinion
of both counsel for the Company and counsel for the Holders, in order to comply
with the provisions of the Act, so as to permit a public offering and sale by
such Holders and any other Holders of the Representative's Warrant and/or
Warrant Shares who notify the Company within fifteen (15) days after the Company
mails notice of such request pursuant to Section 9.3(b) hereof (collectively,
the "Requesting Holders") of their respective Warrant Shares for the earlier of
(i) nine (9) consecutive months (subject to the following three sentences), or
(ii) until the sale of all of the Warrant Shares requested to be registered by
the Requesting Holders. If the Company determines that any such registration
statement that the Company has filed pursuant to the preceding sentence may no
longer be used under applicable law unless it is supplemented or amended, the
Company shall notify the Holders that have securities covered by such
registration statement and shall use its reasonable best efforts to effect the
required ammendment or supplement reasonably expeditiously and thereafter shall
promptly notify such Holders that such action has been taken. Any Holder that
receives such a notice shall cease making any sales pursuant to such
registration statement until the Company notifies such Holder that the required
supplement or amendment has been duly effected. The nine-month period provided
for in the second preceding sentence shall be extended by the number of days, if
any, that sales under the registration statement may not be made pursuant to the
preceding sentence.
-10-
<PAGE>
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 9.3 by any Holder or Holders
representing a Majority of the Representative's Warrants and/or Warrant Shares
to all other registered Holders of the Representative's Warrants and the Warrant
Shares within ten (10) days from the date of the receipt of any such
registration request.
(c) Intentionally omitted.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Shares
within the time period specified in Section 9.4(a) hereof pursuant to the
written notice specified in Section 9.3(a) of the Holders of a Majority of the
Representative's Warrants and/or Warrant Shares, the Company, at its option, may
repurchase (i) any and all Warrant Shares at the higher of the Market Price (as
defined in Section 9.3(e)) per share of Common Stock or per Redeemable Warrant,
as the case may be, on (x) the date of the notice sent pursuant to Section
9.3(a) or (y) the expiration of the period specified in Section 9.4(a) and (ii)
any and all Representative's Warrants at the Market Price of the Common Stock
and Redeemable Warrants purchasable upon exercise thereof less the aggregate
exercise price payable upon such exercise. Such repurchase shall be in
immediately available funds and shall close within two (2) days after the
expiration of the period specified in Section 9.4(a).
(e) Definition of Market Price. As used herein, the phrase "Market
Price" at any date shall be deemed to be the last reported sale price, or, in
case no such reported
-11-
<PAGE>
sale takes place on such day, the average of the last reported sale prices for
the last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the shares of Common Stock and/or
Redeemable Warrants is listed or admitted to trading, or, if the shares of
Common Stock and/or Redeemable Warrants is not listed or admitted to trading on
any national securities exchange, the average closing sale price as furnished by
the NASD through The Nasdaq Stock Market, Inc. ("Nasdaq") or similar
organization if Nasdaq is no longer reporting such information, or if the shares
of Common Stock and/or Redeemable Warrants or Common Stock is not quoted on
Nasdaq, as determined in good faith by resolution of the Board of Directors of
the Company, based on the best information available to it.
9.4 Covenants of the Company With Respect to Registration. In connection
with any registration under Sections 9.2 or 9.3 hereof, the Company covenants
and agrees as follows:
(a) In connection with any registration under Section 9.3 hereof, the
Company shall use its reasonable best efforts to file a registration statement
within one hundred and twenty (120) days of receipt of any demand therefor, and
to have any registration statements declared effective at the earliest possible
time, and shall furnish each Holder desiring to sell Warrant Shares such number
of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
any Holder's counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 9.2 and 9.3(a) hereof
-12-
<PAGE>
including, without limitation, the Company's legal and accounting fees, printing
expenses and blue sky fees and expenses.
(c) The Company will use its commercially reasonable efforts to take
all necessary action which may be required in qualifying or registering the
Warrant Shares included in a registration statement for offering and sale under
the securities or blue sky laws of such states as reasonably are requested by
the Holder(s), provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Shares to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect and subject to the same procedures as are
provided by the provisions pursuant to which the Company has agreed to indemnify
each of the Underwriters contained in Section 7 of the Underwriting Agreement.
-13-
<PAGE>
(e) The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Underwriting
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Representative's Warrant prior to the
initial filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Shares to be included in any registration statement filed
pursuant to Section 9.3 hereof, without the prior written consent of National
Securities Corporation or as otherwise required by the terms of any existing
registration rights granted prior to the date of this Agreement by the Company
to the holders of any of the Company's securities.
-14-
<PAGE>
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
make "generally available to its security holders" (within the meaning of Rule
158 under the Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least 12 consecutive
months beginning after the effective date of the registration statement.
-15-
<PAGE>
(j) In connection with any registration under Section 9.3 hereof, the
Company shall enter into an underwriting agreement with the managing
underwriters selected for such underwriting by Holders holding a Majority of the
Warrant Shares requested to be included in such underwriting, which may be the
Representative. Such agreement shall be satisfactory in form and substance to
the Company, each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement relating
to an underwritten sale of their Warrant Shares and may, at their option,
require that any or all the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to and for
the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(k) For purposes of this Agreement, the term "Majority" in reference
to the Representative's Warrants or Warrant Shares, shall mean in excess of
fifty percent (50%) of the then outstanding Warrant Shares (calculated as
provided in the following sentence) that (i) are not held by the Company, an
affiliate, officer, creditor, employee or agent thereof or any of their
respective affiliates, members of their family, persons acting as nominees or in
conjunction therewith and (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Act. For purposes of
the preceding sentence,
-16-
<PAGE>
the Holder of a Representative's Warrant shall be deemed the holder of the
aggregate number of Warrant Shares that acquirable upon exercise thereof.
10. Obligations of Holders. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 9 hereof that
each of the selling Holders shall:
(a) Furnish to the Company such information regarding themselves, the
Warrant Shares held by them, the intended method of sale or other disposition of
such securities, the identity of and compensation to be paid to any underwriters
proposed to be employed in connection with such sale or other disposition, and
such other information as may reasonably be required to effect the registration
of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus relating to the
Warrant Shares covered by a registration statement is required to be delivered
under the Act, of the happening of any event with respect to such selling Holder
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
11. Adjustments to Exercise Price and Number of Securities. The Exercise
Price in effect at any time and the number and kind of securities purchased upon
the exercise of the Representative's Warrant shall be subject to adjustment from
time to time only upon the happening of the following events:
-17-
<PAGE>
11.1 Stock Dividend, Subdivision and Combination. In case the Company
shall (i) declare a dividend or make a distribution on its outstanding shares of
Common Stock in shares of Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
11.2 Adjustment in Number of Securities. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 11, the number of
Warrant Shares issuable upon the exercise at the adjusted Exercise Price of each
Representative's Warrant shall be adjusted to the nearest number of whole shares
of Common Stock by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares issuable
upon exercise of the Representative's Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
11.3 Definition of Common Stock. For the purpose of this Agreement,
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the
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<PAGE>
Articles of Incorporation of the Company as amended as of the date hereof, or
(ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
11.4 Merger or Consolidation. In case of any consolidation of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the Holder of each Representative's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Representative's Warrant) to receive, upon exercise of such
Representative's Warrant, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger by a holder
of the number of shares of Common Stock for which such Representative's Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
which shall be identical to the adjustments provided in Section 11. The above
provision of this subsection shall similarly apply to successive consolidations
or mergers.
11.5 No Adjustment of Exercise Price in Certain Cases. No adjustment
of the Exercise Price shall be made if the amount of said adjustment shall be
less than two cents ($.02) per share, provided, however, that in such case any
adjustment that would otherwise be
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<PAGE>
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least two cents ($.02) per
Representative's Warrant.
12. Exchange and Replacement of Representative's Warrant Certificates. Each
Representative's Warrant Certificate is exchangeable, without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company for a new Representative's Warrant Certificate of like tenor and
date representing in the aggregate the right to purchase the same number of
Warrant Shares in such denominations as shall be designated by the Holder
thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Representative's Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Representative's Warrant, if mutilated, the Company will make and deliver a
new Warrant Certificate of like tenor, in lieu thereof.
13. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of shares of Common Stock upon the
exercise of the Representative's Warrant, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by
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<PAGE>
rounding any fraction up to the nearest whole number of shares of Common Stock
or other securities, properties or rights.
14. Reservation and Listing of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Representative's Warrant
and the Redeemable Warrants issuable upon exercise thereof, such number of
shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. Every transfer agent ("Transfer Agent") for
the Common Stock and other securities of the Company issuable upon the exercise
of the Representative's Warrant will be irrevocably authorized and directed at
all times to reserve such number of authorized shares of Common Stock and other
securities as shall be requisite for such purpose. The Company will keep a copy
of this Agreement on file with every Transfer Agent for the Common Stock and
other securities of the Company issuable upon the exercise of the
Representative's Warrant. The Company will supply every such Transfer Agent with
duly executed stock and other certificates, as appropriate, for such purpose.
The Company covenants and agrees that, upon exercise of the Representative's
Warrant and payment of the Exercise Price therefor, all shares of Common Stock
and other securities issuable upon such exercise shall be duly and validly
issued, fully paid, non-assessable and not subject to the preemptive rights of
any stockholder. As long as the Representative's Warrant shall be outstanding,
the Company shall use its best efforts to cause all shares of Common Stock
issuable upon the exercise of the Representative's Warrant to be listed (subject
to official notice of
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<PAGE>
issuance) on all securities exchanges on which the Common Stock issued to the
public in connection herewith may then be listed and/or quoted on Nasdaq
SmallCap Market.
15. Notices to Representative's Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Representative's Warrants and their exercise, any
of the following events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
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<PAGE>
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed;
then in any one or more of said events, the Company shall give written notice of
such event at least fifteen (15) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
16. Redeemable Warrants.
The form of the certificate representing the Redeemable Warrants (and the
form of election to purchase shares of Common Stock upon the exercise of the
Redeemable Warrants and the form of assignment printed on the reverse thereof)
shall be substantially as set forth in Exhibit "A" to the Warrant Agreement
dated as of the date hereof by and among the Company, the Representative and
American Stock Transfer & Trust Company, as warrant agent (the "Redeemable
Warrant Agreement"). The exercise price of the Redeemable Warrants and the
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<PAGE>
number of shares of Common Stock issuable upon the exercise of the Redeemable
Warrants are subject to adjustment, whether or not the Representative's Warrants
have been exercised and the Redeemable Warrants have been issued, in the manner
and upon the occurrence of the events set forth in Section 8 of the Redeemable
Warrant Agreement, which is hereby incorporated by reference and made a part
hereof as if set forth in its entirety herein. The Company covenants to, and
agrees with, the Holder(s) that without the prior written consent of the
Holder(s), which will not be unreasonably withheld, the Redeemable Warrant
Agreement will not be modified, amended, canceled, altered or superseded, and
that the Company will send to each Holder, irrespective of whether or not the
Representative's Warrants have been exercised, any and all notices required by
the Redeemable Warrant Agreement to be sent to holders of the Redeemable
Warrants.
17. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) if to the registered Holder of the Representative's Warrant, to
the address of such Holder as shown on the books of the Company; or
(b) if to the Company, to the address set forth in Section 4 hereof or
to such other address as the Company may designate by notice to the Holders.
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<PAGE>
18. Supplements; Amendments; Entire Agreement. This Agreement (including
the Underwriting Agreement to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof and may not be modified or amended except
by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought. The Company and the Representative may from
time to time supplement or amend this Agreement without the approval of any
holders of Representative's Warrant Certificates (other than the Representative)
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Representative may deem necessary or desirable and
which the Company and the Representative deem shall not adversely affect the
interests of the Holders of Representative's Warrant Certificates.
19. Successors. All of the covenants and provisions of this Agreement shall
be binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
20. Survival of Representations and Warranties. Notwithstanding any
investigations made by or on behalf of the parties to this Agreement, all
representations, warranties and agreements made by the parties to this Agreement
herein shall survive.
21. Governing Law. This Agreement and each Representative's Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State
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<PAGE>
of Delaware and for all purposes shall be construed in accordance with the laws
of said State without giving effect to the rules of said State governing the
conflicts of laws.
22. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
23. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
24. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Representative's
Warrant Certificates or Warrant Shares any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Representative and any other Holder(s)
of the Representative's Warrant Certificates or Warrant Shares.
25. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
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<PAGE>
IN WITNESS OF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
ATTEST: INTEGRATED TECHNOLOGY USA, INC.
__________________________ By:_____________________________________
Secretary Name:
Title:
NATIONAL SECURITIES CORPORATION
By:_____________________________________
Name: Steven A. Rothstein
Title: Chairman
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<PAGE>
EXHIBIT A
[FORM OF REPRESENTATIVE'S WARRANT CERTIFICATE]
THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, SEPTEMBER ___, 2001
Representative's Warrant No. ____
____ Shares of Common Stock and/or ____ Redeemable Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ____, or registered assigns, is the
registered holder of Warrants to purchase initially, at any time from September
___, 1997 until 5:30 p.m., New York time on September ___, 2001 ("Expiration
Date"), up to ____ shares of Common Stock and/or ____ Redeemable Warrants at the
initial exercise price, subject to adjustment in certain events, of $____ [120%
of initial offering price per share] per share of Common Stock and $.12 per
Redeemable Warrant (the "Exercise Price") upon surrender of this
Representative's Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth herein
and in the Representative's Warrant Agreement dated as of September ___, 1996
between the Company and National Securities Corporation (the "Warrant
Agreement"). Payment of the Exercise Price shall be made by certified or
official bank check in New York Clearing House funds payable to the order of the
Company.
EXH. A-1
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Representative's Warrant evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Representative's Warrant evidenced by this Warrant Certificate are part
of a duly authorized issue of Representative's Warrants issued pursuant to the
Warrant Agreement, which Warrant Agreement is hereby incorporated by reference
in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the
Representative's Warrant.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Representative's
Warrant; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Representative's Warrant shall be issued to the transferee(s) in exchange for
this Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Representative's Warrant
evidenced by this Certificate, the Company shall forthwith issue to the holder
hereof a new Warrant Certificate representing such numbered unexercised
Representative's Warrant.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
EXH. A-2
<PAGE>
This Warrant Certificate does not entitle any holder thereof to any of the
rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of September ___, 1996.
ATTEST: INTEGRATED TECHNOLOGY USA, INC.
__________________________ By:_____________________________________
Secretary Name:
Title:
EXH. A-3
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ____ shares of Common Stock
and/or ____ Redeemable Warrants and herewith tenders in payment for such
securities a certified or official bank check payable in New York Clearing House
Funds to the order of Integrated Technology USA, Inc. (the "Company") in the
amount of $_____, all in accordance with the terms of Section 4 of the
Representative's Warrant Agreement dated as of ________ __, 1996 between the
Company and National Securities Corporation. The undersigned requests that a
certificate for such securities be registered in the name of
______________________________, whose address is ____________________________
and that such certificate be delivered to ______________, whose address is
______________________________, and if said number of shares shall not be all
the shares purchasable hereunder, that a new Warrant Certificate for the
balance of the shares purchasable under the within Warrant Certificate be
registered in the name of the undesigned warrantholder or his assignee as
below indicated and delivered to the address stated below.
Dated: _______________
Signature: ____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
Address: ______________________________
_____________________________
_______________________________________
(Insert Social Security or Other
Identifying Number of Holder)
Signature Guaranteed: _________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-4
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, _______________ hereby sells, assigns and transfers unto
[NAME OF TRANSFEREE] this Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
_______________ Attorney, to transfer the within Warrant Certificate on the
books of the within-named Company, with full power of substitution.
Dated: _______________
Signature: ____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
Address: ______________________________
______________________________
_______________________________________
(Insert Social Security or Other
Identifying Number of Holder)
Signature Guaranteed: _________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-5
<PAGE>
09/03/96
INTEGRATED TECHNOLOGY USA, INC.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
AND
NATIONAL SECURITIES CORPORATION
-----------------------
WARRANT AGREEMENT
Dated as of September __, 1996
<PAGE>
AGREEMENT, dated this ___ day of _______, 1996, among INTEGRATED TECHNOLOGY
USA, INC., a Delaware corporation (the "Company"), AMERICAN STOCK TRANSFER &
TRUST COMPANY, a New York corporation, as Warrant Agent (the "Warrant Agent"),
and NATIONAL SECURITIES CORPORATION, its successors and assigns ("National" or
the "Representative").
W I T N E S S E T H:
WHEREAS, in connection with (i) the Company's offering to the public of
3,000,000 shares of Common Stock (as defined in Section 1), and 3,000,000
redeemable common stock purchase warrants (the "Warrants"), each warrant
entitling the holder thereof to purchase one additional share of Common Stock;
(ii) the over-allotment option granted to the underwriter to purchase up to an
additional 450,000 shares of Common Stock and 450,000 Warrants (the
"Over-allotment Option"); and (iii) the sale to National of warrants (the
"Representative's Warrants") to purchase up to 300,000 shares of Common Stock
and/or 300,000 Warrants, the Company will issue up to 3,750,000 Warrants; and
WHEREAS, the Company desires to provide for the issuance of certificates
representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the Warrants
and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, National, the
holders of certificates representing the Warrants and the Warrant Agent, the
parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "AMEX" shall mean the American Stock Exchange.
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<PAGE>
(c) "Common Stock" shall mean the authorized stock of the Company of
any class, whether now or hereafter authorized, which has the right to
participate in the voting and in the distribution of earnings and assets of the
Company without limit as to amount or percentage which at the date hereof
consists of 40,000,000 shares of Common Stock, par value $.01 per share.
(d) "Commission" shall mean the Securities and Exchange Commission.
(e) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its business in New York, New
York, shall be administered, which office is located on the date hereof c/o
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.
(f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(g) "Exercise Date" shall mean, subject to the provisions of Section
5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have
received both (i) the Warrant Certificate representing such Warrant, with the
exercise form thereon duly executed by the Registered Holder thereof or his
attorney duly authorized in writing, and (ii) payment in cash or by official
bank or certified check made payable to the Warrant Agent for the account of the
Company, of the amount in lawful money of the United States of America equal to
the applicable Exercise Price (as hereinafter defined) in good funds.
(h) "Exercise Price" [150% of the initial public offering price per
share] shall mean, subject to modification and adjustment as provided in Section
8, $______ per share and further subject to the Company's right, in its sole
discretion, to decrease the Exercise Price for a period of not less than 30 days
on not less than 30 days' prior written notice to the Registered Holders and
National.
(i) "Initial Warrant Exercise Date" shall mean ______ [the date 12
months after the date of Prospectus].
(j) "Initial Warrant Redemption Date" shall mean _____ [the date 18
months after the date of the Prospectus].
(k) "Redemption Date" shall mean the date (which may not occur before
the Initial Warrant Redemption Date) fixed for the redemption of the Warrants in
accordance with the terms hereof.
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<PAGE>
(l) "Redemption Price" shall mean the price at which the Company may,
at its option, redeem the Warrants, in accordance with the terms hereof, which
price shall be $0.01 per Warrant, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof.
(m) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(n) "Representative's Warrant Agreement" shall mean the agreement
dated as of __________, 1996 between the Company and National relating to and
governing the terms and provisions of the Representative's Warrants.
(o) "Transfer Agent" shall mean American Stock Transfer & Trust
Company, or its authorized successor.
(p) "Underwriting Agreement" shall mean the underwriting agreement
dated _________, 1996 between the Company and the several underwriters listed
therein relating to the purchase for resale to the public of 3,000,000 shares of
Common Stock and 3,000,000 Warrants.
(q) "Warrant Certificate" shall mean a certificate representing each
of the Warrants substantially in the form annexed hereto as Exhibit A.
(r) "Warrant Expiration Date" shall mean, unless the Warrants are
redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New York
time), on ___________ [5 years from the date of the Prospectus], or the
Redemption Date as defined herein, whichever date is earlier; provided that if
such date shall in the State of New York be a holiday or a day on which banks
are authorized to close, then 5:00 p.m. (New York time) on the next following
day which, in the State of New York, is not a holiday or a day on which banks
are authorized to close. Upon five business days' prior written notice to the
Registered Holders, the Company shall have the right to extend the Warrant
Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase at the Exercise Price
therefor from the Initial Warrant Exercise Date until the Warrant Expiration
Date one share of Common Stock upon the exercise thereof in accordance with the
terms hereof, subject to modification and adjustment as provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
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<PAGE>
representing the number of Warrants sold pursuant to the Underwriting Agreement
(subject to modification and adjustment as provided in Section 8) shall be
executed by the Company and delivered to the Warrant Agent.
(c) Upon exercise of the Representative's Warrants as provided
therein, Warrant Certificates representing all or a portion of 300,000 Warrants
to purchase up to an aggregate of 300,000 shares of Common Stock (subject to
modification and adjustment as provided in Section 8 hereof and in the
Representative's Warrant Agreement), shall be countersigned, issued and
delivered by the Warrant Agent upon written order of the Company signed by its
Chairman of the Board, Chief Executive Officer, President or a Vice President
and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary.
