<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997
REGISTRATION NO. 333-22811
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ON'VILLAGE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
CALIFORNIA 7375/7379 95-4556314
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
26135 MUREAU ROAD
SUITE 100
CALABASAS, CALIFORNIA 91302
TEL. (818) 871-2800
FAX (818) 871-2828
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JACK B. TRACHT
CHIEF EXECUTIVE OFFICER
ON'VILLAGE COMMUNICATIONS, INC.
26135 MUREAU ROAD
SUITE 100
CALABASAS, CALIFORNIA 91302
TEL. (818) 871-2800
FAX (818) 871-2828
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
SANFORD J. HILLSBERG, ESQ. SHELDON MISHER, ESQ.
LAWRENCE P. SCHNAPP, ESQ. ALISON S. NEWMAN, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION BACHNER, TALLY, POLEVOY & MISHER LLP
1801 CENTURY PARK EAST, SUITE 1600 380 MADISON AVENUE
LOS ANGELES, CALIFORNIA 90067 NEW YORK, NEW YORK 10017
TEL. (310) 553-4441 TEL. (212) 687-7000
FAX. (310) 201-4746 FAX. (212) 682-5729
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
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, as amended ("Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 1, 1997
PROSPECTUS
LOGO
Each unit ("Unit") offered by On'Village Communications, Inc. (the
"Company"), a development stage company, consists of one share of Class A Common
Stock (the "Class A Common Stock") and one redeemable Class A Warrant (the
"Warrants"). The components of the Units will be transferable separately 90 days
from the date of this Prospectus or such earlier date (the "Separation Date") as
D.H. Blair Investment Banking Corp. may determine in its sole discretion. Each
Warrant entitles the holder to purchase one share of Class A Common Stock at an
exercise price of $6.50, subject to adjustment from the Separation Date through
the fifth anniversary of the date of this Prospectus. The Warrants are subject
to redemption commencing one year from the date of this Prospectus, by the
Company at $.05 per Warrant on 30 days' written notice if the closing bid price
of the Class A Common Stock for 30 consecutive trading days ending within 15
days of the notice of redemption of the Warrants averages in excess of $9.10 per
share (subject to adjustment). See "Description of Securities."
Prior to this offering (the "Offering") there has been no public market for
the Units, the Class A Common Stock or the Warrants, and there can be no
assurance that such a market will develop after the completion of the Offering.
See "Underwriting" for a discussion of factors considered in determining the
initial public offering price. The Units, the Class A Common Stock and the
Warrants have been approved for quotation on the Nasdaq SmallCap Market under
the symbols "ONVCU," "ONVCA" and "ONVCW," respectively, subject to official
notice of issuance. FOR INFORMATION CONCERNING A SECURITIES AND EXCHANGE
COMMISSION INVESTIGATION RELATING TO THE REPRESENTATIVE (AS DEFINED BELOW), SEE
"RISK FACTORS" AND "UNDERWRITING."
The Company's Class A Common Stock and Class B Common Stock (collectively,
the "Common Stock") are essentially identical in all respects except that the
Class B Common Stock has five votes per share and the Class A Common Stock has
one vote per share. The Class B Common Stock is convertible into Class A Common
Stock on a share for share basis. Immediately following the consummation of the
Offering, the executive officers and directors of the Company will possess
approximately 67% of the combined voting power in respect of matters submitted
for the vote of all holders and, therefore, will be able to elect at least a
majority of the Company's directors and control the Company. See "Principal
Shareholders" and "Description of Securities."
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
================================================================================================================
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------------------------
Per Unit................................ $5.00 $.50 $4.50
- ----------------------------------------------------------------------------------------------------------------
Total(3)................................ $9,500,000 $950,000 $8,550,000
================================================================================================================
</TABLE>
(1) Does not reflect additional compensation to be received by D.H. Blair
Investment Banking Corp., the representative (the "Representative") of the
several underwriters (the "Underwriters") in the form of (i) a
non-accountable expense allowance of $285,000 or $0.15 per Unit ($327,750 if
the over-allotment option is exercised in full); and (ii) an option to
purchase up to 190,000 Units at an exercise price of $7.50 per Unit,
exercisable over a period of two years commencing three years from the date
of this Prospectus (the "Unit Purchase Option"). In addition, the Company
has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of the Offering of $835,000 ($877,750 if
the over-allotment is exercised) payable by the Company, including the
Representative's non-accountable expense allowance.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 285,000 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any, subject to the right of the
Representative to elect, in its sole discretion, to exercise such option
individually, and not as representative of the several Underwriters. If the
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
increased to $10,925,000, $1,092,500 and $9,832,500, respectively. See
"Underwriting."
The Units are offered by the Underwriters on a "firm commitment" basis
when, as and if delivered to and accepted by the Underwriters, and subject to
withdrawal or cancellation of the offer without notice and to their right to
reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Class A Common Stock
and Warrants comprising the Units will be made at the offices of D.H. Blair
Investment Banking Corp., New York, New York, on or about , 1997.
------------------------
D.H. BLAIR INVESTMENT BANKING CORP.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
1,900,000 UNITS
LOGO
CONSISTING OF 1,900,000 SHARES OF CLASS A COMMON STOCK AND
1,900,000 REDEEMABLE CLASS A WARRANTS
<PAGE> 3
[PHOTOGRAPHS]
ON'VILLAGE
YELLOW PAGES+
OUR WORLD VIEW
<TABLE>
<S> <C>
National Local
- - Business Listings Nationwide - Resale arrangements with Independent Yellow Page
publishers nationwide
[Photo of page from [Photo of page from On'Village Website]
On'Village Website]
</TABLE>
ON'VILLAGE COMMUNICATIONS INC
www.onvillage.com. - www.onzine.com. - www.ontour.net - www.onpages.com
info @ onvillage.com
<TABLE>
<S> <C>
[photo of an On'Village street sign and an American flag] [Photo of the NY skyline with "On'Village" written
into sky]
[Photo of several houses with "On'Village" written across] [Photo of a sailboat with "On'Village" written on the
sail.]
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, CLASS A
COMMON STOCK AND/OR WARRANTS. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF
UNITS, CLASS A COMMON STOCK AND/OR WARRANTS FOLLOWING THE PRICING OF THE
OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE UNITS, CLASS A COMMON STOCK
AND/OR WARRANTS OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE UNITS, COMMON
STOCK AND/OR WARRANTS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
The Company is not currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Upon completion of the
Offering, the Company intends to register as such and to furnish its
securityholders with annual reports containing audited financial statements and
such interim unaudited reports as it deems appropriate.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by the more detailed information and financial data (including the
financial statements and the notes thereto) appearing elsewhere in this
Prospectus. Unless otherwise noted, all information in this Prospectus (a)
assumes no exercise of (i) the Underwriters' over-allotment option, (ii) the
Warrants, (iii) the Representative's Unit Purchase Option, (iv) the Public
Bridge Warrants (defined below), or (v) options granted or available for grant
under the Company's 1997 Stock Option Plan (the "Option Plan") and (b) gives
effect to the conversion, which will occur upon the closing of the Offering, of
(x) the 1,200,000 bridge warrants (the "Bridge Warrants") issued in connection
with the Company's private placement completed in January 1997 (the "Bridge
Financing") and (y) the 62,500 bridge warrants (the "Additional Bridge
Warrants") issued in connection with the Company's private placement to one
institutional investor in September 1997 (the "Additional Bridge Financing"),
into an aggregate of 1,262,500 warrants with terms substantially identical to
the Warrants offered hereby (the "Public Bridge Warrants"). All share, per share
and other information contained in this Prospectus has been adjusted to reflect
the recapitalization effected in October 1996 and January 1997. See "-- The
Recapitalization," "Capitalization," "Management -- Stock Option Plan" and
"Description of Securities."
THE COMPANY
On'Village Communications, Inc. (the "Company") is a development stage
company engaged in the development, publishing and marketing of World Wide
Web-based services designed to help users access information on the Internet,
while at the same time providing advertisers with an efficient and innovative
means of reaching targeted audiences. The Company's primary service offering is
"On'Village Yellow Pages," an on-line national yellow page directory service
which users can currently access through the Company's Web address,
"http://www.onvillage.com." This service, offered free of charge to the user,
enables the user to access the Company's licensed database of over 15 million
business listings nationwide and to perform a search of desired listings
presently by category, business name and business location. At the same time,
On'Village Yellow Pages offers businesses the ability to advertise on the
Internet in what management believes is a targeted, cost-effective and
interactive manner. To better reach their targeted audiences, businesses are
given the opportunity by the Company to purchase enhanced advertising services
that supplement the basic yellow page listing. These enhanced services include
priority listings, listings of the Company's other sites, graphics and logo
advertisements, enhanced textual advertisements, including detailed display
banners, listings of businesses by additional categories and cities, and
additional URL and e-mail links.
The Company believes that the Internet represents an important new and
growing medium for advertisers to reach consumers. The Company's objective is to
position itself to take advantage of this growth by serving the needs of its
advertising customers. The Company's strategy is to develop a critical mass of
advertising customers who purchase enhanced advertisements on the On'Village
Yellow Pages. The Company believes that the most effective way to achieve this
base of advertisers is through joint marketing and sales arrangements with
independent local yellow page publishers ("Independent Publishers"), who
contract with the Company to directly market and resell the Company's services
to the Individual Publishers' existing base of customers. The Company believes
there are an estimated 350 Independent Publishers in the United States. As of
September 30, 1997, the Company had entered into arrangements with 70
Independent Publishers. The Company plans to offer enhanced advertising
services, both indirectly through the Independent Publishers and directly to
customers, and to offer customers the opportunity to advertise on the Company's
ancillary services.
To distinguish itself from other on-line yellow page services, the Company
provides and is in the process of refining several additional services developed
by the Company. These offerings include "My Place," a membership service that
offers users various personalized services, products and promotions, and
"On'Zine," an interactive service providing users the ability to communicate and
immediately access relevant and related content and information on designated
third-party Websites. These sites are organized by category and have been
selected, reviewed and rated by the Company. The Company also recently
introduced "OnTour," a compilation of information regarding select U.S.
destinations, currently comprised of information regarding
3
<PAGE> 5
five national parks and several other tourist destinations. The Company believes
that these additional services, in addition to attracting users, will enable
advertisers to reach a more targeted audience. In the future, the Company may
also attempt to generate revenue through the sale of customized Websites and,
eventually, the hosting of business-to-consumer and business-to-business
electronic commerce on the Internet.
The Company believes that distributing and marketing its services widely is
a key to successfully growing its base of users as well as enhancing its
marketability to its advertising customers. The Company was able to gain access
to a large audience through its agreement with Netscape Communications
Corporation ("Netscape"), which provides that the Company's yellow page
directory is listed as a yellow page service on Netscape's Web page, accessible
via the "Net Search" button, pursuant to the Netscape Distinguished Provider
Program. Although the agreement with Netscape provides for the Company's
inclusion in the program through April 1998, Netscape has the option, upon 90
days' notice, to terminate the agreement at any time. If Netscape were to choose
to terminate the agreement, the Company would likely suffer a significant
decrease in the traffic to its sites, thereby decreasing the marketability of
the Company's services. Therefore, in order to maintain and/or diversify its
channels of distribution, the Company is also currently exploring the creation
of alternate arrangements with Website providers, browser providers and other
distribution channels, to replace and/or supplement its arrangement with
Netscape.
As of the date of this Prospectus, the Company has generated extremely
limited revenue. The Company has incurred operating losses to date and expects
that losses will continue for the foreseeable future. No assurance can be given
that the Company's strategy will be successful or will ever lead to the
generation of significant revenue or operating income. See "Risk Factors."
The principal executive offices of the Company are located at 26135 Mureau
Road, Suite 100, Calabasas, California 91302. The Company's telephone number is
(818) 871-2800.
THE RECAPITALIZATION
The Company was organized as a California corporation in November 1995
under the name "e.ventures, Inc." In October 1996, the Company amended its
Articles of Incorporation to provide for a 6.94975-for-1 split of the then
outstanding shares of its common stock. The Company amended its Articles of
Incorporation again in January 1997 to change the Company's name from
"e.ventures, Inc." to "On'Village Communications, Inc.", to reclassify its
common stock into two classes, consisting of 18,800,000 authorized shares of
Class A Common Stock and 1,400,000 authorized shares of Class B Common Stock and
to convert each then outstanding share of the Company's common stock into one
share of Class B Common Stock. The Class A Common Stock and Class B Common Stock
are essentially identical in all respects except that the Class B Common Stock
has five votes per share and the Class A Common Stock has one vote per share.
See "Description of Securities." The foregoing changes are herein collectively
referred to as the "Recapitalization." All share, per share and other
information contained in this Prospectus has been adjusted to reflect the
Recapitalization.
THE OFFERING
Securities Offered......1,900,000 Units, each Unit consisting of one share of
Class A Common Stock and one Warrant. Each Warrant
entitles the holder to purchase one share of Class A
Common Stock at an exercise price of $6.50, subject to
adjustment, from and after the Separation Date through
the fifth anniversary of the date of this Prospectus.
The Warrants are subject to redemption in certain
circumstances on 30 days' written notice. See
"Description of Securities."
Common Stock Outstanding
Before the
Offering(1)...........Class A Common Stock.........................0 shares(2)
Class B Common Stock.................1,199,996 shares(3)
4
<PAGE> 6
Common Stock Outstanding
After the
Offering(1)...........Class A Common Stock.................1,900,000 shares(4)
Class B Common Stock.................1,199,996 shares(3)
Use of Proceeds.........The net proceeds of the Offering will be used for the
repayment of $2,145,000 principal amount of 10%
promissory notes (the "Bridge Notes"), including
interest, issued in the Bridge Financing, the repayment
of $642,000 principal amount of 10% promissory notes
(the "Blair Notes"), including interest, issued to the
Representative and a corporation controlled by a family
member of the sole stockholder of the Representative,
the repayment of $252,000 principal amount of a 10%
promissory note (the "Additional Bridge Note"),
including interest, issued in the Additional Bridge
Financing, selling expenses, advertising, promotion and
marketing activities, research and development, license
fees and working capital purposes. See "Use of
Proceeds."
Risk Factors............The Offering involves a high degree of risk and
immediate substantial dilution. See "Risk Factors" and
"Dilution."
Nasdaq Symbols(5):
Units.................ONVCU
Class A
Common Stock..........ONVCA
Warrants...............ONVCW
- ------------------
(1) For a description of the voting and other rights of the Class A Common Stock
and Class B Common Stock, see "Description of Securities -- Common Stock."
(2) Does not include (i) 300,000 shares of Class A Common Stock reserved for
issuance under the Option Plan, under which options to purchase 30,000
shares have been granted to date, (ii) an aggregate of 1,262,500 shares of
Class A Common Stock issuable upon exercise of the Bridge Warrants and the
Additional Bridge Warrants, and (iii) up to 62,500 shares of Class A Common
Stock which may be issuable upon exercise of the Additional Bridge Warrants.
See "Capitalization" and "Management -- Stock Option Plan."
(3) Includes 800,000 shares of Class B Common Stock (the "Escrow Shares") which
have been deposited into escrow by the holders thereof. The Escrow Shares
are subject to cancellation and will be contributed to the capital of the
Company if the Company does not attain certain earnings levels or the market
price of the Company's Class A Common Stock does not achieve certain levels.
