<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 1996
REGISTRATION NO. 333-9697
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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>
<CAPTION>
<S> <C> <C>
DELAWARE 3577 22-3136782
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</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>
<CAPTION>
<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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM OFFERING PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share
('Common Stock')...................... 3,450,000(3) $ 8.00 $27,600,000 $ 9,518
Redeemable Common Stock Purchase
Warrants ('Redeemable Warrants'), each
exercisable for one share of Common
Stock................................. 3,450,000(4) $ 0.10 $ 345,000 $ 119
Common Stock issuable upon exercise of
Redeemable Warrants................... 3,450,000 $12.00 $41,400,000 $ 14,276
Representative's Warrants, each
exercisable for one share of Common
Stock and/or one Redeemable Warrant... 300,000 $0.001 $ 300 $ 1
Common Stock issuable upon exercise of
Representative's Warrants............. 300,000 $13.20 $ 3,960,000 $ 1,366
Warrants issuable upon exercise of
Representative's Warrants............. 300,000 $ 0.17 $ 51,000 $ 18
Common Stock issuable upon exercise of
warrants issuable upon exercise of
Representative's Warrants............. 300,000 $12.00 $ 3,600,000 $ 1,242
Total................................... $ 26,540
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the 'Act'), there are
also being registered such additional securities as may become issuable
pursuant to the antidilution provisions of the Redeemable Warrants or the
Representative's Warrants.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Act.
(3) Includes 450,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(4) Includes 450,000 Redeemable Warrants which the Underwriters have the option
to purchase to cover over-allotments, if any.
------------------------
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>
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 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 REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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 165% 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]
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 that was effected on September 10, 1996 (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>
<CAPTION>
<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 a party 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) $1,195,000 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 170,715 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)................ $(339,398) $ 16,567,828
Total assets.................. 688,705 17,595,931
Total liabilities............. 980,958 595,689
Stockholders' equity (net
capital deficiency)......... (292,253) 17,000,242
</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.'
16
<PAGE>
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................. 5,852,471 6,069,652 23,833,652
Treasury stock............................. (165,000) (165,000) (165,000)
Accumulated deficit........................ (6,149,765) (6,149,765) (6,651,270)(1)
Cumulative translation adjustment.......... 140,229 140,229 140,229
-------------- -------------- ------------
Total stockholders' equity (net capital
deficiency)........................... (292,253) (75,072)(1) 17,217,423(1)
-------------- -------------- ------------
Total capitalization.................... 93,016 721,947 17,268,692
-------------- -------------- ------------
-------------- -------------- ------------
</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 $77,000. 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 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 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) $1,195,000 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 170,715 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, deduction of the
underwriting discounts and commissions and estimated offering expenses, and the
application of a portion of the net proceeds to repay the Bridge Notes (as
described under 'Use of Proceeds'), the net tangible book value of the Company
at June 30, 1996, on a pro forma basis would have been approximately $16,958,000
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, deduction of the
underwriting discounts and commissions and estimated offering expenses, and
the application of a portion of the net proceeds to repay the Bridge Notes
(as described under 'Use of Proceeds').
(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 $ (339,398)
Total assets....................... 1,312,029 829,546 688,705
Total liabilities.................. 400,058 531,322 980,958
Stockholders' equity (net capital
deficiency)...................... 911,971 298,224 (292,253)
</TABLE>
- ------------------
(1) For information concerning the computation of net loss per share, see Note 2
of Notes to consolidated Financial Statements.
25
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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.
26
<PAGE>
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.'
27
<PAGE>
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.'
28
<PAGE>
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.
29
<PAGE>
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
the Representative and another party that assisted the Company in connection
with the Bridge Financing. By mutual agreement of the Company and the
Representative, the Other Bridge Warrants issued to the Representative were
cancelled without recourse to the Company in September 1996. The aggregate
number of shares issuable upon exercise of the Other Bridge Warrants that remain
outstanding will be determined by dividing (i) $20,000 by (ii) the initial
public offering price per share of Common Stock in the Offering. 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 $77,000 (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 $337,000.
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).
30
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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 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.
31
<PAGE>
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
32
<PAGE>
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 within
90 days of completion of the Offering.
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.
43
<PAGE>
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
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 May 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
RECAPITALIZATION
On September 10, 1996, the Company amended 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) $1,195,000 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 170,715 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 170,715 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 [165% of the initial
public offering price per share of Common Stock] and $0.16 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.............. -- -- 41,905
Prepaid expenses and other current
assets............................. 25,410 34,514 17,263
---------- ---------- -----------
Total current assets.......... 1,149,746 682,424 564,829
Fixed assets, net..................... 142,120 127,109 102,577
Security deposits..................... 20,163 20,013 21,299
---------- ---------- -----------
Total assets.................. $1,312,029 $ 829,546 $ 688,705
---------- ---------- -----------
---------- ---------- -----------
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 5,852,471
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 (292,253)
---------- ---------- -----------
Total liabilities and
stockholders' equity........ $1,312,029 $ 829,546 $ 688,705
---------- ---------- -----------
---------- ---------- -----------
</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>
TOTAL
STOCKHOLDER'S
COMMON STOCK ADDITIONAL STOCK CUMULATIVE EQUITY (NET
------------------- PAID-IN SUBSCRIPTION TREASURY ACCUMULATED TRANSLATION CAPITAL
SHARES AMOUNT CAPITAL RECEIVABLE STOCK DEFICIT ADJUSTMENT DEFICIENCY)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
<S> <C> <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 $ 22,131
Issuance of common stock,
net of expenses........ 40,923 409 169,591 -- -- -- -- 170,000
Issuance of stock
pursuant to anti-
dilution provisions.... 6,028 -- -- -- -- -- -- --
Proceeds from 1992 stock
subscriptions.......... -- -- -- 340,000 -- -- -- 340,000
Repurchase of common
stock.................. (8,086) -- -- -- $ (35,000) -- -- (35,000)
Change in cumulative
translation
adjustment............. -- -- -- -- -- -- 21,496 21,496
Net loss for 1993........ -- -- -- -- -- (621,852 ) -- (621,852)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
BALANCE AT DECEMBER 31,
1993................... 1,446,243 14,483 1,417,434 -- (35,000) (1,539,916 ) 39,774 (103,225)
Issuance of common stock,
net of expenses........ 1,033,472 10,335 2,519,736 -- -- -- -- 2,530,071
Repurchase of common
stock.................. (48,962) -- -- -- (130,000) -- -- (130,000)
Compensatory stock
options issued to
officers, directors and
employees.............. -- -- 587,754 -- -- -- -- 587,754
Change in cumulative
translation
adjustment............. -- -- -- -- -- -- 4,999 4,999
Net loss for 1994........ -- -- -- -- -- (1,977,628 ) (1,977,628)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
BALANCE AT DECEMBER 31,
1994................... 2,430,753 $24,818 $4,524,924 -- $(165,000) $(3,517,544) $ 44,773 $ 911,971
Issuance of common stock,
net of expenses........ 415,892 4,159 815,991 -- -- -- -- 820,150
Exercise of compensatory
stock options.......... 83,533 835 (725) -- -- -- -- 110
Compensatory stock
options issued to
officers, directors and
employees.............. -- -- 195,673 -- -- -- -- 195,673
Change in cumulative
translation
adjustment............. -- -- -- -- -- -- 53,384 53,384
Net loss for 1995........ -- -- -- -- -- (1,683,064 ) -- (1,683,064)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
BALANCE AT DECEMBER 31,
1995................... 2,930,178 29,812 5,535,863 -- (165,000) (5,200,608 ) 98,157 298,224
Compensatory stock
options issued to
officers, directors and
employees.............. -- -- 135,403 -- -- -- -- 135,403
Proceeds from issuance of
Bridge Warrants, net of
expenses............... -- -- 181,205 -- -- -- -- 181,205
Change in cumulative
translation
adjustment............. -- -- -- -- -- -- 42,072 42,072
Net loss for the six
months ended June 30,
1996................... -- -- -- -- -- (949,157 ) -- (949,157)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
BALANCE AT JUNE 30, 1996
(Unaudited)............ 2,930,178 $29,812 $5,852,471 -- $(165,000) $(6,149,765) $140,229 $ (292,253)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
</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 EXPORT 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 a party 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) $20,000 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 $77,000, 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:
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
Articles 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.
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.
II-1
<PAGE>
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>
<CAPTION>
<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>
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>
<CAPTION>
<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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
DATE SHARES CONSIDERATION PURCHASER
- ---- --------- ------------ ---------
<S> <C> <C> <C> <C>
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
30,426 $ 83,480 Tertiare Investissement
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>
II-3
<PAGE>
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.) By mutual agreement of the Company and National Securities
Corporation, the Bridge Warrants issued to National Securities Corporation were
cancelled without recourse to the Company in September 1996.
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>
- ------------------
* Previously filed.
** Filed herewith.
II-4
<PAGE>
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) 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. 2 to Registration Statement to be signed on its behalf by the undersigned in
Teaneck, New Jersey, on the 25th 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
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ ALAN P. HABER Chairman of the Board; President; September 25, 1996
- ------------------------------------------ Chief Executive Officer and Director
Alan P. Haber (Principal Executive Officer)
/s/ BARRY L. EISENBERG Director September 25, 1996
- ------------------------------------------
Barry L. Eisenberg
Director September , 1996
- ------------------------------------------
Bernard S. Appel
/s/ MORRIS J. SMITH Director September 26, 1996
- ------------------------------------------
Morris J. Smith
/s/ SIMON KAHN Chief Financial Officer September 25, 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>
- ------------------
* Previously filed.
** Filed herewith.
<PAGE>
3,000,000 Shares of Common Stock DRAFT: 9/23/96
and 3,000,000 Redeemable Warrants
INTEGRATED TECHNOLOGY USA, INC.