(d) From time to time, up to the Warrant Expiration Date or the
Redemption Date, whichever date is earlier, the Warrant Agent shall countersign
and deliver Warrant Certificates in required denominations of one or whole
number multiples thereof to the person entitled thereto in connection with any
transfer or exchange permitted under this Agreement. Except as provided herein,
no Warrant Certificates shall be issued except (i) Warrant Certificates
initially issued hereunder and those issued on or after the Initial Warrant
Exercise Date, upon the exercise of fewer than all Warrants held by the
exercising Registered Holder, (ii) Warrant Certificates issued upon any transfer
or exchange of Warrants, (iii) Warrant Certificates issued in replacement of
lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7,
(iv) Warrant Certificates issued pursuant to the Representative's Warrant
Agreement, and (v) at the option of the Company, Warrant Certificates in such
form as may be approved by its Board of Directors, to reflect any adjustment or
change in the Exercise Price, the number of shares of Common Stock purchasable
upon exercise of the Warrants or the Redemption Price therefor made pursuant to
Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Warrants may be listed, or to
conform to usage. The Warrant Certificates shall be dated the date of issuance
thereof (whether upon initial issuance, transfer, exchange or in lieu of
mutilated, lost, stolen or destroyed Warrant Certificates) and issued in
registered form. Warrants shall be numbered serially with the letter "W" on the
Warrants.
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<PAGE>
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, Chief Executive Officer, President or any Vice
President and by its Treasurer or an Assistant Treasurer or its Secretary or an
Assistant Secretary, by manual signatures or by facsimile signatures printed
thereon, and shall have imprinted thereon a facsimile of the Company's seal.
Warrant Certificates shall be manually countersigned by the Warrant Agent and
shall not be valid for any purpose unless so countersigned. In any case any
officer of the Company who shall have signed any of the Warrant Certificates
shall cease to be such officer of the Company before the date of issuance of the
Warrant Certificates or before countersignature by the Warrant Agent and issue
and delivery thereof, such Warrant Certificates, nevertheless, may be
countersigned by the Warrant Agent, issued and delivered with the same force and
effect as though the person who signed such Warrant Certificates had not ceased
to be such officer of the Company. After countersignature by the Warrant Agent,
Warrant Certificates shall be delivered by the Warrant Agent to the Registered
Holder promptly and without further action by the Company, except as otherwise
provided by Section 4(a) hereof.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number multiples thereof
may be exercised by the Registered Holder thereof commencing at any time on or
after the Initial Warrant Exercise Date, but not after the Warrant Expiration
Date, upon the terms and subject to the conditions set forth herein and in the
applicable Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date and the person
entitled to receive the securities deliverable upon such exercise shall be
treated for all purposes as the holder, upon exercise thereof, as of the close
of business on the Exercise Date. If Warrants in denominations other than whole
number multiples thereof shall be exercised at one time by the same Registered
Holder, the number of full shares of Common Stock which shall be issuable upon
exercise thereof shall be computed on the basis of the aggregate number of full
shares of Common Stock issuable upon such exercise. As soon as practicable on or
after the Exercise Date and in any event within five business days after such
date, if one or more Warrants have been exercised, the Warrant Agent on behalf
of the Company shall cause to be issued to the person or persons entitled to
receive the same a Common Stock certificate or certificates for the shares of
Common Stock deliverable upon such exercise, and the Warrant Agent shall deliver
the same to the person or persons entitled thereto. Upon the exercise of any one
or more Warrants, the Warrant Agent shall promptly notify the Company in writing
of such fact and of the number of securities delivered upon such exercise and,
subject to subsection (b) below, shall cause all payments of an amount in cash
or by check made payable to the order of the Company, equal to the Exercise
Price, to be deposited promptly in the Company's bank account.
(b) The Company shall not be required to issue fractional shares on
the exercise of Warrants. Warrants may only be exercised in such multiples as
are required to permit the issuance by the Company of one or more whole shares.
If one or more Warrants
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shall be presented for exercise in full at the same time by the same Registered
Holder, the number of whole shares which shall be issuable upon such exercise
thereof shall be computed on the basis of the aggregate number of shares
purchasable on exercise of the Warrants presented. If any fraction of a share
would, except for the provisions provided herein, be issuable on the exercise of
any Warrant (or specified portion thereof), the Company shall pay an amount in
cash equal to such fraction multiplied by the then current market value of a
share of Common Stock, determined as follows:
(1) If the Common Stock is listed or admitted to unlisted trading
privileges on one or move national securities exchanges and/or is quoted through
the Nasdaq Stock Market, the current market value of a share of Common Stock
shall be the closing sale price of the Common Stock at the end of the regular
trading session on the last business day prior to the date of exercise of the
Warrants on whichever of such exchanges or stock market had the highest daily
trading volume for the Common Stock on such day; or
(2) If the Common Stock is not listed or admitted to unlisted trading
privileges on any national securities exchange and is not quoted through the
Nasdaq Stock Market, but is traded in the over-the-counter market, the current
market value of a share of Common Stock shall be the average of the last
reported bid and asked prices of the Common Stock reported by the National
Quotation Bureau, Inc. (or any successor) on the last business day prior to the
date of exercise of the Warrants; or
(3) If neither clause (1) nor clause (2) immediately above is
applicable, the current market value of a share of Common Stock shall be an
amount, not less than the book value thereof as of the end of the most recently
completed fiscal quarter of the Company ending prior to the date of exercise,
determined by the Board of Directors of the Company exercising good faith and
using customary valuation methods.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery thereof, be duly and validly issued and
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, and that upon
issuance such shares shall be listed on each securities exchange, if any, on
which the other shares of outstanding Common Stock of the Company are then
listed.
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(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post-effective amendment, use its reasonable best efforts to cause the same to
become effective and to keep such registration statement current while any of
the Warrants are outstanding and deliver a prospectus which complies with
Section 10(a)(3) of the Act, to the Registered Holder exercising the Warrant
(except, if in the opinion of counsel to the Company, such registration is not
required under the federal securities law or if the Company receives a letter
from the staff of the Commission stating that it would not take any enforcement
action if such registration is not effected). The Company will use its
reasonable best efforts to obtain appropriate approvals or registrations under
state "blue sky" securities laws with respect to any such securities. However,
Warrants may not be exercised by, or shares of Common Stock issued to, any
Registered Holder in any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the Transfer
Agent to requisition from time to time certificates representing shares of
Common Stock or other securities required upon exercise of the Warrants, and the
Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and, upon satisfaction of the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at its office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with customary
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant
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Agent shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants
of the same class.
(c) With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney-in-fact duly
authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
shall be promptly canceled by the Warrant Agent and thereafter retained by the
Warrant Agent until termination of this Agreement.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Warrant Certificate and (in the case of loss,
theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or the
Warrant Agent that a new Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Adjustment of Exercise Price and Number of Shares of Common
Stock Deliverable.
(a) Except as hereinafter provided, in the event the Company shall, at
any time or from time to time after the date hereof and during the term of the
Warrants, issue
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any shares of Common Stock as a stock dividend to the holders of Common Stock,
or subdivide or combine the outstanding shares of Common Stock into a greater or
lesser number of shares (any such issuance, subdivision or combination being
herein called a "Change of Shares"), then, and thereafter upon each further
Change of Shares, the Exercise Price for the Warrants (whether or not the same
shall be issued and outstanding) in effect immediately prior to such Change of
Shares shall be changed to a price (including any applicable fraction of a cent
to the nearest cent) determined by dividing (i) the total number of shares of
Common Stock outstanding immediately prior to such Change of Shares, multiplied
by the Exercise Price in effect immediately prior to such Change of Shares by
(ii) the total number of shares of Common Stock outstanding immediately after
such Change of Shares; provided, however, that in no event shall the Exercise
Price be adjusted pursuant to this computation to an amount in excess of the
Exercise Price in effect immediately prior to such computation, except in the
case of a combination of outstanding shares of Common Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a), shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of shareholders entitled to receive such dividend or
distribution.
(b) Upon each adjustment of the Exercise Price pursuant to this
Section 8, the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Exercise
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Exercise Price.
(c) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification or change of the then outstanding
shares of Common Stock or other capital stock issuable upon exercise of the
Warrants (other than a change in par value, or from par value to no par value,
or from no par value to par value or as a result of subdivision or combination))
or in case of any sale or conveyance to another corporation of the property of
the Company as an entirety or substantially as an entirety, then, as a condition
of such reclassification, change, consolidation, merger, sale or conveyance, the
Company, or such successor or purchasing corporation, as the case may be, shall
make lawful and adequate provision whereby the Registered Holder of each Warrant
then outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant
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immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance and shall forthwith file at the Corporate Office of the Warrant
Agent a statement signed by its Chief Executive Officer, President or a Vice
President and by its Treasurer or an Assistant Treasurer or its Secretary or an
Assistant Secretary evidencing such provision. Such provisions shall include
provision for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in Sections 8(a) and (b). The above
provisions of this Section 8(c) shall similarly apply to successive
reclassifications and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances.
(d) Irrespective of any adjustments or changes in the Exercise Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(e) hereof, continue to express the Exercise Price per
share and the number of shares purchasable thereunder as the Exercise Price per
share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
(e) After each adjustment of the Exercise Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Exercise Price as so adjusted, (ii) the number of shares
of Common Stock purchasable upon exercise of each Warrant, after such
adjustment, and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate with the Warrant
Agent and cause a brief summary thereof to be sent by ordinary first class mail
to each Registered Holder at his last address as it shall appear on the registry
books of the Warrant Agent. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity thereof except as to
the holder to whom the Company failed to mail such notice, or except as to the
holder whose notice was defective. The affidavit of an officer of the Warrant
Agent or the Secretary or an Assistant Secretary of the Company that such notice
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated herein.
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption Date, the Company
may, on 30 days' prior written notice, redeem all the Warrants at one cent
($0.01) per Warrant, provided, however, that before any such call for redemption
of Warrants can take place, the average closing bid price for the Common Stock
as reported by the AMEX, if the Common Stock is then traded on the AMEX (or the
average closing sale price, if the Common Stock is then traded on the Nasdaq
National Market) shall have equalled or exceeded $_____ per share [250% of the
initial public offering price per share of Common Stock] (the "Minimum Price")
for any twenty (20) trading days within a period of thirty (30) consecutive
trading days ending
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on the fifth trading day prior to the date on which the notice contemplated by
(b) and (c) below is given. In the event that at any time, or from time to time,
the Exercise Price is adjusted pursuant to Section 8, then the Minimum Price
shall be adjusted by a correspondence percentage (e.g., if the Exercise Price is
increased by 50% the Minimum Price shall be increased by 50%, and if the
Exercise Price is decreased by 50% the Minimum Price shall be decreased by 50%).
(b) In case the Company shall exercise its right to redeem all of the
Warrants, it shall give or cause to be given notice to the Registered Holders of
the Warrants, by mailing to such Registered Holders a notice of redemption,
first class, postage prepaid, at their last address as shall appear on the
records of the Warrant Agent. Any notice mailed in the manner provide herein
shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice. Not less than five (5) business days
prior to the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to National a
similar notice telephonically and confirmed in writing.
(c) The notice of redemption shall specify (i) the redemption price,
(ii) the Redemption Date, which shall in no event be less than thirty (30) days
after the date of mailing of such notice, (iii) the place where the Warrant
Certificate shall be delivered and the redemption price shall be paid, and (iv)
that the right to exercise the Warrant shall terminate at 5:00 p.m. (New York
time) on the business day immediately preceding the date fixed for redemption.
No failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
holder (a) to whom notice was not mailed or (b) whose notice was defective. An
affidavit of the Warrant Agent or the Secretary or Assistant Secretary of the
Company that notice of redemption has been mailed shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New
York time) on the business day immediately preceding the Redemption Date. The
redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company and National, and its duties shall be determined solely
by the provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued upon
exercise of any Warrant is fully paid and nonassessable.
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(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Exercise Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustments,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of fact contained herein or for
any action taken, suffered or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in any
Warrant Certificate, or (iii) be liable for any act or omission in connection
with this Agreement except for its own negligence, bad faith or willful
misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or for National) and
shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the Chairman of the Board of Directors, Chief Executive Officer, Chief Financial
Officer, President or any Vice President (unless other evidence in respect
thereof is herein specifically prescribed). The Warrant Agent shall not be
liable for any action taken, suffered or omitted by it in accordance with such
notice, statement, instruction, request, direction, order or demand reasonably
believed by it to be genuine.
(e) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities relating to any
period prior to such resignation or resulting as a result of the Warrant Agent's
own negligence, bad faith or willful misconduct), after giving 30 days' prior
written notice to the Company. At least 15 days prior to the date such
resignation is to become effective, the Warrant Agent shall cause a copy of such
notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation, or any inability of
the Warrant Agent to act as such hereunder, the Company shall appoint in writing
a new warrant agent. If the Company shall fail to make such appointment within a
period of 15 days after it has been notified in writing of such resignation by
the resigning Warrant Agent, then the Registered Holder of any Warrant
Certificate may apply to any court of competent jurisdiction for the appointment
of a new warrant agent. Any new warrant agent, whether appointed by the Company
or by such a court, shall be a bank or trust company having a capital and
surplus, as shown by its last published report to its stockholders, of not less
than $10,000,000 or a stock transfer company. After acceptance in writing of
such appointment by the new warrant agent is received by the Company, such new
warrant agent shall be vested with the same powers, rights, duties and
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responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
(f) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust or stock transfer
business of the Warrant Agent or any new warrant agent shall be a successor
warrant agent under this Agreement without any further act, provided that such
corporation is eligible for appointment as successor to the Warrant Agent under
the provisions of the preceding paragraph. Any such successor warrant agent
shall promptly cause notice of its succession as warrant agent to be mailed to
the Company and to the Registered Holders of each Warrant Certificate.
(g) The Warrant Agent, its subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall retain for a period of two years from the
date of exercise any Warrant Certificate received by it upon such exercise.
(i) The Company agrees to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent in the execution of this Agreement and to
indemnify the Warrant Agent and save it harmless against any and all
liabilities, including judgments, costs and reasonable counsel fees, for
anything done or omitted by the Warrant Agent in the execution of this Agreement
except as a result of the Warrant Agent's negligence, bad faith or willful
misconduct.
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental agreement make any
changes or corrections in this Agreement (i) that they shall deem appropriate to
cure any ambiguity or to correct any defective or inconsistent provision or
manifest mistake or error herein contained; or (ii) that they may deem necessary
or desirable and which shall not adversely affect the interests of the holders
of Warrant Certificates; provided, however, that this Agreement shall not
otherwise be modified, supplemented or altered in any respect except with
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the consent in writing of the Registered Holders representing not less than
66-2/3% of the Warrants then outstanding; provided, further, that no change in
the number or nature of the securities purchasable upon the exercise of any
Warrant, or to increase the Exercise Price therefor or to accelerate of the
Warrant Expiration Date, shall be made without the consent in writing of the
Registered Holder of the Warrant Certificate representing such Warrant, other
than such changes as are specifically prescribed by this Agreement as originally
executed. In addition, this Agreement may not be modified, amended or
supplemented without the prior written consent of National, other than to cure
any ambiguity or to correct any provision which is inconsistent with any other
provision of this Agreement or to make any such change that is necessary or
desirable and which shall not adversely affect the interests of National and
except as may be required by law.
SECTION 12. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been made when delivered or mailed
first-class registered or certified mail, postage prepaid, as follows: if to the
Registered Holder of a Warrant Certificate, at the address of such holder as
shown on the registry books maintained by the Warrant Agent; if to the Company
at Integrated Technology USA, Inc., 545 Cedar Lane, Teaneck, New Jersey 07666,
Attention: President, or at such other address as may have been furnished to the
Warrant Agent in writing by the Company; and if to the Warrant Agent, at 40 Wall
Street, New York, New York 10005, or to such other address as may have been
furnished to the Company in writing by the Warrant Agent. Copies of any notice
delivered pursuant to this Agreement shall also be delivered to National
Securities Corporation, 1001 Fourth Avenue, Suite 2200, Seattle, Washington
98154-1100, Attention: General Counsel, or at such other address as may have
been furnished to the Company and the Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the state of New York without giving effect to conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, National, the Warrant Agent and their respective successors and assigns
and the holders from time to time of Warrant Certificates or any of them.
Nothing in this Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim, in equity or at law, or to impose upon
any other person any duty, liability or obligation.
SECTION 15. Termination.
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This Agreement shall terminate at the close of business on the Expiration
Date of all of the Warrants or such earlier date upon which all Warrants have
been exercised or redeemed, except that the Warrant Agent shall account to the
Company for cash held by it and the provisions of Section 10 hereof shall
survive such termination.
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SECTION 16. Counterparts.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the first date first above written.
INTEGRATED TECHNOLOGY USA, INC.
By: _________________________________
Name:
Title:
AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
By: _________________________________
NATIONAL SECURITIES CORPORATION, INC.
By: _________________________________
Name: Steven A. Rothstein
Title: Chairman
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EXHIBIT A
No. W _______ VOID AFTER SEPTEMBER ___, 2001
__________ WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
INTEGRATED TECHNOLOGY USA, INC.
CUSIP # 45813T 116
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or its registered assigns (the "Registered Holder") is the owner of the number
of Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, par value $.01
per share, of Integrated Technology USA, Inc. (the "Company"), at any time
between September __, 1996 [the date of the Prospectus] (the "Initial Warrant
Exercise Date"), and the Expiration Date (as hereinafter defined) upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of American
Stock Transfer & Trust Company, as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $_____ per share [150% of the initial public
offering price per share], subject to adjustment (the "Exercise Price"), in
lawful money of the United States of America in cash or by check made payable to
the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated September __,
1996, by and between the Company, National Securities Corporation ("National")
and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the
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surrender hereof and shall execute and deliver a new Warrant Certificate or
Warrant Certificates of like tenor, which the Warrant Agent shall countersign,
for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on the date
which is five (5) years after the Initial Warrant Exercise Date. If such date
shall in the State of New York be a holiday or a day on which the banks are
authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) the next following day which in the State of New York is not a holiday or
a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act'), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its reasonable best efforts to cause the same to become
effective, use its reasonable best efforts to keep such registration statement
current, if required under the Act, while any of the Warrants are outstanding,
and deliver a prospectus which complies with Section 10(a)(3) of the Act to the
Registered Holder exercising this Warrant. This Warrant shall not be exercisable
by a Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment for registration of transfer of
this Warrant Certificate at such office and payment of any tax or other charge
imposed in connection therewith or incident thereto, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $0.01 per
Warrant, at any time commencing after _______________ [the date 18 months from
the date of the Prospectus], provided that the average closing bid price for the
Common Stock as reported by the AMEX, if the Common Stock is then traded on the
AMEX (or the average closing sale price, if the Common Stock is then traded on
the Nasdaq National Market), shall have equalled or exceeded $_____ per share
for any twenty (20) trading days within a period of thirty (30) consecutive
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<PAGE>
trading days ending on the fifth trading day prior to the Notice of Redemption,
as defined below (subject to adjustment in the event of any stock splits or
other similar events as provided in the Warrant Agreement). Notice of redemption
(the "Notice of Redemption") shall be given not later than the thirtieth day
before the date fixed for redemption as provided in the Warrant Agreement. On
and after the date fixed for redemption, the Registered Holder shall have no
rights with respect to the Warrants except to receive the $0.01 per Warrant upon
surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to conflicts of
laws.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
[SEAL] INTEGRATED TECHNOLOGY USA, INC.
By: _____________________________
Name:
Title:
By: _____________________________
, Secretary
COUNTERSIGNED:
_____________________________,
as Warrant Agent
By: ______________________________
Authorized Officer
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<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
and be delivered to
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
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<PAGE>
Dated: ______________________ __________________________________________
__________________________________________
__________________________________________
Address
__________________________________________
Social Security or Taxpayer Identification
Number
__________________________________________
Signature Guaranteed
__________________________________________
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<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _____________________, hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
_______________________________________
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
______________________________________ of the Warrants represented by this
Warrant Certificate, and hereby irrevocably constitutes and appoints
__________________________ Attorney to transfer this Warrant Certificate on the
books of the Company, with full power of substitution in the premises.
Dated: ______________________ __________________________________________
Signature Guaranteed
__________________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
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<PAGE>
[Letterhead of Ehrenreich & Krause]
September 19, 1996
Integrated Technology USA, Inc.
545 Cedar Lane
Teaneck, New Jersey 07666
Re: Registration Statement on Form SB-2 (No. 333-9697)
Gentlemen:
You have requested our opinion with respect to certain
matters in connection with the above-referenced registration
statement, as amended (the "Registration Statement"). Such
Registration Statement relates to the following securities:
A. 3,450,000 shares of Common Stock (including
450,000 shares subject to an underwriter's over-allotment
option) and 3,450,000 Redeemable Common Stock Purchase
Warrants (including 450,000 warrants subject to an
underwriter's over-allotment option) that the Registration
Statement contemplates will be sold in an underwritten public
offering (the foregoing shares and warrants being referred to
as the "Offered Shares" and "Offered Warrants",
respectively);
B. A warrant (the "Representative's Warrant") to be sold to
National Securities Corporation in connection with the aforementioned
public offering; and
C. (i) 3,450,000 shares of Common Stock issuable
upon exercise of the Offered Warrants; (ii) 300,000 shares of
Common Stock and 300,000 Redeemable Common Stock Purchase
Warrants issuable upon exercise of the Representative's
Warrant; and (iii) 300,000 shares of Common Stock issuable
upon exercise of the Redeemable Common Stock Purchase
Warrants issuable upon exercise of the Representative's
Warrant (the shares and warrants described in this
subparagraph B being referred to collectively as the "Warrant
Securities").
We have reviewed copies of the Amended and Restated
Certificate of Incorporation of the Company, the By-laws of the
Company, the Registration Statement and exhibits thereto and have
examined such corporate documents and records and other certificates,
and have made such investigations of law, as we have deemed necessary
in order to render the opinion hereinafter set forth. As to certain
questions of fact material to our opinion, we have relied upon the
certificate
<PAGE>
of an officer of the Company and upon certificates of public officials.