If such earnings or market price levels are met, the Company will record a
substantial non-cash charge to earnings, for financial reporting purposes,
as compensation expense relating to the value of the Escrow Shares released
to Company officers, directors, employees and consultants. See
"Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Charge to Income in the Event of
Release of Escrow Shares" and "Principal Shareholders -- Escrow Shares."
(4) Does not include (i) 1,900,000 shares of Class A Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby; (ii) 570,000
shares of Class A Common Stock issuable upon exercise of the Underwriters'
overallotment option, including the shares issuable upon exercise of the
Warrants included in the Units subject to such option; (iii) 380,000 shares
of Class A Common Stock issuable upon exercise of the Representative's Unit
Purchase Option and the Warrants included in the Units issuable upon
exercise of the Representative's Unit Purchase Option; (iv) 1,262,500 shares
of Class A Common Stock issuable upon exercise of the Public Bridge Warrants
and (v) up to 62,500 shares of Class A Common Stock which may be issuable
upon exercise of the Public Bridge Warrants. Also does not include 300,000
shares of Class A Common Stock reserved for issuance under the Option Plan,
under which options to purchase 30,000 shares have been granted to date.
(5) Notwithstanding quotation on Nasdaq, there can be no assurance that an
active trading market for the Company's securities will develop or, if
developed, that it will be sustained.
5
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NOVEMBER 13, 1995
NOVEMBER 13, 1995 SIX MONTHS ENDED (INCEPTION) TO
(INCEPTION) TO YEAR ENDED ----------------------------- JUNE 30, 1997
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997 (CUMULATIVE)
----------------- ----------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 65,548 $ 40,925 $ 23,914 $ 89,462
--------- ----------- ----------- ----------- -----------
Costs and expenses
Cost of revenue....... 6,250 114,052 51,998 63,031 183,333
Research and
development......... -- -- -- 59,249 59,249
General and
administrative...... 12,325 357,552 173,716 961,632 1,331,509
Selling and
marketing........... -- 152,365 24,187 487,651 640,016
--------- ----------- ----------- ----------- -----------
Total costs and
expenses.............. 18,575 623,969 249,901 1,571,563 2,214,107
--------- ----------- ----------- ----------- -----------
Operating loss.......... $ (18,575) $ (558,421) $ (208,976) $ (1,547,649) $(2,124,645)
--------- ----------- ----------- ----------- -----------
Net interest expense.... -- 19,702 -- 383,348 403,050
Net loss................ $ (18,575) $ (578,123) $ (208,976) $ (1,930,997) $(2,527,695)
========= =========== =========== =========== ===========
Net loss per common
share(1).............. $ (0.02) $ (0.67) $ (0.25) $ (2.13)
========= =========== =========== ===========
Weighted average common
shares
outstanding(1)........ 818,344 858,499 850,777 906,378
========= =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(2)(3)
----------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)..................... $(2,419,152) $ (2,390,402) $ 5,339,187
Total assets..................................... 836,449 1,276,449 5,773,858
Total liabilities................................ 2,735,404 3,146,654 346,104
Deficit accumulated during the development
stage.......................................... (2,527,695) (2,527,695) (2,944,736)
Total shareholders' equity (deficit)............. (1,898,955) (1,870,205) 5,427,754
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted average number of shares of Common Stock used
in computing the net loss per common share. Excludes the Escrow Shares. See
"Principal Shareholders -- Escrow Shares" and Note 9 of Notes to Financial
Statements.
(2) Gives pro forma effect to the issuance of (i) $190,000 principal amount of
Blair Notes and (ii) a $250,000 principal amount Additional Bridge Note, in
each case subsequent to June 30, 1997. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Adjusted to give effect to the sale of the 1,900,000 Units offered hereby at
an offering price of $5.00 per Unit, and the receipt of the net proceeds
therefrom and the use of a portion of the net proceeds to repay the Bridge
Notes, the Blair Notes and the Additional Bridge Note, together with accrued
interest of $167,000 through October 15, 1997, and an estimated charge to
operations of $417,000 representing unamortized debt discount and debt
issuance costs associated with the Bridge Financing and the Additional
Bridge Financing. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
6
<PAGE> 8
RISK FACTORS
The securities offered hereby are highly speculative in nature and involve
a high degree of risk. Prospective investors should carefully consider, along
with the other information contained in this Prospectus, the following
considerations and risks in evaluating an investment in the Company. Certain
statements contained in this Prospectus, including statements concerning the
Company's future cash and financing requirements; the Company's substantial
dependence on Independent Publishers and other strategic arrangements; the
Company's dependence on continued growth in use of the Internet; the Company's
reliance on advertising revenue and the uncertain adoption of the Internet as an
advertising medium; the competitive market for the Company's services; and other
statements contained herein regarding matters that are not historical facts, are
forward looking statements; actual results may differ materially from those set
forth in the forward looking statements, which statements involve risks and
uncertainties.
DEVELOPMENT STAGE COMPANY; LIMITED OPERATING HISTORY. The Company commenced
operations in November 1995, is a development stage company, and has a limited
operating history. Since it commenced operations, the Company has been engaged
principally in the development, design and refinement of its Websites,
market-testing activities, and marketing activities directed towards
establishing relationships with Independent Publishers, in addition to capital
raising activities. Accordingly, the Company has an extremely limited operating
history upon which an evaluation of the Company's prospects can be made. The
Company and its prospects must be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of a new business in an
emerging industry and the development and commercialization of a new service.
These risks include, but are not limited to, unanticipated problems relating to
product development, product introduction and acceptance, marketing and
competition. There can be no assurance that the Company's efforts will result in
successful commercialization or further development of the Company's services,
that the Company's marketing efforts will be successful or that the Company will
ever achieve significant revenue. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
ACCUMULATED DEFICIT; WORKING CAPITAL DEFICIT; HISTORY OF LOSSES;
EXPECTATION OF SUBSTANTIAL FUTURE LOSSES. At June 30, 1997, the Company had a
deficit accumulated during the development stage of approximately $2,528,000 and
a working capital deficit of approximately $2,419,000. During the period
November 13, 1995 (inception) to June 30, 1997, the Company recognized limited
revenue of approximately $89,000 and incurred a cumulative net loss of
approximately $2,528,000, including net losses of approximately $578,000 for the
year ended December 31, 1996 and approximately $1,931,000 for the six months
ended June 30, 1997. Since June 30, 1997, the Company has continued to incur
significant losses. Such losses have resulted principally from limited revenues
from operations and costs associated with the design, development and
implementation of the Company's services, including general and administrative
expenses and marketing activities. The Company plans on significantly increasing
its level of operating expenses and will be required to make significant
additional expenditures following consummation of the Offering to continue to
enhance its services and to attract advertisers to the Company's services. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, pursuant to the Company's
agreement with Netscape, the Company is required to make significant payments to
Netscape. Further, the Company is currently exploring the creation of
alternative arrangements with Website providers, browser providers and other
distribution channels, to replace and/or supplement its arrangement with
Netscape. Any such arrangement may require payments or other consideration for
listing the Company's services. Moreover, the Company is obligated to make
minimum annual royalty payments to Pro-CD, Inc. ("Pro-CD") in order to continue
to license its database. See "-- Dependence on Relationship with Pro CD." The
Company anticipates that it will incur significant losses until such time, if
ever, that the Company attracts and retains a sufficient number of advertisers
who purchase the Company's enhanced services (through relationships with
Independent Publishers or otherwise) to fund the Company's continuing
operations. There can be no assurance that the Company will be able to attract
and retain a sufficient number of such advertising customers to generate
significant revenue, that the Company will generate positive cash flow from its
operations, or that the Company will attain or thereafter sustain profitability
in any future period.
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UNCERTAINTY AS TO ABILITY TO CONTINUE AS A GOING CONCERN. The Company's
independent certified public accountants have included an explanatory paragraph
in their report stating that the Company's financial statements have been
prepared assuming that the Company will continue as a going concern and that the
Company's working capital deficiency and shareholders' deficiency raise
substantial doubt as to the Company's ability to continue as a going concern.
See "Financial Statements -- Report of Independent Certified Public
Accountants."
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE CAPITAL WILL BE
AVAILABLE. The Company anticipates, based on currently proposed plans and
assumptions relating to its operations (including assumptions relating to the
generation of revenue through relationships with Independent Publishers), that
the net proceeds of the Offering, together with anticipated revenue from sales
of enhanced advertisements, should be sufficient to fund the Company's
contemplated cash requirements for approximately 12 months following
consummation of the Offering. In the event the Company's plans change, its
assumptions change or prove to be inaccurate or the Company's funds for
operations otherwise prove to be insufficient (including due to anticipated
technical or other problems), the Company could be required to seek additional
financing prior to the expiration of such 12-month period. In addition,
following such 12-month period, if the Company does not generate sufficient
revenue from operations, the Company will need to obtain additional financing.
The Company's ability to generate such revenue will depend primarily upon the
ability of the Company to sell enhanced advertising services to businesses,
primarily through the efforts of Independent Publishers. The Company has no
commitments from any third parties for any future funding and there can be no
assurance that the Company will be able to obtain financing in the future on
terms acceptable to the Company, if at all. Any additional equity financing may
be dilutive to the Company's shareholders and debt financing, if available, may
involve restrictive covenants with respect to dividends, raising future capital
and other financial and operational matters. If the Company is not able to
obtain additional financing as needed, the Company may be required to curtail
its growth plans, significantly reduce operating costs or cease operations
completely. See "Use of Proceeds."
SUBSTANTIAL DEPENDENCE ON INDEPENDENT PUBLISHERS. The Company does not
currently possess, nor does it believe that it will have the capability in the
near future to develop, a sales force capable of effectively marketing the
Company's services directly to individual advertisers in order to develop a
critical mass of customers who will purchase enhanced advertisements on the
On'Village Yellow Pages. Accordingly, the Company believes that the most
effective method of building this customer base is to enter into arrangements
with Independent Publishers who will market and resell the Company's services to
their existing customer base. As of September 30, 1997, the Company had entered
into 70 such arrangements with Independent Publishers. The Company's ability to
enter into a sufficient number of arrangements with Independent Publishers, and
the Company's ability to renew any arrangements entered into (which are
typically for a term of only one year), will be dependent upon a number of
factors, including the Company's ability to effectively market the benefits of
its services to Independent Publishers. The Company currently has limited
marketing capabilities and needs to hire a significant number of additional
sales and marketing personnel. The Company intends to use a portion of the
proceeds of the Offering to hire certain of such personnel and outside agents
and consultants to market its services, primarily to Independent Publishers.
Further, the Company believes it will face significant competition from existing
and future providers of Internet-related services who attempt to market their
services in a similar manner.
Even if the Company is successful in entering into arrangements with a
sufficient number of Independent Publishers, no assurance can be given that such
Independent Publishers will market the Company's services effectively or that
such arrangements will lead to the generation of a significant amount of
revenue. The inability of the Company to enter into arrangements with a
sufficient number of Independent Publishers, or such Independent Publishers'
inability to successfully market and resell the Company's services, would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "-- Reliance on Advertising Revenue; Uncertain Adoption
of the Internet as an Advertising Medium."
RELIANCE ON ADVERTISING REVENUE; UNCERTAIN ADOPTION OF THE INTERNET AS AN
ADVERTISING MEDIUM. The Company has derived a significant amount of its limited
revenue to date from the sale of advertisements in a limited geographical area,
and expects to continue to derive most of its revenue, if any, from the sale of
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advertisements for the foreseeable future. There can be no assurance that the
Company will be able to successfully attract advertisers to its services, either
directly or through Independent Publishers. The Company's ability to generate
significant advertising revenue will depend, among other things, on advertisers'
acceptance of the Internet as an attractive and sustainable commercial medium,
the development of a large base of users of the Company's services with
demographic characteristics attractive to advertisers, the successful expansion
of the Company's advertising capabilities and the Company's ability to enter
into a sufficient number of arrangements with Independent Publishers.
Furthermore, there is intense competition among sellers of advertising space on
the Internet, and a variety of pricing models offered by different vendors for a
range of advertising services. The Company intends to rely on independent third
party sales representatives affiliated with Independent Publishers for the sale
of advertising on the Company's Websites. Failure of these third party agents to
achieve successful advertising sales could have a material adverse effect on the
Company's ability to generate revenue. See "-- Substantial Dependance on
Independent Publishers."
Because the Company expects to derive a significant portion of its revenue
in the foreseeable future from sales of Web-based advertising, the future
success of the Company is highly dependent on the development of the Internet as
an advertising medium. Most of the Company's advertising customers and potential
advertising customers may have limited or no experience using the Internet as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Internet-based advertising and may not find such advertising to
be effective for promoting their products and services relative to traditional
print and broadcast media. No standards have yet been widely accepted for the
measurement of the effectiveness of Internet-based advertising, and there can be
no assurance that such standards will develop sufficiently to support
Internet-based advertising as a significant advertising medium. The Internet
industry is young and has few proven products and services. Moreover, critical
issues concerning the commercial use of the Internet (including security,
reliability, cost, ease of use and access, quality of service and acceptance of
advertising) remain unresolved and may negatively affect the growth of Internet
use or the attractiveness of Internet advertising. There can be no assurance
that widespread commercial use of the Internet will develop, or that the
Internet will develop as an effective and measurable medium for advertising. See
"-- Dependence on Continued Growth in Use of the Internet."
DEPENDENCE ON RELATIONSHIP WITH NETSCAPE; ABILITY OF NETSCAPE TO TERMINATE
CONTRACT. The Company is a party to an agreement with Netscape which provides
that the Company's services will be listed on Netscape's Web page, accessible
via the "Net Search" button, through April 1998 pursuant to the Netscape
Distinguished Provider Program. Currently, two competing yellow page services as
well as a number of leading navigational services with yellow page directories,
are also listed. The agreement with Netscape is not exclusive and gives Netscape
the ability to change its services and Web page without the Company's approval.
In addition, the agreement provides that either party can terminate the
agreement at any time, upon 90 days' prior notice. Further, pursuant to its
agreement, the Company is required to make certain payments to Netscape by
October 31, 1997. Failure to make such payments could result in a default by the
Company under the Netscape agreement. As a consequence, Netscape could terminate
the agreement prior to the end of the 90 day notice period. There can be no
assurance that Netscape will not terminate the agreement prior to its
expiration, that Netscape will not enter into similar arrangements with other
competing companies (thereby resulting in an increase in the number of
competitive companies listed on Netscape's Web page), or that Netscape will not
develop its own service offerings competitive with those of the Company. If
Netscape were to choose to terminate the agreement, or if it were to develop and
market its own competitive services or promote competing services from other
third parties, the Company would likely suffer a significant decrease in the
traffic to its sites, thereby decreasing the marketability of the Company's
services. The Company is currently exploring the creation of alternate
arrangements with Website providers, browser providers and other distribution
channels, to replace and/or supplement its arrangement with Netscape. No
assurance can be given that the Company will enter into any such arrangements on
terms acceptable to the Company or at all, or that any such arrangements will
generate significant traffic to the Company's on-line sites.