UNDERWRITING AGREEMENT
Teaneck, New Jersey
September ___, 1996
National Securities Corporation
As Representative of the Several Underwriters
1001 Fourth Avenue, Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
Integrated Technology USA, Inc., a Delaware corporation (the
"Company"), hereby agrees with National Securities Corporation ("National") and
each of the underwriters named in Schedule A hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 11), for whom National is acting as
representative (in such capacity, National shall hereinafter be referred to as
"you" or the "Representative") with respect to the sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of the
respective amount of shares (the "Shares") set forth in said Schedule A of the
Company's common stock, par value $.01 per share (the "Common Stock"), and
redeemable common stock purchase warrants (the "Redeemable Warrants"), each to
purchase one share of Common Stock, set forth in Schedule A hereto. The
aggregate 3,000,000 Shares and 3,000,000 Redeemable Warrants will be separately
tradeable upon issuance and are hereinafter referred to as the "Firm
Securities." Each Redeemable Warrant is exercisable commencing on _________,
1997 until _________, 2001, unless previously redeemed by the Company, at an
initial exercise price of $_______ per share of Common Stock. The Redeemable
Warrants may be redeemed by the Company at a redemption price of $.01 per
Redeemable Warrant at any time after _________, 1997 [18 months after the date
of this Agreement] on thirty (30) days' prior written notice, provided that the
average closing sale price of the Common Stock equals or exceeds $_________ per
share (subject to adjustment under certain circumstances), for any twenty (20)
trading days within a period of thirty (30) consecutive trading days ending on
the fifth trading day prior to the notice of redemption, all in accordance with
the terms and conditions of the Warrant Agreement (herein defined).
<PAGE>
Upon your request, as provided in Section 2(b) of this
Agreement, the Company shall also issue and sell to the Underwriters, acting
severally and not jointly, up to an additional 450,000 shares of Common Stock
and/or 450,000 Redeemable Warrants for the purpose of covering over-allotments,
if any. Such 450,000 shares of Common Stock and 450,000 Redeemable Warrants are
hereinafter collectively referred to as the "Option Securities." The Company
also proposes to issue and sell to you warrants (the "Representative's
Warrants") pursuant to the Representative's Warrant Agreement (the
"Representative's Warrant Agreement") for the purchase of an additional 300,000
shares of Common Stock and/or 300,000 Redeemable Warrants. The shares of Common
Stock and Redeemable Warrants issuable upon exercise of the Representative's
Warrants are hereinafter referred to as the "Representative's Securities." The
Firm Securities, the Option Securities, the Representative's Warrants and the
Representative's Securities (collectively, hereinafter referred to as the
"Securities") are more fully described in the Registration Statement and the
Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, and as of the Closing Date and the Option Closing Date, if any, as
follows:
(a) The Company has prepared and filed with the
Securities and Exchange Commission (the "Commission") a registration statement,
and an amendment or amendments thereto, on Form SB-2 (No. 333-9697), including
any related preliminary prospectus (the "Preliminary Prospectus"), for the
registration of the Firm Securities, the Option Securities and the
Representative's Securities under the Securities Act of 1933, as amended (the
"Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
Regulations (as defined below) of the Commission under the Act. The Company will
not file any other amendment thereto to which the Underwriters shall have
objected in writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430(A) of the Regulations), is hereinafter called the "Registration
Statement," and the form of prospectus in the form first filed with the
Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called the
"Prospectus." For purposes hereof, "Regulations" mean the rules and regulations
adopted by the Commission under either the Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory
authority has issued any order preventing or suspending the use of any
Preliminary Prospectus, the Registration Statement or the Prospectus and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement have been instituted, or, to the Company's knowledge, are threatened.
Each of the Preliminary Prospectus, the Registration Statement and the
Prospectus at the time of filing thereof conformed in all material respects with
the requirements of the Act and
-2-
<PAGE>
Regulations, and none of the Preliminary Prospectus, the Registration Statement
or the Prospectus at the time of filing thereof contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that this representation and warranty does not apply to statements made or
statements (?) in reliance upon and in conformity with written information
furnished to the Company in writing by or on behalf of any Underwriter expressly
for use in such Preliminary Prospectus, Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective
and at all times subsequent thereto up to the Closing Date (as defined in
Section 2(c) hereof) and each Option Closing Date (as defined in Section 2(b)
hereof), if any, and during such longer period as the Prospectus may be required
to be delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus, as amended or supplemented as
required, will contain all statements which are required to be stated therein in
accordance with the Act and the Regulations, and will conform in all material
respects to the requirements of the Act and the Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
conformity with information furnished to the Company in writing by or on behalf
of any Underwriter expressly for use in the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto.
(d) The Company and each of its subsidiaries have been
duly organized and are validly existing as corporations in good standing under
the laws of the respective jurisdictions of their incorporation. The Company
does not own or control, directly or indirectly, any corporation, partnership,
trust, joint venture or other business entity other than the subsidiaries listed
in Exhibit 21.1 of the Registration Statement (except that one subsidiary listed
on such Exhibit has a wholly owned subsidiary Company in the United Kingdom
which has been inactive except for lodging a request for approval to distribute
one of the Company's products in the United Kingdom). Each of the Company and
its subsidiaries is duly qualified and licensed and in good standing as a
foreign corporation in each jurisdiction in which its ownership or leasing of
any properties or the character of its operations require such qualification or
licensing, except where the failure to be so qualified or licensed would not
have a material and adverse effect on the condition, financial or otherwise, or
the business affairs, operations, properties, or results of operations of the
Company and its subsidiaries, taken as a whole (the "Business"). Each of the
Company and its subsidiaries has all requisite power and authority (corporate
and other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without limitation,
those having jurisdiction over environmental or similar matters), to own or
lease its properties and conduct its business as described in the Prospectus
(except where the failure to have any such power or authority or to have
obtained
-3-
<PAGE>
any of the aforementioned items would not have a material and adverse effect on
the Business); the Company and each of its subsidiaries have been doing business
in compliance in all material respects with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and all federal, state,
local and foreign laws, rules and regulations (except where the failure to be so
doing business in compliance would not have a materials and adverse effect on
the Business); and neither the Company nor any of its subsidiaries have received
any notice of proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the Business. The
disclosures in the Registration Statement concerning the effects of federal,
state, local, and foreign laws, rules and regulations on the Company's business
as currently conducted and as contemplated are correct in all material respects
and do not omit to state a material fact necessary to make the statements
contained therein not misleading in light of the circumstances in which they
were made.
(e) The Company's authorized, issued and outstanding
capital stock are as set forth in the Prospectus under the headings
"Capitalization" and "Description of Securities." As of the Closing Date
(assuming that none of the Option securities are purchased on such date), the
Company's authorized, issued and outstanding capital stock will be as set forth
in the Prospectus under the heading "Capitalization." The Company is not a party
to or bound by any instrument, agreement or other arrangement providing for it
to issue any capital stock, rights, warrants, options or other securities,
except for this Agreement and as described in the Prospectus. The Securities and
all other securities issued or issuable by the Company conform or, when issued
and paid for, will conform, in all material respects to all statements with
respect thereto contained in the Registration Statement and the Prospectus. All
issued and outstanding shares of capital stock of each subsidiary of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable. Except as disclosed in or contemplated by the Prospectus and the
financial statements of the Company and the related notes thereto included in
the Prospectus, neither the Company nor any subsidiary has outstanding any
options to purchase, or any preemptive rights or other rights to subscribe for
or to purchase, any securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The description of the
Company's stock option, stock bonus and other stock plans or arrangements and
the options or other rights granted and exercised thereunder as set forth in the
Prospectus conforms in all material respects with the requirements of the Act.
All issued and outstanding securities of the Company have been duly authorized
and validly issued and are fully paid and nonassess-able, and the holders
thereof have no rights of rescission with respect thereto and are not subject to
personal liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any holders of any security
of the Company or similar contractual rights granted by the Company.
(f) The Securities are not and will not be subject to
any preemptive or other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the terms
hereof, will be validly issued, fully paid and
-4-
<PAGE>
nonassessable and will conform in all material respects to the description
thereof contained in the Prospectus; the holders thereof will not be subject to
any liability solely as such holders; all corporate action required to be taken
for the authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities will be in due
and proper form. Upon the issuance and delivery pursuant to the terms hereof of
the Securities to be sold by the Company hereunder, the Underwriters or the
Representative, as the case may be, will acquire good and marketable title to
such Securities free and clear of any lien, charge, claim, encumbrance, pledge,
security interest, defect, or other restriction or equity of any kind
whatsoever. No stockholder of the Company has any right which has not been
waived in writing to require the Company to register the sale of any shares
owned by such stockholder under the Act in the public offering contemplated by
this Agreement. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the issuance and sale of
the Shares, the Option Shares and the Representative's Warrants to be sold by
the Company as contemplated herein.
(g) The financial statements of the Company, together
with the related notes and schedules thereto, included in the Registration
Statement, each Preliminary Prospectus and the Prospectus fairly present the
financial position, changes in stockholders' equity and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply and such financial statements have been prepared in
conformity with generally accepted accounting principles and the Regulations,
consistently applied throughout the periods involved. There has been no material
adverse change or development involving a material prospective change in the
Business, whether or not arising in the ordinary course of business since the
date of the financial statements included in the Registration Statement and the
Prospectus and the outstanding debt, the property, both tangible and intangible,
and the business of the Company and its subsidiaries taken as a whole conform in
all material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus. Financial information set forth in the Prospectus
under the headings "Prospectus Summary - Selected Financial Data,"
"Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," fairly present, on the basis stated in the
Prospectus, the information set forth therein and have been derived from or
compiled on a basis consistent with that of the audited financial statements
included in the Prospectus.
(h) The Company (i) has paid all federal, state, local,
franchise, and foreign taxes for which it is liable (except for certain foreign
taxes for which the Company has established adequate accruals that are reflected
in the financial statements included in the Prospectus and the late payment of
which would not have a material adverse effect on the Business), including, but
not limited to, withholding taxes and amounts payable under Chapters 21 through
24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has
furnished all information returns it is required to furnish pursuant to the
Code, (ii) has established adequate reserves for such taxes which are not due
and payable, and (iii) does not have any tax deficiency or claims outstanding,
proposed or assessed against it.