Based upon and subject to the foregoing, we are of the
opinion that (i) the Offered Shares and Offered Warrants will, when
sold and paid for as contemplated by the Registration Statement and
the Underwriting Agreement filed as an exhibit thereto, be duly
authorized, validly issued, fully paid and non-assessable and (ii) the
Warrant Securities will, when issued and paid for in accordance with
the terms of the applicable warrant, be duly authorized, validly
issued, fully paid and non-assessable.
We hereby consent to the reference to us under the caption
"Legality" in the Registration Statement and to the use of this
opinion as an exhibit to the Registration Statement. In giving this
consent, we do not hereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
Ehrenreich & Krause
<PAGE>
SUBSCRIPTION AGREEMENT
(Revised as of May 16, 1996)
Integrated Technology USA, Inc.
545 Cedar Lane
Teaneck, New Jersey 07666
Gentlemen:
1. Subscription. (a) The undersigned, intending to be legally bound, hereby
irrevocably agrees to purchase from Integrated Technology USA, Inc., a Delaware
corporation (the "Company"), an unsecured note of the Company in the principal
amount set forth on the signature page hereof, substantially in the form set
forth in Exhibit 1 annexed hereto (the "Note") together with a warrant (the
"Warrant") to purchase shares of common stock of the Company, without par value
(the "Common Stock"), at the rate of one Warrant to acquire such number of
shares of Common Stock equal to the principal amount of the Note divided by the
initial public offering price of the Common Stock (the "IPO Price") at an
exercise price equal to the IPO Price multiplied by 10% per share, substantially
in the form set forth in Exhibit 2 annexed hereto, for an aggregate purchase
price equal to the principal amount of the Note (the "Purchase Price"). This
subscription is submitted to you in connection with an offering (the "Offering")
by the Company of a minimum of $500,000 and a maximum of $1,500,000 of principal
amount of Notes, together with Warrants, in units of $250,000 ("Units"). The
Company may, in its sole discretion accept subscriptions for partial Units.
(b) Subscription payments should be wired to the Company's account at
Summit Bank as set forth on Exhibit 3 annexed hereto. In the event the
subscription is not accepted in whole or in part by the Company pursuant to
Section 2(a) hereof, the full or ratable amount, as the case may be, of any
subscription payment received will be promptly refunded to the subscriber
without deduction therefrom or interest thereon.
(c) In the event this subscription is accepted by the Company, in
whole or in part, and subject to the conditions set forth in Section 2 of this
Subscription Agreement, the Company shall deliver to you, the Note and the
Warrant, each dated the date of closing of such portion of the Offering, and a
fully executed copy of this Subscription Agreement.
(d) The Company has engaged National Securities Corporation
("National") to introduce the Company to persons who may be interested in
purchasing up to 4 Units and to advise the Company in connection with the
structure, terms, and conditions of the Offering. In consideration for its
services, National will receive, among other things, a fee of 10% of the
<PAGE>
aggregate gross proceeds from the sale of the Units to persons introduced by
National. In addition, National will receive a five-year warrant to purchase
such number of shares of Common Stock equal to 10% multiplied by the total
dollar value of the sale up to 4 Units divided by the IPO Price, at an exercise
price equal to the IPO Price multiplied by 10%. National did not prepare any of
the information to be delivered to prospective investors in connection with the
Offering and does not make any representation or warranty concerning the
accuracy or completeness of such information. Prospective investors are advised
to conduct their own review of the business, properties, and affairs of the
Company before subscribing to purchase Units.
(e) The Note subscribed for hereby is an unsecured general obligation
of the Company.
(f) The undersigned agrees, and any future permitted transferee of the
Warrant or the shares of Common Stock issuable upon exercise of the Warrant (the
"Warrant Shares"), by his acceptance thereof agrees, that neither the Warrant
nor the Warrant Shares shall be sold, assigned, transferred, or otherwise
disposed of for the three-month period commencing on date upon which the
registration statement under the Securities Act of 1933, as amended (the "Act"),
filed by the Company relating to the initial public offering of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock is
declared effective, in each case without the prior written consent of National
in its sole discretion as to the timing, size, terms, and parties to any such
sale, assignment, transfer, or other disposition. You acknowledge that the
certificate or certificates evidencing the Warrant Shares shall bear a legend
with respect to such restrictions.
Florida Residents Only:
These Securities have not been registered under the Securities Act of 1933,
as amended, or the Florida Securities Act, by reason of specific exemptions
thereunder relating to the limited availability of the offering. These
Securities cannot be sold, transferred or otherwise disposed of to any person or
entity unless subsequently registered under the Securities Act of 1933, as
amended, and the Laws of Florida, or unless an exemption from such registration
is available.
Where sales are made to five or more persons in Florida, any sale made
pursuant to sub-section 517.061(11) of the Florida Securities Act shall be
voidable by such Florida purchasers either within three days after the first
tender of consideration is made by such purchaser to the Issuer, an agent of the
Issuer, or an Escrow Agent, or within three days after the availability of such
privilege is communicated to such purchaser, whichever occurs later. To
accomplish this withdrawal, it is sufficient for the Subscriber to send a letter
or telegram to
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<PAGE>
the company indicating his intention to withdraw. The letter or telegram should
be sent and postmarked prior to the end of the aforementioned third business
day. If the Subscriber sends a letter, it is prudent to send it by certified
mail, return receipt requested, to ensure that it is received and also to
evidence the time when it was mailed. Should the Subscriber make the request
orally, he should ask for written confirmation that the request has been
received.
Connecticut Residents Only:
The Securities referred to in this Agreement have not been registered under
Section 36-485 of the Connecticut Uniform Securities Act and will be sold to and
acquired by the holder pursuant to an exemption therefrom. The Securities may
not be resold unless they are registered under the Connecticut Uniform
Securities Act or unless an exemption from Registration is available.
Pennsylvania Residents Only:
The Securities may not be sold or transferred for twelve months from the
date of purchase if such sale or transfer would violate Section 203(d) of the
Pennsylvania Securities Act of 1972 and Regulations thereunder.
Under the Pennsylvania Securities Act, each Pennsylvania resident who
subscribes for the Securities may elect, within two business days after the
later of (i) the execution and delivery of this Subscription Agreement to the
Company; or (ii) the delivery of the purchase price for the Securities to the
Company, to withdraw such acceptance and receive a full refund of all monies
paid. Such withdrawal will be without further liability to any person. To
accomplish this withdrawal, a Pennsylvania subscriber need only send a letter or
telegram to the Company indicating his intention to withdraw. The letter or
telegram should be sent and postmarked prior to the end of the aforementioned
second business day. If the subscriber sends a letter, it is prudent to send it
by registered mail, return receipt requested, to ensure that it is received and
also to evidence the time when it was mailed. Should the subscriber make the
request orally, he should ask for written confirmation that the request has been
received.
Indiana, Utah and Washington Residents Only:
The Securities offered hereby have not been registered under the Securities
Act of 1933, as amended, or the Securities Laws of certain states and are being
offered and sold in reliance on exemptions from the Restriction Requirements of
said Act and such laws. These Securities are subject to restrictions on
transferability and resale and may not be transferred or resold except as
permitted under the Securities Act of 1933, as amended, and the applicable state
securities laws, pursuant to registration or exemption therefrom. Investors
should be aware that
-3-
<PAGE>
they may be required to bear the financial risks of this investment for an
indefinite period of time. The Securities have not been recommended, approved or
disapproved by the Securities and Exchange Commission, any State Securities
Commission, or any Regulatory Authority nor has the Securities and Exchange
Commission, any State Securities Commission, or any Regulatory Authority passed
upon the accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense. In making an investment decision investors must
rely on their own examination of the Issuer and the terms of the offering,
including the merits and risks involved.
2. Conditions. It is understood and agreed that this subscription is made
subject to the following terms and conditions:
(a) The Company shall have the right to accept or reject this
subscription in whole or in part. Unless this subscription is accepted in whole
or in part or rejected by the Company within 5 days from the receipt hereof by
the Company, the subscription shall be deemed rejected in whole.
(b) When two Units have been subscribed and paid for and accepted by
the Company, the Company will cause a closing (the "Initial Closing") of the
sale of a portion of the Units to take place. Thereafter, the Company may cause
additional closings (each an "Additional Closing," and, together with the
Initial Closing, the "Closings") of the sale of all or a portion of the
remaining Units. The date of each such Closing shall be deemed a Closing Date.
(c) That on each Closing Date, the Company shall have outstanding no
more than 4,340 shares of Common Stock, on a fully-diluted basis without giving
effect to the Offering of the Units.
3. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, you as follows:
(a) The Company is duly organized, validly existing, and in good
standing under the laws of the State of Delaware, with all requisite corporate
power and authority to own, lease, license, and use its properties and assets
and to conduct the business in which it is engaged. The Company is duly
qualified and is in good standing as a foreign corporation in every jurisdiction
in which its ownership, leasing, licensing, or use of property or assets or the
conduct of its business make such qualification necessary unless the failure to
be so qualified would not have a material adverse effect on the business,
operations, properties, or condition (financial or otherwise) of the Company (a
"Material Adverse Effect").
-4-
<PAGE>
(b) The Company is authorized to issue 10,000 shares of Common Stock.
Immediately prior to the Initial Closing, there were issued and outstanding a
total of 3,962.568 shares of Common Stock, and there were issued and outstanding
options or warrants to acquire 377.380 shares of Common Stock. Except as set
forth in this paragraph (b), there are outstanding no securities of the Company
which may be convertible into or otherwise exchangeable or exercisable for any
shares of Common Stock. It is presently contemplated that the Company will
effect a stock split prior to an initial public offering of its Common Stock.
(c) The Company has all requisite corporate power and authority to
execute, deliver, and perform its obligations under this Subscription Agreement,
and to issue, sell, and deliver the Notes and the Warrants, and perform its
obligations thereunder. This Subscription Agreement has been duly authorized by
the Company, and (subject, with respect to enforceability, to the provisions of
specific performance, bankruptcy, and similar laws and principles of equity)
when executed and delivered by the Company, will constitute the legal, valid,
and binding obligations of the Company, enforceable as to the Company in
accordance with its terms, assuming for such purpose that the Subscription
Agreement constitutes the legal, valid, and binding obligation of the
subscriber. The Notes and the Warrants have been duly authorized by the Company
and (subject, with respect to enforceability, to the provisions of specific
performance, bankruptcy, and similar laws and principles of equity), when
executed, issued, sold, and delivered in accordance with the terms of this
Subscription Agreement, against payment therefor, the Notes and the Warrants
will have been validly executed, issued, sold, and delivered and will constitute
the legal, valid, and binding obligation of the Company, enforceable as to the
Company in accordance with their respective terms.
(d) No consent, authorization, approval, order, license, certificate,
or permit of or from, or declaration or filing with, any federal, state, local,
or other governmental authority or any court or any other tribunal is required
by the Company for the execution, delivery, or performance by the Company of
this Subscription Agreement or the execution, issuance, sale, delivery, or
performance of the Notes or the Warrants (except as may be required under
federal and state securities laws).
(e) No consent of any party to any contract, agreement, instrument,
lease, license, arrangement, or understanding to which the Company is a party or
to which any of its properties or assets are subject, the failure of which to
obtain would have a Material Adverse Effect, is required for the execution,
delivery, or performance by the Company of this Subscription Agreement or the
execution, issuance, sale, delivery, or performance of the Note or the Warrants.
(f) The execution, delivery, and performance of this Subscription
Agreement and the execution, issuance, sale, delivery and performance of the
Notes and the
-5-
<PAGE>
Warrants, will not violate, result in a breach of, conflict with (with or
without the giving of notice or the passage of time or both), or entitle any
party to terminate or call a default under any material contract, agreement,
instrument, lease, license, arrangement, or understanding or violate or result
in a breach of any term of the certificate of incorporation or by-laws of, or
conflict with any law, rule, regulation, order, judgment, or decree binding
upon, the Company or to which any of its operations, businesses, properties, or
assets are subject, the result of which may have a Material Adverse Effect.
(g) The shares of Common Stock issuable upon exercise of the warrants
(the "Warrant Shares") have been duly reserved for such issuance, are validly
authorized and, if and when the Warrant is exercised in whole or in part in
accordance with its terms, the Warrant Shares will be validly issued, fully
paid, and nonassessable and will not be issued in violation of any preemptive or
other rights of stockholders.
(h) Attached as Exhibit 4 hereto are the unaudited consolidated
balance sheets of the Company at December 31, 1994 and September 30, 1995 and
the related unaudited consolidated statements of income for the twelve months
and nine months then ended, respectively (the "Financial Statements"). Attached
as Exhibit 5 hereto is a summary description of the Company's existing product
and of its products currently under development (the "Product Summary").
Attached as Exhibit 6 is a description of certain risks associated with your
investment in the Notes and the Warrants (the "Risk Factors").
(i) Other than any effect resulting from or associated with continued
operating losses incurred by the Company, since September 30, 1995 there has
been no Material Adverse Change.
4. Representations and Warranties of the Subscriber. You hereby represent
and warrant to, and agree with, the Company as follows:
(a) You are an "Accredited Investor" as that term is defined in
Section 501(a) of Regulation D promulgated under the Act. Specifically you are
(check appropriate items(s)):
_____(i) A bank as defined in Section 3(a)(2) of the Act, or a
savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Act, whether acting in its individual or fiduciary capacity; a
broker or dealer registered pursuant to Section 15 of the Securities Exchange
Act of 1934, as amended; an insurance company as defined in Section 2(13) of the
Act; an investment company registered under the Investment Company Act of 1940,
as amended, or a business development company as defined in Section 2(a)(48) of
that Act; a Small
-6-
<PAGE>
Business Investment Company licensed by the U.S. Small Business Administration
under Section 301(c) or (d) of the Small Business Investment Act of 1958, as
amended; a plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if such plan has total assets in
excess of $5,000,000; an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, as amended, if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of such Act,
which is either a bank, savings and loan association, insurance company, or
registered investment advisor, or if the employee benefit plan has total assets
in excess of $5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors.
_____(ii) A private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940, as amended.
_____(iii) An organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific purpose of acquiring
the securities offered, with total assets in excess of $5,000,000.
_____(iv) A director or executive officer of the Company.
_____(v) A natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of his or her purchase exceeds
$1,000,000.
_____(vi) A natural person who had an individual income in excess
of $200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year. If
the subscriber is a California resident, such subscriber's investment in the
Company will not exceed 10% of such subscriber's net worth (or joint net worth
with his spouse). If the subscriber is a Massachusetts resident, such
subscriber's investment in the Company will not exceed 25% of such subscriber's
joint net worth with his spouse (exclusive of principal residence and its
furnishings).
_____(vii) A trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) (i.e., a purchaser not an Accredited Investor who either alone or
with his purchaser representative(s) has such knowledge and experience in
financial and business matters that he is capable of evaluating the merits and
risks of the prospective investment).
-7-
<PAGE>
_____(viii) An entity in which all of the equity owners are
accredited investors. (If this alternative is checked, you must identify each
equity owner and provide statements signed by each demonstrating how each
qualified as an accredited investor.)
(b) If you are a natural person, you are: a bona fide resident of the
State contained in your address set forth on the signature page of this
Subscription Agreement as your home address; at least 21 years of age; and
legally competent to execute this Subscription Agreement. If an entity, you are
duly authorized to execute this Subscription Agreement, and this Subscription
Agreement, when executed and delivered by you, will constitute your legal,
valid, and binding obligation enforceable against you in accordance with its
terms, assuming for such purpose that the Subscription Agreement constitutes the
legal, valid, and binding obligation of the Company; and the execution,
delivery, and performance of this Subscription Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all requisite corporate or other necessary action on the part of the
undersigned.
(c) You have received, read carefully, and are familiar with this
Subscription Agreement, the Financial Statements, the Product Summary and the
Risk Factors. Respecting the Company, its business, plans, and financial
condition, the terms of the Offering and any other matters relating to the
Offering you have received all materials which have been requested by you and
the Company has answered all inquiries made by you or your representatives. You
have had access to all additional information necessary to verify the accuracy
of the information set forth in this Subscription Agreement, the Financial
Statements, the Product Summary and the Risk Factors and you have taken all the
steps necessary to evaluate the merits and risks of an investment as proposed
hereunder, including the risks described in the Risk Factors. In evaluating the
suitability of an investment in the Company, you have not relied upon any
representation or other information (whether oral or written) other than as may
be set forth in this Subscription Agreement, the Financial Statements, the
Product Summary and the Risk Factors.
(d) You or your purchaser representative have such knowledge and
experience in finance, securities, investments, and other business matters so as
to be able to protect your interests in connection with this transaction, and
your investment in the Company hereunder is not material when compared to your
total financial capacity.
(e) You understand the various risks of an investment in the Company
as proposed herein and can afford to bear such risks, including, but not limited
to, the risks of losing your entire investment.
(f) You acknowledge that no market for the Units, the Note, the
Warrants, or the Warrant Shares presently exists and none may develop in the
future and that you may find
-8-
<PAGE>
it impossible to liquidate your investment at a time when it may be desirable to
do so, or at any other time.
(g) You have been advised by the Company that none of the Notes, the
Warrants, or the Warrant Shares (collectively, the "Securities") have been
registered under the Act, that the Securities will be issued on the basis of the
statutory exemption provided by Section 4(2) of the Act and/or Regulation D
promulgated thereunder relating to transactions by an issuer not involving any
public offering and under similar exemptions under certain state securities
laws, that this transaction has not been reviewed by, passed on, or submitted to
any Federal or state agency or self-regulatory organization where an exemption
is being relied upon, and that the Company's reliance thereon is based in part
upon the representations made by you in this Subscription Agreement. You
acknowledge that you have been informed by the Company of, or are otherwise
familiar with, the nature of the limitations imposed by the Act and the rules
and regulations thereunder on the transfer of securities. In particular, you
agree that no sale, assignment, or transfer of the Securities shall be valid or
effective, and the Company shall not be required to give any effect to any such
sale, assignment, or transfer, unless (i) the sale, assignment, or transfer of
the Securities is registered under the Act, it being understood that the
Securities are not currently registered for sale and that the Company has no
obligation or intention to so register the Securities except as contemplated by
the provisions concerning registration rights set forth in the Warrants, or (ii)
the Securities are sold, assigned, or transferred in accordance with all the
requirements and limitations of Rule 144 under the Act, it being understood that
Rule 144 is not available at the present time for the sale of the Securities, or
(iii) such sale, assignment, or transfer is otherwise exempt from registration
under the Act. You acknowledge that the Securities shall be subject to a stop
transfer order and the certificate or certificates evidencing any Securities
shall bear the legend described in paragraph 1(f) and the following or a
substantially similar legend and such other legends as may be required by state
blue sky laws:
-9-
<PAGE>
THIS SECURITY AND THE SECURITIES ISSUABLE
HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
NOR UNDER ANY STATE SECURITIES LAW AND SUCH
SECURITIES MAY NOT BE PLEDGED, SOLD, ASSIGNED,
HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE
SECURITIES LAW OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE COMPANY OR COUNSEL TO
THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH SECURITIES MAY BE PLEDGED,
SOLD, ASSIGNED, HYPOTHECATED, OR TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT AND APPLICABLE STATE SECURITIES LAWS.
(h) You will acquire the Securities for your own account (or for the
joint account of you and your spouse either in joint tenancy, tenancy by the
entirety, or tenancy in common) for investment and not with a view to the sale
or distribution thereof or the granting of any participation therein, and that
you have no present intention of distributing or selling to others any of such
interest or granting any participation therein.
(i) It never has been represented, guaranteed, or warranted by any
broker, the Company, National, any of the officers, directors, shareholders,
partners, employees, or agents of either, or any other persons, whether
expressly or by implication, that:
(i) the Company or you will realize any given percentage of
profits and/or amount or type of consideration, profit, or loss as a
result of the Company activities or your investment in the Company; or
(ii) the past performance or experience of the management of the
Company, or of any other person, will in any way indicate the
-10-
<PAGE>
predictable results of the ownership of the Securities or of the
Company's activities.
(j) You understand that the Notes will not be secured by any
collateral.
(k) Without limiting any of your other representations and warranties
hereunder, you acknowledge that you have reviewed and are aware of the Risk
Factors annexed as Exhibit 6 hereto.
(l) You acknowledge that the representations, warranties and
agreements made by you herein shall survive the execution and delivery of this
Subscription Agreement and the purchase of the Units.
5. Transferability. Neither this Subscription Agreement, nor any of your
interests herein, shall be assignable or transferable by you in whole or in part
except by operation of law.
6. Opinion of Counsel. At each Closing, the Company shall deliver to the
undersigned an original opinion of the counsel to the Company, in form and
substance reasonably satisfactory to National.
7. Miscellaneous.
(a) All notices or other communications given or made hereunder shall
be in writing and shall be delivered or mailed to you at your address set forth
on the signature page of this Subscription Agreement and to the Company at the
address set forth on the first page above. Notices hand delivered shall be
deemed given upon receipt and notices sent by mail shall be deem given on the
second business day following deposit in the United States mail.
(b) This Subscription Agreement shall be construed in accordance with
and governed by the internal laws of the State of New York without reference to
that State's conflicts of laws provisions.
(c) This Subscription Agreement, the Note, and the Warrant constitute
the entire agreement between the parties hereto with respect to the subject
matter hereof and may be amended only by a writing executed by all parties
hereto.
(d) This Subscription Agreement may be executed in one or more
counterparts representing, however, one and the same agreement.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Subscription
Agreement as of the day and year this subscription has been accepted by the
Company as set forth below.