DEPENDENCE ON THIRD PARTY TECHNOLOGY SUPPLIER. The Company is currently
dependent on Network Publishing, Inc. ("Network Publishing") for certain
integral components of its current and future technologies. All of the Company's
hardware systems and maintenance activities, including server hosting, are
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<PAGE> 11
managed and maintained by Network Publishing. The Company's agreement with
Network Publishing provides that Network Publishing will host and maintain the
Company's computer hardware. Given that Network Publishing may terminate the
agreement upon 120 days' notice, there is no assurance that the services of
Network Publishing will be available in the future, or that if the agreement is
terminated another entity satisfactory to the Company can or will provide the
requisite services. Failure of Network Publishing or another entity to support
and maintain the Company's hardware would have a material adverse effect on the
Company's business, results of operations and financial condition. Given the
technological changes occurring in the industry, there can be no assurance that
the technologies utilized by the Company will remain competitive in the future.
The Company also relies on Network Publishing to provide the Company with
access to its Internet connection. Although the Company believes that Internet
access through other providers is currently available, any disruption in the
Internet access by Network Publishing or any failure of Network Publishing to
handle a higher volume of queries could have a material adverse effect on the
Company's business, results of operations and financial condition.
The executive officers of the Company have experience in the apparel and
wholesale industries, but prior to forming the Company, had limited technical
experience in the field of computers or the Internet. The Company currently has
only four employees with significant technical experience. Although the Company
plans on hiring additional technical personnel, until the Company does so it
will remain dependent on Network Publishing or other third parties to provide
technical support. See "-- Dependence on Key Personnel."
TECHNOLOGICAL CHANGE AND NEW SERVICES. The market for Internet products and
services is characterized by technological change, changing customer needs,
frequent new product introductions and evolving industry standards. These market
characteristics are exacerbated by the fact that many companies are expected to
introduce new Internet products and services in the near future. The Company's
future success will depend in significant part on its ability to continually and
on a timely basis introduce new services and technologies and to continue to
improve the performance, features and reliability of the Company's services in
response to both evolving demands of the marketplace and competitive product
offerings.
There can be no assurance that the Company will be successful in developing
new services or improving existing services that respond to technological
changes or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development, licensing,
introduction and marketing of new or improved services, or that its new services
will adequately meet the requirements of the marketplace and achieve market
acceptance. In addition, new or enhanced services introduced by the Company may
contain undetected errors that require significant design modifications. This
could result in a loss of customer confidence and user support, thus adversely
affecting the use of the Company's services. See "-- Intense Competition; No
Substantial Barriers to Entry."
DEPENDENCE ON RELATIONSHIP WITH PRO-CD. The Company's On'Village Yellow
Pages directory consists of a database of business listings licensed from
Pro-CD, pursuant to a five-year licensing agreement entered into in December
1995. Pro-CD has the right to terminate the agreement on or after January 1,
1998, upon six months notice, if it is unable, or if it becomes impractical for
Pro-CD, to continue to supply the data. In addition, the terms of the license
are subject to a number of restrictions, the violation of which may result in
the cancellation by Pro-CD of the agreement. Pro-CD's unwillingness to continue
to license its database to the Company, whether before or after the expiration
of the existing agreement, would force the Company to secure an alternative
source of data and could require the Company to delete all directory listings
derived from the Pro-CD database. Although the Company believes that there exist
at least two alternative sources of data, no assurance can be given that the
Company would be able to enter into an agreement to license such data on a
timely basis, or at all, or on terms which the Company views as satisfactory.
Failure of the Company to enter into an agreement on a timely basis could cause
an interruption in the Company's business which would have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, the agreement does not prohibit Pro-CD from licensing its database
to others, including existing and potential competitors of the Company.
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INTENSE COMPETITION; NO SUBSTANTIAL BARRIERS TO ENTRY. The market for
Internet products and services is highly competitive, with no substantial
barriers to entry, and the Company expects that competition will continue to
intensify. The market for the Company's services has only recently begun to
develop, is rapidly evolving and is characterized by an increasing number of
market entrants with competing products and services. Although the Company
believes that the diverse segments of the Internet market may provide
opportunities for more than one supplier of services similar to those of the
Company, it is possible that a single or few suppliers may dominate one or more
market segments. There can be no assurance that the Company's competitors will
not develop Internet services that are superior to those of the Company or that
achieve greater market acceptance than the Company's offerings. Any failure of
the Company to provide service offerings that achieve success in the short-term
could result in an insurmountable loss in market share and brand acceptance, and
could, therefore, have a material adverse effect upon the Company's business in
the long term.
A number of companies offer competitive services addressing certain of the
Company's target markets. Most of the Company's competitors have significantly
greater financial, technical and marketing resources than the Company. These
companies include America Online, Inc., Excite, Inc., Lycos, Inc., The McKinley
Group, CompuServe Corporation, Prodigy Services Company, Infoseek Corporation
and Yahoo! Corporation. Specifically, the Company's On'Village Yellow Page
directory service competes with other Internet Yellow Page directory services
including BigYellow, BigBook, YellowNet, GTE SuperPages, Yellow Pages Online,
Switchboard, InfoSpace, ZIP2, American Business Information's Lookup USA and a
Netscape Guide by Yahoo! Corporation featuring the Yellow Page services of the
five Regional Bell Operating Companies. In addition, the Company competes with
metasearch services that allow a user to search the databases of several
catalogs and directories simultaneously. The Company also competes indirectly
with database vendors that offer information search and retrieval capabilities
with their core database products. In the future, the Company may encounter
competition from providers of Web browser software, including Netscape and
Microsoft Corporation, on-line services and other providers of other Internet
services who elect to incorporate their own search and retrieval features into
their product and service offerings.
Netscape and Pro-CD, as well as a number of the Company's current
advertising customers, have established relationships with certain of the
Company's competitors, and future advertising customers, licensees and licensors
may establish similar relationships. In addition, the Company competes with
on-line services and other Website operators as well as traditional offline
media such as print (including print yellow page directories) and television for
a share of advertisers' total advertising budgets. Competition among current and
future suppliers of Internet navigational and directory services, as well as
competition with other media for advertising placements, could result in
significant price competition and reductions in advertising revenue. There can
be no assurance that the Company will be able to compete successfully against
its current or future competitors.
MANAGEMENT OF POTENTIAL GROWTH; NEED TO ESTABLISH INFRASTRUCTURE. The
Company plans to significantly expand its operations following the Offering,
which could place a significant strain on the Company's limited managerial,
operational and financial resources. The Company's ability to manage this
expansion will require significant expansion of its service development,
marketing and sales, and technical and financial capability, and its personnel.
In particular, the Company intends to increase its dependence and reliance on
computer generated information. This will necessitate continuous reassessment of
the appropriateness of the Company's computerized data and systems. In addition,
the Company plans to add an additional approximately 30 employees in the
approximately 12 months following the consummation of the Offering. See
"Business -- Employees."
There can be no assurance that the Company will be able to effectively
manage the expansion of its operations, that the Company's employees will work
together effectively, that the Company will be able to attract and retain
qualified personnel, that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company's management will
be able to achieve the rapid execution necessary to fully exploit any potential
market opportunity for the Company's services. Any inability to effectively
manage growth could have a material adverse effect on the Company's business,
results of operations and financial condition.
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DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S SERVICES. The
markets for the Company's services have only recently begun to develop, are
rapidly evolving and are characterized by an increasing number of market
entrants who have introduced or developed services similar to the services
offered by the Company for use on the Internet. As is typical in the case of a
new and rapidly evolving industry, demand and market acceptance for recently
introduced services are subject to a high level of uncertainty and risk. Because
the market for the Company's services is new and evolving, it is difficult to
predict the future growth rate, if any, and size of this market. There can be no
assurance that either the market for the Company's services will develop or that
demand for the Company's services will emerge or become sustainable.
In the future, the Company may attempt to develop a Web-based service that
is focused on information and resources relating to the purchase of consumer
products and services over the Internet. On-line purchasing of goods and
services by consumers is in an early stage of development, and has been hindered
to date by, among other factors, a lack of widely accepted secure payment
mechanisms. In addition, a significant number of well-capitalized and
established companies have developed or are currently developing online commerce
applications and technologies, many of which may compete with or eliminate or
reduce the need for, services that the Company may attempt to introduce. No
assurance can be given that the Company will successfully develop such a
service, or that if developed, such service will be profitable. See
"Business -- The Company's Services -- Proposed Services."
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. The Company's future
success is substantially dependent upon continued growth in the use of the
Internet and the Web for information publication, distribution and commerce.
Rapid growth in the use of and interest in the Internet and the Web is a recent
phenomenon. There can be no assurance that information publication, advertising,
communication or commerce over the Internet will become widespread or that
extensive content (such as Web pages) will continue to be provided over the
Internet. The Internet may not prove to be a viable medium for information
publication, advertising, communication or commerce for a number of reasons,
including potentially inadequate development of the necessary infrastructure to
support the widespread use of the Internet, including a reliable network
backbone, or the timely development of performance improvements such as high
speed modems. In addition, to the extent that the Internet continues to
experience significant growth in the number of users and level of use, as
recently experienced by other on-line services, there can be no assurance that
the Internet infrastructure will continue to be able to support the demands
placed upon it by such potential growth. Further, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Internet and therefore, the
Company's services.
CAPACITY CONSTRAINTS AND SYSTEM FAILURE. The performance of the Company's
services is critical to the Company's reputation and its ability to attract
advertisers to the Company's services and market acceptance of these services.
Any system failure that causes interruptions or that increases response time of
the Company's services would result in less traffic to the Company's sites and,
if sustained or repeated, would reduce the attractiveness of the Company's
services to advertisers, users and Independent Publishers. Recent increases in
the volume of searches conducted through the Company's services have strained
the capacity of the operating system, hardware and telecommunications lines
deployed by the Company, and has led to slower response times and operating
system failures. To respond to these problems, the Company has recently leased a
new hardware system and has commenced identifying new operating systems to
replace its existing operating system. Although the Company believes it will be
able to identify and purchase such new operating system, no assurance can be
given that the Company will be able to integrate such operating system with its
hardware system in a timely and cost effective manner. In addition, there can be
no assurance that the Company's services and systems will be able to scale
appropriately to any further increases in users and services offered. The
Company is also dependent upon Web browser companies and Internet and online
service providers for access to its services, and users have experienced and may
in the future experience difficulties due to system or software failures or
incompatibilities not within the Company's control. The Company is also
dependent on Network Publishing for prompt delivery, installation and service of
servers and other equipment and services used to provide the Company's services.
Any disruption in the Internet access and service provided by the
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<PAGE> 14
Company or Network Publishing could have a material adverse effect upon the
Company's business, results of operations and financial condition. See
"-- Technological Change and New Services" and "-- Dependence on Third Party
Technology Supplier."
In addition, the Company's operations depend upon the Company's ability to
maintain and protect its computer systems located in Provo, Utah. These systems
are vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events. The Company does not
currently have a disaster recovery plan in effect with respect to its computer
hardware system. Despite the implementation of network security measures by the
Company, its servers are also vulnerable to computer viruses, break-ins and
similar disruptive problems. Computer viruses, break-ins or other problems
caused by third parties could lead to interruptions, delays in or cessation of
service to users of the Company's services.
LIABILITY FOR INFORMATION RETRIEVED FROM THE INTERNET. The Company's
services link users to information which is downloaded, indexed and distributed
from Web pages published by third-party Internet Websites and content providers.
In addition, although the Company has certain monitoring safeguards in place,
certain of the Company's customers have the ability to enter and revise
advertising content directly on the Company's sites, and participants in the
Company's On'Zine "chat-areas" have the ability to directly enter content.
Accordingly, there is potential that claims will be made against the Company on
theories such as defamation, negligence, copyright or trademark infringement,
distribution of obscene, lascivious or indecent communications or other theories
of liability based on the nature and content of such materials. Such claims have
been brought, sometimes successfully, against on-line services in the past.
Although the Company carries general liability insurance, the Company's
insurance may not cover potential claims of this type, or may not be adequate to
indemnify the Company for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of insurance coverage
could have a material adverse effect on the Company's business, results of
operations and financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends in
significant part upon the continued contributions of its senior management and
key technical personnel, including Mr. Jack B. Tracht, the Company's Chief
Executive Officer, Mr. Robert D. Tracht, the Company's President and Chief
Operating Officer, Mr. Jeff W. Walden, the Company's Senior Vice President of
Marketing, Mr. James E. Austin, the Company's Senior Vice President of Sales and
Secretary and Mr. Kent Hinkson, the Company's Director of Technology. Although
the Company has entered into employment agreements with each of the foregoing,
and has obtained key-man life insurance coverage on the lives of each of the
foregoing (other than Mr. Hinkson) in the amount of $2,000,000, the loss of
services of any of them could have a material adverse effect on the Company's
business, operating results and financial condition. Further, although Messrs.
R. Tracht and Walden's employment contracts provide that they will devote
substantially all of their time to the Company, they both will remain as
principals of Robert Tracht Enterprises, Inc. See "Management."
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical, sales and management personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its key technical, sales and management employees or that
it can attract, assimilate or retain other highly qualified technical, sales and
management personnel in the future. The Company plans to add an additional
approximately 30 employees in the approximately 12 months following the
consummation of the Offering in the areas of marketing, product development and
administration (including a total of approximately 10 to 15 national and
regional sales managers and sales support staff). See "Business -- Employees."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company may be subject
to Sections 5 and 12 of the Federal Trade Commission Act (the "FTC Act"), which
regulate advertising in all media, including the Internet, and require
advertisers to have substantiation for advertising claims before disseminating
advertisements. The FTC Act prohibits the dissemination of false, deceptive,
misleading and unfair advertising, and grants the Federal Trade Commission
("FTC") enforcement powers to impose and seek civil and criminal penalties,
consumer redress, injunctive relief and other remedies upon persons who
disseminate prohibited advertisements. The Company could be subject to liability
under the FTC Act if it were found to have participated in creating and/or
disseminating a prohibited advertisement with knowledge, or reason to know
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that the advertising was false or deceptive. The FTC has recently brought
several actions charging deceptive advertising via the Internet, and is actively
seeking new cases involving advertising via the Internet.
The Company may also be subject to the provisions of the recently enacted
Communications Decency Act (the "CDA"), which, among other things, imposes
substantial monetary fines and/or criminal penalties on anyone that distributes
or displays certain prohibited material over the Internet or knowingly permits a
telecommunications device under its control to be used for such purposes.
Although the manner in which the CDA will be interpreted and enforced and its
effect on the Company's operations cannot yet be fully determined, the CDA could
subject the Company to substantial liability. The CDA could also dampen the
growth of the Internet generally and decrease the acceptance of the Internet as
an advertising medium.
Other federal, state or local laws, regulations and policies, either now
existing or that may be adopted in the future, may apply to the business of the
Company and may subject the Company to significant liabilities, significantly
dampen growth in Internet usage, prevent the Company from offering certain
Internet content or services, or otherwise cause a material adverse effect on
the Company's business, results of operations and financial condition. These
laws, regulations and policies may apply to matters such as, but not limited to,
copyright, trademark, unfair competition, antitrust, property ownership,
negligence, defamation, indecency, obscenity, personal privacy, trade secrecy,
encryption, taxation and patents.