-5-
<PAGE>
(i) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (i) the issuance
by the Company of the Securities, (ii) the purchase by the Underwriters of the
Firm Securities and the Option Securities from the Company and the purchase by
the Representative of the Representative's Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby.
(j) There is no action, suit, proceeding, inquiry,
arbitration, mediation, investigation, litigation or governmental proceeding
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, pending or, to the best knowledge of the
Company, threatened against (or circumstances known to the Compant that it is
reasonably foreseeable are reasonably likely to give rise to the same), or
involving the properties or businesses of, the Company which (i) questions the
validity of the capital stock of the Company, this Agreement or the
Representative's Warrant Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or the Representative's
Warrant Agreement, (ii) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are summarized in
the Registration Statement are accurately summarized in all material respects),
or (iii) might materially and adversely affect the condition, financial or
otherwise, or the business, affairs, position, stockholders' equity, operation,
properties, or results of operations of the Company and its subsidiaries taken
as a whole.
(k) The Company has the corporate power and authority
to authorize, issue, deliver, and sell the Securities and to enter into this
Agreement, the Warrant Agreement, and the Representative's Warrant Agreement,
and to consummate the transactions provided for in such agreements; and this
Agreement, the Warrant Agreement and the Representative's Warrant Agreement have
each been duly and properly authorized by the Company; and this Agreement has
been duly and properly executed and delivered by the Company and the Warrant
Agreement and the Representative's Agreement will be properly executed and
delivered by the Company on or prior to the Closing Date. This Agreement
constitutes, and each of the Warrant Agreement and the Representative's
Agreement will when executed and delivered by the Company constitute, a legal,
valid and binding obligation of the Company enforceable against the Company in
accordance with its respective terms (except as the enforceability thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law), and none of the issue and sale of the Securities,
execution, delivery or performance by the Company of this Agreement, the Warrant
Agreement, and the Representative's Warrant Agreement, the consummation by the
Company of the transactions contemplated herein and therein, or the conduct of
the Company's businesses as described in the Registration Statement, the
Prospectus, and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or violation of any of the
terms or provisions of, or constitutes or will constitute a default under, or
result in
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the creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever
upon, any property or assets (tangible or intangible) of the Company pursuant to
the terms of (i) the articles of incorporation or by-laws of the Company, as
amended and restated, (ii) any license, contract, indenture, mortgage, deed of
trust, voting trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which it is or may be bound or to which its properties or assets (tangible
or intangible) is or may be subject, or any indebtedness, or (iii) any statute,
judgment, decree, order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company of any of their activities or properties.
(l) No consent, approval, authorization or order of,
and no filing with, any court, regulatory body, government agency or other body,
domestic or foreign, is required for the issuance of the Securities pursuant to
the Prospectus and the Registration Statement, the performance of this
Agreement, the Warrant Agreement, the Representative's Warrant Agreement, and
the transactions contemplated hereby and thereby, including without limitation,
any waiver of any preemptive, first refusal or other rights that any entity or
person may have for the issue and/or sale of any of the Securities, except such
as have been or may be made or obtained under the Act or may be required under
state securities or Blue Sky laws or laws of foreign (?) in connection with the
Underwriters' purchase and distribution of the Firm Securities, the Option
Securities, and the acquisition by the Representative of the Representative's
Warrants to be sold by the Company hereunder and the acquisition of the
Representative's Securities pursuant thereto (it being understood that the
Company makes no representation or warranty with respect to the consents,
approvals, authorizations, orders or filings required in order to enable to
resale or distribution of the Representative's Warrants or the Representative's
Securities.
(m) All executed agreements, contracts or other
documents or copies of executed agreements, contracts or other documents filed
as exhibits to the Registration Statement to which the Company is a party or by
which it may be bound or to which its assets, properties or businesses may be
subject have been duly and validly authorized, executed and delivered by the
Company and constitute the legal, valid and binding agreements of the Company
enforceable against the Company in accordance with their respective terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law). The descriptions in
the Registration Statement of such agreements, contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown with respect thereto by Form SB-2, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
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(n) Since the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as described
in or specifically contemplated by the Prospectus (i) the Company has not
incurred any material liabilities or obligations, indirect, direct or
contingent, or entered into any material verbal or written agreement or other
transaction which is not in the ordinary course of business or which could
result in a material reduction in the future earnings of the Company; (ii) the
Company has not sustained any material loss or interference with its business or
properties from fire, flood, windstorm, accident or other calamity, whether or
not covered by insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its capital stock, and the
Company is not in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the capital
stock (other than upon the sale of the Firm Securities, the Option Securities
and the Representative's Warrants hereunder and upon the exercise of options and
warrants described in the Registration Statement) of, or indebtedness material
to, the Company (other than in the ordinary course of business); (v) the Company
has not issued any securities or incurred any liability or obligation, primary
or contingent, for borrowed money; and (vi) there has not been any material
adverse change in the condition (financial or otherwise), business, properties,
results of operations, or prospects of the Company and its subsidiaries.
(o) Except as disclosed in or specifically contemplated
by the Prospectus, and subject to the risks and uncertainties described in the
Prospectus in the headings entitled "Risk Factors - Importance of Protection of
Proprietary Technology," (i) the Company has sufficient trademarks, trade names,
patent rights, copyrights, licenses, approvals and governmental authorizations
to conduct its business as now conducted; (ii) the expiration of any trademarks,
trade names, patent rights, copyrights, licenses, approvals or governmental
authorizations would not have a material adverse effect on the condition
(financial or otherwise), business, results of operations or prospects of the
Company; (iii) the Company has no knowledge of any infringement by it or its
subsidiaries of trademark, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others; and (iv) there is no
claim being made against the Company regarding trademark, trade name, patent,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company.
(p) No default exists in the due performance and
observance of any term, covenant or condition of any material license, contract,
indenture, mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders agreement, note, loan or credit agreement, or any
other material agreement or instrument evidencing an obligation for borrowed
money, or any other material agreement or instrument to which the Company is a
party or by which the Company may be bound or to which the property or assets
(tangible or intangible) of the Company is subject or affected, except for such
defaults, if any, which individually and in the aggregate would not have a
material adverse effect on the Business.
(q) To the Company's knowledge, there are no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of federal, state,
local, or foreign laws and regulations relating
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to labor law. There is no unfair labor practice charge or complaint against the
Company pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or to its knowledge
threatened against or involving the Company. No representation question exists
respecting the employees of the Company. No collective bargaining agreement, or
modification thereof is currently being negotiated by the Company. No grievance
or arbitration proceeding is pending under any expired or existing collective
bargaining agreements of the Company. No labor dispute with the employees of the
Company exists or to its knowledge is imminent.
(r) Except as described in the Prospectus, the Company
does not maintain, sponsor or contribute to any program or arrangement that is
an "employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute to a
defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or
any trust created thereunder) has engaged in a "prohibited transaction" within
the meaning of Section 406 of ERISA or Section 4975 of the Code, which could
subject the Company to any tax penalty on prohibited transactions and which has
not adequately been corrected. Each ERISA Plan is in compliance with all
material reporting, disclosure and other requirements of the Code and ERISA as
they relate to any such ERISA Plan. Determination letters have been received
from the Internal Revenue Service with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified thereunder. The Company has never completely
or partially withdrawn from a "multiemployer plan."
(s) None of the Company, nor any of its employees,
directors, stockholders, or affiliates (within the meaning of the Regulations)
of any of the foregoing has taken or will take directly or indirectly, any
action designed to or which has constituted or which might be expected to cause
or result in unlawful stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Securities.
(t) The Company has good and marketable title to, or
valid and enforceable leasehold estates in, all items of real and tangible
personal property stated in the Prospectus to be owned or leased by it
(excluding any proprety that the Prospectus indicates is leases on a
month-to-month basis, for which there are no written agreements), free and clear
of all liens, charges, claims, encumbrances, pledges, security interests, or
other restrictions or equities of any kind whatsoever, other than those referred
to in the Prospectus and liens for taxes not yet due and payable.
(u) Price Waterhouse LLP ("Price Waterhouse"), whose
report is filed with the Commission as a part of the Registration Statement, are
independent certified public accountants as required by the Act and the
Regulations.
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(v) The Company has caused to be duly executed legally
binding and enforceable agreements pursuant to which each Two-Percent Holder (as
hereinafter defined) has agreed that until the first anniversary of the
effective date of the Registration Statement (the "Effective Date"), such holder
will not, without the prior written consent of the Representative, directly or
indirectly offer to sell, grant an option for the sale of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose (all of 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") (either pursuant to Rule 144 of the
regulations under the Securities Act of 1933, as amended, or otherwise), whether
or not beneficially owned by such holder, or dispose of any beneficial interest
therein, provided, however; that (i) the foregoing shall not prohibit any
Transfer 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, the foregoing shall not prohibit any Transfer of
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 receding sentence, the ownership of 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 shall be 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. As used herein,
a "Two-Percent Holder" means any person or entity that immediately prior to the
Effective Date 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 the 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 Effective Date (calculated on a pro forma basis as
aforesaid). Except as disclosed in the Prospectus or in a Schedule thereto, the
Company has caused to be duly executed legally binding and enforceable
agreements pursuant to which each holder of Common Stock and/or options that is
not a Two-Percent Holder has agreed that, until the 270th day following the
Effective Date, such Holder will not, without the prior written consent of the
Representative, directly or indirectly Transfer any Covered Securities, whether
or not beneficially owned by the undersigned, or dispose of any beneficial
interest therein; provided, however, that the foregoing shall not include any
Transfer in a private placement provided that the transferee agrees to be bound
by the terms of the foregoing agreement. The agreements described in this
paragraph are referred to as the "Lock-up Agreements." The Company will cause
the Transfer Agent (as defined herein) to place "stop transfer" orders on the
Company's stock ledgers in order to effect the Lock-up Agreements.