Principal Amount of Notes _______________________________
Being Purchased Print Name of Subscriber
________________________ By:____________________________
(Signature of Authorized
Signatory)
Social Security Number of other Being
Taxpayer Identification Number:
_____________________________
Address:______________________________
______________________________
Purchase Price____________
ACCEPTED BY:
INTEGRATED TECHNOLOGY USA, INC.
By:____________________________
Title:_______________________
Date:______________, 1996
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<PAGE>
EXHIBIT 1
[FORM OF PROMISSORY NOTE]
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY
NOT BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR TRANSFERRED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THE TRANSFER OF THIS PROMISSORY NOTE IS RESTRICTED AS DESCRIBED HEREIN.
PROMISSORY NOTE
$_________________ Teaneck, New Jersey
June __, 1996
FOR VALUE RECEIVED, Integrated Technology USA, Inc., a ________ corporation
(the "Company"), promises to pay to the order of ___________________ (the
"Holder") at ______________________, or at such other place as the Holder may
from time to time designate by written notice to the Company, in lawful money of
the United States of America, the aggregate sum of _________________(______).
All principal and interest is to be paid without setoff or counterclaim as set
forth below. The Company further agrees as follows:
Section 1.
This Note is one of several promissory notes made and issued by the Company
in an aggregate principal amount of up to $1,500,000 (individually, a "Note,"
and together, the "Notes"), pursuant to the terms and subject to the conditions
of subscription agreements (the "Subscription Agreements"), by and among the
Company and certain investors. Reference is made to the Subscription Agreements
for agreements of the parties applicable to this Note.
<PAGE>
Section 2. Payments.
(a) Principal, together with interest thereon which shall accrue at the
rate of ten percent (10%) per annum, shall be due and payable upon the earlier
of (i) December 15, 1996 or (ii) ten (10) days after the consummation by the
Company of an initial public offering of its securities.
(b) The Company shall have the right to prepay this Note in full or in part
at any time, without premium or penalty.
(c) In the event that the principal of this Note is not paid timely,
interest shall accrue from the date of such default on the unpaid principal at
the rate of fifteen percent (15%) per annum, and shall be due and payable on the
first day of each month until the repayment of this Note.
(d) The Company and the Holder intend that this Note comply with any
applicable usury laws from time to time in effect. In furtherance thereof, the
Company and the Holder stipulate and agree that none of the terms and provisions
contained in this Note shall be construed to create a contract to pay, as
consideration for the use, forbearance or detention of money, interest at a rate
in excess of the highest lawful rate under applicable law.
Section 3. Representations and Warranties of the Company.
The Company represents and warrants to the Holder that the Company:
(a) is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Delaware;
(b) has all requisite corporate power and authority to own, lease, license
and use its properties and assets and to conduct the business in which it is
engaged; and
(c) is duly licensed or qualified and is in good standing as a foreign
corporation in each jurisdiction wherein the nature of the business transacted
by it or the nature of the property owned or leased by it makes such licensing
or qualification necessary, the failure of which would have a material adverse
effect on the business, operations, properties or condition (financial or
otherwise) of the Company.
(d) The Company will not (i) declare or pay any dividend or make any other
distribution on any equity securities of the Company, except dividends or
distributions payable in equity securities of the Company, (ii) purchase, redeem
or otherwise acquire or retire for value any equity securities of the Company,
except equity securities acquired upon conversion thereof into other equity
securities of the Company, or (iii) permit a subsidiary of the Company to
purchase, redeem or otherwise acquire or retire for value any equity securities
of the Company, if, upon giving effect to such dividend, distribution, purchase,
redemption, or other
2
<PAGE>
acquisition, the net worth of the Company would be reduced to less than an
amount equal to the remaining indebtedness outstanding under the Notes.
(e) The Company will not itself, and will not permit any subsidiary to,
engage in any transaction of any kind or nature with any affiliate of the
Company, other than a wholly-owned subsidiary, unless such transaction, or in
the case of a course of related or similar transactions or continuing
transactions is or are upon terms which are fair to the Company or such
subsidiary, as the case may be, and which are reasonably similar to, or more
beneficial to the Company or such subsidiary than, the terms deemed likely to
occur in similar transactions with unrelated persons under the same
circumstances.
Section 4. Events of Default.
It shall be an Event of Default with respect to this Note upon the
occurrence and continuation uncured of any of the following events:
(a) Default in Payment, Etc.
(i) a default in the payment of the principal on this Note, when and
as the same shall become due and payable, either by the terms hereof or upon
redemption or otherwise, which default shall continue uncured for a period of 7
days after receipt by the Company of written notice of such default; or
(ii) a default in the payment of any interest on this Note, and such
default shall continue uncured for a period of 7 days after receipt by the
Company of written notice of such default; or
(iii) default in the performance, or breach, of any other covenant of
the Company in this Note and continuance of such default or breach uncured for a
period of thirty (30) days after receipt of notice as to such breach.
(b) Bankruptcy. The entry of a decree or order by a court having
jurisdiction adjudging the Company a bankrupt or insolvent, or approving a
petition seeking reorganization, arrangement, adjustment, or composition of or
in respect of the Company, under federal bankruptcy law, as now or hereafter
constituted, or any other applicable federal or state bankruptcy, insolvency, or
other similar law, and the continuance of any such decree or order unstayed and
in effect for a period of sixty (60) days; or the commencement by the Company of
a voluntary case under federal bankruptcy law, as now or hereafter constituted,
or any other applicable Federal or state bankruptcy, insolvency, or other
similar law, or the consent by it to the institution of bankruptcy or insolvency
proceedings against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under federal bankruptcy law or any other
applicable Federal or state law, or the consent by it to the filing of such
petition or to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator, or similar official of the Company or of any substantial part of
its property, or the making by it of an assignment for the benefit of creditors,
or the admission by it in writing of its inability to pay its debts generally
3
<PAGE>
as they become due, or the taking of corporate action by the Company in
furtherance of any such action.
Section 5. Remedies Upon Default.
(a) Acceleration. Upon an Event of Default and at any time during the
continuation thereof, the Holder, by notice in writing given to the Company, may
declare the entire principal of this Note then outstanding to be due and payable
immediately, and upon any such declaration the same shall become and be due and
payable immediately, anything herein contained to the contrary notwithstanding.
(b) Proceedings and Actions. During the continuation of any Event of
Default, the Holder may institute such actions or proceedings in law or equity
as it shall deem expedient for the protection of its rights and may prosecute
and enforce its claims against all assets of the Company, and in connection with
any such action or proceeding shall be entitled to receive from the Company
payment of the principal amount of this Note plus accrued interest to the date
of payment plus reasonable expenses of collection including, without limitation,
attorney's fees and expenses.
Section 6. Restrictions on Transfer.
The Holder acknowledges that he has been advised by the Company that this
Note has not been registered under the Act, that the Note is being issued on the
basis of the statutory exemption provided by section 4(2) of the Act and/or
Regulation D promulgated thereunder relating to transactions by an issuer not
involving any public offering, and that the Company's reliance thereon is based
in part upon the representations made by the Holder in the Holder's Subscription
Agreement. The Holder acknowledges that he has been informed by the Company of,
or is otherwise familiar with, the nature of the limitations imposed by the Act
and the rules and regulations thereunder on the transfer of securities. In
particular, the Holder agrees that no sale, assignment, or transfer of any of
the Securities shall be valid or effective, and the Company shall not be
required to give any effect to any such sale, assignment, or transfer, unless
(i) the sale, assignment, or transfer of the Securities is registered under the
Act, it being understood that the Securities are not currently registered under
the Act and that the Company has no obligation or intention so to register the
Securities, or (ii) the Securities are sold, assigned, or transferred in
accordance with all the requirements and limitations of Rule 144 under the Act,
it being understood that Rule 144 is not available at the present time for the
sale of the Securities and that there can be no assurance that Rule 144 sales
will be available at any time in the future, or (iii) such sale, assignment, or
transfer is otherwise exempt from registration under the Act. The Holder and
each transferee hereof further agrees that if any distribution of Securities is
proposed to be made by them otherwise than by delivery of a prospectus meeting
the requirements of Section 10 of the Act, such action shall be taken only after
submission to the Company of an opinion of counsel, reasonably satisfactory in
form and substance to the Company's counsel, to the effect that the proposed
distribution will not be in violation of the Act or of applicable state law.
Furthermore, it shall be a condition to the
4
<PAGE>
transfer of the Securities that any transferee thereof deliver to the Company
his written agreement to accept and be bound by all of the terms and conditions
contained in this Note.
Section 7. Miscellaneous.
(a) This Note may be altered only by prior written agreement signed by the
party against whom enforcement of any waiver, change, modification, or discharge
is sought. This Note may not be modified by an oral agreement, even if supported
by new consideration.
(b) Subject to Section 6, the covenants, terms and conditions contained in
this Note apply to and bind the heirs, successors, executors, administrators and
assigns of the parties.
(c) Upon receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Note, and of
indemnity or security reasonably satisfactory to the Company, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Note, if mutilated, the Company will
make and deliver a new Note of like tenor and of the same series, in lieu of
this Note. Any Note made and delivered in accordance with the provisions of this
Section shall be dated as of the date to which interest has been paid on this
Note, or if no interest has theretofore been paid on this Note, then dated the
date hereof.
(d) This Note constitutes a final written expression of all the terms of
the agreement between the parties regarding the subject matter hereof, are a
complete and exclusive statement of those terms, and supersedes all prior
agreements, understandings, and representations between the parties. If any
provision or any word, term, clause, or other part of any provision of this Note
shall be invalid for any reason, the same shall be ineffective, but the
remainder of this Note shall not be affected and shall remain in full force and
effect.
(e) This Note shall be governed by and construed in accordance with the
laws of the State of New York without giving effect to its conflicts of law
principles. The Company agrees that any dispute or controversy arising out of
this Note shall be adjudicated in a court located in New York City, and hereby
submits to the exclusive jurisdiction of the courts of the State of New York
located in New York, New York, and of the federal courts in the Southern
District of New York, and irrevocably waives any objection it now or hereafter
may have respecting the venue of such action or proceeding brought in such a
court or respecting the fact that such court is an inconvenient forum, and
consents to the service of process in any such action or proceeding by means of
registered or certified mail, return receipt requested.
(f) All notices, consents, or other communications provided for in this
Note or otherwise required by law shall be in writing and may be given to or
made upon the respective parties at the following mailing addresses:
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<PAGE>
Holder: _________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Attention:_______________________________________________________
Company: Integrated Technology USA, Inc.
545 Cedar Lane
Teaneck, New Jersey 07666
Attention: Alan Haber
Such addresses may be changed by notice given as provided in this
subsection. Notices shall be effective upon the date of receipt; provided,
however, that a notice (other than a notice of a changed address) sent by
certified or registered U.S. mail, with postage prepaid, shall be presumed
received no later than three (3) business days following the date of sending.
(g) Time is of the essence under this Note.
IN WITNESS WHEREOF, the Company has executed this Note effective as of the
date first set forth above.
INTEGRATED TECHNOLOGY USA, INC.
By:__________________________________________
Name:
Title:
6
<PAGE>
EXHIBIT 2
[FORM OF WARRANT]
THIS WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR
UNDER ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT BE PLEDGED, SOLD,
ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE
STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE
COMPANY OR COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION
ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE PLEDGED,
SOLD, ASSIGNED, HYPOTHECATED, OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF IS
RESTRICTED AS DESCRIBED HEREIN.
INTEGRATED TECHNOLOGY USA, INC.
Warrant for the Purchase of Shares of Common Stock,
without par value
No. U-_____
THIS CERTIFIES that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, ____________________, (the
"Holder"), is entitled to subscribe for and purchase from Integrated Technology
USA, Inc., a Delaware corporation (the "Company"), upon the terms and conditions
set forth herein, at any time or from time to time after ______ the date (the
"Exercise Date") which is the earlier of (i) the closing of an underwritten
public offering of the Company's securities (an "IPO") pursuant to a
registration statement declared effective by the Securities and Exchange
Commission or (ii) December 15, 1996, and before 5:00 P.M. on ____________ __,
2001 [five years after the date of the issuance of the First Warrant (as
hereinafter defined) issued in connection with the Offering (as defined below)],
New York time (the "Exercise Period"), such number of shares of the Company's
common stock, without par value ("the Common Stock"), equal to [insert amount of
investment] divided by the price per share to the public of the Common Stock
(the "IPO Price"), at a price equal to the IPO Price multiplied by 10% per share
(the "Exercise Price"). In the event the Company does not effect an IPO by
December 15, 1996, this Warrant shall represent the right to purchase such
number of shares of Common Stock equal to [insert amount of investment] divided
by 4,032.31 and the Exercise Price shall be $1,209.69 per share. As used herein
the term "this Warrant" shall mean and include this Warrant and any Warrant or
<PAGE>
Warrants hereafter issued as a consequence of the exercise or transfer of this
Warrant in whole or in part. This Warrant may not be sold, transferred, assigned
or hypothecated until _____________ [90 days after the earlier of the date of
the IPO or December 15, 1996]. This Warrant is one of a series of warrants
issued to the original Holder in connection with the sale by the Company of
notes (the "Notes") and Warrants (the "Offering"), with National Securities
Corporation ("National"), as placement agent. As used herein, the term "Holder"
shall include any transferee to whom this Warrant has been transferred in
accordance with the terms hereof.
The number of shares of Common Stock issuable upon exercise of the Warrants
(the "Warrant Shares") may be adjusted from time to time as hereinafter set
forth.
1. This Warrant may be exercised during the Exercise Period, as to the
whole or any lesser number of whole Warrant Shares, by the surrender of this
Warrant (with the Election to Exercise attached hereto duly executed) to the
Company at its office at 545 Cedar Lane, Teaneck, New Jersey 07666, or at such
other place as is designated in writing by the Company, together with a
certified or bank cashier's check payable to the order of the Company in an
amount equal to the product of Exercise Price and the number of Warrant Shares
for which this Warrant is being exercised.
2. Upon each exercise of the Holder's rights to purchase Warrant Shares,
the Holder shall be deemed to be the holder of record of the Warrant Shares
issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Warrant Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Warrant, the Company shall issue
and deliver to the Holder a certificate or certificates for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
3. Any Warrants issued upon the transfer or exercise in part of this
Warrant shall be numbered and shall be registered in a warrant register (the
"Warrant Register") as they are issued. The Company shall be entitled to treat
the registered holder of any Warrant on the Warrant Register as the owner in
fact thereof for all purposes and shall not be bound to recognize any equitable
or other claim to or interest in such Warrant on the part of any other person,
and shall not be liable for any registration of transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge of an executive officer of the
Company that a fiduciary or nominee is committing a breach of trust in
requesting
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<PAGE>
such registration of transfer. This Warrant shall be transferable on the Warrant
Register only upon delivery thereof duly endorsed by the Holder or by his duly
authorized attorney or representative, or accompanied by proper evidence of
succession, assignment, or authority to transfer, subject in all cases to
compliance with the Subscription Agreement between the holder and the Company
dated the date hereof. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his or its authority shall be produced. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto. This Warrant may be exchanged, at the option of the Holder
thereof, for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of Warrant Shares (or portions thereof), upon surrender to the Company or its
duly authorized agent. Notwithstanding anything contained herein to the
contrary, the Company shall have no obligation to cause Warrants to be
transferred on its books to any person if, in the opinion of counsel to the
Company, such transfer does not comply with the provisions of the Securities Act
of 1933, as amended (the "Act"), and the rules and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the rights to purchase all Warrant Shares granted pursuant to
the Warrants, such number of shares of Common Stock as shall, from time to time,
be sufficient therefor. The Company covenants that all shares of Common Stock
issuable upon exercise of this Warrant, upon receipt by the Company of the full
Exercise Price therefor, shall be validly issued, fully paid, nonassessable, and
free of preemptive rights.
5. (a) The Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(b) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding after giving effect to such action, and the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Such adjustment shall be made
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<PAGE>
successively whenever any event listed above shall occur.
(c) Upon each adjustment of the Exercise Price pursuant to the
provisions of this Section 5, the number of Warrant Shares issuable upon the
exercise at the adjusted exercise price of each Warrant shall be adjusted to the
nearest number of whole shares of Common Stock by multiplying a number equal to
the Exercise Price in effect immediately prior to such adjustment by the number
of Warrant Shares issuable upon exercise of this Warrant immediately prior to
such adjustment and dividing the product so obtained by the adjusted Exercise
Price.
(d) For the purpose of this Agreement, the term "Common Stock" shall
mean (i) the class of stock designated as Common Stock in the Articles of
Incorporation of the Company as amended as of the date hereof, or (ii) any other
class of stock resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value.
(e) In case of any consolidation of the Company with, or merger of the
Company into, another corporation (other than a consolidation or merger which
does not result in any reclassification or change of the outstanding Common
Stock), the corporation formed by such consolidation or merger shall execute and
deliver to the Holder a supplemental warrant agreement providing that the Holder
of this Warrant shall have the right thereafter (until the expiration of such
Warrant) to receive, upon exercise of such Warrant, the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation or merger by a holder of the number of shares of Common Stock for
which such Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant agreement
shall provide for adjustments which shall be identical to the adjustments
provided in this Section 5. The above provision of this subsection shall
similarly apply to successive consolidations or mergers.
(f) No adjustment in the number of Warrant Shares shall be required if
such adjustment is less than one; provided, however, that any adjustments which
by reason of this Section 5(f) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 5 shall be made to the nearest one-thousandth of a share.
(g) In any case in which this Section 5 shall require that an
adjustment in the number of Warrant Shares be made effective as of a record date
for a specified event, the Company may elect to defer, until the occurrence of
such event, issuing to the Holder, if the Holder exercised this Warrant after
the record date, the Warrant Shares, if any, issuable upon such exercise over
and above the Warrant Shares, if any, issuable upon such exercise
-4-
<PAGE>
prior to such adjustment; provided, however, that the Company shall deliver to
the Holder a due bill or other appropriate instrument evidencing the Holder's
right to receive such additional Warrant Shares upon the occurrence of the event
requiring such adjustment.
(h) Whenever there shall be an adjustment as provided in this Section
5, the Company shall promptly cause written notice thereof to be sent by
certified mail, postage prepaid, to the Holder, at its address as it shall
appear in the securities register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares issuable upon
the exercise of this Warrant if such Warrant were exercisable on the date of
such notice, and setting forth a brief statement of the facts requiring such
adjustment and the computation thereof, which officer's certificate shall be
conclusive evidence of the correctness of any such adjustment absent manifest
error.
6. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all holders
of Common Stock entitling them to purchase any additional shares of Common Stock
or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares of
Common Stock, or any consolidation, merger, sale, lease, or conveyance of
property, described in Section 5; or
(d) to effect any liquidation, dissolution, or winding-up of the
Company,
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, or (ii) the date on which
any such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property,
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<PAGE>
liquidation, dissolution, or winding-up.
7. The issuance of any shares or other securities upon the exercise of this
Warrant, and the delivery of certificates or other instruments representing such
shares or other securities, shall be made without charge to the Holder for any
tax or other charge in respect of such issuance, other than applicable transfer
taxes. The Company shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of any
certificate in a name other than that of the Holder and the Company shall not be
required to issue or deliver any such certificate unless and until the person or
persons requesting the issue thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
8. (a) (i) If, at any time (including the IPO) the Company shall file a
registration statement (other than a registration statement for an offering of
debt securities or a registration statement which does not permit the
registration of the Warrant Shares) with the Securities and Exchange Commission
(the "Commission") while any Securities (as hereinafter defined) are
outstanding, the Company shall give all the then holders of any Securities (the
"Eligible Holders") at least 30 days prior written notice of the filing of such
registration statement. Such right shall expire once the Eligible Holders have
been offered the opportunity to register all of the Shares (as defined herein).
If requested in writing by any Eligible Holder within 20 days after receipt of
any such notice, the Company shall, at the Company's sole expense (other than
the fees and disbursements of counsel for the Eligible Holders and the
underwriting discounts and selling commissions, if any, payable in respect of
the Securities sold by any Eligible Holder), subject to Section 8(a)(ii) below,
register or qualify all or, at each Eligible Holder's option, any portion of the
Warrant Shares of any Eligible Holders who shall have made such request,
concurrently with the registration of such other securities, all to the extent
requisite to permit the public offering and sale of the Warrant Shares through
the facilities of all securities exchanges and the over-the-counter market on
which the Common Stock is traded, and will use its reasonable best efforts
through its officers, directors, auditors, and counsel to cause such
registration statement to become effective as promptly as practicable.
(ii) If the registration of which the Company gives notice is a
registered public offering involving an underwriting, the Company shall so
advise the Eligible Holders as a part of the written notice given pursuant to
Section 8(a)(i). In such event, the right of any Eligible Holder to registration
pursuant to this Section 8(a) shall be conditioned upon such Eligible Holder's
participation in such underwriting and the inclusion of such Eligible Holder's
Warrant Shares in the underwriting to the extent
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<PAGE>
provided herein. An Eligible Holder proposing to distribute its Warrant Shares
through such underwriting shall (together with the Company and the other holders
of securities of the Company with registration rights to participate therein
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company. Notwithstanding the
foregoing, if the managing underwriter of any such offering shall advise the
Company in writing that, in its opinion, the distribution of all or a portion of
the Warrant Shares requested to be included in the registration concurrently
with the securities being registered by the Company would materially adversely
affect the distribution of such securities by the Company for its own account,
then any Eligible Holder who shall have requested registration of his or its
Warrant Shares shall not be entitled to have such Eligible Holder's Warrant
Shares included in such registration statement, provided that no such
restriction shall be required as to any Warrant Shares if any securities of the
Company are included in such registration statement for the account of any
person other than the Company and any Eligible Holder unless the securities
included in such registration statement for such other person shall have been
reduced pro rata to the reduction of the Warrant Shares which were requested to
be included in such registration and provided further, that nothing set forth in
this Section 9(a) shall restrict the right of any Eligible Holder to sell any of
his or its Warrant Shares in accordance with Rule 144 promulgated under the Act.