RELIANCE ON INTELLECTUAL PROPERTY RIGHTS; NO ASSURANCE OF OBTAINING SERVICE
MARK REGISTRATION. The Company relies on a combination of copyright and
trademark laws and contractual provisions to protect its intellectual property
rights. Despite the Company's efforts to protect its intellectual property
rights, unauthorized parties may attempt to copy aspects of the Company's
services, such as all or portions of the Company's directory listings. In
addition, there are few barriers to entry into the market for the Company's
services. There can be no assurance, therefore, that any of the Company's
competitors, most of whom have far greater resources than the Company, will not
independently develop technologies that are substantially equivalent or superior
to the Company's technologies. See "-- Intense Competition; No Substantial
Barriers to Entry."
The Company has applied for a service mark registration for "On'Village."
Although this application was initially denied, the Company has responded to the
denial, arguing that the registration should be granted. There can be no
assurance, however, that the Company's application will be approved. The Company
intends to focus its efforts on achieving brand recognition for its products;
therefore, failure of the Company to obtain the "On'Village" service mark
registration and the use of the name by third parties, could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company will continue to evaluate the registration of additional
service marks and trademarks, as appropriate.
There has been substantial litigation in the computer industry regarding
intellectual property rights. There can be no assurance that the Company will
not commence litigation to protect its position or third parties will not in the
future claim infringement by the Company with respect to current or future
services, trademarks or other rights (including the use of the "On'Village"
name), or that the Company will not counterclaim against any such parties in
such actions. Any such claims or counterclaims could be time-consuming, result
in costly litigation, or require the Company to redesign its services, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. Although the Company will take steps that it
considers appropriate to protect its intellectual property rights, the Company
believes its future success will depend primarily on its ability to rapidly
introduce new services and enhancements to its existing services, rather than
upon legal protections afforded existing intellectual property.
CONTROL BY INSIDERS; OWNERSHIP OF SHARES HAVING DISPROPORTIONATE VOTING
RIGHTS. Upon consummation of the Offering, Messrs. J. Tracht, R. Tracht, Walden
and Austin, the co-founders and executive officers and directors of the Company,
will own, in the aggregate, shares of the Company's capital stock representing
approximately 67% of the total voting power of the Company. Accordingly, the
foregoing individuals will be able to continue to elect at least a majority of
the Company's directors and thereby direct the policies of the Company after
consummation of the Offering. Furthermore, the disproportionate vote afforded
the shares of Class B Common Stock could also serve to impede or prevent a
change of control of the Company. As a result, potential acquirors may be
discouraged from seeking to acquire control of the Company through the purchase
of Class A Common Stock, which could have a depressive effect on the market
price of the Company's securities. See "Principal Shareholders."
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<PAGE> 16
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SHARES. In the event any
Escrow Shares owned by securityholders of the Company who are officers,
directors, employees or consultants of the Company are released from escrow,
compensation expense will be recorded for financial reporting purposes.
Therefore, in the event the Company attains any of the earnings thresholds or
the Company's Class A Common Stock meets certain minimum bid prices required for
the release of the Escrow Shares, the Company will recognize during the period
in which the earnings thresholds are probable of being met or such stock levels
achieved, what could be a substantial non-cash charge to earnings, as
compensation expense to the Company. The amount of this charge would be equal to
the fair market value of such shares on the date of their release, and would
have the effect of increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. Although the amount of compensation expense
recognized by the Company will not affect the Company's total shareholders'
equity (due to a corresponding increase in additional paid-in capital), it may
have a depressive effect on the market price of the Company's securities. Such
charge will not be deductible for income tax purposes. Notwithstanding the
foregoing discussion, there can be no assurance that the Company will attain the
targets which would enable the Escrow Shares to be released from escrow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Charge to Income in the Event of Release of Escrow Shares."
SUBSTANTIAL PORTION OF NET PROCEEDS TO BE USED TO REPAY BRIDGE NOTES, BLAIR
NOTES AND ADDITIONAL BRIDGE NOTE; CHARGES ARISING FROM DEBT ISSUANCE
COSTS. Approximately $3,039,000 of the net proceeds of the Offering will be used
to repay in full interest and principal on the Bridge Notes, Blair Notes and
Additional Bridge Note. As a result, the proceeds from the Offering available
for the Company to meet its ongoing operating needs and expansion plans will be
correspondingly reduced. See "Use of Proceeds." Upon completion of the Offering
and repayment of the Bridge Notes and the Additional Bridge Note, a non-
recurring charge representing the unamortized debt discount and debt issuance
costs incurred in connection with the Bridge Financing and the Additional Bridge
Financing in the amount of $417,000 will be charged to operations. The aggregate
debt discount and debt issuance costs associated with the Bridge Financing and
Additional Bridge Financing are approximately $713,000. In addition, the Company
incurred a non-recurring charge representing unamortized debt discount and
interest relating to the Interim Notes through the date of repayment of
approximately $24,200, $14,200 of which was recorded in the fiscal quarter ended
December 31, 1996 and $10,000 of which was recorded in the fiscal quarter ended
March 31, 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
BROAD DISCRETION AS TO USE OF PROCEEDS; CERTAIN PROCEEDS TO BENEFIT
INSIDERS. Of the net proceeds of the Offering, approximately $2,330,000 or 30.2%
has been allocated to working capital. Approximately $725,000 of this amount
(representing approximately 9.4% of the net proceeds), has not been allocated
for a specific purpose and will be used for such purposes as management may
determine in its sole discretion, without the need for shareholder approval with
respect to any such allocation. In particular, the Company may use a portion of
the proceeds to acquire other businesses or technologies or products which are
compatible with the Company's business for the purpose of expanding its business
or the Company may enter into strategic alliances with other such companies. The
Company does not currently have any agreements, commitments or arrangements with
respect to any proposed acquisition, joint venture or strategic alliance, and no
assurance can be given that any acquisitions, joint ventures or strategic
alliances will be made in the future. See "Use of Proceeds."
Certain proceeds of the Offering will directly or indirectly benefit the
executive officers of the Company. Approximately $548,000 of the proceeds of the
Offering will be used to pay compensation to the Company's executive officers
during the 12 months following consummation of the Offering (including amounts
which will be paid to such officers upon consummation of the Offering with
respect to accrued salaries, which amounts aggregated approximately $100,000 at
September 30, 1997). In addition, approximately $102,000 of the proceeds of the
Bridge Notes (which Bridge Notes will be repaid from the proceeds of the
Offering) were used to make payments with respect to accrued salaries to the
Company's executive officers.
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<PAGE> 17
SHARES AVAILABLE FOR FUTURE SALE; REGISTRATION RIGHTS. Future sales of
Common Stock by existing shareholders pursuant to Rule 144 under the Securities
Act or otherwise, could have an adverse effect on the price of the Company's
securities. Upon the sale of the 1,900,000 Units offered hereby, the Company
will have outstanding 1,900,000 shares of Class A Common Stock, 1,199,996 shares
of Class B Common Stock, 1,900,000 Warrants and 1,262,500 Public Bridge Warrants
(2,185,000 shares of Class A Common Stock, 1,199,996 shares of Class B Common
Stock, 2,185,000 Warrants and 1,262,500 Public Bridge Warrants if the
Underwriters' over-allotment option is exercised in full). The shares of Class A
Common Stock and the Warrants sold in the Offering will be freely tradeable
without restriction under the Securities Act, unless acquired by "affiliates" of
the Company as that term is defined in the Securities Act. The 1,199,996
outstanding shares of Class B Common Stock are "restricted securities" within
the meaning of Rule 144 under the Securities Act. Pursuant to Rule 144,
substantially all of these restricted shares will be eligible for resale
commencing 90 days after consummation of the Offering (upon which resale they
will automatically convert into shares of Class A Common Stock). However, all
the holders of the shares of Class B Common Stock outstanding prior to the
Offering have agreed not to sell or otherwise dispose of any securities of the
Company for a period of 13 months from the date of this Prospectus without the
prior written consent of the Representative. Holders of 1,262,500 Public Bridge
Warrants have agreed not to sell any of the Public Bridge Warrants for at least
one year from the closing of the Offering. The Company has agreed to register
the Public Bridge Warrants for resale upon termination of the lock-up period. In
addition, the holders of shares of Class B Common Stock have placed an aggregate
of 800,000 of such shares in escrow. See "Principal Shareholders -- Escrow
Shares." The holders of the Unit Purchase Option have certain demand and "piggy-
back" registration rights covering their securities. The exercise of such rights
could involve substantial expense to the Company. Sales of Class A Common Stock,
or the possibility of such sales, in the public market may adversely affect the
market price of the securities offered hereby. See "Description of Securities,"
"Shares Eligible for Future Sale" and "Underwriting."
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Upon sale of the 1,900,000
Units offered hereby, the Company will have outstanding 1,900,000 Warrants to
purchase 1,900,000 shares of Class A Common Stock (or 2,185,000 Warrants to
purchase 2,185,000 shares of Class A Common Stock if the Underwriters' over-
allotment option is exercised in full). In addition, the Company will have
outstanding 1,262,500 Public Bridge Warrants to purchase 1,262,500 shares of
Class A Common Stock, the Unit Purchase Option to purchase an aggregate of
380,000 shares of Class A Common Stock assuming exercise of the underlying
Warrants, and 300,000 shares of Class A Common Stock reserved for issuance under
the Option Plan, under which options to purchase 30,000 shares are outstanding
at an exercise price of $4.00 per share. Holders of such options and warrants
may exercise them at a time when the Company would otherwise be able to obtain
additional equity capital on terms more favorable to the Company. Moreover,
while these warrants and options are outstanding, the Company's ability to
obtain financing on favorable terms may be adversely affected. See "Management,"
"Principal Shareholders -- Escrow Shares" and "Description of Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Units offered hereby
will incur immediate and substantial dilution in the pro forma net tangible book
value of the Class A Common Stock included in the Units, estimated to be
approximately $3.27 per share or approximately 65% of the public offering price
per share (allocating no value to the Warrants). Additional dilution to public
investors, if any, may result to the extent that the Warrants, the Unit Purchase
Option or outstanding options and warrants are exercised at a time when the net
tangible book value per share of Class A Common Stock exceeds the exercise price
of any such securities. See "Dilution."
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; POTENTIAL
ANTI-TAKEOVER PROVISIONS. The Company's Restated Articles of Incorporation
authorizes the issuance of a maximum of 5,000,000 shares of Preferred Stock on
terms which may be fixed by the Company's Board of Directors without further
shareholder action. The terms of any series of preferred stock, which may
include priority claims to assets and dividends and special voting rights, could
adversely affect the rights of holders of the Class A Common Stock and thereby
reduce the value of the Class A Common Stock. The issuance of preferred stock
could make the possible takeover of the Company or the removal of management of
the Company more difficult, discourage hostile bids for control of the Company
in which shareholders may receive premiums for their shares of Class A Common
Stock or otherwise dilute the rights of holders of Class A Common Stock.
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<PAGE> 18
ARBITRARY DETERMINATION OF OFFERING PRICE; ABSENCE OF PUBLIC MARKET AND
POSSIBLE VOLATILITY OF STOCK PRICE. The initial public offering price of the
Units and the exercise prices and other terms of the Warrants have been
arbitrarily determined by negotiation between the Company and the Representative
and do not necessarily bear any relationship to the Company's assets, net worth
or other established criteria of value. The exercise and redemption prices of
the Warrants should not be construed to imply or predict any increase in the
market price of the Class A Common Stock. See "Underwriting." No public market
for the securities has existed prior to the Offering. No assurance can be given
that an active trading market in the Company's securities will develop after
completion of the Offering or, if developed, that it will be sustained. No
assurance can be given that the market price of the Company's securities will
not fall below the initial public offering price. The Company believes factors
such as quarterly fluctuations in financial results, announcements of
technological innovations or new products and services, product and service
enhancements by the Company or its competitors, changes in financial estimates
by securities analysts and other events may cause the market price of the
Company's securities to fluctuate, perhaps substantially. These fluctuations, as
well as general economic conditions, such as recessions or high interest rates,
may adversely affect the market price of the securities.
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ SMALLCAP MARKET. Although
the Company's Units, Class A Common Stock and Warrants meet the current Nasdaq
listing requirements and are expected to be initially included on The Nasdaq
SmallCap Market, the Company will have to maintain certain minimum financial and
corporate governance requirements for continued inclusion on Nasdaq. Continued
inclusion on Nasdaq generally requires that (i) the Company maintain either at
least $2,000,000 in net tangible assets ("net tangible assets" equals total
assets less total liabilities and goodwill) or a $35,000,000 market
capitalization, or the Company has generated net income of at least $500,000 in
two of the three prior years; (ii) there be at least 500,000 shares in the
public float valued at $1,000,000 or more; (iii) the minimum bid price of the
Class A Common Stock be $1.00 per share; (iv) the Class A Common Stock have at
least two active market makers; (v) the Class A Common Stock be held by at least
300 holders; and (vi) the Company have at least two independent directors.
If the Company is unable to satisfy Nasdaq's maintenance requirements, the
Company's securities may be delisted from Nasdaq. In such event, trading, if
any, in the Units, Class A Common Stock and Warrants would thereafter be
conducted in the over-the-counter markets in the so-called "pink sheets" or the
NASD's "Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of the transactions
and lower prices for the Company's securities than might otherwise be attained.
RISK OF LOW-PRICE STOCKS; PENNY STOCK RESTRICTIONS. If the Company's
securities were to be delisted from Nasdaq, they could become subject to Rule
15g-9 under the Exchange Act, which imposes additional sales practice
requirements on broker-dealers which sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may adversely affect the ability of broker-dealers
to sell the Company's securities and may adversely affect the ability of
purchasers in the Offering to sell any of the securities acquired hereby in the
secondary market.
Securities and Exchange Commission (the "Commission") regulations define a
"penny stock" to be any non-Nasdaq equity security that has a market price (as
therein defined) of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require delivery, prior to any
transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also required to be
made about commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and
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<PAGE> 19
continuing basis or meet certain minimum net tangible assets or average revenue
criteria. There can be no assurance that the Company's securities will qualify
for exemption from these restrictions. In any event, even if the Company's
securities were exempt from such restrictions, the Company would remain subject
to Section 15(b)(6) of the Exchange Act, which gives the Commission the
authority to prohibit any person that is engaged in unlawful conduct while
participating in a distribution of a penny stock from associating with a
broker-dealer or participating in a distribution of a penny stock, if the
Commission finds that such a restriction would be in the public interest. If the
Company's securities were subject to the rules on penny stocks, the market
liquidity for the Company's securities could be severely adversely affected.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Warrants included in the Units offered hereby will be detachable
and separately tradeable from and after the Separation Date. Although the Units
will not knowingly be sold to purchasers in jurisdictions in which the Units are
not registered or otherwise qualified for sale, purchasers who reside in or move
to jurisdictions in which the securities underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable may
buy Units (or the Warrants included therein) in the aftermarket. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their Warrants unless and until the underlying shares could be
qualified for sale in the jurisdictions in which such purchasers reside, or
unless an exemption from such qualification exists in such jurisdictions. No
assurance can be given that the Company will be able to effect any such required
registration or qualification.