(w) To the best knowledge of the Company, there are no
claims, payments, arrangements or understandings, whether oral or written, for
services in the nature of a finder's or origination fee with respect to the sale
of the Securities hereunder or any other arrangements, agreements,
understandings, payments or issuance with respect to the Company or any of its
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officers, directors, stockholders, employees or affiliates (excluding any of the
foregoing to which the Representative or any Underwriter is a party of which is
disclosed in the Registration Statement) that may affect the Underwriters'
compensation as determined by the Commission and the National Association of
Securities Dealers, Inc. (the "NASD").
(x) The Securities have been approved for listing on
the American Stock Exchange.
(y) Neither the Company nor any of its officers,
employees, agents or any other person acting on behalf of the Company has,
directly or indirectly, given or agreed to give any money, gift or similar
benefit (other than legal price concessions to customers in the ordinary course
of business or as disclosed in the Prospectus) to any customer, supplier,
employee or agent of a customer or supplier, or official or employee of any
governmental agency (domestic or foreign) or instrumentality of any government
(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who was, is, or may be in a position to help or
hinder the business of the Company (or assist the Company in connection with any
actual or proposed transaction) which might subject the Company or any other
such person to any damage or penalty in any civil, criminal or governmental
litigation or proceeding (domestic or foreign). The Company's internal
accounting controls are sufficient to cause the Company to comply with the
Foreign Corrupt Practices Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Regulations) of any of
the foregoing persons or entities has or has had, either directly or indirectly,
(i) an interest in any person or entity which (A) furnishes or sells services or
products which are furnished or sold or are proposed to be furnished or sold by
the Company, or (B) purchases from or sells or furnishes to the Company any
goods or services, or (ii) a beneficiary interest in any contract or agreement
to which the Company is a party or by which it may be bound or affected. Except
as set forth in the Prospectus, there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, and any officer,
director, stockholders identified in the Prospectus under the caption "Principal
Stockholders," or any affiliate or associate of any of the foregoing persons or
entities which are required to be disclosed in the Prospectus.
(aa) The Company is not, and does not intend to conduct
its business in a manner in which it would become an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(ab) Any certificate signed by any officer of the
Company and delivered to the Underwriters or to the Underwriters' Counsel (as
defined in Section 4(d) herein) shall be deemed a representation and warranty by
the Company to the Underwriters as to the matters covered thereby.
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(ac) The minute books of the Company have been made
available to the Underwriters and contain a complete summary of all meetings and
actions of the directors and stockholders of the Company, since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
(ad) The Company has not distributed and will not
distribute prior to the Closing Date any offering material in connection with
the offering and sale of the Shares in this offering other than the Prospectus,
the Registration Statement and the other materials permitted by the Act. No
holders of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right (i) to
include any securities issued by the Company as part of the Registration
Statement or (ii) except as described in the Prospectus or contemplated by the
Representative's Warrant Agreement or the Bridge Warrants (as defined in the
Prospectus), to require the Company to file a registration statement under the
Act. No person or entity holds any anti-dilution rights with respect to any
securities of the Company.
(ae) Each of the Company and its subsidiaries maintains
insurance by insurers of recognized financial responsibility of the types and in
the amounts as the Company believes are prudent and adequate for the business in
which it is engaged, including, but not limited to, insurance covering real and
personal property owned or leased by the Company and its subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect. The Company
has delivered to the Underwriter's Counsel satisfactory summaries of these
insurance policies. The Company has no reason to believe that it will not be
able to renew existing insurance coverage with respect to the Company as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business, in either case, at a cost that
would not have a material adverse effect on the financial condition, operations,
business, assets or properties of the Company. The Company has not failed to
file any material claims, has no material disputes with its insurance company
regarding any claims submitted under its insurance policies, and has complied in
material respects with all material provisions contained in its insurance
policies.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to each Underwriter, and
each Underwriter, severally and not jointly agrees to purchase from the Company,
at a price equal to $ per Share and $ per Redeemable Warrant, that number of
Firm Securities set forth in Schedule A opposite the name of such Underwriter,
subject to such adjustment as the Representative in its discretion shall make to
eliminate any sales or purchases of fractional shares, plus any additional
numbers of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 11 hereof.
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(b) In addition, on the basis of the representations,
warranties, covenants and agreements, herein contained, but subject to the terms
and conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 450,000 shares of Common Stock at a price of $ per share of Common
Stock and/or an additional 450,000 Redeemable Warrants at a price of $ per
Redeemable Warrant. The option granted hereby will expire 45 days after (i) the
date the Registration Statement becomes effective, if the Company has elected
not to rely on Rule 430A under the Regulations, or (ii) the date of this
Agreement if the Company has elected to rely upon Rule 430A under the
Regulations, and may be exercised in whole or in part from time to time (but not
on more than two (2) occasions) only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the Firm
Securities upon notice by the Representative to the Company setting forth the
number of Option Securities as to which the several Underwriters are then
exercising the option and the time and date of payment and delivery for any such
Option Securities. Any such time and date of delivery (an "Option Closing Date")
shall be determined by the Representative, but shall not be earlier then two
business days or later than three full business days after the exercise of said
option, nor in any event prior to the Closing Date, as hereinafter defined,
unless otherwise agreed upon by the Representative and the Company. Nothing
herein contained shall obligate the Underwriters to exercise the over-allotment
option described above. No Option Securities shall be delivered unless the Firm
Securities shall be simultaneously delivered or shall theretofore have been
delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Securities shall be made at the offices of National,
at 1001 Fourth Avenue, Suite 2200, Seattle, Washington, or at such other place
as shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 9:00 a.m. (New York time) on ______________, 1996, or
at such other time and date as shall be agreed upon by the Representative and
the Company, but no more than four (4) business days after the date hereof (such
time and date of payment and delivery being herein called the "Closing Date").
In addition, in the event that any or all of the Option Securities are purchased
by the Underwriters, payment of the purchase price for, and delivery of
certificates for, such Option Securities shall be made at the above mentioned
office of National or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Firm Securities and the Option Securities, if any, shall be made to the
Underwriters against payment by the Underwriters, of the purchase price for the
Firm Securities and the Option Securities, if any, to the order of the Company
by New York Clearing House Funds. In the event such option is exercised, each of
the Underwriters, acting severally and not jointly, shall purchase that
proportion of the total number of Option Securities then being purchased which
the number of Firm Securities set forth in Schedule A hereto opposite the name
of such Underwriter bears to the total number of Firm Securities, subject in
each case to such adjustments as the Representative in its discretion shall make
to eliminate any sales or purchases of fractional shares. Certificates for the
Firm Securities and the Option Securities, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as
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the Underwriters may request in writing at least three (3) business days prior
to Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Firm Securities and the Option Securities, if any, shall be
made available to the Representative at such office or such other place as the
Representative may designate for inspection, checking and packaging no later
than 9:30 a.m. on the last business day prior to Closing Date or the relevant
Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and
sell to the Representative Representative's Warrants at a purchase price of
$.001 per warrant, which warrants shall entitle the holders thereof to purchase
an aggregate of 300,000 shares of Common Stock and/or 300,000 Redeemable
Warrants. The Representative's Warrants shall expire five (5) years after the
effective date of the Registration Statement and shall be exercisable for a
period of four (4) years commencing one (1) year from the effective date of the
Registration Statement at a price equaling one hundred twenty percent (120%) of
the initial public offering price of the Shares. The Representative's Warrant
Agreement and form of Warrant Certificate shall be substantially in the form
filed as Exhibit 4.2 to the Registration Statement. Payment for the
Representative's Warrants shall be made on the Closing Date.
3. Public Offering of the Shares and the Redeemable Warrants.
As soon after the Registration Statement becomes effective as the Representative
deems advisable, the Underwriters shall make a public offering of the Shares and
the Redeemable Warrants (other than to residents of or in any jurisdiction in
which qualification of the Shares and the Redeemable Warrants is required and
has not become effective) at the price and upon the other terms set forth in the
Prospectus. The Representative may from time to time increase or decrease the
public offering price after distribution of the Shares and the Redeemable
Warrants has been completed to such extent as the Representative, in its sole
discretion, deems advisable. The Underwriters may enter into one or more
agreements as the Underwriters, in each of their sole discretion, deem advisable
with one or more broker-dealers who shall act as dealers in connection with such
public offering. The Shares and Redeemable Warrants that this Agreement
contemplates will be publicly offered as set forth above are referred to
collectively as the "Offered Securities."
4. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the Shares
by the Underwriters of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Regulations.
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(b) As soon as the Company is advised or obtains
knowledge thereof, the Company will advise the Representative and confirm the
notice in writing, (i) when the Registration Statement, as amended, becomes
effective, if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said Rule
430A and when any post-effective amendment to the Registration Statement becomes
effective, (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding, suspending the effectiveness
of the Registration Statement or any order preventing or suspending the use of
the Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose, (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the threatening,
of any proceeding for that purpose, (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
authority shall enter a stop order or suspend such qualification at any time,
the Company will use its best efforts to obtain promptly the lifting of such
order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Representative) in accordance with the
requirements of the Act.
(d) The Company will give the Representative notice of
its intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Underwriters in connection with the offering of the offered Securities
which differs from the corresponding prospectus on file at the Commission at the
time the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Regulations),
and will furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such amendment or supplement to which the
Representative or Camhy Karlinsky & Stein LLP ("Underwriters' Counsel") shall
reasonably object.