As used herein, "Securities" shall mean the Warrants, the Warrant Shares,
the warrants (the "Agent Warrants") issued to National in connection with the
Offering, and the shares of Common Stock issuable upon exercise of the Agent's
Warrants (the "Agent Warrant Shares") which, in each case, have not been
previously sold pursuant to a registration statement or Rule 144 promulgated
under the Act. The Warrants and the Agent Warrants are hereinafter referred to
collectively as the "Private Placement Warrants," and the Warrant Shares and the
Agent Warrant Shares are hereinafter referred to collectively as the "Shares."
(b) If, at any time after the first anniversary of the closing of an
IPO and during the five-year period commencing _____________ ___, 1996, [the
date of the issuance of the first Warrant], the Company shall receive a written
request, from Eligible Holders who in the aggregate own (or upon exercise of all
Private Placement Warrants then outstanding would own) a majority of the total
number of Shares outstanding (or upon such exercise would be outstanding) (the
"Initiating Holders"), to register the sale of all or part of such Shares, the
Company shall, as promptly as practicable, prepare and file with the Commission
a registration statement sufficient to permit the public offering and sale of
the Shares through the facilities of all securities exchanges and the
over-the-counter market on which the Common Stock is traded, and
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<PAGE>
will use its reasonable best efforts through its officers, directors, auditors,
and counsel to cause such registration statement to become effective as promptly
as practicable; provided, however, that the Company shall only be obligated to
file one such registration statement. All of the expenses incurred in connection
with such registration statement (other than the fees and disbursements of
counsel for the Eligible Holders and underwriting discounts and selling
commissions, if any, payable in respect of the Shares sold by the Eligible
Holders) shall be borne by the Company. Within five business days after
receiving any request contemplated by this Section 8(b), the Company shall give
written notice to all the other Eligible Holders, advising each of them that the
Company is proceeding with such registration and offering to include therein all
or any portion of any such other Eligible Holder's Shares, provided that the
Company receives a written request to do so from such Eligible Holder within 20
days after receipt by him or it of the Company's notice.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 8(b):
(i) During the period starting with the date sixty (60) days
prior to the Company's good faith estimate of the date of filing of, and ending
on a date one hundred eighty (180) days after the effective date of, a
Company-initiated registration; provided that the Company is actively employing
in good faith all reasonable efforts to cause such registration statement to be
filed and become effective; or
(ii) Within 270 days after the effective date of a registration
statement filed by the Company in which Eligible Holders shall have been
entitled to join pursuant to Section 8(a) hereof and in which there shall have
been effectively registered not less than 75% of all Shares as to which
registration shall have been so requested by the Eligible Holders.
(c) In the event of a registration pursuant to the provisions of this
Section 8, the Company shall use its reasonable best efforts to cause the Shares
so registered to be registered or qualified for sale under the securities or
blue sky laws of such jurisdictions as the Holder or such holders may reasonably
request; provided, however, that the Company shall not be required to qualify to
do business in any state by reason of this Section 8(c) in which it is not
otherwise required to qualify to do business or to consent to service of process
in such jurisdiction in connection with such offering, and provided, further,
that if (i) in the good faith judgment of the Board of Directors of the Company,
such registration would be seriously detrimental to the Company and the Board of
Directors of the Company concludes, as a result, that it is necessary to defer
the filing of such registration statement at such time, and (ii) the Company
shall furnish to the Eligible
-8-
<PAGE>
Holders a certificate signed by the President of the Company stating that, in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company for such registration statement to be filed
in the near future and that it is, therefore, essential to defer the filing of
such registration statement, then the Company shall have the right to defer such
filing for the period during which such disclosure would be seriously
detrimental, provided that (except as provided above) the Company may not defer
the filing for a period of more than one hundred eighty (180) days after receipt
of the request of the Initiating Holders, and, provided further, that the
Company shall not defer its obligation in this manner more than once in any
twelve-month period.
(d) The Company shall keep effective any registration or qualification
contemplated by this Section 8 and shall from time to time amend or supplement
each applicable registration statement, preliminary prospectus, final
prospectus, application, document, and communication for such period of time as
shall be required to permit the Eligible Holders to complete the offer and sale
of the Shares covered thereby. The Company shall in no event be required to keep
any such registration or qualification in effect for a period in excess of four
months from the date on which the Eligible Holders are first free to sell such
Shares; provided, however, that, if the Company is required to keep any such
registration or qualification in effect with respect to securities other than
the Shares beyond such period, the Company shall keep such registration or
qualification in effect as it relates to the Shares for so long as such
registration or qualification remains or is required to remain in effect in
respect of such other securities.
(e) In the event of a registration pursuant to the provisions of this
Section 8, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Eligible Holder may reasonably request to
facilitate the disposition of the Shares included in such registration.
(f) The Company agrees that, from the date on which the Company first
becomes subject to Section 12(b), 12(g), or 15(d) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") until all the Shares have been sold
under a registration statement or pursuant to Rule 144 under the Act, it shall
use its best efforts to keep current in filing all reports, statements, and
other materials required to be filed with the Commission to permit holders of
the Securities to sell such securities under Rule 144.
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<PAGE>
9. (a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act, from and against any and all loss, liability, charge, claim,
damage, and expense whatsoever (which shall include, for all purposes of this
Section 10, but not be limited to, reasonable attorneys' fees and any and all
reasonable expense whatsoever incurred in investigating, preparing, or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), as and when
incurred, arising out of, based upon, or in connection with (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in any
registration statement, preliminary prospectus, or final prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
relating to the sale of any of the Shares, or (B) in any application or other
document or communication (in this Section 10 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Shares under the securities or blue
sky laws thereof or filed with the Commission or any securities exchange; or any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, unless such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to an Eligible Holder by or on
behalf of such person expressly for inclusion in any registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be, or (ii) any breach of any
representation, warranty, covenant, or agreement of the Company contained in
this Warrant. The foregoing agreement to indemnify shall be in addition to any
liability the Company may otherwise have, including liabilities arising under
this Warrant.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability other than pursuant to this Section 9(a)), and the
Company shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such indemnified party or
parties) and payment of expenses. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such
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<PAGE>
indemnified party or parties unless the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action or the Company shall not have promptly employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action or counsel to such indemnified party or parties shall have
reasonably concluded that there may be one or more legal defenses available to
it or them or to other indemnified parties which are different from or
additional to those available to the Company, in any of which events such fees
and expenses shall be borne by the Company and the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties. Anything in this Section 10 to the contrary notwithstanding, the
Company shall not be liable for any settlement of any such claim or action
effected without its prior written consent. The Company agrees promptly to
notify the Eligible Holders of the commencement of any litigation or proceedings
against the Company or any of its officers or directors of which it is aware in
connection with the sale of any Securities or any preliminary prospectus,
prospectus, registration statement, or amendment or supplement thereto, or any
application relating to any sale of any Securities.
(b) The Holder agrees to indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who shall have signed any
registration statement covering Securities held by the Holder, each other
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, and its or their respective counsel,
to the same extent as the foregoing indemnity from the Company to the Holder in
Section 9(a), but only with respect to statements or omissions, if any, made in
any registration statement, preliminary prospectus, or final prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
or in any application, in reliance upon and in conformity with written
information furnished to the Company with respect to the Holder by or on behalf
of the Holder expressly for inclusion in any such registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be. If any action shall be
brought against the Company or any other person so indemnified based on any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, and in respect of which
indemnity may be sought against the Holder pursuant to this Section 9(b), the
Holder shall have the rights and duties given to the Company, and the Company
and each other person so indemnified shall have the rights and duties given to
the indemnified parties, by the provisions of Section 9(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant
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<PAGE>
to Section 9(a) or 9(b) (subject to the limitations thereof) but it is found in
a final judicial determination, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this Warrant
expressly provides for indemnification in such case, or (ii) any indemnified or
indemnifying party seeks contribution under the Act, the Exchange Act or
otherwise, the Company (including for this purpose any contribution made by or
on behalf of any director of the Company, any officer of the Company who signed
any such registration statement, any controlling person of the Company, and its
or their respective counsel), as one entity, and the Eligible Holders of the
Securities included in such registration in the aggregate (including for this
purpose any contribution by or on behalf of an indemnified party), as a second
entity, shall contribute to the losses, liabilities, claims, damages, and
expenses whatsoever to which any of them may be subject, on the basis of
relevant equitable considerations such as the relative fault of the Company and
such Eligible Holders in connection with the facts which resulted in such
losses, liabilities, claims, damages, and expenses. The relative fault, in the
case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information supplied
by the Company or by such Eligible Holders, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement, alleged statement, omission, or alleged omission. The Company and the
Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Eligible Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Holder and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations referred
to in this Section 9(c). In no case shall any Eligible Holder be responsible for
a portion of the contribution obligation imposed on all Eligible Holders in
excess of its pro rata share based on the number of shares of Common Stock owned
(or which would be owned upon exercise of all Securities) by it and included in
such registration as compared to the number of shares of Common Stock owned (or
which would be owned upon exercise of all Securities) by all Eligible Holders
and included in such registration. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 9(c), each person, if any, who
controls any Eligible Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent, and counsel of each such Eligible Holder or control person shall have the
same rights to contribution as such Eligible Holder or control person and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange
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<PAGE>
Act, each officer of the Company who shall have signed any such registration
statement, each director of the Company, and its or their respective counsel
shall have the same rights to contribution as the Company, subject in each case
to the provisions of this Section 9(c). Anything in this Section 9(c) to the
contrary notwithstanding, no party shall be liable for contribution with respect
to the settlement of any claim or action effected without its prior written
consent. This Section 9(c) is intended to supersede any right to contribution
under the Act, the Exchange Act, or otherwise.
Anything contained herein to the contrary notwithstanding, the Company
shall have no obligations pursuant to Section 8 with respect to any request or
requests made by the Holder, if at the time the request is made by the Holder,
all of the Warrant Shares to be sold by the Holder can be sold without
registration under the provisions of Rule 144 under the Act or otherwise in any
three-month period.
10. Unless registered pursuant to the provisions of Section 8 hereof, the
Warrant Shares issued upon exercise of the Warrants shall be subject to a stop
transfer order and the certificate or certificates evidencing such Warrant
Shares shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN NOT REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT, OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT. SUCH
SHARES ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER CONTAINED IN A
WARRANT, DATED MARCH __, 1996, COPIES OF WHICH ARE ON FILE WITH THE
SECRETARY OF THE COMPANY."
11. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Warrant (and upon surrender of any
Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses and, if reasonably requested, an indemnity reasonably
acceptable to the Company, the Company shall execute and deliver to the Holder
thereof a new Warrant of like date, tenor, and denomination.
12. The Holder of any Warrant shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
13. This Warrant shall be construed in accordance with the laws of the
State of New York applicable to contracts made and
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performed within such State, without regard to principles of conflicts of law.
Dated: , 1996
INTEGRATED TECHNOLOGY USA, INC.
By:_______________________________
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FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers unto __________________ a Warrant to purchase __________ shares of
Common Stock, without par value, of Integrated Technology USA, Inc. (the
"Company"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint _____________________ attorney to
transfer such Warrant on the books of the Company, with full power of
substitution.
Dated: _________________________
Signature____________________________
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
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<PAGE>
To: Integrated Technology USA, Inc.
545 Cedar Lane
Teaneck, New Jersey 07666
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase _______
Warrant Shares covered by the within Warrant and tenders payment herewith
in the amount of $_________ in accordance with the terms thereof, and
requests that certificates for such securities be issued in the name of,
and delivered to:
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of,
and delivered to, the undersigned at the address stated below.
Dated: ____________________ Name_______________________________
(Print)
Address: _______________________________________________________________
______________________________________
(Signature)
<PAGE>
DISTRIBUTION AGREEMENT
THIS AGREEMENT ("Agreement") made as of the _____ day of
_________________, 1996
B E T W E E N:
INTEGRATED TECHNOLOGY USA, INC.
545 Cedar Lane
Teaneck, New Jersey 07666
FAX No.: (201) 907-0344
(hereinafter called "ITI")
OF THE FIRST PART;
-and-
GEMINI INDUSTRIES, INC., a corporation incorporated
under the laws of the State of Delaware, having an office at
215 Entin Road, Clifton, New Jersey, U.S.A. 07014
FAX No.: (201) 471-4425
(hereinafter called "Gemini")
OF THE SECOND PART;
WHEREAS, ITI is engaged in the development, manufacture, sale and
distribution of the CompuNet 2000 integrated telephone/computer keyboard and
proprietary software ("CompuNet 2000") utilizing certain trademarks (the "Trade
Marks"); and
WHEREAS, ITI and Gemini wish to enter into a strategic alliance in
which ITI will sell its CompuNet 2000 to Gemini and Gemini will undertake
responsibility for the distribution and resale of said CompuNet 2000 in the
retail channels of distribution on an exclusive basis, in the United States
("Territory"), during the Term (as defined in Section 2.01) on the terms and
conditions contained herein;
<PAGE>
NOW, THEREFORE, THIS AGREEMENT WITNESSETH that in consideration of the
mutual covenants herein contained, the parties agree as follows:
ARTICLE 1. - APPOINTMENT AND TERRITORY
1.01 Appointment
Subject to the terms of this Appointment, ITI hereby grants to Gemini
the sole and exclusive right to distribute and sell within the Territory all
current versions of the CompuNet 2000 (see data sheet attached hereto and made
a part hereof as Exhibit A) manufactured and sold by ITI.
1.02 Restriction on Sale of Products
During the Term, ITI shall not, directly or indirectly, sell, assign
or grant to any other person, firm or corporation the right to sell or
distribute the CompuNet 2000 in retail channels of distribution within the
Territory. "Retail channels of distribution" is defined as the sale of CompuNet
2000 through retail stores to end users.
Notwithstanding the foregoing, the parties hereto agree that ITI shall
be entitled to sell, license and distribute the CompuNet 2000 to original
equipment manufacturers, corporate and business end users and to export and
sell, license and distribute the CompuNet 2000 to such purchasers and licensees
inside or outside the Territory as it deems appropriate, provided, however,
that such purchasers or licensees of ITI shall not be allowed to sell the
CompuNet 2000 on a stand alone basis within the Territory. If, due to an
oversight, inadvertence, lack of knowledge or for any reason whatsoever, any
such purchaser or licensee does export for sale into the Territory the CompuNet
2000, ITI shall use its best efforts to have such parties immediately cease
such activity provided that ITI need not commence litigation.
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<PAGE>
1.03 Referrals
ITI agrees to refer all inquiries, orders or requests for the CompuNet
2000 originating from or intended for delivery within the Territory to Gemini
providing that they pertain to retail channels of distribution within the
Territory.
ARTICLE 2. - TERM AND TERMINATION
2.01 Term
This Agreement shall become effective on June 1, 1996 and, unless
terminated earlier in accordance with the provisions of this Article 2, shall
remai n in effect until December 31, 1997 (the "Initial Term"). Provided Gemini
is not in default hereunder, ITI or Gemini may, by notice in writing to the
other, to be given not less than ninety (90) days prior to the expiry of the
Initial Term, renew this Agreement upon the terms and conditions herein
contained for an additional period of one (1) year (the "Renewal Term") and
thereafter, this Agreement shall then be considered to be automatically renewed
for additional one (1) year periods (an "Additional Renewal Term") unless at
least ninety (90) days prior to the expiry of the Initial Term, Renewal Term or
any Additional Renewal Term, either party gives written notice to the other
party that it desires to terminate this Agreement at the end of such period.
Notwithstanding receipt of written notice of renewal for the Renewal Term as
provided herein, the receiving party may, within ten (10) days after receipt
thereof, notify the other party that it desires to terminate this Agreement at
the end of the Initial Term. The Initial Term, the Renewal Term and any
Additional Renewal Terms, if any, are herein collectively referred to as the
"Term".
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<PAGE>
2.02 Early Termination
The parties covenant and agree that either party may terminate this
Agreement upon ninety (90) days' written notice to the other in the event that:
(a) the other party is in default of any of its material obligations under
this Agreement and such default is not cured within thirty (30) days
after written notice of such default was given by the notifying party
to the defaulting party (or in the case of a default which is
incapable of being cured within such thirty (30) day period, the
defaulting party is not taking steps to expeditiously cure such
default during the thirty (30) day period);
(b) a decree or order by a court of competent jurisdiction is made
adjudicating the other party bankrupt or insolvent and such decree or
order continues undischarged, undismissed or unstayed for a period of
thirty (30) days or such other party avails itself of any applicable
statute relating to insolvent debtors;
(c) if the other party winds up, dissolves, liquidates or otherwise ceases
to function as a going concern or is prevented from performing its
duties or obligations hereunder; or
(d) if a receiver or other custodian (interim or permanent) of any of the
assets of the other party is appointed by private instrument or by
court order or if any execution or other similar process of any court
becomes unenforceable against the other party or the assets thereof.
4
<PAGE>
2.03 Sales Commitment
Gemini will purchase from ITI 10,000 CompuNet 2000's between August
15, 1996 and December 31, 1996. Although it is Gemini's goal to sell not less
than 200,000 CompuNet 2000's in 1997, in order for Gemini to maintain its
CompuNet 2000 exclusivity as a distributor in the retail channel Gemini must
purchase 10,000 CompuNet 2000's per month commencing January 1, 1997 and ending
December 31, 1997. However, Gemini is not contractually committed to purchasing
the CompuNet 2000 at the rate of 10,000 units per month hereunder or to
attaining its goal of 200,000 unit sales in 1997.
Gemini's obligation to purchase these CompuNet 2000's during the
Initial Term will be conditioned, however, on the following:
(a) timely CompuNet 2000 availability and delivery;
(b) quantity of CompuNet 2000's available to Gemini within particular time
periods, including traditional selling seasons; and
(c) reasonable pricing to Gemini.
The parties further agree that sales goals in the Renewal Term shall
and in each Additional Renewal Term shall be determined by mutual agreement of
the parties as provided herein.
Gemini shall actively, with due diligence, pursue all practical
avenues of distribution for the CompuNet 2000 in retail channels in an
honorable and business-like fashion and in all respects in such manner so as to
enhance the business reputation and standing of ITI and Gemini. Gemini will use
its best efforts to attain such sales goals as are mutually agreed by the
parties.
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2.04 Effect of Termination
Upon the termination or expiration of this Agreement:
(a) If the Agreement is terminated by ITI without cause or if it is
terminated by either party in accordance with Section 2.02 (b)-(d), or
by Gemini pursuant to Section 2.02: (a) Gemini shall be entitled to
complete all orders on hand at the effective date of termination or
expiration and shall be further entitled to sell its existing stock of
the CompuNet 2000 or, at its option, return all unopened cartons of
CompuNet 2000's, freight prepaid, to ITI and thirty (30) days after
receipt and inspection thereof, ITI shall pay to Gemini the price
which ITI received from Gemini for such returned CompuNet 2000's or
credit Gemini with such amount if Gemini is then indebted to ITI;
(b) the parties shall settle all amounts outstanding to each other at the
effective date of termination or expiration or within sixty (60) days
of such date; and
(c) Gemini will refrain from holding itself out to the public as having
any association with ITI, refrain from using the Trademarks and
acknowledge to ITI, if requested, that it has no right, title or
interest in and to the Trademarks of ITI.
2.05 Distributorship Operating During Notice Period
In the event either party gives notice of termination of this
Agreement in accordance with the terms hereof, ITI and Gemini agree to continue
relations in accordance with this Agreement until the date of termination,
provided Gemini is not in default, and shall use their best efforts to continue
the sales volume of CompuNet 2000's in accordance with sales goals established
by the parties until the Agreement shall come to an end. During this time
period ITI may contact other parties for retail distribution of the CompuNet
2000, however, such other parties' distribution rights shall not become
effective until the date of termination of this Agreement.
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2.06 Promotional Plans
Gemini's promotional plans shall include but not be limited to the
following:
(a) Gemini shall display, demonstrate and promote the CompuNet 2000 at the
1996 Spring COMDEX show;
(b) Gemini shall prepare full color catalog sheets;
(c) Gemini shall prepare in-store, self liquidating, floor displays;
(d) Gemini shall make individual presentations to its key account
customers;
(e) Gemini shall issue press releases to all appropriate trade and
business media;
(f) Gemini shall display, demonstrate and heavily promote the CompuNet
2000 at the November 1996 and January 1997 COMDEX shows; and
(g) Gemini shall make public relations announcements from time to time
regarding the CompuNet 2000.
ARTICLE 3. - PRICES, PAYMENT AND SHIPPING
3.01 Schedule 1
See Schedule 1 which is hereby incorporated by reference and made a
part hereof.
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ARTICLE 4. - PRIVATE LABEL MERCHANDISE
4.01 Private Label Merchandise
In the event Gemini is required or wishes, in connection with the sale
of the CompuNet 2000 within the Territory, to package and label the CompuNet
2000 in accordance with trade packaging and labelling practices and
specifications of a particular customer or under the particular brand name or
names of such customers, then ITI may, upon the terms and conditions to be
agreed upon between ITI and Gemini, arrange for the supply of CompuNet 2000's
packaged and labelled in accordance with such practices and specifications or
under such brand name or names. Such orders will be based on such minimum order
requirements as may be agreed upon between ITI and Gemini. Such CompuNet 2000's
shall not be returnable to ITI for any reason except as covered by ITI's
limited warranty.