Additionally, purchasers of the Units will be able to exercise the Warrants
included therein only if a current prospectus relating to the shares underlying
the Warrants is then in effect under the Securities Act and such shares are
qualified for sale or exempt from qualification under the applicable securities
or "blue sky" laws of the states in which the various holders of the Warrants
then reside. Although the Company has undertaken to use reasonable efforts to
maintain the effectiveness of a current prospectus covering the shares
underlying the Warrants, no assurance can be given that the Company will be able
to do so. The value of the Warrants may be greatly reduced if a current
prospectus covering the shares issuable upon the exercise of the Warrants is not
kept effective or if such shares are not qualified or exempt from qualification
in the states in which the holders of the Warrants then reside.
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS. The Warrants are subject
to redemption one year from the date of this Prospectus, on at least 30 days'
prior written notice, if the average of the closing bid prices (or last sales
prices) of the Class A Common Stock for 30 consecutive business days ending
within 15 days of the date on which the notice of redemption is given exceeds
$9.10 per share. If the Warrants are redeemed, holders of Warrants will lose
their right to exercise the Warrants, except during such 30-day notice of
redemption period. Upon the receipt of a notice of redemption of the Warrants,
the holders thereof would be required to: (i) exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for them to do so; (ii)
sell the Warrants at the then current market price (if any) when they might
otherwise wish to hold the 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. See "Description of Securities -- Redeemable Warrants."
NO DIVIDENDS. The Company has paid no dividends to its shareholders since
its inception and does not plan to pay dividends in the foreseeable future. The
Company intends to reinvest earnings, if any, in the development and expansion
of its business. See "Dividend Policy."
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER CALIFORNIA
LAW. Pursuant to the Company's Restated Articles of Incorporation, and as
authorized under applicable California law, directors of the Company are not
liable for monetary damages for breach of fiduciary duty, except (i) in
connection with a breach of the duty of loyalty; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) for dividend payments or stock repurchases illegal under California
law; or (iv) for any transaction in which a director has derived an improper
personal benefit. See "Management -- Limitation of Liability and Indemnification
Matters."
POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO
INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION OF THE REPRESENTATIVE
AND BLAIR & CO. AND RECENT SETTLEMENT BY BLAIR & CO. WITH NASD. The Commission
is conducting an investigation concerning various business activities of the
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<PAGE> 20
Representative and D.H. Blair & Co., Inc. ("Blair & Co."), a selling group
member that will distribute a substantial portion (not to exceed approximately
52%, including the Underwriters' over-allotment option) of the Units offered
hereby. The Company has been advised by the Representative that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. The Representative cannot predict whether this
investigation will ever result in any type of formal enforcement action against
the Representative or Blair & Co. In July 1997, Blair & Co., its Chief Executive
Officer and its head trader consented, without admitting or denying any
violations, to a settlement with the NASDR District Business Conduct Committee
for District No. 10 to resolve allegations of NASD rule and securities law
violations in connection with mark-up and pricing practices and adequacy of
disclosures to customers regarding market-making activities of Blair & Co. in
connection with certain securities issues during the period from June 1993
through May 1995 where Blair & Co. was the primary selling group member. NASDR
alleged the firm failed to accurately calculate the contemporaneous cost of
securities in instances where the firm dominated and controlled after-market
trading, thereby causing the firm to charge its customers excessive mark-ups.
NASDR also alleged the firm did not make adequate disclosure to customers about
its market-making activities in two issues. As part of the settlement, Blair &
Co. has consented to a censure and has agreed to pay a $2.0 million fine, make
$2.4 million in restitution to retail customers, employ an independent
consultant for two years to review and make recommendations to strengthen the
firm's compliance procedures, and has undertaken for 12 months not to sell to
its retail customers (excluding banks and other institutional investors) more
than 60% of the total securities sold in any securities offering in which it
participates as an underwriter or selling group member. The Chief Executive
Officer of Blair & Co. has agreed to settle failure to supervise charges by
consenting to a censure, the imposition of a $225,000 fine and a 60-day
suspension from associating with any NASD member firm and to take a
requalification examination. The firm's head trader has agreed to settle charges
against him by consenting to a censure, the imposition of a $300,000 fine and a
90-day suspension from associating with any member firm and has undertaken to
take certain requalification examinations. The settlement with NASDR does not
involve or relate to the Representative, its chief executive officer or any of
its other officers or directors. See "Underwriting."
The Company has been advised that Blair & Co. intends to make a market in
the Company's securities after the Offering. The Company is unable to predict
whether Blair & Co.'s settlement with the NASDR or any unfavorable resolution of
the Commission's investigation will have any effect on such firm's ability to
make a market in the Company's securities and, if so, whether the liquidity or
price of the Company's securities would be adversely affected.
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. The Representative has advised the Company that Blair & Co. intends
to make a market in the Company's securities. Regulation M under the Exchange
Act may prohibit Blair & Co. from engaging in any market-making activities with
regard to the Company's securities for the period from five business days (or
such other applicable period as Regulation M may provide) prior to any
solicitation by the Representative of the exercise of Warrants until the later
of the termination of such solicitation activity or the termination (by waiver
or otherwise) of any right that the Representative may have to receive a fee for
the exercise of Warrants following such solicitation. As a result, Blair & Co.
may be unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable. In addition, the Company has agreed
to register for resale the Public Bridge Warrants and the underlying Class A
Common Stock one year from the closing of the Offering. Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution
in the future of the Public Bridge Warrants may not simultaneously engage in
market-making activities with respect to any securities of the Company for the
applicable "cooling off" period (which is likely to be five business days) prior
to the commencement of such distribution. Accordingly, in the event the
Representative or Blair & Co. is engaged in a distribution of the Public Bridge
Warrants, neither of such firms will be able to make a market in the Company's
securities during the applicable restrictive period. Any temporary cessation of
such market-making activities could have an adverse effect on the market prices
of the Company's securities. See "Underwriting."
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<PAGE> 21
USE OF PROCEEDS
The net proceeds from the sale of 1,900,000 Units offered hereby, after
deducting the underwriting discounts and commissions and other estimated
expenses of the Offering, are estimated to be approximately $7,715,000
($8,954,750 if the Underwriters' over-allotment option is exercised in full).
The Company expects the net proceeds to be utilized approximately as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
---------- ----------
<S> <C> <C>
Repayment of Bridge Notes(1)......................... $2,145,000 27.8%
Repayment of Blair Notes(2).......................... 642,000 8.3
Repayment of Additional Bridge Note(3)............... 252,000 3.3
Selling expenses(4).................................. 1,138,000 14.8
Advertising, promotion and marketing(5).............. 913,000 11.8
Research and development(6).......................... 163,000 2.1
License fees(7)...................................... 132,000 1.7
Working capital(8)................................... 2,330,000 30.2
---------- ------
Total...................................... $7,715,000 100.0%
========== ======
</TABLE>
- ---------------
(1) Represents principal amount of the Bridge Notes issued in the Bridge
Financing completed by the Company in January 1997, together with estimated
accrued interest through October 15, 1997. The Bridge Notes bear interest at
the rate of 10% per annum and mature on the closing of the Offering. In
October and November 1996, the Company sold in a private placement the
Interim Notes in the aggregate principal amount of $200,000. The proceeds of
the Interim Notes were used for working capital purposes. Approximately
$204,000 of the proceeds from the issuance of the Bridge Notes were used to
repay principal and interest on the Interim Notes. The remaining proceeds of
the Bridge Notes were used for selling expenses, advertising, promotion and
marketing, and for working capital purposes, including general and
administrative expenses and payment of compensation to the Company's
executive officers (approximately $102,000 of which relates to payments made
with respect to accrued salaries).
(2) Represents principal amount of the Blair Notes issued in May, June and July
1997, together with estimated accrued interest through October 15, 1997. The
Blair Notes bear interest at the rate of 10% per annum and mature on the
closing of the Offering. The proceeds of the Blair Notes were used for
working capital purposes, including general and administrative expenses. The
Blair Notes were issued to the Representative and a corporation controlled
by a family member of the sole stockholder of the Representative.
(3) Represents principal amount of the Additional Bridge Note issued in
September 1997, together with estimated accrued interest through October 15,
1997. The Additional Bridge Note bears interest at the rate of 10% per annum
and matures on the closing of the Offering. The proceeds of the Additional
Bridge Note were used for working capital purposes, including the repayment
of past due payables.
(4) Includes expenses associated with developing the Company's sales force,
including salaries, commissions and travel expenses for an estimated total
of 10 to 15 national and regional sales managers and sales support staff
anticipated to be hired following the consummation of the Offering to sell
the Company's services. See "Business -- Sales, Marketing and Distribution."
(5) Includes amounts which are expected to be paid to Netscape (approximately
$180,000 of which relates to amounts due by October 31, 1997) and amounts
which may be paid to other Website providers, browser providers and
distribution channels to market the Company's services, expenses associated
with print advertising and the development of printed promotional materials,
trade show expenses, and the salary of one marketing manager.
(6) Includes payment of compensation to the Company's technical personnel
comprised of the Company's Director of Technology, Web Master and staff of
an estimated two to three additional employees.
(7) Represents royalties payable to Pro-CD for the Company's licensed database.
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<PAGE> 22
(8) Working capital will be used for general corporate purposes, including
approximately $548,000 in aggregate annual base compensation to the
Company's executive officers (approximately $100,000 of which relates to the
payment of accrued salaries), the payment of past due payables
(approximately $200,000 past due as of September 30, 1997), payments for
insurance, corporate headquarter lease payments, administrative salaries and
other business support costs. In addition, an estimated approximately
$280,000 will be used for computer hardware system lease payments during the
12 months following the consummation of the Offering and the purchase of a
new operating system and related consulting support. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Management."
The Company anticipates, based on the Company's currently proposed plans
and assumptions relating to its operations (including assumptions relating to
the generation of revenue through relationships with Independent Publishers),
that the proceeds of the Offering, together with anticipated revenue from sales
of enhanced advertisements, should be sufficient to fund the Company's
contemplated cash requirements for approximately 12 months following the
consummation of the Offering. In the event the Company's plans change, its
assumptions change or prove to be inaccurate or if the Company's funds for
operations otherwise prove to be insufficient (including due to unanticipated
technical or other problems), the Company could be required to seek additional
financing prior to the expiration of such 12-month period. In addition,
following such 12-month period, if the Company does not generate significant
revenue from operations, the Company will need to obtain additional financing.
The Company's ability to generate such revenue will depend primarily upon the
ability of the Company to sell enhanced advertising services to businesses,
primarily through the efforts of Independent Publishers. There can be no
assurance that the Company will be successful in selling such advertising
services or will ever generate sufficient revenue to fund its operations. The
Company has no current arrangements with respect to, or sources of, additional
financing. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all. The inability to obtain
additional financing could have a material adverse effect on the Company,
including possibly requiring the Company to curtail its growth plans,
significantly reduce operating costs or cease operations completely. See "Risk
Factors -- Future Additional Capital Requirements; No Assurance Capital Will be
Available."
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering. This estimate is based upon the current status
of the Company's business operations and upon certain assumptions regarding
future operations, including assumptions relating to the ability of the Company
to generate revenue through relationships with Independent Publishers or
otherwise. The amounts actually expended for each purpose set forth in "Use of
Proceeds," other than the repayment of the Bridge Notes, the Blair Notes and the
Additional Bridge Note, may vary significantly in the event any of these
assumptions prove inaccurate. Future events, including changes in economic or
competitive conditions or the Company's business and the results of the
Company's sales and marketing activities, may make shifts in the allocation of
funds necessary or desirable. Specifically, in the event the Company does not
generate sufficient revenue within the first six months following the
consummation of the Offering, the Company will be required to curtail its growth
plan through reductions in the Company's sales force and administrative
personnel. The Company reserves the right to change its use of proceeds as
unanticipated events or opportunities may cause the Company to redirect its
priorities and reallocate the proceeds accordingly. The Company may use a
portion of the proceeds to acquire other businesses or technologies or products
which are compatible with the Company's business for the purpose of expanding
its businesses or the Company may enter into strategic alliances with other such
companies. The Company does not currently have any agreements, commitments or
arrangements with respect to any proposed acquisition, joint venture or
strategic alliance, and no assurance can be given that any acquisitions, joint
ventures or strategic alliances will be made in the future.
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<PAGE> 23
Prior to their use, the net proceeds of the Offering will be invested in
short-term, high-grade, interest-bearing investments or accounts. The Company
anticipates that any proceeds received upon exercise of the Underwriters'
over-allotment option, the Warrants or the Public Bridge Warrants, will be added
to working capital.
DIVIDEND POLICY
The Company has not, to date, paid any cash dividends on its Common Stock.
The Company has no current plans to pay dividends on its Common Stock and
intends to retain earnings, if any, for working capital purposes. Any future
determination as to the payment of dividends on the Common Stock will depend
upon the results of operations, capital requirements and financial condition of
the Company and other factors deemed relevant by the Company's Board of
Directors.
22
<PAGE> 24
DILUTION
The following discussion and tables allocate no value to the Warrants
contained in the Units.
Dilution represents the difference between the initial public offering
price per share paid by the purchasers in the Offering and the net tangible book
value per share immediately after completion of the Offering. Pro forma net
tangible book value per share represents the net tangible assets of the Company
(total assets less total liabilities and intangible assets), divided by the
number of shares of Common Stock outstanding upon the closing of the Offering.
At June 30, 1997, the Company had a pro forma net tangible deficit of
approximately $(2,360,000), or approximately $(1.97) per share ($(5.90) per
share if the Escrow Shares are excluded). After giving effect to the issuance of
the 1,900,000 Units offered hereby at an initial public offering price of $5.00
per Unit, and the Company's receipt of the estimated net proceeds therefrom and
the use of a portion of the net proceeds to repay the Bridge Notes, the Blair
Notes and the Additional Bridge Note (in each case including interest), the net
tangible book value of the Company, as adjusted at June 30, 1997 would have been
approximately $5,370,000, or approximately $1.73 per share ($2.25 per share if
the Escrow Shares were excluded). This would result in an immediate dilution to
investors in the Offering of $3.27, or 65%, per share ($2.75, or 55%, per share
if the Escrow Shares were excluded), and the aggregate increase in the pro forma
net tangible book value to present shareholders would be $3.70 per share ($8.15
per share if the Escrow Shares were excluded), as illustrated by the following
table:
<TABLE>
<S> <C> <C>
Initial public offering price per Unit....................... $5.00
Pro forma net tangible deficit per share before the
Offering................................................ (1.97)
Increase per share attributable to new investors........... 3.70
------ -----
Pro forma net tangible book value per share after the
Offering................................................... 1.73
-----
Dilution per share to new investors(1)....................... $3.27
=====
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share after the Offering would be
approximately $1.95, resulting in dilution to new investors in the Offering
of $3.05, or 61%, per share.
The following table sets forth, on a pro forma basis, the differences
between existing shareholders and new investors in the Offering with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing shareholders and by new investors at an initial public offering price
of $5.00 per Unit:
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF OF TOTAL AVERAGE
OUTSTANDING CONSIDERATION CONSIDERATION PRICE PER
NUMBER SHARES PAID(1) PAID SHARE
--------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders.............. 1,199,996(2) 38.7% $ 152,940 1.6% $0.13
New Investors...................... 1,900,000 61.3 9,500,000 98.4 5.00
--------- ----- ---------- -----
Total.............................. 3,099,996 100.0% $ 9,652,940 100.0%
========= ===== ========== =====
</TABLE>
- ---------------
(1) Prior to the deduction of costs of issuance.