(e) The Company shall endeavor in good faith, in
cooperation with the Representative, at or prior to the time the Registration
Statement becomes effective, to qualify the offered Securities for offering and
sale under the securities laws of such jurisdictions as the Representative may
reasonably designate to permit the continuance of sales and dealings therein for
as long as may be necessary to complete the distribution, and shall make such
applications, file such documents and furnish such information as may be
required for such purpose; provided, however, the Company shall not be required
to qualify as a foreign corporation or become subject to service of process in
any such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Representative agree that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such
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statements or reports at such times as are or may reasonably be required by the
laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon it by the Act, as now and hereafter amended,
and by the Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the offered Securities in
accordance with the provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating to the offered
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend or supplement the Prospectus to comply with
the Act, the Company will notify the Representative promptly and prepare and
file with the Commission an appropriate amendment or supplement in accordance
with Section 10 of the Act, each such amendment or supplement to be satisfactory
to Underwriters' Counsel, and the Company will furnish to the Underwriters
copies of such amendment or supplement as soon as available and in such
quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later
than 45 days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Regulations, and to the Representative, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which
statement need not be audited unless required by the Act, covering a period of
at least 12 consecutive months after the effective date of the Registration
Statement.
(h) During a period of five (5) years after the date
hereof, the Company will furnish to its stockholders, as soon as practicable,
annual reports (including financial statements audited by independent public
accountants) and will make available to its stockholders unaudited quarterly
reports of earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly
reports to its stockholders, statements of income of the
Company for each quarter in the form furnished to the
Company's stockholders;
(ii) concurrently with furnishing such annual
reports to its stockholders, a balance sheet of the Company
as at the end of the preceding fiscal year, together with
statements of operations, stockholders' equity, and cash
flows
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of the Company for such fiscal year, accompanied by a copy of
the report thereon of independent certified public
accountants;
(iii) as soon as they are available, copies of
all reports (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of
all reports and financial statements furnished to or filed
with the Commission, the American Stock Exchange or any
securities exchange;
(v) every press release and every material news
item or article of interest to the financial community in
respect of the Company or its affairs which was released or
prepared by or on behalf of the Company; and
(vi) any additional information of a public
nature concerning the Company (and any future subsidiaries)
or its businesses which the Representative may reasonably
request.
During such five-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated basis
to the extent that the accounts of the Company and its subsidiaries are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(i) The Company will maintain a transfer agent (the
"Transfer Agent") and, if necessary under the jurisdiction of incorporation of
the Company, a registrar (which may be the same entity as the transfer agent)
for the Common Stock and the Redeemable Warrants.
(j) The Company will furnish to the Representative or
on the Represen- tative's order, without charge, at such place as the
Representative may designate, copies of each Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto (two of which copies will be signed and will include all financial
statements and exhibits), each Preliminary Prospectus, the Prospectus, and all
amendments and supplements thereto, including any prospectus prepared after the
effective date of the Registration Statement, in each case as soon as available
and in such quantities as the Representative may reasonably request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Representative with true copies of duly
executed Lock-up Agreements. On or before the Closing Date, the Company shall
deliver instructions to the Transfer Agent authorizing it to place appropriate
stop transfer orders on the Company's ledgers.
(l) The Company shall use its best efforts to cause its
officers, directors, stockholders or affiliates (within the meaning of the
Regulations) not to take, directly or
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indirectly, any action designed to, or which might in the future reasonably be
expected to cause or result in, unlawful stabilization or manipulation of the
price of any securities of the Company.
(m) The Company shall apply the net proceeds from the
sale of the Securities substantially in the manner, and subject to the
conditions, set forth under "Use of Proceeds" in the Prospectus.
(n) The Company shall timely file all such reports,
forms or other documents as may be required (including, but not limited to, a
Form SR as may be required pursuant to Rule 463 under the Act) from time to
time, under the Act, the Exchange Act, and the Regulations, and all such
reports, forms and documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the Regulations.
(o) The Company shall cause the Common Stock and
Redeemable Warrants to be listed on the American Stock Exchange, and for a
period of two (2) years from the date hereof shall use its best efforts to
maintain the listing of the Common Stock and Redeemable Warrants to the extent
outstanding.
(p) For a period of two (2) years from the Closing
Date, the Company shall furnish to the Representative, at the Company's sole
expense, monthly consolidated transfer sheets relating to the, Common Stock and
Redeemable Warrants.
(q) For a period of five (5) years after the effective
date of the Registration Statement the Company shall, at the Company's sole
expense, use reasonable efforts to further qualify the Common Stock and
Redeemable Warrants in all jurisdictions of the United States in order to permit
secondary sales of such securities pursuant to the Blue Sky laws of those
jurisdictions which do not require the Company to qualify as a foreign
corporation or to file a general consent to service of process.
(r) The Company (i) prior to the effective date of the
Registration Statement, has filed a Form 8-A with the Commission providing for
the registration of the Common Stock and Redeemable Warrants under the Exchange
Act and (ii) as soon as practicable, will use its reasonable best efforts to
take all necessary and appropriate actions to be included in Standard and Poor's
Corporation Descriptions and to continue such inclusion for a period of not less
than five (5) years.
(s) The Company agrees that for a period of twelve (12)
months following the effective date of the Registration Statement it will not,
without the prior written consent of National, directly or indirectly, issue,
offer, sell, sell, grant an option for the sale of, assign, transfer, pledge,
hypothecate or otherwise encumber or dispose of any Covered Securities, except
that the Company may (i) issue shares upon exercise of the Bridge Warrants (as
defined in the Prospectus), (ii) grant options pursuant to its 1996 Stock Option
plan (described in the Prospectus under "Management -- Stock Option Plan"),,
provided that the optionee is subject
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to (or upon receipt of the option agrees to be subject to) a Lock-up Agreement,
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 or otherwise dispose of any Common Stock, or securities
convertible into Common Stock, except for the issuance of the Option Securities,
the Representative's Warrants, and shares of Common Stock issued upon the
exercise of currently outstanding warrants or options, or options and warrants
granted in the ordinary course of business consistent with prior practice.
(t) Until the completion of the distribution of the
offered Securities, the Company shall not without the prior written consent of
National or Underwriters' Counsel, issue, directly or indirectly any press
release or other communication or hold any press conference with respect to the
Company or its activities or the offering contemplated hereby, other than trade
releases issued in the ordinary course of the Company's business consistent with
past practices with respect to the Company's operations.
(u) For a period equal to the lesser of (i) five (5)
years from the date hereof, and (ii) the sale to the public of the
Representative's Securities, the Company will not take any action or actions
which may prevent or disqualify the Company's use of an appropriate form for the
registration under the Act of the Representative's Securities.
(v) The Company agrees that it shall use its best
efforts, which shall include, but shall not be limited to, the solicitation of
proxies, to cause one (1) designee of National to be elected to the Company's
Board of Directors for a period of three (3) years following the Closing,
provided that such designee is reasonably acceptable to the Company and that
such director may be excluded from consideration of certain confidential matters
which, in the good faith judgment of a majority of the other directors, such
director's presence would not be appropriate.
(w) The Company agrees that within forty-five (45) days
after the Closing it shall retain a public relations firm which is reasonably
acceptable to National (it being agreed that the firm currently being used by
the Company is acceptable). The Company shall keep such public relations firm,
or any replacement, for a period of two (2) years from the Closing. Any
replacement public relations firm shall be retained only with the consent of
National, which shall not be unreasonably withheld.
(x) The Company agrees that any and all future
transactions between the Company and its officers, directors, principal
stockholders and the affiliates of the foregoing persons will be on terms no
less favorable to the Company than could reasonably be obtained in arm's length
transactions with independent third parties, and that any such transactions also
be approved by a majority of the Company's outside independent directors
disinterested in the transaction.
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<PAGE>
(y) The Company shall prepare and deliver, at the
Company's sole expense, to National within the one hundred and twenty (120) day
period after the later of the effective date of the Registration Statement or
the latest Option Closing Date, as the case may be, one bound volume containing
all correspondence with regulatory officials, agreements, documents and all
other materials in connection with the offering as requested by the
Underwriters' Counsel.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the
Closing Date and each Option Closing Date (to the extent not previously paid)
all expenses and fees (other than fees of Underwriters' Counsel, except as
provided in (iv) below) incident to the performance of the obligations of the
Company under this Agreement, the Warrant Agreement, and the Representative's
Warrant Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses incurred in
connection with the preparation, duplication, printing, filing, delivery and
mailing (including the payment of postage with respect thereto) of the
Registration Statement and the Prospectus and any amendments and supplements
thereto and the duplication, mailing (including the payment of postage with
respect thereto) and delivery of this Agreement, the Warrant Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreements, the Powers of
Attorney, and related documents, including the cost of all copies thereof and of
the Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriters and such dealers as the
Underwriters may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the certificates representing the
Securities, (iv) the qualification of the Securities under state or foreign
securities or "Blue Sky" laws, and determination of the status of such
securities under legal investment laws, of such
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<PAGE>
states or jurisdictions as the Underwriters may reasonably designate, including
the costs of printing and mailing the "Preliminary Blue Sky Memorandum," the
"Supplemental Blue Sky Memorandum" and "Legal Investments Survey," if any, and
reasonable disbursements and fees of counsel in connection therewith, (v)
advertising costs and expenses, including but not limited to reasonable expenses
for travel and lodging incurred by the Representative and any such expenses
incurred by the Company in connection with the "road show," information meetings
and presentations, bound volumes and prospectus memorabilia and reasonable
"tombstone" advertisement expenses, (vi) experts, (vii) fees and expenses of the
transfer agent and registrar, (viii) the fees payable to the Commission and the
NASD, (ix) issue and transfer taxes, if any and (x) the fees and expenses
incurred in connection with the listing of the Common Stock on the Nasdaq
National Market and any other market or exchange.