ARTICLE 5. - RESPONSIBILITIES OF ITI
5.01 ITI Responsibilities
During the Term, ITI shall:
(a) in the sole discretion of ITI and at such time or times as ITI
considers appropriate, file or cause to be filed applications for
registration of the Trademarks in the Territory.
(b) ITI shall provide Gemini's technical support personnel with training
for the purpose of handling routine calls by end-users. However, ITI
shall accept and respond to more difficult inquiries from end-users of
the CompuNet 2000.
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5.02 Compliance with Applicable Laws
ITI agrees that all CompuNet 2000's sold to Gemini will comply in all
material respects with all applicable laws of the Territory, including, without
limitation, laws and regulations relating to product performance, FCC approvals
to utilize the CompuNet 2000 for its intended purpose, packaging and labelling
and, in the event of any non-compliance with the foregoing, ITI agrees to
indemnify Gemini against all losses arising solely as the result of such
non-compliance, other than loss of profits, and this indemnity shall survive
termination of this Agreement. Gemini agrees to immediately notify ITI, in
writing, in the event of any claim or alleged violation of any laws relating to
product performance, packaging and labelling.
ARTICLE 6. - RESPONSIBILITIES OF GEMINI
6.01 Sales and Marketing
The determination of sales and marketing strategies for the CompuNet
2000 as they relate to Gemini's efforts within the Territory during the Term
shall be the sole responsibility of Gemini.
6.02 Consultation
Gemini agrees to consult with ITI, at ITI's request, but in no event
less than semimonthly in connection with sales and marketing strategies of the
CompuNet 2000. In addition, Gemini agrees to report to ITI at ITI's request but
in no event less than semimonthly upon marketing conditions affecting the sale
of the CompuNet 2000 within the Territory.
6.03 Other Gemini Responsibilities
Gemini agrees to:
(a) use its best efforts to develop and promote the sale of the CompuNet
2000 in the Territory and maintain an adequate supply of CompuNet
2000's so as to reasonably supply its customers;
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(b) maintain a suitable place of business for the sale of the CompuNet
2000 and employ a sufficient staff of adequately qualified
salespersons to cover the Territory;
(c) that so long as it is acting as the retail channel distributor for
ITI, it shall not distribute, act as a sales representative, or handle
in any way any products which compete with the CompuNet 2000;
(d) Gemini shall provide end users of the CompuNet 2000 with a customer
service and technical support telephone number during the Term of this
Agreement. Such telephone number shall be operated during Gemini's
normal business hours.
(e) comply in all respects with all applicable laws of the Territory in
regard to the sale and distribution of the CompuNet 2000. Gemini shall
indemnify and hold harmless ITI and its Affiliates, customers,
officers, directors, employees, assigns and successors (each of which
may be referred to in this Article as an "Indemnified Party" and
collectively as the "Indemnified Parties") for any loss, damage,
expenses, cost (including but not limited to, any attorney's fees
incurred in the enforcement of this indemnity) or liability that may
result by reason of any claim arising from Gemini's, its employees',
Affiliates', officers', directors', assigns' and successors' failure
to comply with this Article or for their gross negligence or willful
misconduct.
Provided, however, this indemnification shall be effective only if any
Indemnified Party provides Gemini with prompt written notice of any
such claim brought against it or any proceeding in which it is a named
party. Gemini shall have sole control over any such action including
the settlement thereof; provided that no settlement shall be concluded
without the consent of ITI if such settlement requires any admission
of liability or would, in the reasonable opinion of ITI adversely
affect ITI's business or reputation. Gemini shall keep ITI and each
Indemnified Party advised of the status of any such claims and of its
defense and/or negotiation efforts and shall afford such Indemnified
Party a reasonable opportunity to review and comment on significant
actions planned to be taken by Gemini on behalf of such Indemnified
Party. The omission of ITI or any Indemnified Party to provide notice
to Gemini of any action shall not relieve Gemini from any liability in
respect of such action which it may have to an Indemnified Party on
account of the indemnity agreement contained in this Article, except
to the extent Gemini may have been prejudiced by the failure to give
notice.
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(e) Distribute and sell CompuNet 2000 only with the Limited Warranty
attached hereto and made a part hereof as Exhibit B.
ARTICLE 7. - TRADEMARKS
7.01 Use of Trademarks
ITI hereby grants to Gemini the exclusive right to sell the CompuNet
2000 bearing its Trademarks in retail channels of distribution in the
Territory. In connection with the use of such Trademarks, the parties agree as
follows:
(a) Gemini shall notify ITI promptly of any suspected infringement or
passing off or any pending or threatened litigation or other
proceeding concerning the Trademarks which may come to its attention;
(b) ITI will use its best efforts to prosecute, defend and conduct at its
own expense all suits involving the Trademarks, including, without
limitation, actions involving infringement or passing off and will
undertake any actions or litigate any proceeding reasonably necessary
for the protection of the Trademarks;
(c) nothing in this agreement shall be deemed in any way to constitute any
transfer or assignment by ITI of the Trademarks to Gemini or give
Gemini any right, title or interest in or to the Trademarks. Gemini
agrees that it will not at any time during the Term or thereafter
dispute or contest, directly or indirectly, the validity or
enforceability of the Trademarks nor counsel, procure or assist anyone
else to do the same, nor directly or indirectly attempt to dilute the
value of the goodwill attached in or to the Trademarks, nor counsel,
procure or assist anyone else to do the same; and
(d) all renderings of the Trademarks shall be accompanied by a notice
indicating the ownership of the Trademarks by ITI in such form as ITI
may reasonably require from time to time. If so requested by ITI,
Gemini shall execute a registered user application and agreement, in a
form specified by ITI, acting reasonably, for purposes of registration
of Gemini as a registered user of the Trademarks.
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7.02 Warranty
Notwithstanding anything to the contrary herein contained, no
provision of this Agreement is to be construed as a representation or warranty
by ITI that it has obtained or shall obtain effective registration of the
Trademarks, and the parties agree that Gemini is not entitled to any
compensation, damage or any other relief whatsoever if ITI is not successful in
obtaining the registration of the Trademarks in the Territory, or if ITI is
required to change the Trademarks or any trade names or trademarks associated
with the CompuNet 2000 due to any reason whatsoever. ITI agrees to indemnify
Gemini against and to reimburse Gemini for all damages for which it is held
liable in any proceeding arising out of the use of the Trademarks in compliance
with the terms of this Agreement and for all costs and attorneys fees
reasonably incurred by Gemini in the defense of any such claim brought against
it or any proceeding in which it is named as a party. Provided however, this
indemnification shall be effective only if Gemini provides ITI with prompt
written notice of any such claim brought against it or any proceeding in which
it is a named party. ITI shall have sole control over any such action including
the settlement thereof; provided that no settlement shall be concluded without
the consent of Gemini if such settlement requires an admission of liability or
would, in the reasonable opinion of Gemini adversely affect Gemini's business
or reputation. ITI shall keep Gemini and each indemnified party advised of the
status of any such claims and of its defense and/or negotiation efforts and
shall afford to Gemini a reasonable opportunity to review and comment on
significant actions planned to be taken by ITI on behalf of Gemini. The
omission of Gemini to provide notice to ITI of any action shall not relieve ITI
from any liability in respect of such action which it may have to Gemini on
account of the indemnity agreement contained in this Article, except to the
extent ITI may have been prejudiced by the failure to give notice. If it
becomes advisable at any time in the sole discretion of ITI for Gemini to
modify or discontinue the use of any of the Trademarks or to make use of one or
more substitute trade names or trademarks, Gemini agrees to do so and ITI
agrees to reimburse Gemini for the actual expenses reasonably incurred by
Gemini in replacing signs or other pertinent materials then being used by
Gemini bearing the Trademarks to be modified or discontinued.
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ARTICLE 8. - COMPATIBILITY
8.01 ITI represents and warrants to Gemini that the CompuNet 2000 is
compatible with the "Windows 95" operating system. The CompuNet 2000 keyboard,
however, shall not have the extra three (3) "Windows 95" keys.
ARTICLE 9. - ASSIGNMENT
9.01 Non-Assignability
The parties agree that neither party shall assign this Agreement
without the prior written consent of the other.
ARTICLE 10. - INTELLECTUAL PROPERTY INDEMNIFICATION
10.01 Indemnified Party
The following terms apply to any infringement, suit for or claim or
allegation of infringement of any patent, trademark, copyright, trade secret or
other proprietary interest (collectively referred to as "IP Claim") based on
the manufacture, use, sale or importation into the Territory of any CompuNet
2000 furnished to Gemini under or in contemplation of this Agreement. For
purposes of this section, a claim will be considered to have been made against
CompuNet 2000 if (i) CompuNet 2000 is specifically identified as forming a
basis of an IP Claim or (ii) an IP Claim is made against the general
functionality or methods supported by or used in CompuNet 2000. ITI shall
indemnify and hold harmless Gemini and its Affiliates, customers, officers,
directors, employees, assigns and successors (each of which may be referred to
as an "Indemnified Party" and collectively as the "Indemnified Parties") for
any loss, damage, expenses, cost (including, but not limited to, any attorney's
fees incurred in the enforcement of this indemnity) or liability that may
result by reason of any such IP Claim, and ITI shall defend or settle, at its
own expense, any such IP Claim against any Indemnified Party.
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10.02 Notice to ITI
Gemini shall provide ITI with prompt written notice of any IP Claim
that identifies a CompuNet 2000 provided to Gemini hereunder and tender to ITI
sole control of such action or settlement negotiations to the extent covered by
the indemnification provided herein. ITI shall keep Gemini and each Indemnified
Party advised of the status of any such IP Claim and of its defense and/or
negotiation efforts and shall afford such Indemnified Party a reasonable
opportunity to review and comment on significant actions planned to be taken by
ITI on behalf of such Indemnified Party. If any such IP Claim involves other
vendors of Gemini, ITI shall cooperate as reasonably necessary to effectively
defend Gemini. Each Indemnified Party shall, at ITI's expense, reasonably
cooperate with ITI in the defense of such Indemnified Party. The omission of
Gemini or any Indemnified Party to provide notice to ITI of any action shall
not relieve ITI from any liability in respect of such action which it may have
to an Indemnified Party on account of the indemnity agreement contained in this
Article 10, except to the extent ITI may have been prejudiced by the failure to
give notice.
10.03 Options
If the use, manufacture, sale, or importation into the Territory of
CompuNet 2000 furnished hereunder becomes subject to an IP Claim, ITI shall, at
ITI's option and at no expense to Gemini, (i) by license or other release from
claim of infringement obtain for Gemini and its customers the right to make,
use, sell and/or import into the Territory the CompuNet 2000, as appropriate;
or (ii) substitute an equivalent non-infringing CompuNet 2000 reasonable
acceptable to Gemini, which meets the specification for the CompuNet 2000 and
extend this indemnity thereto; or (iii) modify such CompuNet 2000 to make it
non-infringing but continue to meet the specifications therefor, and extend
this indemnity thereto. If, despite the exercise of reasonably best efforts,
ITI is unable to accomplish any of options (i), (ii) or (iii) above, ITI may
accept the return of the CompuNet 2000 and reimburse Gemini for both the
purchase price therefor, less a reasonable charge for reasonable wear and tear,
and all costs incidental to such CompuNet 2000 return, and release Gemini from
all future payments under this Agreement, as applicable. 10.04 NO PARTY SHALL
BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OR
LOST PROFITS ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE PERFORMANCE OR
BREACH THEREOF.
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ARTICLE 11. - INDEPENDENT CONTRACTOR
11.01 Partnership/Agency Denied
This Agreement does not and shall not be construed to create any
partnership or agency whatsoever as between ITI and Gemini and neither party
shall, by reason of any provision herein contained, be deemed to be the
partner, agent or legal representative of the other or have the ability, right
or authority to assume or create, in writing or otherwise, any obligation of
any kind, express or implied, in the name of or on behalf of the other. It is
further understood and agreed that this Agreement creates a
principal-to-principal relationship between the parties hereto. Gemini shall
not make quotations or write letters over the name of ITI, but in every
instance, shall sign with its own firm name. The name of ITI shall not appear
on any stationery used by Gemini. 11.02 Indemnity
Each party agrees to indemnify and save harmless the other from and
against any and all liabilities, obligations, claims or losses resulting from
any representation by such party that it is the partner or agent of the other,
whether with respect to CompuNet 2000, this Agreement or otherwise, and this
indemnity shall survive termination or expiration of this Agreement.
ARTICLE 12. - GENERAL CONTRACT PROVISIONS
12.01 Entire Agreement
This Agreement constitutes the entire Agreement between the parties
hereto with respect to all of the matters herein contained, and its execution
has not been induced by, nor do any of the parties hereto rely upon or regard
as material, any representations or writings whatsoever not incorporated herein
and made a part hereof and this Agreement shall not be amended, altered or
qualified except by an instrument in writing, signed by both parties hereto and
any amendments, alterations or qualifications hereto shall not be binding upon
or affect the rights of any party who has not given its consent as aforesaid.
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12.02 Headings
The division of this Agreement into articles and sections and the use
of headings is for convenience of reference only and shall not affect the
interpretation or construction of this Agreement.
12.03 Severability
In the event that any of the covenants herein contained shall be held
unenforceable or declared invalid for any reason whatsoever in any
jurisdiction, such unenforceability or invalidity shall not affect the
enforceability or validity of the remaining provisions of this Agreement in any
other jurisdiction and such unenforceable or invalid portion shall be severable
from the remainder of this Agreement.
12.04 Governing Law and Jurisdiction
This Agreement shall be construed and interpreted in accordance with
the laws of the United States of America and the State of New Jersey. All
questions concerning such construction or interpretation, or regarding the
parties' performance or obligations under this Agreement shall be resolved
exclusively in the courts of New Jersey. The parties hereby submit and consent
to personal jurisdiction before such courts for such purposes.
12.05 Notices
All notices, requests, demands or communications made or by the terms
hereof required or permitted to be given by one party to another shall be given
in writing by personal delivery, by telefax or by registered mail, postage
prepaid, addressed to such other party or delivered to such other party at the
addresses set forth on page 1 hereof or at such other address as may be given
by either party to the other from time to time and such notices, requests,
demands or other communications shall be deemed to have been received when
delivered or, if telecopied, on the next business day, or, if mailed, seven (7)
business days following the date of mailing thereof, provided that if any such
notice, request, demand or other communication shall have been mailed, and if
regular mail service shall be interrupted by strikes or other irregularities,
such notices, requests, demands or other communications shall be deemed to have
been received seven (7) business days from the day following the resumption of
normal mail service. Copies of all notices to Gemini shall also be sent to
Kenneth T. Statmore, Vice President, General Counsel and Secretary of Gemini,
215 Entin Road, Clifton, New Jersey 07014 and copies of all notices to ITI
shall also be sent to Alan P. Haber, President and Chief Executive Officer of
ITI, 545 Cedar Lane, Teaneck, New Jersey 07666.
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12.06 Authority to Execute
The parties executing this Agreement warrant and represent that they
are duly authorized to do so.
12.07 Further Assurances
The parties hereto covenant and agree to sign such other instruments,
cause such meeting to be held, resolutions passed and by-laws enacted, exercise
their vote and influence, do and perform and cause to be done and performed
such further and other acts and things as may be necessary or desirable in
order to give full effect to this Agreement and every part hereof.
12.08 Successors and Assigns
This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns.
12.09 Force Majeure
Neither party shall be responsible to the other for non-performance of
or for delay in performance occasioned by any causes beyond its control,
including without limitation, acts or omissions of the other, acts of civil or
military authority, governmental decrees or orders, strikes, lock-outs,
embargoes, acts of God, delay of suppliers or inability to obtain or shortages
of materials or supplies but for greater certainty, the shortage of funds by a
party hereto, thereby preventing it from discharging its obligations hereunder
shall be deemed to be a cause within its control.
12.10 Waiver
No waiver by either party of any breach of any of the provisions of
this Agreement by the other party shall be binding upon such party unless in
writing and signed by such party. No such waiver shall be construed as a waiver
of any breach of any of the other provisions of this Agreement.
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12.11 Warranties and Returns
(a) Except as specifically set forth in the Limited Warranty, attached
hereto as Exhibit B, ITI makes no representations or warranties in regard to
any of the CompuNet 2000. ITI will be responsible for all limited warranty
claims by purchasers of the CompuNet 2000 and Gemini may pass such limited
warranties on to its customers and the ultimate end-users/consumers. Gemini is
prohibited from modifying any limited warranties made by ITI. CompuNet 2000 may
be returned if defective for replacement, credit or refund of the purchase
price. IN NO EVENT SHALL ITI BE LIABLE TO GEMINI OR ANY OTHER PARTY FOR
SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES WHETHER IN CONTRACT,
TORT OR NEGLIGENCE OR FOR LOSS OF PROFITS.
12.12 Change of Law
<PAGE>
The rights and obligations of the parties hereto under this Agreement
shall be subject to all applicable laws, orders, regulations, directions,
restrictions and limitations of the governments having jurisdiction over the
parties hereto. In the event, however, that any such law, order, regulation,
direction, restriction or limitation, or interpretation thereof, shall in the
reasonable judgment of ITI or Gemini substantially alter the relationship
between the parties under this Agreement, or the advantages derived or to be
derived from such relationship, the adversely affected party may request the
other party to modify this Agreement, and, if within thirty (30) days
subsequent to making such request, the parties are unable to agree upon a
mutually satisfactory modification hereof, then the adversely affected party
may terminate this Agreement on ninety (90) days' notice given to the other
party in writing.
12.13 Meetings Between the Parties
The parties shall periodically meet to exchange details of present and
future plans as they relate to ITI's CompuNet 2000 to assist in the attainment
of sales goals and to ensure an adequate supply of parts, material and other
necessary information.
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12.14 Arbitration Provision
Any dispute regarding the validity, constuction, interpretation or
performance of this Agreement shall be submitted to binding arbitration to be
conducted by the American Arbitration Association in accordance with its then
current rules; provided that nothing contained herein shall permit the
arbitrators to award punitive or exemplary damages. Judgment upon any award of
such arbitrators may be entered in any court having jurisdication in the State
of New York. It is specifically agreed that the locale of any arbitration shall
be New York, New York. Nothing in this section shall be construed to preclude
either party from seeking provisional remedies, including, without limitation,
a temporary injunction, from any court of competent jurisdication, in order to
protect its rights pending arbitration, but such preliminary relief shall not
be sought as a means for avoiding arbitration.
12.15 Illegal Provisions
Any provision or provisions of this Agreement which may contravene the
law of any state or country in which this Agreement is effective shall, in such
state or country, to the extent of such contravention of law, be deemed
severable and shall not affect any other provision or provisions of this
Agreement.
12.16 Counterparts
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
GEMINI INDUSTRIES, INC.
By:____________________________________
Michael Schwartz
Vice President Marketing
INTEGRATED TECHNOLOGY USA, INC.
By:____________________________________
Alan P. Haber
Chairman and Chief Executive Officer
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EXHIBIT B
SIX MONTH LIMITED WARRANTY
The CompuNet 2000 is manufactured to ITI's specifications and is free
from design or other inherent defects. Should a defect occur under normal
operating conditions, ITI shall at its option, repair or replace the CompuNet
2000 free of charge, within the warranty period, to the original end purchaser.
The defective CompuNet 2000 must be returned, with proof of purchase, to place
of purchase for repair or replacement. This warranty shall not apply if this
CompuNet 2000 is misused, abused, modified, or otherwise tampered with. THERE
ARE NO OTHER EXPRESS OR IMPLIED WARRANTIES INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE. Liability is limited to
repair or replacement of the CompuNet 2000. IN NO EVENT SHALL ITI BE LIABLE FOR
SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES WHETHER IN CONTRACT,
TORT, OR NEGLIGENCE, OR FOR LOSS OF PROFITS.
<PAGE>
SCHEDULE 1
(a) Prices and Payment
The price of the CompuNet 2000 shall be $90.00 per unit landed cost
F.O.B. Clifton, New Jersey (landed cost includes transportation costs,
insurance, brokerage fees, consolidation fees, import surcharge, customs duties
and harbor maintenance fees). However, ITI agrees to exercise its best efforts
to reduce the price of the ComputNet 2000 to Gemini during the Initial Term and
any Renewal Term or Additional Renewal Term of this Agreement. Notwithstanding
the foregoing, in the event that other competitive products are offered in the
marketplace at lower prices during the Initial Term, ITI agrees to keep Gemini
competitive in price and quality with those competitive products. Failure by
ITI to keep Gemini competitive in the retail channel of distribution shall be
the basis of an event of default which shall enable Gemini to terminate this
Agreement under Section 2.02(a).
(b) Payment Terms
Gemini shall, upon receipt and acceptance by ITI of Gemini's Purchase
Order for 10,000 CompuNet 2000's, pay ITI the amount of $450,000.00 net ten
(10) days after receipt of order for the first 5,000 CompuNet 2000's (one half
of the quantity ordered) shipped to Gemini's Clifton, New Jersey warehouse by
no later than August 31, 1996. Gemini shall, by no later than July 1, 1996,
open an transferable irrevocable Letter of Credit in the amount of $450,000.00
for 5,000 CompuNet 2000's (the remaining units of the Purchase Order) for
shipment to Gemini's Clifton, New Jersey warehouse by no later than October 31,
1996.
(c) Insurance
ITI shall be responsible for and shall bear the risk of all loss or
damage for CompuNet 2000's shipped to Gemini F.O.B. Gemini, Clifton, New
Jersey.