(2) Includes the 800,000 shares of Class B Common Stock that are Escrow Shares.
See "Principal Shareholders -- Escrow Shares."
23
<PAGE> 25
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, (ii) pro forma as of June 30, 1997 to reflect the $190,000
portion of the Blair Notes and the Additional Bridge Note issued subsequent to
such date and (iii) pro forma as adjusted to give effect to the issuance by the
Company of 1,900,000 Units pursuant to the Offering at an initial offering price
of $5.00 per Unit and the receipt of the net proceeds thereof and the
application of the net proceeds to repay the Bridge Notes, the Blair Notes and
the Additional Bridge Note and related interest. See "Use of Proceeds." This
table should be read in conjunction with the financial statements of the Company
and the notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Bridge Notes, Blair Notes and Additional Bridge
Note payable, net of discount.................... $2,222,300 $ 2,633,550 $ 0
=========== =========== ===========
Shareholders' equity (deficit):
Preferred Stock, 5,000,000 shares authorized; no
shares issued and outstanding, actual, pro
forma and pro forma as adjusted............... 0 0 0
Class A Common Stock, 18,800,000 shares
authorized; no shares issued and outstanding,
actual and pro forma, 1,900,000 shares issued
and outstanding, pro forma as adjusted(1)..... 0 0 7,715,000
Class B Common Stock, 1,400,000 shares
authorized; 1,199,996 shares issued and
outstanding(2)................................ 152,940 152,940 152,940
Additional paid in capital....................... 475,800 504,550 504,550
Deficit accumulated during the development
stage......................................... (2,527,695) (2,527,695) (2,944,736)(3)
----------- ----------- -----------
Total shareholders' equity (deficit)..... (1,898,955) (1,870,205) 5,427,754
----------- ----------- -----------
Total capitalization............................... $ 323,345 $ 763,345 $ 5,427,754
=========== =========== ===========
</TABLE>
- ---------------
(1) Does not include (i) 1,900,000 shares of Class A Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby; (ii) 570,000
shares of Class A Common Stock issuable upon exercise of the Underwriters'
over-allotment option, including the shares issuable upon exercise of the
Warrants included in the Units subject to such option; (iii) 380,000 shares
of Class A Common Stock issuable upon exercise of the Unit Purchase Option
and the Warrants included in the Units issuable upon exercise of the Unit
Purchase Option; (iv) 1,262,500 shares of Class A Common Stock issuable upon
exercise of the Public Bridge Warrants; and (v) up to 62,500 shares of Class
A Common Stock which may be issuable upon exercise of the Public Bridge
Warrants. Also does not give effect to 300,000 shares of Class A Common
Stock reserved for issuance under the Option Plan, under which options to
purchase 30,000 shares have been granted to date. See "Management -- Stock
Option Plan."
(2) Includes 800,000 Escrow Shares. See "Principal Shareholders -- Escrow
Shares."
(3) As adjusted to give effect to the recognition of approximately $417,000 of
expense upon the repayment of the Bridge Notes and the Additional Bridge
Note. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
BRIDGE FINANCINGS
In October and November 1996, the Company issued an aggregate of $200,000
principal amount of Interim Notes and warrants to purchase an aggregate of
200,000 shares of Class B Common Stock ("Interim Warrants") to a total of three
individual investors, pursuant to which the Company received net proceeds of
$200,000. In January 1997, the Company completed the Bridge Financing of an
aggregate of $2,000,000 principal amount of Bridge Notes and 1,000,000 Bridge
Warrants to a total of 42 individual and institutional investors, in which the
Company received net proceeds of approximately $1,680,000 (after expenses of
such offering). A portion of the proceeds of the Bridge Financing were used to
repay principal and interest on the
24
<PAGE> 26
Interim Notes. On the closing of the Bridge Financing, the Interim Warrants
automatically converted into 200,000 Bridge Warrants.
The Representative, which acted as placement agent in connection with the
Bridge Financing, has advised the Company that there are no relationships
between any of the foregoing investors and the Representative except that
virtually all of such investors are existing high net worth clients of Blair &
Co. (a corporation that is substantially owned by family members of the sole
stockholder of the Representative). See "Underwriting." As used herein, the term
"Bridge Warrants" refers to, collectively, the 1,000,000 Bridge Warrants issued
in the Bridge Financing and the 200,000 Interim Warrants which were converted
into Bridge Warrants.
The Bridge Notes are payable, together with interest at the rate of 10% per
annum, on the earlier of one year from the issuance of the Bridge Notes and the
closing of the Offering. See "Use of Proceeds." The Bridge Warrants entitle the
holders thereof to purchase one share of Class A Common Stock commencing one
year from the date of their issuance but will be exchanged automatically on the
closing of the Offering for Public Bridge Warrants, each of which will be
identical to the Warrants included in the Units offered hereby. The Bridge
Financing investors have agreed not to exercise, sell, transfer, or otherwise
dispose of their Public Bridge Warrants for a period of one year from the
closing of the Offering. The Company has agreed to use its best efforts to
register such Public Bridge Warrants for resale upon expiration of such lockup
period.
In May, June and July 1997, the Company issued an aggregate of $622,000
principal amount of promissory notes (the "Blair Notes") to the Representative
and a corporation controlled by a family member of the sole stockholder of the
Representative. See "Underwriting." The Blair Notes are payable, together with
interest, at the rate of 10% per annum, on the earlier of six months from their
issuance, the closing of the Offering and the closing of any private financing
providing gross proceeds to the Company of at least $1,000,000.
In September 1997, the Company issued a $250,000 principal amount
Additional Bridge Note and 62,500 Additional Bridge Warrants to one
institutional investor. The Additional Bridge Note is payable, together with
interest at the rate of 10% per annum, on the earlier of March 15, 1998 and the
closing of the Offering. See "Use of Proceeds." In the event the Additional
Bridge Note is not repaid in full by October 27, 1997, the holder shall be
entitled to receive warrants to purchase an additional 10,000 shares of Class A
Common Stock for each seven-day period that the Additional Bridge Note remains
unpaid (up to a maximum of 62,500 additional warrants). The Additional Bridge
Warrants (including any additional warrants which may be issued) entitle the
holder thereof to purchase one share of Class A Common Stock commencing one year
from the date of their issuance but will be exchanged automatically on the
closing of the Offering for Public Bridge Warrants, each of which will be
identical to the Warrants included in the Units offered hereby. The Additional
Bridge Financing investor has agreed not to exercise, sell, transfer, or
otherwise dispose of its Public Bridge Warrants for a period of one year from
the closing of the Offering. The Company has agreed to use its best efforts to
register such Public Bridge Warrants for resale upon expiration of such lockup
period.
25
<PAGE> 27
SELECTED FINANCIAL DATA
The following statement of operations data for the period from November 13,
1995 (inception) to December 31, 1995 and for the year ended December 31, 1996,
are derived from the audited financial statements of the Company included
elsewhere in this Prospectus. The report of BDO Seidman LLP which also appears
herein contains an explanatory paragraph relating to uncertainty as to the
ability of the Company to continue as a going concern. The statement of
operations data for the six months ended June 30, 1996 and 1997 and the period
from November 13, 1995 (inception) to June 30, 1997 and the balance sheet data
at June 30, 1997 are derived from the unaudited financial statements of the
Company included elsewhere in this Prospectus and include, in the opinion of the
Company, all adjustments consisting of all normal recurring adjustments
necessary for a fair presentation of the Company's results of operations for
those periods and financial position at that date. The results of operations for
the six months ended June 30, 1997 are not necessarily indicative of the results
to be expected for the entire year. The following selected financial data should
be read in conjunction with the financial statements and related notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NOVEMBER 13, 1995
NOVEMBER 13, 1995 SIX MONTHS ENDED (INCEPTION) TO
(INCEPTION) TO YEAR ENDED ----------------------------- JUNE 30, 1997
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997 (CUMULATIVE)
----------------- ----------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................... $ -- $ 65,548 $ 40,925 $ 23,914 $ 89,462
--------- --------- --------- ----------- -----------
Costs and expenses
Cost of revenue..................... 6,250 114,052 51,998 63,031 183,333
Research and development............ -- -- -- 59,249 59,249
General and administrative.......... 12,325 357,552 173,716 961,632 1,331,509
Selling and marketing............... -- 152,365 24,187 487,651 640,016
--------- --------- --------- ----------- -----------
Total costs and expenses.............. 18,575 623,969 249,901 1,571,563 2,214,107
--------- --------- --------- ----------- -----------
Operating loss........................ $ (18,575) $(558,421) $(208,976) $(1,547,649) $(2,124,645)
--------- --------- --------- ----------- -----------
Net interest expense.................. -- 19,702 -- 383,348 403,050
Net loss.............................. $ (18,575) $(578,123) $(208,976) $(1,930,997) $(2,527,695)
========= ========= ========= =========== ===========
Net loss per common share(1).......... $ (0.02) $ (0.67) $ (0.25) $ (2.13)
========= ========= ========= ===========
Weighted average common shares
outstanding(1)...................... 818,344 858,499 850,777 906,378
========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------
ACTUAL PRO FORMA(2)
----------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency).......................................................... $(2,419,152) $(2,390,402)
Total assets.......................................................................... 836,449 1,276,449
Total liabilities..................................................................... 2,735,404 3,146,654
Deficit accumulated during the development stage...................................... (2,527,695) (2,527,695)
Total shareholders' equity (deficit).................................................. (1,898,955) (1,870,205)
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted average number of shares of Common Stock used
in computing the net loss per common share. Excludes the Escrow Shares. See
"Principal Shareholders -- Escrow Shares" and Note 9 of Notes to Financial
Statements.
(2) Gives pro forma effect to the issuance of (i) $190,000 principal amount of
Blair Notes and (ii) a $250,000 principal amount Additional Bridge Note, in
each case subsequent to June 30, 1997. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus.
OVERVIEW
The Company is a development stage company which did not commence
operations until November 1995. Since it commenced operations, the Company has
been engaged principally in the development, design and refinement of its sites,
market-testing activities, and marketing activities directed towards
establishing relationships with Independent Publishers, in addition to capital
raising activities.
The Company believes that the Internet represents an important new means
for advertisers to reach consumers through a targeted, interactive and highly
measurable medium. The Company has derived substantially all of its limited
revenue to date from the sale of enhanced advertisements on its On'Village
Yellow Pages and intends to continue to derive most of its revenue, if any, from
sales of such advertisements for the foreseeable future. As of September 30,
1997, the Company had entered into 70 arrangements with Independent Publishers.
The Company's initial arrangements with Independent Publishers provided that the
Company receive limited cash payments up-front from the Independent Publishers
and a commitment by the Independent Publisher to market and resell a specified
number of the Company's "QuickStart" advertisements (the "QuickStart Ad"). The
Company's more recent agreements with Independent Publishers, which represent
the Company's current business strategy and cover 60 of the Company's
agreements, provide that, for a period of one year, the Independent Publisher
will offer its advertising customers the opportunity to advertise on the
Company's yellow page directory for one year through the Company's "QuickStart
Ads," at no charge to the Independent Publisher. In exchange for affording the
Independent Publishers' advertising customers the opportunity to advertise on
the Company's yellow page site, the Independent Publisher is required to print
the Company's name and Internet address in its print yellow page directories
(including at least one full page display advertisement in each published
directory) and to use its best efforts to resell the Company's enhanced
advertising services. Revenue, if any, under these agreements will initially be
derived only to the extent the Company's enhanced advertising services are sold
and revenue, if any, derived under the agreements will be recognized by the
Company ratably over the term of the advertisement. Any cash received prior to
the completion of the earning process is recorded as deferred revenue.
Advertising revenue is also anticipated to be derived to a lesser extent from
direct sales by the Company to advertising customers. See
"Business -- Strategy."
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside the Company's
control. These factors include the level of usage of the Internet, demand for
Internet advertising, seasonal trends in Internet usage, the advertising
budgeting cycles of individual advertisers, the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
operations, the introduction of new services by the Company or its competitors,
pricing changes in the industry, general economic conditions and economic
conditions specific to the Internet and on-line media. As a strategic response
to changes in the competitive environment, the Company may from time to time
make certain pricing, service or marketing decisions that could have a material
adverse effect on the Company's business, results of operations and financial
condition.
RESULTS OF OPERATIONS
To date, the Company has generated extremely limited revenue. During the
period November 13, 1995 (inception) to June 30, 1997 (cumulative) (the "Initial
Period"), the Company incurred a cumulative net loss of approximately
$2,528,000, including net losses of approximately $578,000 and $1,931,000 for
the year ended December 31, 1996 and for the six months ended June 30, 1997,
respectively. Since June 30, 1997, the Company has continued to incur
significant losses. These losses have resulted primarily from limited revenue
from operations and costs associated with the design and development of the
Company's services, including royalty and licensing payments, general and
administrative expenses and marketing activities.
27
<PAGE> 29
REVENUE
During the Initial Period, the Company generated revenue of approximately
$89,000, a substantial portion of which was derived from the direct sale of
advertisements to businesses located in Southern Utah in connection with the
Company's test marketing activities. The Company also recorded approximately
$66,000 of deferred revenue as of June 30, 1997 under agreements with
Independent Publishers. The Company's business strategy is to generate
advertising revenue through arrangements with Independent Publishers who will
market and attempt to resell the Company's enhanced advertising services to
their existing customers. As of September 30, 1997, the Company had entered into
70 of such arrangements and has generated extremely limited revenue from such
arrangements.
COST AND EXPENSES
Costs and expenses are comprised of cost of revenue, research and
development, general and administrative expenses and selling and marketing
expenses. For the Initial Period, the Company's cost of revenue was
approximately $183,000, and was comprised primarily of royalty payments made to
Pro-CD for use of Pro-CD's nationwide database. Subsequent to the Initial
Period, cost of revenue may also include royalty payments to Network Publishing
and payments to Mr. Kent Hinkson, the Company's Director of Technology, equal to
a total of 2% of the Company's annual net revenue, if any. See "-- Liquidity and
Capital Resources."
During the periods from November 13, 1995 (inception) to December 31, 1995
and for the year ended December 31, 1996, all of the Company's research and
development activities were conducted by Network Publishing and accordingly, the
Company did not have any research and development expenditures during such
periods. During the six months ended June 30, 1997, the Company incurred
approximately $59,000 of research and development expenses relating to salaries
for technical personnel, and expects to incur significant further increases in
research and development expenses throughout 1997. These increases are expected
to include significant increases in spending on salaries and benefits (including
salaries for a director of technology, a systems engineer, an operations manager
and a programmer).
General and administrative expenses during the Initial Period totalled
approximately $1,331,000, and were comprised primarily of salaries for
administrative personnel and executive officers, legal and professional fees,
and other business support costs. Upon consummation of the Bridge Financing, the
Company began to incur increased general and administrative expenses, and
expects to incur significant further increases throughout 1997. These increases
are expected to include significant increases in spending on salaries and
benefits (including salaries for a chief financial officer, a customer service
staff, an editorial creative staff and other administrative personnel), rent
relating to a new corporate headquarters and other business support costs.