(b) If this Agreement is terminated by the Underwriters
in accordance with the provisions of Section 6, Section 10(a) or Section 12, the
Company shall reimburse and indemnify the Representative for all of its actual
out-of-pocket expenses on an accountable basis, including the fees and
disbursements of Underwriters' Counsel, less any amounts already paid pursuant
to Section 5(c) hereof up to $100,000.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to subsection (a) of this Section 5, it will pay to
the Representative on the Closing Date by certified or bank cashier's check or,
at the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Firm Securities, $25,000 of which has been paid to date. In the event the
Representative elects to exercise the over-allotment option described in Section
2(b) hereof, the Company further agrees to pay to the Representative on the
Option Closing Date (by certified or bank cashier's check or, at the
Representative's election, by deduction from the proceeds of the offering) a
non-accountable expense allowance equal to three percent (3%) of the gross
proceeds received by the Company from the sale of the Option Securities.
6. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company herein as of the
date hereof and as of the Closing Date and each Option Closing Date, if any, as
if they had been made on and as of the Closing Date or each Option Closing Date,
as the case may be; the accuracy on and as of the Closing Date or Option Closing
Date, if any, of the statements of officers of the Company made pursuant to the
provisions hereof; and the performance by the Company on and as of the Closing
Date and each Option Closing Date, if any, of its covenants and obligations
hereunder and to the following further conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 p.m., New York City time, on the date prior to the
date of this Agreement or such later date and time as shall be consented to in
writing by the Representative, and, at Closing Date and each Option Closing
Date, if any, no stop order suspending the effectiveness of the Registration
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<PAGE>
Statement shall have been issued and no proceedings for that purpose shall have
been instituted or shall be pending or contemplated by the Commission and any
request on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of Underwriters' Counsel. If the
Company has elected to rely upon Rule 430A of the Regulations, the price of the
Shares and any price-related information previously omitted from the effective
Registration Statement pursuant to such Rule 430A shall have been transmitted to
the Commission for filing pursuant to Rule 424(b) of the Regulations within the
prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory to the Representative of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Regulations.
(b) The Representative shall not have advised the
Company that the Registration Statement, or any amendment thereto, contains an
untrue statement of fact which, in the Representative's opinion, is material, or
omits to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representative's reasonable opinion, is
material, or omits to state a fact which, in the Representative's reasonable
opinion, is material and is required to be stated therein or is necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(c) On or prior to the Closing Date, the Underwriters
shall have received from Underwriters' Counsel such opinion or opinions with
respect to the organization of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and other related matters as the
Representative may request and Underwriters' Counsel shall have received from
the Company such papers and information as they request to enable them to pass
upon such matters.
(d) At Closing Date, the Underwriters shall have
received the favorable opinion of Ehrenreich & Krause ("Ehrenreich & Krause"),
counsel to the Company, dated the Closing Date, addressed to the Underwriters
and in form and substance satisfactory to Underwriters' Counsel, to the effect
that:
(i) the Company (A) has been duly organized and
is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation,
(B) is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which
its ownership or leasing of any properties or the
character of its operations requires such qualification
or licensing, and (C) to the best of such counsel's
knowledge, has all requisite corporate power and
authority and has obtained any and all necessary
authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all
governmental or regulatory officials and bodies
(including, without limitation, those having
jurisdiction over environmental
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<PAGE>
or similar matters), to own or lease its properties
and conduct its business as described in the
Prospectus.
(ii) except as described in the Prospectus, and
to the best of such counsel's knowledge after
reasonable investigation, the Company does not own an
interest in any corporation, limited liability company,
partnership, joint venture, trust or other business
entity;
(iii) the Company has a duly authorized, issued
and outstanding capitalization as set forth in the
Prospectus, and any amendment or supplement thereto,
under "Capitalization" and "Description of Securities,"
and to the knowledge of such counsel, the Company is
not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities,
except for this Agreement, the Warrant Agreement, the
Representative's Warrant Agreement, and as described in
the Prospectus. The Securities and all other securities
issued or issuable by the Company conform in all
material respects to the statements with respect
thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of
the Company have been duly authorized and validly
issued and are fully paid and nonassessable; the
holders thereof are not subject to personal liability
by reason of being such holders; and none of such
securities were issued in violation of the preemptive
rights of any holders of any security of the Company.
The Securities to be sold by the Company hereunder,
under the Warrant Agreement, and under the
Representative's Warrant Agreement are not and will not
be subject to any preemptive or other similar rights of
any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with their
terms, will be validly issued, fully paid and
nonassessable and will conform in all material respects
to the description thereof contained in the Prospectus;
the holders thereof will not be subject to any
liability solely as such holders; all corporate action
required to be taken for the authorization, issue and
sale of the Securities has been duly and validly taken;
and the certificates representing the Securities are in
due and proper form. The Representative's Warrants and
the Redeemable Warrants constitute valid and binding
obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number and
type of securities of the Company called for thereby
(except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application
relating to or affecting enforcement of creditors'
rights and the application of equitable principles in
any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable
law). Upon the issuance and delivery pursuant to this
Agreement of the Securities to be sold by the Company,
the Company will
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<PAGE>
convey, against payment therefor as provided herein, to
the Underwriters and the Representative, respectively,
good and marketable title to the Securities free and
clear of all liens and other encumbrances;
(iv) the Registration Statement is effective
under the Act, and, if applicable, filing of all
pricing information has been timely made in the
appropriate form under Rule 430A, and no stop order
suspending the use of the Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any
thereof or suspending the effectiveness of the
Registration Statement has been issued and no
proceedings for that purpose have been instituted or
are pending or, to the best of such counsel's
knowledge, threatened or contemplated under the Act;
(v) each of the Preliminary Prospectus, the
Registration Statement, and the Prospectus and any
amendments or supplements thereto (other than the
financial statements and other financial and
statistical data included therein as to which no
opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and
the Regulations. Such counsel shall state that such
counsel has participated in conferences with officers
and other representatives of the Company and the
Representative and representatives of the independent
public accountants for the Company, at which
conferences the contents of the Preliminary Prospectus,
the Registration Statement, the Prospectus, and any
amendments or supplements thereto were discussed, and,
although such counsel is not passing upon and does not
assume any responsibility for the accuracy,
completeness or fairness of the statements contained in
the Preliminary Prospectus, the Registration Statement
and Prospectus, and any amendments or supplements
thereto, on the basis of the foregoing, no facts have
come to the attention of such counsel which lead them
to believe that either the Registration Statement or
any amendment thereto, at the time such Registration
Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or
supplement thereto as of the date of such opinion
contained any untrue statement of a material fact or
omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading (it being understood that such counsel need
express no opinion with respect to the financial
statements and schedules and other financial and
statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus,
and any amendments or supplements thereto);
(vi) to the best of such counsel's knowledge
after reasonable investigation, (A) there are no
agreements, contracts or other documents required by
the Act to be described in the Registration Statement
and the Prospectus and filed as exhibits to the
Registration Statement other than
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those described in the Registration Statement and the
Prospectus and filed as exhibits thereto; (B) the
descriptions in the Registration Statement and the
Prospectus and any supplement or amendment thereto of
contracts and other documents to which the Company is a
party or by which it is bound are accurate in all
material respects and fairly represent the information
required to be shown by Form SB-2; (C) there is not
pending or threatened against the Company any action,
arbitration, suit, proceeding, litigation, governmental
or other proceeding (including, without limitation,
those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened
against the Company which (x) is required to be
disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in
the Registration Statement are accurately summarized in
all material respects), (y) questions the validity of
the capital stock of the Company or this Agreement, the
Warrant Agreement, or the Representative's Warrant
Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with any of the
foregoing; and (D) there is no action, suit or
proceeding pending or threatened against the Company
before any court or arbitrator or governmental body,
agency or official in which there is a reasonable
possibility of an adverse decision which may result in
a material adverse change in the financial condition,
business, affairs, stockholders' equity, operations,
properties, business or results of operations of the
Company, which could adversely affect the present or
prospective ability of the Company to perform its
obligations under this Agreement, the Warrant
Agreement, or the Representative's Warrant Agreement,
or which in any manner draws into question the validity
or enforceability of this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement;
(vii) the Company has the corporate power and
authority to enter into each of this Agreement, the
Warrant Agreement, and the Representative's Warrant
Agreement and to consummate the transactions provided
for therein; and each of this Agreement, the Warrant
Agreement, and the Representative's Warrant Agreement
has been duly authorized, executed and delivered by the
Company. Each of this Agreement, the Warrant Agreement,
and the Representative's Warrant Agreement, assuming
due authorization, execution and delivery by each other
party thereto, constitutes a legal, valid and binding
obligation of the Company enforceable against the
Company in accordance with its terms (except as the
enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or
affecting enforcement of creditors' rights and the
application of equitable principles in any action,
legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law), and
none of the Company's execution, delivery or
performance of this Agreement, the Warrant
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Agreement, and the Representative's Warrant Agreement,
the consummation by the Company of the transactions
contemplated herein or therein, or the conduct of the
Company's business as described in the Registration
Statement, the Prospectus, and any amendments or
supplements thereto conflicts with or results in any
breach or violation of any of the terms or provisions
of, or constitutes a default under, or result in the
creation or imposition of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any
property or assets (tangible or intangible) of the
Company pursuant to the terms of (A) the articles of
incorporation or by-laws of the Company, as amended,
(B) any license, contract, indenture, mortgage, deed of
trust, voting trust agreement, stockholders' agreement,
note, loan or credit agreement or any other agreement
or instrument known to such counsel to which the
Company is a party or by which it is bound, or (C) any
federal, state or local statute, rule or regulation
applicable to the Company or any judgment, decree or
order known to such counsel of any arbitrator, court,
regulatory body or administrative agency or other
governmental agency or body (including, without
limitation, those having jurisdiction over
environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or any of
its activities or properties;
(viii) no consent, approval, authorization or
order, and no filing with, any court, regulatory body,
government agency or other body (other than such as may
be required under Blue Sky laws, as to which no opinion
need be rendered or under federal securities laws, as
to which no opinion need be rendered pursuant to this
subsection (viii) is required in connection with the
issuance of the Securities pursuant to the Prospectus,
and the Registration Statement, the performance of this
Agreement, the Warrant Agreement, and the
Representative's Warrant Agreement, and the
transactions contemplated hereby and thereby;
(ix) to the best of such counsel's knowledge
after reasonable investigation, the properties and
business of the Company conform in all material
respects to the description thereof contained in the
Registration Statement and the Prospectus;
(x) to the best knowledge of such counsel, and
except as disclosed in Registration Statement and the
Prospectus, the Company is not in breach of, or in
default under, any term or provision of any license,
contract, indenture, mortgage, installment sale
agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, note, loan or
credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any
other agreement or instrument to which the Company is a
party or by which the Company is bound or to which the
property or assets
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<PAGE>
(tangible or intangible) of the Company is subject; and
the Company is not in violation of any term or
provision of its articles of incorporation or by-laws,
as amended, and to the best of such counsel's knowledge
after reasonable investigation, not in violation of any
franchise, license, permit, judgment, decree, order,
statute, rule or regulation;
(xi) the statements in the Prospectus under
"Dividend Policy," "Description of Securities," and
"Shares Eligible for Future Sale" have been reviewed by
such counsel, and insofar as they refer to statements
of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions, are correct in all
material respects;
(xii) the Common Stock has been accepted for
listing on the American Stock Exchange;
(xiii) to the best of such counsel's knowledge
and based upon a review of the outstanding securities
and the contracts furnished to such counsel by the
Company, no person, corporation, trust, partnership,
association or other entity has the right to include
and/or register any securities of the Company in the
Registration Statement, require the Company to file any
registration statement or, if filed, to include any
security in such registration statement;
(xiv) assuming due execution by the parties
thereto other than the Company, each Lock-up Agreement
is a legal, valid and binding obligation of the party
thereto, enforceable against the party and any
subsequent holder of the securities subject thereto in
accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of
general application relating to or affecting
enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable,
and except as rights to indemnity or contribution may
be limited by applicable law);
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws, rules and
regulations of the United States and the laws, rules and regulations of the
State of New Jersey, to the extent such counsel deems proper and to the extent
specified in such opinion, if at all, upon an opinion or opinions (in form and
substance satisfactory to Underwriters' Counsel) of other counsel acceptable to
Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of
fact, to the extent they deem proper, on certificates and written statements of
responsible officers of the Company and certificates or other written statements
of officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company, provided
that copies of any such statements or certificates shall be delivered to
Underwriters' Counsel if requested. The opinion of such counsel shall state that
knowledge shall not include
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the knowledge of a director or officer of the Company who is affiliated with
such firm in his or her capacity as an officer or director of the Company. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel.