(d) Shipping
ITI agrees to quote Gemini reasonable shipping dates and to make
shipment as promptly as conditions permit. ITI agrees that it shall arrange for
the delivery of all CompuNet 2000's ordered by Gemini to FOB Gemini's plant in
Clifton, New Jersey. Such delivery shall be made in such manner as shall be
specified by Gemini in each order for CompuNet 2000 or in such other manner as
shall be agreed to in writing between ITI and Gemini. Gemini shall have the
right to inspect and test random samples of the CompuNet 2000's prior to
delivery to Gemini to ensure that the units meet specifications, are of
merchantable quality and fit for their intended use. The parties shall agree
upon mutually acceptable times and locations to perform these inspections.
<PAGE>
VocalTec
BUNDLING AND SALES LICENSE FEE AGREEMENT
(FOR DISTRIBUTION OF FULL-FUNCTION VERSION)
COVER PAGES(S)
This Bundling and Sales License Fee Agreement ("Agreement") is made as of the
Effective Date by and between VocalTec Ltd., an Israeli corporation
("VocalTec") having a place of business at 157 Veterans Drive, Northvale,
NJ 07647 and
Name: ITI Innovative Technology Ltd. (the "Licensee")
Address: P.O. Box 23047
Jerusalem 91230 Israel
Tel.: 972-2-870-410
Fax: 972-2-865-604
1. INCORPORATION OF AGREEMENT TERMS AND DEFINITIONS
The Agreement Terms and Conditions ("Agreement Terms") attached hereto as
Exhibit A are hereby incorporated into and made a part of this Agreement.
Capitalized terms not defined in this Cover Page shall have the meaning ascribed
to them in the Agreement Terms.
The "Effective Date" of this Agreement is July 3, 1996.
2. PURPOSE OF AGREEMENT
Licensee shall obtain a license to distribute VocalTec's OEM Version 3.2 (the
"OEM Version") of the VocalTec Product in conjunction with the Licensee Product.
The OEM Version will include installation information and Promotional
Information which offers Licensee customers the options to (i) order a copy of
the Full-Function Version from Licensee; and/or (ii) to upgrade to version 4.0
of the VocalTec Product from Licensor.
Upon receipt of an order for the OEM Version, VocalTec shall deliver an
Authorization Key which unlocks the functionality in the Demo Version and
converts it to Full-Function OEM Version. Licensee will pay VocalTec a
sublicense fee for each Authorization Key delivered to Licensee by VocalTec.
Licensee will receive a Sales Assistance Fee for every Qualified License for
Full-Function Software distributed by VocalTec.
3. BUNDLING OF VOCALTEC PRODUCTS WITH LICENSEE PRODUCTS
During the term of the Agreement, Licensee will include the following VocalTec
Product(s) (the "VocalTec Products") in a bundle with all of the following
Licensee Product(s) shipped by Licensee:
VOCALTEC PRODUCT(S):
--------------------
INTERNET PHONE SOFTWARE OEM ENGLISH VERSION.
LICENSEE PRODUCT(S):
--------------------
COMPUNET 2000
4. COMMERCIAL TERMS
4.1 Term of Agreement eighteen (18) months
4.2 Territory world-wide
4.3 Price one dollar ($1.00) per unit
4.4 Initial Order
Upon signature of this Agreement, Licensee will place an order in the
total amount of $30,000 for 30,000 Authorization Keys. Payment for the Initial
Order shall be made in three (3) equal
<PAGE>
payments. The first such payment shall be due within thirty (30) days after
shipment of the Initial Order. The second such payment shall be due within sixty
(60) days after shipment of the Initial Order. The third such payment shall be
due within ninety (90) days after shipment of the Initial Order. Payment terms
for subsequent orders shall be as set forth in Exhibit A, Section 5.
4.5 Subsequent Orders During the Term of the Agreement
Licensee will order 70,000 Authorization Keys during the term of this
Agreement.
5. MASTER INSTALLATION
Check if Master Installation is permitted XXX
---
Check if Master Installation is not permitted
---
If master installation is permitted, Licensee may incorporate the OEM Version in
the Licensee Product. VocalTec will provide Licensee with a master diskette for
the VocalTec Products, and Licensee will be responsible for master installing
the VocalTec Products on the hard drives or other memory storage devices of the
computers or computer peripheral equipment with which the VocalTec Products are
"bundled." Licensee shall bundle the OEM Version with Promotional Information
offering the end user to purchase the most recent full-function version of the
Internet Phone. Licensee shall have the option to place a 3"x3" sticker on the
box containing the bundled OEM Version. Licensee shall produce all labels,
stickers, diskettes and coupons for the bundling of the OEM Version. VocalTec
shall provide Licensee with all artwork necessary for Licensee's production of
such labels, stickers, diskettes and coupons, including but not limited to the
artwork for the eight (8) page insert.
6. SALES ASSISTANCE FEE PERCENTAGE: ten (10%) percent
(For detailed description of applicable terms, see the Section entitled "Sales
Assistance Fees" in the Agreement Terms attached as Exhibit A)
By signing below, the parties agree to the terms and conditions of this
Agreement.
INTEGRATED TECHNOLOGY USA, INC. VOCALTEC LTD.
/s/ Betsy Mehlman /s/
- ------------------------------ ----------------------------------
Authorized Signature Authorized Signature
BETSY MEHLMAN /s/
- ------------------------------ ----------------------------------
Printed Name and Title Printed Name and Title
Senior Vice President V.P. Tech. Mark.
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<PAGE>
EXHIBIT A
BUNDLING AND SALES LICENSE FEE AGREEMENT
TERMS AND CONDITIONS
The following terms and conditions are referenced in and incorporated into the
Bundling Agreement between VocalTec Ltd., an Israeli corporation ("VocalTec")
and the Licensee identified on the Cover Page:
1. GRANT OF DISTRIBUTION LICENSES
VocalTec grants the Licensee a personal, nonexclusive, nontransferable license:
a) to distribute copies of the OEM Version solely when bundled with or
integrated into Licensee Product;
b) to make object code copies of the OEM Version (and Promotional Information
and installation information provided by VocalTec) solely in connection
with distribution hereunder;
c) to use copies of the OEM Version to demonstrate the features of the OEM
Version to Licensee's potential customers; and
e) to use VocalTec's tradenames and trademarks solely in connection with
Licensee's promotion and distribution of the VocalTec Product hereunder;
provided, that Licensee clearly identifies VocalTec's ownership of such
names or marks. All advertising and marketing materials bearing any
VocalTec's tradenames and trademarks must, prior to release by Licensee,
be delivered to VocalTec for review and approval, such approval not to be
unreasonably withheld. Licensee shall not endeavor to register with any
government authority, any VocalTec trademark or tradename. Any proprietary
rights which Licensee may acquire in any VocalTec trademark (through use
or otherwise) are hereby assigned to VocalTec and Licensee agrees to
execute and deliver to VocalTec upon request any further documentation
required to perfect such assignment.
2. LICENSE EXCLUSIONS
Except as expressly authorized herein, Licensee shall not:
a) copy or modify the VocalTec Product;
b) reverse compile or reverse assemble all or any portion of the VocalTec
Product;
c) distribute, disclose, market, rent, lease or transfer to any third
party the VocalTec Product;
d) export the VocalTec Product in violation of U.S. Department of Commerce
export administration regulations.
3. ORDERS; FORECASTS
3.1 Licensee shall submit to VocalTec on a regular basis rolling forecasts of
the number of units of Authorization Keys to be ordered from VocalTec. All
orders for VocalTec Products shall be submitted verbally and confirmed by
Licensee in writing.
3.2 The VocalTec Product shall be shipped FOB VocalTec, fright prepaid, to be
reimbursed by Licensee upon thirty (30) days from the date of the invoice.
Terms on any purchase order which add to, derogate from and/or conflict
with this Agreement shall be of no effect.
3.3 When Licensee places orders with VocalTec, VocalTec will supply Licensee
with the number of Authorization Keys ordered to unlock the full
functionality of the VocalTec Product thereby converting a copy of
DemoVersion into Full-Function OEM Version. These Authorization Keys will
be supplied either printed on individual cards to be inserted by the
Licensee within the package of the Licensee product, or on a diskette in
a standard file format.
3.4 VocalTec will invoice Licensee for each Authorization Key shipped by
VocalTec at the time of shipment.
4. RECORDS; REPORTS
4.1 Licensee will keep complete and accurate records of the number of copies
of the VocalTec Products it installs and the number of VocalTec Products
shipped, the customers to whom the VocalTec Products were shipped and the
location and number and type of VocalTec Products shipped to such
customers. VocalTec shall have the right to audit Licensee's records once
per year, at VocalTec's expense, with reasonable notice and during normal
business hours, to confirm proper payment. However, if such audit by
VocalTec uncovers a discrepancy whereby following audit and investigation
by both parties it is finally determined that
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<PAGE>
VocalTec Products previously distributed by Licensee were erroneously
reported by more than five percent (5%), the reasonable cost of the audit
shall be paid by Licensee and Licensee shall immediately pay VocalTec the
full amount due for any copies of the VocalTec Products not previously
paid for and associated interest charges.
4.2 Licensee shall submit to VocalTec by the twenty-fifth (25th) day of each
month a report of all sales of VocalTec Product during the preceding
month. The report shall list all shipments of VocalTec Products.
4.3 Within thirty (30) days after the end of each calendar quarter, VocalTec
shall provide Licensee with a completed reporting statement with respect
to such quarter indicating the amount of Sales Assistance Fees due to
Licensee for such quarter with reasonable detail as to the basis for
calculating such fees. VocalTec shall include with such report, payment
of amounts due to Licensee for such quarter.
5. PAYMENTS
All payments shall be made in U.S. Dollars at the address first set forth above
or as changed with thirty (30) days prior written notice. Unless otherwise
specified herein, all payments are due within thirty (30) days of receipt of
invoice. Overdue payments shall accrue interest at the lesser of 12% per annum
or the maximum rate permitted by law. Licensee shall pay all taxes and duties
associated with this Agreement, other than taxes based on VocalTec's income.
VocalTec shall pay Sales Assistance Fees to Licensee in accordance with Section
4.3 above.
6. TECHNICAL SUPPORT
VocalTec shall provide to Licensee standard technical support for VocalTec
Products that will consist of telephone support on business days, via telephone
or over the Internet Phone, between 9am-5pm EST.
7. TITLE AND PROTECTION
a) VocalTec (or its third party providers) retains all right, title, copyright
and interest to the VocalTec Product and the Promotional Information
provided by VocalTec. Licensee shall not remove from any full or partial
copy of the VocalTec Product and/or such Promotional Information made by
Licensee, any copyright and proprietary information notices as were
affixed or otherwise incorporated into the original.
b) Licensee shall affix, to any media containing a copy of all or any
portion of the VocalTec Product and to each whole or partial copy of
Promotional Information provided by VocalTec, all copyright, proprietary
information notices and restricted rights legends as were affixed to the
original media or documents.
8. REPRESENTATIONS AND WARRANTIES
a) VocalTec represents and warrants: (i) that it has the right to enter into
this Agreement, and (ii) that the VocalTec Product does not infringe any
U.S. patent, U.S. copyright or other U.S. third party intellectual property
rights. VocalTec does not represent that the VocalTec Product is
error-free. Licensee shall make no representation or warranty concerning
the VocalTec Product which would expand the scope of the representations
set forth in this Agreement.
b) VOCALTEC DISCLAIMS ALL OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING BUT LIMITED TO THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
9. LIMITATION OF LIABILITY
EXCEPT AS SET FORTH IN SECTION 10 BELOW (INDEMNIFICATION) NEITHER PARTY WILL BE
LIABLE FOR ANY LOST DATA, LOST PROFITS, INCIDENTAL, CONSEQUENTIAL OR INDIRECT
DAMAGES OR ANY KIND, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.
10. INDEMNIFICATION
a) VocalTec shall indemnify and defend Licensee against any third party claim
that the VocalTec Product infringes any third party intellectual property
rights under U.S. law when used by Licensee or its Customers in accordance
with the terms of this Agreement; provided, VocalTec is given information,
reasonable assistance and sole authority to defend or settle the claim.
Licensee shall give VocalTec prompt notice of any such claim.
b) Except as provided in the immediately preceding paragraph, Licensee shall
indemnify and defend VocalTec against any claims that the Licensee Products
infringe any third party intellectual property rights under U.S. law;
provided, Licensee is given information, reasonable assistance and sole
authority to defend or settle the claim. VocalTec shall give Licensee
prompt notice of any such claim.
11. DEFAULT
a) Any of the following shall constitute an event of default:
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<PAGE>
(1) Either party fails to perform any of its material obligations under
this Agreement and such failure remains uncured for thirty (30) days
after receipt of notice thereof; or
(2) Either party ceases to conduct business, becomes or is declared
insolvent or bankrupt, is the subject of any proceeding relating to
its liquidation or insolvency which is not dismissed within thirty
(30) days or makes an assignment for the benefit of its creditors.
b) If an event of a default occurs, the nondefaulting party in addition to
any other rights available to it under law or equity, may terminate this
Agreement and the licenses granted hereunder by written notice to the
defaulting party. Unless otherwise provided in this Agreement, remedies
shall be cumulative and there shall be no obligation to exercise a
particular remedy.
12. TERM/TERMINATION
a) Unless otherwise terminated as provided herein, this Agreement shall
terminate at the end of the Term.
b) All sublicenses of VocalTec Product properly granted by Licensee pursuant
to this Agreement shall survive termination of this Agreement.
c) Upon termination of this Agreement, Licensee may continue to distribute
its existing inventory of Licensee Product which is bundled with the
OEM Version and Promotional Information for a period of up to ninety (90)
days after termination of this Agreement. The parties shall cooperate to
enable customers who desire to order the Full-Function Version after
termination to acquire such product from VocalTec. Unless this Agreement
is terminated for cause by VocalTec, Sales Assistance Fees will continue to
accrue hereunder for Qualified Licenses distributed by VocalTec for a
period of ninety (90) days after termination of this Agreement.
d) In addition to this section, the sections entitled "License Exclusions,"
"Title and Protection," "Representations and Warranties," "Limitation of
Liability," "Indemnification," "Compliance with Laws," and "General" shall
survive termination of this Agreement.
13. THIRD PARTY PRODUCTS
If the VocalTec Product includes (now or in the future) any Third Party
Product, VocalTec's right and authority to grant Licensee the right to
Distribute such Third Party Product arises from a contract with the applicable
third party vendor. Accordingly, termination of any such contract for any reason
shall terminate Licensee's right to continue Distributing the applicable
Third Party Product. VocalTec shall provide Licensee with written notice of any
such occurrence.
14. COMPLIANCE WITH LAWS
Licensee hereby agrees that it shall comply with the requirements of all
applicable export laws and regulations in Distributing the VocalTec Product and
that it shall comply with the U.S. Foreign Corrupt Practices Act (the "Act") and
shall refrain from any payments to third parties which would violate the Act.
Licensee hereby agrees to indemnify and hold VocalTec harmless from any breach
of this Section.
15. SALES ASSISTANCE FEES
VocalTec shall pay Licensee a Sales Assistance Fee in consideration for
Licensee's assistance in VocalTec's procurement of Qualified Licenses in an
amount equal to a percentage (as indicated on the Cover Page) of the Net License
Fees received by VocalTec for such Qualified License.
16. GENERAL
All notices or demands shall be in writing and sent registered mail, return
receipt requested and sent to the address set forth in the Cover Page. No
agency, partnership or employment is created by this Agreement. Neither party
shall use the name of the other in any advertising, public relations or media
release without the prior written consent of the other. The parties may release
a media release to the public as mutually agreed in writing separate from this
Agreement. Licensee may not assign this Agreement, delegate any duty or assign
any right hereunder without the prior written consent of VocalTec. Neither party
shall be liable for any failure to perform due to causes beyond its reasonable
control. The failure by a party to exercise any right hereunder shall not
operate as a waiver of such right or any other right. If any provision of this
Agreement is held to be unenforceable, this Agreement shall be construed without
such provision. This Agreement shall be governed by the laws of the State of
New York, without reference to choice of law principles. All proceedings shall
be conducted in English. Venue for all proceedings shall be in New York County,
New York. The United Nations Convention for the International Sale of Goods
shall not apply. This Agreement constitutes the entire agreement between the
parties, supersedes all other agreements between the parties concerning the
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<PAGE>
subject matter hereof and may only be modified by a written instrument signed
by each party's authorized signatories.
17. DEFINITIONS
"Authorization Key" means the authorization code supplied by VocalTec which can
be utilized to unlock the functionality of a single copy of the Demo Version,
thereby converting such copy into the Full-Function OEM Version.
"Cover Page" means the cover page(s) to this Agreement which include the
signatures of the parties hereto and incorporates the terms of this Exhibit.
"Demo-Version" means the latest English version of the VocalTec Internet Phone
software product which is disabled to the extent that telephone communication
over the Internet is limited in time and functionality to enable demonstrations
but to render normal use impractical. VocalTec shall provide Licensee with a
master copy of the Demo-Version to be used to make copies for distribution
hereunder.
"Full-Function Version" means VocalTec's retail end-user version of the VocalTec
Product which facilitates full-duplex, voice data packet communication by
individual users via the Internet.
"Licensee Product" means the Licensee products identified on the Cover Page,
which shall be bundled with the VocalTec Product.
"Promotional Information" means the promotional material provided by Licensee to
its customers which shall include (i) an offer for the customer to acquire
Full-Function Version; and/or (ii) an offer for the customer to upgrade to
version 4.0 of the VocalTec Product in accordance with VocalTec's pricing
policy.
"Qualified License" means the license to use version 4.0 of the Full-Function
Software granted by VocalTec to a end user customer site which results from
Licensee's distribution of the Promotional Information, as evidenced by the
applicable customer's submission with its product order to VocalTec of a copy of
the promotional offer included in the Promotional Information. Full-Function
software license orders not accompanied by such promotional offer and licenses
to re-sell or distribute the Full-Function Software are specifically excluded
from the definition of "Qualified Licenses".
"Sales Assistance Fee" means a percentage (as indicated on the Cover Page) of
the Net License Fees received by VocalTec for distribution of Qualified
Licenses.
"Term" means the period indicated on the Cover Page which shall commence on the
Effective Date of this Agreement.
"Territory" means the territory indicated on the Cover Page.
"Third Party Product" means a software product that VocalTec is authorized to
distribute under a contract with a third party vendor.
"VocalTec Product" means the VocalTec Products identified on the Cover Page and
reference to the VocalTec Product hereunder shall include the OEM Version.
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<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
1996 STOCK OPTION PLAN
1. Purpose.
The purpose of the Integrated Technology USA, Inc., 1996 Stock Option
Plan (the "Plan") is to encourage and enable employees (which term, as used
herein, shall include officers), and directors of Integrated Technology USA,
Inc., or a parent (if any) or subsidiaries thereof (collectively, unless the
context otherwise requires, the "Company"), consultants, and advisors to the
Company, and other persons or entities providing goods or services to the
Company to acquire a proprietary interest in the Company through the ownership
of common stock of the Company ("Stock"). (Such directors, consultants,
advisors, and other persons or entities providing goods or services to the
Company and entitled to receive options hereunder being collectively referred to
as the "Associates," and the relationship of the Associates to the Company being
referred to as "association with" the Company.) Such ownership will provide
such employees and Associates with a more direct stake in the future welfare of
the Company and encourage them to remain employed by or associated with the
Company. It is also expected that the Plan will encourage qualified persons to
seek and accept employment or association with the Company.
2. Type of Options.
Options granted pursuant to the Plan may (subject to the following two
sentences) be incentive stock options as defined in Section 422 of the Internal
Revenue Code of 1986 (as from time to time amended, the "Code") (any option
that is intended so to qualify as an incentive stock option being referred to
herein as an "incentive option"), or options that are not incentive options, or
both. Incentive options may only be granted to "employees" as defined in the
provisions of the Code or regulations thereunder applicable to incentive stock
options. In the event that the Plan is not approved by the stockholders of the
Company in the manner and within the time frame required by the Code for
incentive options, then any options designated as incentive options shall
instead be treated as options that are not incentive options.
3. Effective Date and Term of Plan.
The Plan became effective upon being approved by the Board of
Directors of the Company (the "Board") on July 29, 1996. No option may be
granted under the Plan after July 29, 2006, but options previously granted may
extend beyond that date.
4. Administration.
(a) Subject to the following sentence, the Plan shall be administered
by the Board. The Board may delegate any and all of its authority and
administrative powers and functions under the Plan to one or more committees of
two or more directors appointed from time to time by the Board. Each such
committee to which any duties or authority is delegated as aforesaid is
referred to herein as a "Committee". If there are multiple Committee, the
authority, powers and functions delegated to each Committee may be different or
the same. Unless otherwise provided by the Board resolution establishing a
Committee, (i) a majority of the members of a Committee shall constitute a
quorum, (ii) all determinations of the Committee shall be made by a majority
of its members and (iii) any determination of the Committee may be made,
without notice or meeting of the Committee, by a writing signed by a majority
of the Committee members. Each reference herein to the "Plan
1
<PAGE>
Administrator" with respect to any authority, power or function shall mean the
Board and/or any Committee to which the Board has delegated the power to
exercise such authority or power or to perform such function, as the case may
be.