Selling and marketing expenses during the Initial Period were approximately
$640,000, and were comprised of costs incurred to support the Company's test
marketing activities, the commencement of the establishment of a sales force and
relationships with Independent Publishers and expenses relating to the
amortization of the agreement with Netscape of approximately $257,000. Upon
consummation of the Bridge Financing, the Company began to incur increased
selling and marketing expenses relating to the foregoing activities and expects
to incur significant further increases throughout 1997. The Company believes
that a significant component of these expenses will include increased salaries
and benefits for sales and marketing personnel, including an estimated 10 to 15
national and regional sales managers and sales support staff. The Company
believes that the addition of the foregoing personnel is a necessary component
of the Company's business strategy. No assurance can be given, however, that the
Company will be able to attract, retain or assimilate such personnel in a timely
manner, or at all. Further increases in selling and marketing expenses are
expected to include additional payments to Netscape, as well as payments to
other Website providers, browser providers and distribution channels that the
Company may in the future enter into arrangements with to replace and/or
supplement its arrangement with Netscape.
Net interest expense during the Initial Period was approximately $403,000,
consisting primarily of the amortization of debt discount and debt issuance
costs and interest associated with the Bridge Financing.
NET LOSS
The Company incurred a net loss during the Initial Period of approximately
$2,528,000. Inasmuch as the Company plans on significantly increasing its level
of operating expenses and will be required to make
28
<PAGE> 30
significant additional expenditures upon consummation of the Offering to
continue to enhance its services and to attract advertisers to the Company's
services, the Company anticipates that it will incur significant losses until
such time, if ever, that the Company attracts and retains a sufficient number of
advertisers (through relationships with Independent Publishers or otherwise) to
generate enough revenue to support the Company's operating costs. There can be
no assurance that the Company will be able to attract and retain a sufficient
number of advertising customers to generate significant revenue, that the
Company will generate positive cash flow from its operations, or that the
Company will attain or thereafter sustain profitability in any future period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had a deficit accumulated during the
development stage of approximately $2,528,000 and a working capital deficit of
approximately $2,419,000. Since inception, the Company has had continuing
negative cash flow from operations and has funded its operations primarily
through the private sales of equity securities and borrowings from investors.
To date, the activities of the Company have been financed primarily by (i)
equity contributions from Messrs. J. Tracht, R. Tracht, Walden and Austin
(collectively, the "Founders"), officers, directors and the principal
shareholders of the Company, in the aggregate amount of $32,000, (ii) loans in
the aggregate amount of $80,000 from the Founders (which loans, together with
accrued interest of $5,800, were contributed to the capital of the Company in
December 1996), (iii) an equity contribution from an unaffiliated third party in
the amount of $100,000, (iv) the issuance in October and November 1996 of the
Interim Notes and the Interim Warrants, (v) the issuance in January 1997 of the
Bridge Notes and Bridge Warrants, (vi) the issuance in May, June and July 1997
of the Blair Notes and (vii) the issuance in September 1997 of the Additional
Bridge Note. See "Certain Transactions."
In October and November 1996, the Company received a total of $200,000 from
the issuance of the Interim Notes and the Interim Warrants. These proceeds were
used for working capital purposes. In January 1997, the Company received
approximately $1,686,000 from the issuance of the Bridge Notes and Bridge
Warrants, net of issuance costs. A portion of these proceeds were used to repay
principal and interest on the Interim Notes, and were used for selling expenses,
advertising, promotion and marketing expenses and working capital purposes,
including general and administrative expenses and payment of compensation to the
Company's executive officers (approximately $102,000 of which relates to
payments made with respect to accrued salaries). The Company recognized a
non-recurring charge to operations relating to the Interim Notes through the
date of repayment of approximately $24,000, $14,000 of which was recorded in the
fiscal quarter ended December 31, 1996 and $10,000 of which was recorded in the
fiscal quarter ended March 31, 1997. On the closing of the Bridge Financing, the
Interim Warrants automatically converted into 200,000 Bridge Warrants. In May,
June and July 1997, the Company received a total of $622,000 from the issuance
of the Blair Notes. These proceeds were used for working capital purposes. In
September 1997, the Company received $250,000 from the issuance of the
Additional Bridge Note. These proceeds will be used for working capital
purposes, including the repayment of past due payables. The Company has
allocated a portion of the proceeds of the Offering to repay principal and
accrued interest on the Bridge Notes, the Blair Notes and the Additional Bridge
Note. The Company will recognize a charge to operations of approximately
$417,000 in connection with the repayment of the Bridge Notes and the Additional
Bridge Note. See "Use of Proceeds" and "Capitalization -- Bridge Financing."
Pursuant to the Company's original agreement with Netscape, the Company was
required to make an initial payment of $21,666, followed by monthly payments of
$25,000, for total payments to Netscape of $196,666 through March 1997. Pursuant
to the Company's current agreement with Netscape, the Company is obligated to
pay Netscape $180,000 by October 31, 1997, and thereafter, make monthly payments
of $30,000. In the event the required payments are not made by October 31, 1997,
the Company could be in default under its agreement. The Company is also
currently exploring the creation of alternate arrangements with other Website
providers, browser providers or distribution channels to replace and/or
supplement its arrangement with Netscape, which may require payments or other
consideration for listing the Company's services. In addition, the Company is a
party to an agreement with Pro-CD pursuant to which the Company licenses its
database of business listings. Pursuant to this agreement, the Company is
obligated to pay an annual royalty based on net advertising revenue, subject to
minimum annual royalty payments to Pro-CD in order to continue to license its
database. Further, the Company is obligated to pay Network Publishing 1% of the
Company's net
29
<PAGE> 31
advertising revenue derived from the On'Village Yellow Pages and a service fee
of $2,000 per month. In addition, the Company is obligated to pay Kent Hinkson,
the Company's Director of Technology (and a former consultant to Network
Publishing), 1% of the Company's net revenue generated during the term of Mr.
Hinkson's employment agreement (and, in certain instances, for a period of up to
three years following the termination of such agreement). See "Business,"
"Management-Employment Agreements" and Notes 1, 6 and 7 of Notes to Financial
Statements.
Pursuant to an equipment lease dated April 21, 1997, the Company has
financed the acquisition of approximately $300,000 of equipment, consisting
primarily of a computer hardware system. The Company plans to finance an
additional $100,000 of equipment pursuant to this lease during the remainder of
1997. In addition, the Company plans to purchase an estimated $150,000 of
operating system software and related consulting support during the remainder of
1997. As of the date of the Prospectus, the Company had no other material
commitments for capital expenditures. Following the Offering, the Company
intends to hire a number of additional employees, which will require substantial
capital resources. The Company plans to add an additional approximately 30
employees (including a total of approximately 10 to 15 national and regional
sales managers and sales support staff located nationwide) in the approximately
12 months following the consummation of the Offering in the areas of marketing,
product development and administration. In addition, the Company has entered
into employment agreements with each of the Founders, effective on the closing
of the Offering, providing for aggregate salaries of $370,000 in the first year
of each agreement. The Company began accruing salaries to the Founders based on
the salaries in the employment agreements in October 1996. See
"Management -- Employment Agreements." During the second quarter of 1997, the
Company relocated its headquarters, which will result in monthly rent expense of
approximately $8,800 during the first 12 months of the lease (which lease term
commenced in June 1997), increasing to $11,000 per month during the remaining 48
months of the lease term. See "Business -- Facilities."
The Company's independent certified public accountants have included an
explanatory paragraph in their report stating that the Company's financial
statements have been prepared assuming that the Company will continue as a going
concern and that the Company's working capital deficiency and shareholders'
deficit raises substantial doubt as to the Company's ability to continue as a
going concern. The Company is dependent upon the proceeds of the Offering or
other financing in order to continue in business.
The Company expects its cash requirements to increase in the future due to
higher expenses associated with the hiring of additional personnel, advertising,
promotion and marketing activities and other anticipated operating activities.
The Company also anticipates that it will incur significant losses until such
time, if ever, that the Company attracts and retains a sufficient number of
advertisers (through relationships with Independent Publishers or otherwise) to
generate enough revenue to support the Company's operating costs. There can be
no assurance that the Company will be able to attract and retain a sufficient
number of advertising customers to generate significant revenue, that the
Company will generate positive cash flow from its operations, or that the
Company will attain or thereafter sustain profitability in any future period.
The Company anticipates, based on the Company's currently proposed plans
and assumptions relating to its operations (including assumptions relating to
the generation of revenue through relationships with Independent Publishers),
that the proceeds of the Offering, together with anticipated revenue from sales
of enhanced advertisements, should be sufficient to fund the Company's
contemplated cash requirements for approximately 12 months following the
consummation of the Offering. In the event the Company's plans change, its
assumptions change or prove to be inaccurate or if the Company's funds for
operations otherwise prove to be insufficient (including due to unanticipated
technical or other problems), the Company could be required to seek additional
financing prior to the expiration of such 12-month period. In addition,
following such 12-month period, if the Company does not generate significant
revenue from operations, the Company will need to obtain additional financing.
The Company's ability to generate such revenue will depend primarily upon the
ability of the Company to sell enhanced advertising services to businesses,
primarily through the efforts of Independent Publishers. There can be no
assurance that the Company will be successful in selling such advertising
services or will ever generate sufficient revenue to fund its operations. The
Company has no current arrangements with respect to, or sources of, additional
financing. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all. The inability to obtain
additional financing could have a material adverse effect on the Company,
including possibly requiring the
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Company to curtail its growth plans, significantly reduce operating costs or
cease operations completely. See "Risk Factors -- Future Additional Capital
Requirements; No Assurance Capital Will Be Available."
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SHARES
In the event the Company attains any of the earnings or stock price
thresholds required for the release of all or a portion of the Escrow Shares,
the release of the Escrow Shares to Company officers, directors, employees or
consultants will be treated, for financial reporting purposes, as compensation
expense of the Company. Accordingly, the Company will, in the event of the
release of any or all of the Escrow Shares, recognize during the period that the
earnings or stock price thresholds are met a substantial non-cash charge to
earnings that would increase the Company's loss or reduce or eliminate the
Company's net income, if any, for financial reporting purposes for the period or
periods during which such securities are, or become probable of being, released
from escrow. The amount of this charge will be equal to the fair market value of
such securities on the date of release from escrow. Although the amount of
compensation expense recognized by the Company will not affect the Company's
total shareholders' equity (due to a corresponding increase in additional
paid-in capital), it may have a depressive effect on the market price of the
Company's securities.
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board ("FASB") is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. Because the Company is
not currently engaging in any transactions within the scope of this
pronouncement, the Company does not expect adoption of SFAS No. 125 to have a
material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128) issued by the FASB is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Earlier application
is not permitted. SFAS 128 requires dual presentation of basic and diluted
earnings per share ("EPS") on the face of the income statement. It also requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. This statement
also requires restatement of all prior period EPS data presented. The Company
does not expect adoption of SFAS No. 128 to have a material effect on its
results of operations.
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company does not expect adoption of SFAS No. 129
to have a material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined the effect
on its financial position or results of operations from the adoption of this
statement.
Statements of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company has not determined the
effect on its financial position or results of operations from the adoption of
this statement.
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BUSINESS
OVERVIEW
The Company is a development stage company engaged in the development,
publishing and marketing of World Wide Web-based services designed to help users
access information on the Internet, while at the same time providing advertisers
with an efficient and innovative means of reaching targeted audiences. The
Company's primary service offering is "On'Village Yellow Pages," an on-line
national yellow page directory service which users can currently access through
the Company's Web address, "http://www.onvillage.com." This service, offered
free of charge to the user, enables the user to access the Company's licensed
database of over 15 million business listings nationwide and to perform a search
of desired listings presently by category, business name and business location.
At the same time, On'Village Yellow Pages offers businesses the ability to
advertise on the Internet in what management believes is a targeted,
cost-effective and interactive manner. To better reach their targeted audiences,
businesses are given the opportunity by the Company to purchase enhanced
advertising services that supplement the basic yellow page listing. These
enhanced services include priority listings, listings of the Company's other
sites, graphics and logo advertisements, enhanced textual advertisements,
including detailed display banners, listings of businesses by additional
categories and cities, and additional URL and e-mail links.
The Company believes that the Internet represents an important new and
growing medium for advertisers to reach consumers. The Company's objective is to
position itself to take advantage of this growth by serving the needs of its
advertising customers. The Company's strategy is to develop a critical mass of
advertising customers who purchase enhanced advertisements on the On'Village
Yellow Pages. The Company believes that the most effective way to achieve this
base of advertisers is through joint marketing and sales arrangements with
independent local yellow page publishers ("Independent Publishers"), who
contract with the Company to directly market and resell the Company's services
to the Individual Publisher's existing base of customers. The Company believes
there are an estimated 350 Independent Publishers in the United States. As of
September 30, 1997, the Company had entered into arrangements with 70
Independent Publishers. The Company plans to offer enhanced advertising
services, both indirectly through the Independent Publishers and directly to
customers, and to offer customers the opportunity to advertise on the Company's
ancillary services.
To distinguish itself from other on-line yellow page services, the Company
provides and is in the process of refining several additional services developed
by the Company. These offerings include "My Place," a membership service that
offers users various personalized services, products and promotions, and
"On'Zine," an interactive service providing users the ability to communicate and
immediately access relevant and related content and information on designated
third-party Websites. These sites are organized by category and have been
selected, reviewed and rated by the Company. The Company also recently
introduced "OnTour," a compilation of information regarding select U.S.
destinations, currently comprised of information regarding five national parks
and several other tourist destinations. The Company believes that these
additional services, in addition to attracting users, will enable advertisers to
reach a more targeted audience. In the future, the Company may also attempt to
generate revenue through the sale of customized Websites and, eventually, the
hosting of business-to-consumer and business-to-business electronic commerce on
the Internet.
INDUSTRY BACKGROUND
GENERAL
The Internet was originally created by the United States government to
facilitate the exchange of information and electronic mail ("e-mail") between a
limited number of academic institutions, defense contractors and government
agencies. The Internet was commercialized in the late 1980s and 1990s and
technological enhancements have since extended the Internet's reach to consumers
and businesses. The most important technological enhancement to the Internet was
the creation of the World Wide Web in the early 1990s. The Web is a
client/server system of hyperlinked, multimedia databases. The Web enables non-
technical users to easily access information on the Internet and enables
individuals or organizations to offer textual, graphical and other information
directly to end-users. The Web is an interactive environment which facilitates
the exchange of multimedia-rich information and entertainment resources among
users worldwide.
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In addition, recent technological developments have enabled consumers and
businesses to use the Web for buying and selling products and services. As a
result, the Web has changed, and will continue to change the way in which people
exchange information, communicate with each other and distribute products
worldwide.
A number of factors have contributed to the recent growth in popularity of
the Web. The open nature of the Web enables any individual or organization to
publish a Website. New software-based authoring tools have lowered the cost of
publishing content on the Web relative to conventional publishing methods and
enabled new, exciting forms of multimedia content. The Company believes that the
cost of delivering content to a large audience can often be lower than that of
conventional media, consisting primarily of the cost of maintaining and
operating computer equipment and inputting data. In addition, the interactive
nature of the Internet provides an environment in which content providers can
track the appeal of their content by measuring the number of visits to a Website
and can respond quickly to consumers' changing tastes and needs.