At each Option Closing Date, if any, the Underwriters shall
have received the favorable opinion of Ehrenreich & Krause, counsel to the
Company, dated the Option Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel confirming as of such
Option Closing Date the statements made by Ehrenreich & Krause in its opinion
delivered on the Closing Date.
(e) On or prior to each of the Closing Date and the
Option Closing Date, if any, Underwriters' Counsel shall have been furnished
such documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsection (c) of this Section 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company or herein contained.
(f) Prior to each of the Closing Date and each Option
Closing Date, if any, (i) there shall have been no material adverse change nor
development involving a prospective change in the condition, financial or
otherwise, prospects, stockholders' equity or the business activities of the
Company, whether or not in the ordinary course of business, from the latest
dates as of which such condition is set forth in the Registration Statement and
Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the Registration
Statement and Prospectus which is adverse to the Company; (iii) the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness which default has not been waived; (iv) the Company
shall not have issued any securities (other than the Securities) or declared or
paid any dividend or made any distribution in respect of its capital stock of
any class and there has not been any change in the capital stock, or any
material increase in the debt (long or short term) or liabilities or obligations
of the Company (contingent or otherwise) except for the issuance of the Option
Securities, the Representative's Warrants, and shares of Common Stock issued
upon the exercise of currently outstanding warrants or options, or options and
warrants granted in the ordinary course of business consistent with prior
practice; (v) no material amount of the assets of the Company shall have been
pledged or mortgaged, except as set forth in the Registration Statement and
Prospectus; (vi) no action, suit or proceeding, at law or in equity, shall have
been pending or threatened (or circumstances giving rise to same) against the
Company, or affecting any of its respective properties or businesses before or
by any court or federal, state or foreign commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus; and (vii) no stop order shall have been issued under
the Act and no proceedings therefor shall have been initiated, threatened or
contemplated by the Commission.
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(g) At each of the Closing Date and each Option Closing
Date, if any, the Underwriters shall have received a certificate of the Company
signed on behalf of the Company by the principal executive officer of the
Company, dated the Closing Date or Option Closing Date, as the case may be, to
the effect that such executive has carefully examined the Registration
Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties of the
Company in this Agreement are true and correct, as if
made on and as of the Closing Date or the Option
Closing Date, as the case may be, and the Company has
complied with all agreements and covenants and
satisfied all conditions contained in this Agreement on
its part to be performed or satisfied at or prior to
such Closing Date or Option Closing Date, as the case
may be;
(ii) No stop order suspending the effectiveness
of the Registration Statement or any part thereof has
been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best of each
of such person's knowledge after due inquiry, are
contemplated or threatened under the Act;
(iii) The Registration Statement and the
Prospectus and, if any, each amendment and each
supplement thereto, contain all statements and
information required by the Act to be included therein,
and none of the Registration Statement, the Prospectus
nor any amendment or supplement thereto includes any
untrue statement of a material fact or omits to state
any material fact required to be stated therein or
necessary to make the statements therein not misleading
and neither the Preliminary Prospectus or any
supplement, as of their respective dates, thereto
included any untrue statement of a material fact or
omitted to state any material fact required to be
stated therein or necessary to make the statements
therein, in light of the circumstances under which they
were made, not misleading; and
(iv) Subsequent to the respective dates as of
which information is given in the Registration
Statement and the Prospectus, (a) the Company has not
incurred up to and including the Closing Date or the
Option Closing Date, as the case may be, other than in
the ordinary course of its business, any material
liabilities or obligations, direct or contingent; (b)
the Company has not paid or declared any dividends or
other distributions on its capital stock; (c) the
Company has not entered into any transactions not in
the ordinary course of business; (d) there has not been
any change in the capital stock as described in the
Registration Statement and Prospectus or material
increase in long-term debt or any increase in the
short-term borrowings (other than any increase in the
short-term borrowings in the ordinary course of
business) of the Company, (e) the Company has not
sustained any loss or damage to its property or assets,
whether or not insured, (f) there is no
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litigation which is pending or threatened (or
circumstances giving rise to same) against the Company
or any affiliated party of any of the foregoing which
is required to be set forth in an amended or
supplemented Prospectus which has not been set forth,
and (g) there has occurred no event required to be set
forth in an amended or supplemented Prospectus which
has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriters will have
received clearance from the NASD as to the amount of compensation allowable or
payable to the Underwriters.
(i) At the time this Agreement is executed, the
Underwriters shall have received a letter, dated such date, addressed to the
Underwriters in form and substance satisfactory in all respects to the
Underwriters and Underwriters' Counsel from Price Waterhouse:
(i) confirming that they are independent
accountants with respect to the Company within the
meaning of the Act and the applicable published Rules
and Regulations (the "Regulations") thereunder;
(ii) stating that the consolidated financial
statements of the Company included in the Registration
Statement comply as to form in all material respects
with the applicable accounting requirements of the Act
and the Regulations thereunder;
(iii) stating that, on the basis of procedures
(but not an audit in accordance with generally
accepted auditing standards) which included a: (1)
reading of the latest available unaudited interim
financial data of the Company (with an indication of
the date of the latest available unaudited interim
financial data), (2) a reading of the latest available
minutes of the stockholders and board of directors and
the various committees of the board of directors of
the Company, (3) performing the procedures specified
by the American Institute of Certified Public
Accountants for a review of interim financial
information as described in SAS 71, Interim Financial
Information, on the unaudited interim consolidated
financial statements of the Company included in the
Registration Statement, (4) inquiries of certain
officers and other employees of the Company
responsible for financial and accounting matters
regarding the specific items for which representations
are requested below, nothing has come to their
attention which would lead them to believe that (A)
the unaudited interim consolidated financial
statements of the Company included in the Registration
Statement, if any, do not comply as to form in all
material respects with the applicable accounting
requirements
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of the Act and the Regulations and any material
modifications should be made to the unaudited condensed
interim financial statements, included in the
Registration Statement, for them to be in conformity
with generally accepted accounting principles applied
on a basis substantially consistent with that of the
audited financial statements of the Company included in
the Registration Statement, or (B) at a specified date
not more than five (5) days prior to the effective date
of the Registration Statement, there has been any
change in the capital stock or material increase in
long-term debt of the Company, or any material decrease
in the stockholders' equity or net current assets or
net assets of the Company as compared with amounts
shown in the June 30, 1996 balance sheet included in
the Registration Statement, other than as set forth in
or contemplated by the Registration Statement, or, if
there was any change or decrease, setting forth the
amount of such change or decrease.
(iv) stating that they have compared specific
dollar amounts, numbers of shares, percentages of
revenues and earnings, statements and other financial
information pertaining to the Company set forth in the
Prospectus in each case to the extent that such
amounts, numbers, percentages, statements and
information may be derived from the Company's general
accounting records subject to its system of internal
accounting controls and to schedules prepared by the
Company therefrom, and excluding any questions
requiring an interpretation by legal counsel, with the
results obtained from the application of specified
readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in
accordance with generally accepted auditing standards)
set forth in the letter and found them to be in
agreement; and
(v) statements as to such other material
matters incident to the transaction contemplated
hereby as the Representative may reasonably request.