(b) The Plan Administrator shall have authority, not inconsistent with
the express provisions of the Plan, (i) to grant options to such eligible
employees and Associates of the Company as the Plan Administrator may select;
(ii) to determine the time or times when options shall be granted and the
number of shares of Stock subject to each option; (iii) to determine which
options are, and which options are not, incentive options; (iv) to determine
the terms and conditions of each option; (v) to prescribe the form or forms of
instruments evidencing options and any other instruments required under the
Plan and to change such forms from time to time; (vi) to adopt, amend and
rescind rules and regulations for the administration of the Plan; and (vii) to
interpret the Plan and to decide any questions and settle all controversies and
disputes that may arise in connection with the Plan. Any determination,
decision or action of the Plan Administrator in connection with the
construction, interpretation, administration or application of the Plan shall
be final and conclusive on all persons participating in the Plan.
5. Shares Subject to the Plan.
(a) Number of Shares.
Subject to adjustment as provided in Section 8, the aggregate number
of shares of Stock that may be delivered upon the exercise of options granted
under the Plan shall be 833,333. If any option granted under the Plan
terminates without having been exercised in full, the number of shares of Stock
as to which such option was not exercised shall be available for future grants
within the limits set forth in this Section 5(a).
(b) Shares to be Delivered.
Shares delivered under the Plan shall be authorized but unissued Stock
or if the Plan Administrator so decides in its sole discretion, previously
issued Stock acquired by the Company and held in treasury. No fractional
shares of Stock shall be delivered under the Plan.
6. Eligibility for Options.
Options may be granted to such Employees and Associates of the Company
as the Plan Administrator shall from time to time select (subject to the second
sentence of Section 2 hereof). Receipt of options under the Plan or of awards
under any other employee benefit plan of the Company shall not preclude an
employee from receiving options or additional options under the Plan.
7. Terms and Conditions of Options.
(a) Special Rule for Incentive Options. Consistent with Section 422 of
the Code and any regulations, notices or other official pronouncements of
general applicability, to the extent the aggregate fair market value
(determined in accordance with Section 7(b) as of the time the option is
granted) of the shares of Stock with respect to which incentive options are
exercisable for the first time by the optionee during any calendar year (under
all plans of his employer corporation and its
2
<PAGE>
parent and subsidiary corporations) exceeds $100,000, such options shall not be
treated as incentive options. Nothing in this special rule shall be construed
as limiting the exercisability of any option, unless the Plan Administrator
expressly provides for such a limitation at time of grant.
(b) Exercise Price. The exercise price of each option shall be
determined by the Plan Administrator, subject to the following: (i) in the case
of an incentive option, the exercise price per share of stock shall not be less
than 100% (110% for a stock option granted to a greater than ten-percent
shareholder) of the fair market value per share of Stock at the time the option
is granted and (ii) in the case of all options, the exercise price per share of
Stock shall not be less than the par value per share (unless the Stock subject
to the option is treasury stock). A "greater than ten-percent shareholder"
shall mean for purposes of the Plan any employee who at the time of grant owns
directly, or is deemed to own by reason of the attribution rules set forth in
Section 424(d) of the Code, stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company. The fair market
value of a share of Stock as of any date shall be determined for purposes of
the Plan as follows: (i) if the Stock is listed on a securities exchange or
quoted through the Automated Quotation National Market System of the National
Association of Securities Dealers, Inc. ("NASDAQ"), the fair market value shall
equal the mean between the high and low sales prices on such exchange or
through such market system, as the case may be, on such day or in the absence
of reported sales on such day, the mean between the closing reported bid and
asked prices on such exchange or through such market system, as the case may
be, on such day, (ii) if the Stock is not listed or quoted as described in the
preceding clause but is quoted through NASDAQ (but not through the National
Market System), the fair market value shall equal the mean between the closing
bid and asked prices as quoted by the National Association of Securities
Dealers, Inc., through NASDAQ for such day and (iii) if the Stock is not listed
or quoted on a securities exchange or through NASDAQ, then the fair market
value shall be determined by such other method as the Plan Administrator
determines to be reasonable and consistent with applicable requirements of the
Code and the regulations issued thereunder applicable to incentive options;
provided, however, that if pursuant to clause (i) or (ii) fair market value is
to be determined based upon the mean of bid and asked prices and the Plan
Administrator determines that such mean does not properly reflect fair market
value, then fair market value shall be determined by the Plan Administrator as
provided in clause (iii).
(c) Duration of Options. An option, shall be exercisable during such
period or periods as the Plan Administrator may specify. The latest date on
which an option may be exercised (the "Final Exercise Date") shall be the date
which is ten years (five years, in the case of an incentive option granted to a
"greater than ten-percent shareholder" as defined in Section 7(b)) from the
date the option was granted or such earlier date as may be specified by the
Plan Administrator at the time the option is granted.
(d) Exercise of Options.
(1) At the time of the grant of an option, the Plan Administrator
shall specify whether the option shall be exercisable in full
at any time prior to the Final Exercise Date or in
installments (which may be cumulative or noncumulative). In
the case of an option not
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immediately exercisable in full, the Plan Administrator may
at any time accelerate the time at which all or any part of
the option may be exercised.
(2) The award forms or other instruments evidencing incentive
options shall contain such provisions relating to exercise
and other matters as are required of incentive options under
the applicable provisions of the Code and the regulations
thereunder, as from time to time in effect.
(3) Any exercise of an option shall be in writing, signed by the
proper person and delivered or mailed to the Company,
accompanied by (a) the option certificate and any other
documents required by the Plan Administrator and (b) payment
in full for the number of shares for which the option is
exercised.
(4) In the case of an option that is not an incentive option, the
Plan Administrator shall have the right to require that the
individual exercising the option remit to the Company an
amount sufficient to satisfy any federal, state, or local
withholding tax requirements (or make other arrangements
satisfactory to the Company with regard to such taxes) prior
to the delivery of any Stock pursuant to the exercise of the
option. In the case of an incentive option, if at the time
the option is exercised the Plan Administrator determines
that under applicable law and regulations the Company could
be liable for the withholding of any federal, state or local
tax with respect to a disposition of the Stock received upon
exercise, the Plan Administrator (i) shall require as a
condition of exercise that the individual exercising the
option agree to inform the Company promptly of any
disposition (within the meaning of Section 424(c) of the Code
and the regulations thereunder) of Stock received upon
exercise, and (ii) may require as a condition of exercise
that the individual exercising the option give such security
as the Plan Administrator deems adequate to meet the
potential liability of the Company for the withholding of
tax, and to augment such security from time to time in any
amount reasonably deemed necessary by the Plan Administrator
to preserve the adequacy of such security.
(5) If an option is exercised by the executor or administrator of
a deceased employee or Associate, or by the person or persons
to whom the option has been transferred by the employee's or
Associate's will or the applicable laws of descent and
distribution or otherwise, the Company shall be under no
obligation to deliver Stock pursuant to such exercise until
the Company is satisfied as to the authority of the person or
persons exercising the option.
(e) Termination of Employment.
An employee's options shall terminate immediately upon the termination
of his employment with the Company, subject to the following exceptions: (i) if
the termination is by reason of the death or disability of the employee, the
unexercised portion of such options shall continue to be exercisable
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for 12 months after such termination (but only to the extent, if any, that such
options were exercisable immediately prior to the date of such termination) and
(ii) if the termination is for any other reason, excluding termination for
cause, the unexercised portion of such options shall continue to be exercisable
for three months after such termination (but only to the extent, if any, that
such options were exercisable immediately prior to the date of such
termination); provided, however, that the foregoing right of an option holder
to exercise options following termination of employment is subject to the
condition that the option holder shall not have conducted himself during the
term of his employment or thereafter in a manner which adversely affects the
Company. Notwithstanding the foregoing, the Plan Administrator in its
discretion in any particular case may provide that upon termination of an
employee's employment with the Company, the unexercised portion of his options
shall continue to be exercisable for a longer or shorter period than the period
provided for in the preceding sentence; provided, however, that (i) in the case
of an incentive option, the Plan Administrator may not provide for a shorter or
longer period after the option is granted and, in any event, may not provide
for a longer period except in the case where the employee's employment is
terminated by reason of death and (ii) in the case of an option that is not an
incentive option, the Plan Administrator may not provide for a shorter period
after the option is granted. For purposes of this Section 7(e), employment
shall not be considered terminated (i) in the case of sick leave or other bona
fide leave of absence approved for purposes of the Plan by the Plan
Administrator, so long as the employee's right to reemployment is guaranteed
either by statute or by contract, or (ii) in the case of a transfer of
employment between the Company and a subsidiary or between subsidiaries, or to
the employment of a corporation (or a parent or subsidiary corporation of such
corporation) issuing or assuming an option in a transaction to which Section
424(a) of the Code applies.
(f) Payment for Stock.
Stock purchased under the Plan upon exercise of an option shall be
paid for as follows:
(i) in cash or by certified check or bank draft or money
order payable to the order of the Company; or
(ii) with the consent of the Plan Administrator and to the
extent permitted by it (not later than the time of grant, in the case
of an incentive option) as follows:
(A) through the delivery of shares of Stock having a fair
market value (determined as provided in Section 7(b)) on the
date of exercise equal to the purchase price (but only if
such shares have been held by the option holder for a period
of time sufficient to prevent a pyramid exercise that would
create a charge to the Company's earnings); or
(B) by delivery of a full recourse interest bearing
promissory note of the option holder to the Company, secured
by a pledge of the Stock being purchased, such note to be
payable in the case of an incentive option, on such terms as
are specified in the option (except that, in lieu of a stated
rate of interest, an incentive option may provide that
5
<PAGE>
the rate of interest on the note will be such rate as is
sufficient, at the time the note is given, to avoid the
imputation of interest under the applicable provisions of the
Code); provided, that if the Stock delivered upon exercise of
the option is an original issue of authorized Stock, at least
so much of the exercise price as represents the par value of
such Stock shall be paid in cash or by a combination of cash
and Stock; or
(C) by delivering a properly executed exercise notice
together with irrevocable instructions to a broker to sell
shares acquired upon exercise of the option and promptly to
deliver to the Company a portion of the proceeds thereof
equal to the exercise price, or
(D) any combination of any of the foregoing payment methods
provided for in this Section 7(f).
(g) Delivery of Stock.
An option holder shall not have the rights of a stockholder with
regard to awards under the Plan except as to Stock actually received by him
under the Plan. The Company shall not be obligated to deliver any shares of
Stock (a) until, in the opinion of the Company's counsel, all applicable
federal and state laws and regulations have been complied with, and (b) if the
outstanding Stock is at the time listed on any stock exchange, until the shares
to be delivered have been listed or authorized to be listed on such exchange
upon official notice of issuance, and (c) until all other legal matters in
connection with the issuance and delivery of such shares have been approved by
the Company's counsel. If the sale of Stock has not been registered under the
Securities Act of 1933, as amended, the Company may require, as a condition to
exercise of the option, such representations or agreements as counsel for the
Company may consider appropriate to avoid violation of such Act and may require
that the certificates evidencing such Stock bear an appropriate legend
restricting transfer.
(h) Nontransferability of Options.
No option may be transferred other than by will or by the laws of
descent and distribution, and during the lifetime of the employee or Associate
to whom granted may be exercised only by him; provided, however, that an option
that is not an incentive option may be otherwise transferred to the extent, if
any, permitted by the Plan Administrator.
(i) Restrictions on Stock.
The Plan Administrator may provide that shares of Stock purchased
through the exercise of options under the Plan be subject to such restrictions
on resale, including restrictions requiring resale to the Company at or below
fair market value, or such other restrictions, as the Plan Administrator in its
sole discretion shall determine, and shall take such steps as it deems
necessary or appropriate to carry out the purposes of any such restriction;
provided, however, that any such restrictions relating to the shares of Stock
that may be purchased upon exercise of an option may not be provided for after
6
<PAGE>
the option has been granted.
8. Mergers, Recapitalizations. Etc.
(a) In the event of a consolidation or merger in which the Company is
not the surviving corporation or in the event of any transaction that results
in the acquisition of substantially all of the Company's outstanding Stock by a
single person or entity or by a group of persons and/or entities acting in
concert, or in the event of the sale or other transfer of substantially all of
the Company's assets (all the foregoing being referred to as "Acquisition
Events"), then the Plan Administrator may in its discretion terminate all
outstanding options by delivering notice of termination to each option holder;
provided, however, that, during the 20-day period following the date on which
such notice of termination is delivered, each option holder shall have the
right to exercise in full all of his options that are then outstanding (without
regard to any condition with respect to the exercise of any installment that
relates to the passage of time). If an Acquisition Event occurs and the Plan
Administrator does not terminate the outstanding options pursuant to the
preceding sentence, then the provisions of Section 8(b) shall apply.
(b) In the event that the outstanding shares of Stock are changed
into or exchanged for a different number or kind of shares or other securities
or property (including cash) of the Company or of another corporation by reason
of a stock dividend, stock split or combination of shares (excluding the stock
split effected by the Company on September 10, 1996), recapitalization or other
change in the Company's capital stock, reorganization, merger, sale or other
transfer of substantially all the Company's assets to another corporation,
consolidation, or other transaction described in Section 424(a) of the Code,
the Plan Administrator shall make appropriate adjustments (in such manner as
it deems equitable in its sole discretion) in (i) the number and kind of shares
of Stock, other securities or property for the purchase of which options may
be granted under the Plan, (ii) the number and kind of shares of Stock, other
securities or property as to which outstanding options, or portions thereof
then unexercised, shall be exercisable, (iii) the exercise price and other
terms of outstanding options and (iv) any other relevant provisions of the
Plan. Any adjustment of the Plan or in outstanding options shall be effective
on the effective date of the event giving rise to such adjustment. The Plan
Administrator may also adjust the number of shares subject to outstanding
options, the exercise price of outstanding options and the terms of outstanding
options to take into consideration any other event (including, without
limitation, accounting changes) if the Plan Administrator determines that such
adjustment is appropriate to avoid distortion in the operation of the Plan. All
determinations and adjustments made by the Plan Administrator pursuant to this
Section 8(b) shall be binding on all persons.
(c) The Plan Administrator may grant options under the Plan in
substitution for options held by employees of another corporation who
concurrently become employees of the Company or a subsidiary of the Company as
the result of a merger or consolidation of the employing corporation with the
Company or a subsidiary of the Company, or as the result of the acquisition by
the Company of property or stock of the employing corporation. The Company may
direct that substitute awards be granted on such terms and conditions as the
Plan Administrator considers appropriate in the
7
<PAGE>
circumstances.
9. Limitation on Rights.
Neither the adoption of the Plan nor the grant of options shall confer
upon any employee any right to continued employment with the Company or affect
in any way the right of the Company to terminate the employment of an employee
at any time. Except as specifically provided by the Plan Administrator in any
particular case, the loss of existing or potential profit in options granted
under this Plan shall not constitute an element of damages in the event of
termination of the employment of an employee even if the termination is in
violation of an obligation of the Company to the employee by contract or
otherwise.
10. Effect, Discontinuance, Cancellation, Amendment and Termination.
(a) Neither adoption of the Plan nor the grant of options to an
employee shall affect the Company's right to grant to such employee options
that are not subject to the Plan, to issue to such employees Stock as a bonus
or otherwise, or to adopt other plans or arrangements under which Stock may be
issued to employees.
(b) The Plan Administrator may at any time discontinue granting
options under the plan. With the consent of the option holder, the Plan
Administrator may at any time cancel an existing option in whole or in part and
grant the option holder another option for such number of shares as the Plan
Administrator specifies. The Plan Administrator may at any time or times amend
the Plan, provided that (i) no such amendment shall affect the rights of any
option holder (without his consent) under any option previously granted, and
(ii) without the approval of the stockholders of the Company, no such amendment
shall (a) increase the maximum number of shares available under the Plan for
delivery pursuant to the exercise of incentive options, (b) change the group of
employees eligible to receive incentive options, (c) reduce the price at which
incentive options may be granted, (d) extend the time within which incentive
options may be granted, (e) alter the Plan in such a way that incentive options
already granted hereunder would not be considered incentive stock options under
Section 422 of the Code, or (f) amend the provisions of this Section 8(b). The
Plan Administrator may at any time terminate the Plan as to any further grants
of options.
8
<PAGE>
EXHIBIT 11.1
INTEGRATED TECHNOLOGY USA, INC.
EARNINGS PER SHARE
<TABLE>
<CAPTION>
POST SPLIT WEIGHTED
PERIOD DAYS SHARES WEIGHTED AVERAGE NET LOSS
YEAR ENDED DECEMBER 31, 1993 OUTSTANDING OUTSTANDING @760.6291 SHARES SHARES NET LOSS PER SHARE
- ----------------------------- ----------------- ----------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SHARES OUTSTANDING AT 1/1/93
Balance at 1/1/93............ 1/1/93--8/10/93 222 1,407,378 312,438,012
After repurchase of certain
shares..................... 8/11/93--11/29/93 111 1,401,603 155,577,930
After repurchase of certain
shares..................... 11/30/93--12/31/93 32 1,399,293 44,777,374
--- -----------
512,793,316 1,404,913
-----------
SHARES ISSUED IN 1993
1/1/93--12/31/93 365 6,846 2,498,667
2/17/93--12/31/93 318 1,217 387,008
1/14/93--12/31/93 352 2,435 857,040
1/24/93--12/31/93 342 30,425 10,405,406
12/31/93--12/31/93 1 1,206 1,206
12/31/93--12/31/93 1 2,411 2,411
12/31/93--12/31/93 1 2,411 2,411
--- -----------
14,154,149 38,778
-----------
1995 CHEAP STOCK............. 1/1/93--12/31/93(A) 83,532 83,532
1995 CHEAP STOCK............. 1/1/93--12/31/93(A) 116,979 116,979
1995/96 CHEAP
WARRANTS/OPTIONS........... 1/1/93--12/31/93(A) 202,035 202,035
---------
1,846,237 (621,852) (0.34)
---------
YEAR ENDED DECEMBER 31, 1994
- -----------------------------
SHARES OUTSTANDING AT 1/1/94
Balance at 1/1/94............ 1/1/94--1/18/94 18 1,446,245 26,032,402
After repurchase of certain
shares..................... 1/19/94--12/31/94 347 1,397,283 484,857,145
--- -----------
510,889,547 1,399,698
SHARES ISSUED IN 1994
1/14/94--12/31/94 352 1,033,472 363,782,173 996,663
--- -----------
1995 CHEAP STOCK............. 1/1/94--12/31/94(A) 83,532 83,532
1995 CHEAP STOCK............. 1/1/94--12/31/94(A) 116,979 116,979
1995/96 CHEAP
WARRANTS/OPTIONS........... 1/1/94--12/31/94(A) 202,035 202,035
---------
2,798,907 (1,977,628) (0.71)
---------
YEAR ENDED DECEMBER 31, 1995
- -----------------------------
SHARES OUTSTANDING AT 1/1/95
Balance at 1/1/95............ 1/1/95--12/31/95 365 2,430,755 887,225,547 2,430,755
Shares issued................ 2/15/95--12/31/95 320 298,913 95,652,091 262,060
Cheap stock issued........... 1/1/95--12/31/95 83,532 83,532
Cheap stock issued........... 1/1/95--12/31/95 116,979 116,979
1995/96 cheap
warrants/options........... 1/1/95--12/31/95 202,035 202,035
----------- ---------
3,132,214 3,095,361 (1,683,064) (0.54)
----------- ---------
SIX MONTHS ENDED JUNE 30,
1995
- -----------------------------
Balance at 1/1/95............ 1/1/95--6/30/95 181 2,430,755 439,966,641 2,430,755
Shares issued................ 2/15/95--6/30/95 167 298,913 49,918,435 275,792
Cheap stock issued........... 1/1/95--6/30/95(A) 181 83,532 15,119,344 83,532
Cheap stock issued........... 1/1/95--6/30/95(A) 181 116,979 21,173,139 116,979
1995/96 cheap
warrants/options........... 1/1/95--6/30/95 181 202,035 36,568,310 202,035
----------- ---------
3,132,214 3,109,093 (749,130) (0.24)
----------- ---------
</TABLE>
(A) COMPUTED USING THE TREASURY STOCK METHOD AND AN ASSUMED OFFERING PRICE
OF $7 PER SHARE.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated March 29, 1996 (except
as to the recapitalization described in Note 10, which is as of September 10,
1966) relating to the consolidated financial statements of Integrated Technology
USA, Inc., which appears in such Prospectus. We also consent to the references
to us under the headings 'Experts' and 'Selected Financial Data' in such
prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such 'Selected Financial Data.'
Price Waterhouse LLP
New York, New York
September 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1993 DEC-31-1994 DEC-31-1995 DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1993 DEC-31-1994 DEC-31-1995 JUN-30-1995 JUN-30-1996
<CASH> 0 894 33 0 28
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 0 29 164 0 133
<ALLOWANCES> 0 (11) (17) 0 (12)
<INVENTORY> 0 212 467 0 357
<CURRENT-ASSETS> 0 1,150 682 0 574
<PP&E> 0 142 127 0 103
<DEPRECIATION> 0 0 0 0 0
<TOTAL-ASSETS> 0 1,312 829 0 698
<CURRENT-LIABILITIES> 0 370 503 0 0
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 25 30 0 30
<OTHER-SE> 0 0 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 1,312 829 0 698
<SALES> 77 86 804 355 208
<TOTAL-REVENUES> 77 86 804 355 208
<CGS> 73 81 491 198 113
<TOTAL-COSTS> 698 2,097 2,483 1,131 1,081
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 1 0 4 0 77
<INCOME-PRETAX> (622) (1,977) (1,683) (749) (949)
<INCOME-TAX> 0 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0 0
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 0 0 0 0 0
<EPS-PRIMARY> (0.34) (0.71) (0.54) (0.24) (0.30)
<EPS-DILUTED> 0 0 0 0 0
</TABLE>