(j) At the Closing Date and each Option Closing Date,
if any, the Underwriters shall have received from Price Waterhouse a letter,
dated as of the Closing Date or the Option Closing Date, as the case may be, to
the effect that they reaffirm that statements made in the letter furnished
pursuant to Subsection (i) of this Section 6, except that the specified date
referred to shall be a date not more than five (5) days prior to Closing Date or
the Option Closing Date, as the case may be, and, if the Company has elected to
rely on Rule 430A of the Rules and Regulations, to the further effect that they
have carried out procedures as specified in clause (iv) of Subsection (i) of
this Section 6 with respect to certain amounts, percentages and financial
information as specified by the Representative and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) and have found such amounts,
percentages and financial information to be in agreement with the records
specified in such clause (iv).
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(k) On each of Closing Date and Option Closing Date,
if any, there shall have been duly tendered to the Representative for the
several Underwriters' accounts the appropriate number of Securities.
(l) No order suspending the sale of the Securities in
any jurisdiction designated by the Representative pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the Option
Closing Date, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(m) On or before the Closing Date, the Company shall
have executed and delivered to the Representative, (i) the Representative's
Warrant Agreement, substantially in the form filed as Exhibit 4(b), to the
Registration Statement, in final form and substance satisfactory to the
Representative, and (ii) the Representative's Warrants in such denominations and
to such designees as shall have been provided to the Company.
(n) On or before Closing Date, the Common Stock shall
have been duly approved for listing on American Stock Exchange.
(o) On or before Closing Date, there shall have been
delivered to the Representative all of the Lock-up Agreements in final form and
substance satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations
hereunder to be fulfilled prior to or at the Closing Date or the relevant Option
Closing Date, as the case may be, is not so fulfilled, the Representative may
terminate this Agreement or, if the Representative so elect, they may waive any
such conditions which have not been fulfilled or extend the time for their
fulfillment.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless
each of the Underwriters (for purposes of this Section 7 "Underwriters" shall
include the officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person, if any, who
controls the Underwriter ("controlling 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, claim, damage, and expense whatsoever (including, but not
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 provided that the
indemnified persons may not agree to any such settlement without the prior
written consent of the Company), 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 Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented); or
(B) in any
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application or other document or communication (in this Section 7 collectively
called "application") executed by or on behalf of the Company or based upon
written information furnished by or on behalf of the Company in any jurisdiction
in order to qualify the Securities under the securities laws thereof or filed
with the Commission, any state securities commission or agency, the American
Stock Exchange 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 (in the case of the Prospectus, in the light
of the circumstances under which they were made), unless such statement or
omission was made in reliance upon and in conformity with written information
furnished to the Company with respect to any Underwriter by or on behalf of such
Underwriter expressly for use in any Preliminary Prospectus, the Registration
Statement or Prospectus, or any amendment thereof or supplement thereto, or in
any application, as the case may be; or (ii) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Agreement. The
indemnity agreement in this subsection (a) shall be in addition to any liability
which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the Registration Statement, and each other
person, if any, who controls the Company, within the meaning of the Act, to the
same extent as the foregoing indemnity from the Company to the Underwriters but
only with respect to statements or omissions, if any, made in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any application made in reliance upon, and in strict
conformity with, written information furnished to the Company with respect to
any Underwriter by such Underwriter or the Representative expressly for use in
such Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Underwriters in connection with
this Offering. The Company acknowledges that the statements with respect to the
public offering of the Securities set forth under the heading "Underwriting" and
the stabilization legend in the Prospectus have been furnished by the
Underwriters expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriters or the Representative
for inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party
under this Section 7 of notice of the commencement of any action, suit or
proceeding, such indemnified party shall, if a claim in respect thereof is to be
made against one or more indemnifying parties under this Section 7, notify each
party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure to so notify an indemnifying party shall
not relieve it from any liability which it may have otherwise or which it may
have under this Section 7, except to the extent that it has been prejudiced in
any material respect by such failure). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party or parties
of the commencement thereof, the indemnifying party or parties will be entitled
to participate therein, and to the extent it may elect by written notice
delivered to the indemnified
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party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
the reasonable fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld.
(d) In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes claim for
indemnification pursuant to this Section 7, but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of this Section 7 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Securities or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where the Company is
a contributing party and the Underwriters are the indemnified party, the
relative benefits received by the Company on the one hand, and the Underwriters,
on the other, shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Securities (before deducting expenses other
than underwriting discounts and commissions) bear to the total underwriting
discounts received by the Underwriters hereunder, in each case as set forth in
the table on the Cover Page of the Prospectus. Relative
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fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subdivision (d) the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 12(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company within the meaning of the Act, each officer of the
Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution may
be made against another party or parties under this subparagraph (d), notify
such party or parties from whom contribution may be sought, but the omission so
to notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), or to the extent that such party or
parties were not adversely affected by such omission. The contribution agreement
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements of the Company
at the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the respective
indemnity and contribution agreements contained in Section 7 hereof shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter, the Company, any controlling person of either
the Underwriter or the Company, and shall survive termination of this Agreement
or the issuance and delivery of the Securities to the Underwriters and the
Representative, as the case may be.
9. Effective Date.
(a) This Agreement shall become effective at 5:00
p.m., New York City time, on the date hereof. For purposes of this Section 9,
the Securities to be purchased hereunder shall be deemed to have been so
released upon the earlier of dispatch by the Representative of telegrams to
securities dealers releasing such shares for offering or the release by the
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Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the
Representative shall have the right to terminate this Agreement, if between the
date of this Agreement and the Closing Date or the Option Closing Date, as the
case may be, (i) if any domestic or international event or act or occurrence has
materially disrupted, or in the Representative's reasonable opinion will in the
immediate future materially disrupt the financial markets; or (ii) any material
adverse change in the financial markets shall have occurred; or (iii) if trading
on the New York Stock Exchange, the American Stock Exchange, or in the
over-the-counter market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been required on the over-the-counter market by the NASD or by order
of the Commission or any other government authority having jurisdiction; or (iv)
if the United States shall have become involved in a war or major hostilities,
or if there shall have been an escalation in an existing war or major
hostilities or a national emergency shall have been declared in the United
States; or (v) if a banking moratorium has been declared by a state or federal
authority; or (vi) if the Company shall have sustained a loss material or
substantial to the Company by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not such
loss shall have been insured, will, in the Representative's opinion, make it
inadvisable to proceed with the delivery of the Securities; or (viii) if there
shall have been such a material adverse change in the prospects or conditions of
the Company, or such material adverse change in the general market, political or
economic conditions, in the United States or elsewhere as in the
Representative's judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities.
(b) If this Agreement is terminated by the
Representative in accordance with any of the provisions of Section 6, Section
10(a) or Section 11, the Company shall promptly reimburse and indemnify the
Underwriters pursuant to Section 5(b) hereof. Notwithstanding any contrary
provision contained in this Agreement, any election hereunder or any termination
of this Agreement (including, without limitation, pursuant to Sections 6, 10, 11
and 12 hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 and Section 7 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement or
any part hereof.
11. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 6, Section 10 or
Section 12 hereof) to purchase the Securities which it or they are obligated to
purchase on such date under this Agreement (the "Defaulted Securities"), the
Representative shall have the right, within 24 hours thereafter, to make
arrangement for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the
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terms herein set forth. If, however, the Representative shall not have completed
such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not
exceed 10% of the total number of Firm Securities to be purchased on such date,
the non-defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10%
of the total number of Firm Securities to be purchased on such date, this
Agreement shall terminate without liability on the part of any ondefaulting
Underwriters.
No action taken pursuant to this Section shall relieve
any defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result
in a termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the
Closing Date or any Option Closing Date, as applicable, to sell and deliver the
number of Securities which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect to
any Option Securities to be purchased on an Option Closing Date, the
Underwriters may at the Representative's option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date) without any liability
on the part of any non-defaulting party other than pursuant to Section 5,
Section 7 and Section 10 hereof. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except
as herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative, c/o National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle, Washington 98154, Attention: Steven A. Rothstein, with a copy,
which shall not constitute notice, to Camhy Karlinsky & Stein LLP, 1740
Broadway, 16th Floor, New York, New York 10019, Attention: Alan I. Annex, Esq.
Notices to the Company shall be directed to the Company at Integrated Technology
USA, Inc., 545 Cedar Lane, Teaneck, New Jersey 07666, with a copy, which shall
not constitute notice, to Ehrenreich & Krause, 1140 Avenue of the Americas, New
York, New York 10036, Attn: Joseph Ehrenreich.
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14. Parties. This Agreement shall inure solely to the benefit
of and shall be binding upon the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from any Underwriter shall be deemed to be
a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York
without giving effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement, the Warrant
Agreement, and the Representative's Warrant Agreement constitute the entire
agreement of the parties hereto and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in a writing, signed by the
Representative and the Company.
If the foregoing correctly sets forth the understanding
between the Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
INTEGRATED TECHNOLOGY USA, INC.
By:______________________________
Name:
Title:
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CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
NATIONAL SECURITIES CORPORATION
By: ___________________________________________
Name: Steven A. Rothstein
Title: Chairman
For itself and as Representative of the Underwriters named in Schedule A hereto.
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Shares of Common Number of Warrants
Name of Underwriters Stock to be Purchased to be Purchased
-------------------- -------------------------- ----------------------
<S> <C> <C>
National Securities Corporation
TOTAL............................. 3,000,000 3,000,000
</TABLE>
SCH. A-1
<PAGE>
DRAFT 09/26/96
-------------------------------
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
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<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
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<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
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<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 [165% of the initial public
offering price per share of Common Stock] and $.165 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
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<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
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<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
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<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.
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<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
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<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
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<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.
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<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.
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<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.
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<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,
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<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:
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<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
-20-
<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
-21-
<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
-22-
<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
-23-
<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.
-24-
<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
-25-
<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.
-26-
<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
-27-
<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 $____ [165%
of initial offering price per share] per share of Common Stock and $.165 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>
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 26, 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>
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<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 0 565
<PP&E> 0 142 127 0 103
<DEPRECIATION> 0 0 0 0 0
<TOTAL-ASSETS> 0 1,312 829 0 689
<CURRENT-LIABILITIES> 0 370 503 0 0
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<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
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<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)
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