The dramatic increase in Web-based information and entertainment has
increased the appeal of the Web to consumers and has driven the high growth in
traffic on the Web. Continued enhancement to the Internet, such as support for
secured transactions, multimedia offering technology and new compression
technologies, is expected to continue to attract new content providers and users
to this medium.
ADVERTISING ON THE WEB
With the growth in the number of Internet users and content providers, the
Internet has begun to develop the attributes of a conventional mass medium,
where advertising subsidizes content delivered to users. The 1995
CommerceNet/Nielsen Internet Demographics Survey indicates that on average, Web
users are upscale, professional and educated, providing an attractive
demographic profile for advertisers.
The Company believes that advertisers have begun to recognize that the
interactive nature of the Internet can provide an environment where advertising
may become more effective than it is in traditional broadcast and print media.
The interactive and global nature of the Internet has the potential to enable
advertisers to target specific audiences, measure the popularity of advertising
content and make timely changes in response, reach worldwide audiences
cost-effectively, and create innovative and interactive advertisements. The
Company believes that increases in transmission bandwidth through higher speed
Internet connections, and wider multimedia enabling technologies for the Web
could also increase the appeal and effectiveness of advertisements and make the
Web an even more attractive platform for advertising.
Advertisers currently face difficulties, however, in placing their
advertisements strategically on the Web. There are few companies that provide
inexpensive convenient turnkey packages that allow advertisers to make their
introduction onto the Web. In addition, it is difficult for advertisers to
understand the volume and demographics of traffic patterns on Websites. As a
result, advertisers can find it difficult to make the existence and location of
their advertisements widely known and target their audiences effectively. The
Company believes that, in the near term, advertisers will migrate to sites which
can offer a high number of impressions per day. The Company also believes that,
over time, advertisers will be attracted to those services that experience a
high volume of traffic, track consumers carefully and deliver advertisers
audiences that fit specific buying profiles. In order to provide such audiences
to advertisers, services and sites must develop technologies to enable them to
conduct complex demographic and psychographic profiling of their consumers. By
understanding their audiences, services and sites will be able to match
advertisements with buyers, resulting in targeted, high-impact advertising,
referred to as "narrowcasting." In addition, the ability to interact with such
targeted groups of consumers by providing enhanced benefits such as savings,
coupons, incentives and contests is expected to enable advertisers to customize
the consumers' needs and eventually, to build a long-term relationship with
customers. The Company believes that those sites and services which both garner
a high volume of traffic and offer advertisers the ability to target specific
audiences effectively will be in the best position to take advantage of the
advertising and commercial opportunities on the Web.
THE YELLOW PAGE ADVERTISING MARKET
Yellow page directories have been published in the United States since at
least the 1890s and, traditionally, have been published almost exclusively by
telephone utilities. In the early 1980s, due in part to
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telephone deregulation, independent companies began publishing an increasing
number of directories. There are currently an estimated 350 Independent
Publishers. The Company believes that yellow page directories have proved to be
a successful advertising medium.
THE COMPANY'S SERVICES
The Company's primary service offering is "On'Village Yellow Pages," a
national yellow page directory service targeted towards individuals and
businesses. To complement its yellow page directory, the Company also offers (i)
"My Place," a membership service designed to enable registered users to take
advantage of various personalized services, products and promotions, including
savings, coupons and other incentives offered by the Company's advertisers and
other listed businesses, (ii) "On'Zine," an interactive service designed to
enable users to communicate and access relevant and related content and
information on outside Websites, and (iii) "OnTour," a compilation of
information regarding select U.S. destinations, currently comprised of
information regarding five national parks and several other tourist
destinations. All of these services are offered to users free of charge.
Users can access the Company's sites through the Company's Web address,
"http://www.onvillage.com." In addition, the Company's sites can currently be
accessed directly through Netscape's Web page via the "Net Search" button, as
well as through numerous other links throughout the Web. The Company's agreement
with Netscape, pursuant to which the Company participates in the Netscape
Distinguished Provider Program, expires on April 30, 1998. The agreement
provides, however, that either party can terminate the agreement at any time
upon 90 days' prior notice. If Netscape were to terminate the agreement, the
Company would likely suffer a significant decrease in the traffic to its sites,
thereby decreasing the marketability of the Company's services. Therefore, the
Company is currently exploring the creation of alternate arrangements with
Website providers, browser providers and other distribution channels, to replace
and/or supplement its arrangement with Netscape. See "-- Sales, Marketing and
Distribution."
ON'VILLAGE YELLOW PAGES
The Company's primary service offering is "On'Village Yellow Pages," an
on-line yellow page directory service containing a licensed database of over 15
million business listings nationwide. The Company believes that its yellow page
directory offers users many advantages over print yellow page directories,
including (i) enabling users to obtain more timely content; (ii) enabling
regional users to search neighboring cities or counties not otherwise available
in their local print yellow page directory; (iii) enabling travelers to obtain
information from other parts of the country; and (iv) enabling businesses to
locate other businesses locally, regionally or nationally.
The directory is formatted and categorized in a manner similar to that of
most print yellow page directories. Users have the option of performing searches
by either business listings or by categories. To perform a search, the user
enters the name of the desired business listing or category, together with the
state and, if desired, the city in which the search is to be conducted. If the
user is performing a category search, the user will be presented with a series
of sub-categories from which to choose. For example, if the category entered is
"Restaurants," the user will be presented with a list of types of restaurants
from which to choose, in order to narrow the scope of the search. Shortly after
entering the search, the user is presented with a list of each business in the
database which fits within the specified search criteria. The listings include
businesses which have chosen to use the Company's services (including businesses
which have paid for the use of the Company's services), as well as those that
have not. Businesses that have purchased the Company's priority listing service
are listed first, followed by an alphabetical listing of the remaining entries.
By clicking on the desired business listing, the user will access the "page
behind" the listing, which provides the phone number, and, in most cases, the
address, of the business. In addition, each business with a yellow page listing
may add to the page-behind, free of charge, a brief (ten words or less) textual
advertisement, as well as a reference to an outside Website and e-mail address.
Users can link to these Websites by clicking on them. The page behind most
business listings are linked to a zoomable map prepared by a third party and
currently available free of charge to the Company, which provides users with a
convenient method of viewing the location of desired business listings. Expanded
listings, including enhanced textual enhancements and graphics customized by the
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Company, as well as other related services, are available to businesses for a
fee. See "-- Advertising Services and Pricing."
The Company's On'Village Yellow Pages directory consists of a database of
business listings licensed from Pro-CD, Inc. ("Pro-CD"), a leading CD-ROM
electronic directory publisher, pursuant to a five-year licensing agreement
entered into in December 1995. The database is comprised of telephone directory
information derived from print yellow page listings and includes the business
name, address (when available), and phone number of at least 15 million
businesses nationwide. Pro-CD is required to provide the Company with quarterly
updates of the database during the term of the agreement. Pursuant to the
agreement, the Company is obligated to pay annual royalty amounts based on net
advertising revenue, make certain minimum annual royalty payments to Pro-CD,
provide Pro-CD with 50 electronic advertising bill boards free of charge, and
include a reference to Pro-CD on each of the Company's search screens. In
addition, the agreement specifies certain limits regarding the number of
business listings which can be displayed by the Company per screen. So long as
Pro-CD is in compliance with its obligations regarding updating the database,
the Company is prohibited from utilizing any other yellow page database. The
agreement does not prohibit Pro-CD from licensing its database to others,
including existing and potential competitors of the Company. Pro-CD has the
right to terminate the agreement on or after January 1, 1998, upon six months'
notice, if it is unable, or if it becomes impractical for Pro-CD to continue to
supply the data. If the agreement is terminated for any reason, the Company
could be required to delete all directory listings derived from the Pro-CD
database. The Company believes that its national database gives it a competitive
advantage over publishers of most print yellow pages, which contain only local
listings and generally are published annually.
In the future, the Company plans to introduce enhanced search tools which
will enable a user to narrow his search of the Company's yellow page database,
based on such categories as area code, zip code, key words, brand names,
available discounts and other sub-categories. These refinements are expected to
be designed to enable businesses to narrowcast advertisements to specific
audiences by placing advertisements only where the user's query contains a
specific word that has been designated as a key word for that particular
advertiser. The Company believes that this type of advertising provides
advertisers the opportunity to engage in high-response, product-specific
advertising. Although the Company plans to introduce searches by area code by
the end of the first quarter of 1998, no assurance can be given as to when, if
ever, additional enhancements will be introduced, or if such enhancements will
lead to increased traffic on the Company's sites.
The Company's On'Village Yellow Pages currently generates only a very
limited amount of traffic per day. Additionally, a substantial portion of the
Company's revenue generated to date (which has been extremely limited) has been
derived from sales of enhanced advertisements to businesses in Southern Utah,
the location of the Company's test-market site, and from contracts entered into
with a limited number of Independent Publishers. No assurance can be given that
the Company's yellow page directory will ever generate a significant amount of
traffic or that the Company will be able to generate a significant amount of
advertising revenue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
MY PLACE
The Company's "My Place" service is an interactive, on-line service
designed to provide personalized services to registered users, referred to as
"residents." By providing certain personal or demographic information, such as
name, area code and, at the user's option, interests, an end user is assigned a
personal password through which he can access My Place. My Place offers end
users services such as: (i) access to discounts and promotions offered by
advertisers in their geographic area or areas of interest; (ii) an e-mail
forwarding service; (iii) a reminder service consisting of an automatic e-mail
message sent on a specified date; (iv) a personal notebook, consisting of
telephonic numbers selected by the end-user; and (v) links to other Internet
services such as a weather forecasting service. In addition, each resident is
given his own personalized e-mail address: "@onvillage.net."
Membership in My Place is currently available, free of charge, to any user
who accesses the Company's site. First time users can register as a resident by
inputting their name, address and telephone number, a secret
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password, and optional information regarding their personal interests. Each time
a resident enters My Place, he is greeted with the following personalized
message: "ON'VILLAGE SAYS WELCOME BACK [NAME OF RESIDENT] OF [CITY OF
RESIDENCE]." Residents are then presented with notices, discounts, coupons and
special offers made available by businesses within the resident's area code.
Residents also have the ability to search for offerings made by businesses with
different area codes. Although businesses can currently post offerings on My
Place free of charge, in the future, the Company intends to limit participation
to advertisers who have purchased enhanced listings on the Company's On'Village
Yellow Pages directory or who otherwise pay a specified fee. See "-- Advertising
Services and Pricing."
The Company believes that My Place provides advertisers with an efficient
method of reaching a targeted audience. Advertisers can currently narrowcast
their promotional campaigns to users within a specified area code. Within the 12
months following consummation of the Offering, the Company expects to be able to
furnish further refinements to its My Place service based on a user's city,
state and zip code. Ultimately, the Company's goal is to utilize the information
it gathers regarding its users to provide advertisers with the ability to
narrowcast their advertisements based on such "psychographic" information as
hobbies and areas of interest. No assurance can be given that the Company will
ever implement such refinements, that My Place will ever attract a significant
number of users, will be an effective platform for advertisers, or that My Place
will ever generate significant revenue.
ON'ZINE
The Company's "On'Zine" service provides an interactive service for users
to communicate and immediately access relevant and related content and
information on designated third-party Websites. These Websites are organized by
category, and have been selected, reviewed and rated by the Company. On'Zine
currently lists over 400 Websites in a total of 22 different categories (or
"Zines"), including On'Travel, On'Computers, On'Cars and On'Gossip. Users
receive a direct and immediate link to outside Websites by simply clicking on
the desired Website within a Zine. On'Zine also offers a "chat area" within each
Zine where users can interactively discuss topics of common interest. These
"chat areas" are not currently monitored by the Company, although the Company
anticipates it will do so in the future.
The Company believes that On'Zine will provide advertisers with an
efficient method of reaching targeted audiences. The Company also views On'Zine
as an effective pathway for users to access third-party Websites. Accordingly,
the Company plans to offer advertisers (in particular, businesses purchasing
enhanced advertisements on the On'Village Yellow Pages, either through
Independent Publishers or directly) and third-party Website hosts the
opportunity to purchase advertising banners and other forms of advertising
within the various 'Zines. See "-- Advertising Services and Pricing."
The Company may, in the future, expand On'Zine, and may offer users a
limited amount of Company-prepared content. To date, On'Zine has generated a
limited amount of traffic, and, due to, among other things, the Company's
limited marketing resources, the Company has not sold any advertising on its
On'Zine service. No assurance can be given that On'Zine will ever attract a
significant number of users, will be an effective platform for advertisers or
that On'Zine will ever generate significant revenue.
ONTOUR
The Company's recently introduced "OnTour" service provides users with a
compilation of information regarding select U.S. destinations. Currently, users
can access information regarding five national parks (Zion, Bryce Canyon, Canyon
Lands, Arches and the Grand Canyon), and several other tourist destinations
including Sonoma, California, Daytona Beach, Florida and Sun Valley, Idaho. By
clicking on the desired destination, users can locate listings of restaurants,
retail shops, hotels and other information regarding surrounding areas at such
destination. The Company plans to offer advertisers (in particular, businesses
purchasing enhanced advertisement on the On'Village Yellow Pages, either
directly or through Independent Publishers) and third-party Website hosts the
opportunity to purchase advertising banners and other forms of advertising on
the Company's OnTour site.
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To date, sales of advertisements on OnTour have been limited to businesses
located in Utah in conjunction with the Company's test-marketing activities and
OnTour has generated a limited amount of traffic. No assurance can be given that
OnTour will ever generate a significant number of users, will be an effective
platform for advertisers or that OnTour will ever generate significant revenue.
PROPOSED SERVICES
The Company may in the future host and sell customized Websites. Prices for
these services would depend upon the nature and extent of the desired Website.
The Company may also develop and market services that enable customers to engage
in business-to-consumer and business-to-business electronic commerce on the
Internet. These services would include hosting of transactions and could include
order taking, authorization, payment processing, security and customer service.
The Company anticipates that it would receive a fee for hosting these services
as well as a transaction fee based on the dollar amount of each sale. Online
purchasing of goods and services by consumers is in an early stage of
development, and has been hindered to date by, among other factors, a lack of
widely accepted secure payment mechanisms. See "Risk Factors -- Developing
Market; Unproven Acceptance of the Company's Services." No assurance can be
given that the Company will successfully develop such services, or that if
developed, such services will ever generate significant revenue.
STRATEGY
The Company believes that the Internet represents an important new growing
medium for advertisers to reach consumers. The Company's objective is to
position itself to take advantage of this growth by serving the needs of its
advertising customers. The Company designed its initial service offering, the
On'Village Yellow Pages, to provide businesses with the ability to undertake
measurable, targeted, cost-effective and interactive advertising on the
Internet. In an effort to differentiate its yellow page directory service from
other Internet-based yellow page directories, the Company introduced My Place,
On'Zine and OnTour. In the future, as the Company continues to address the
requirements of its advertising customers, the Company plans to invest resources
in the enhancement of its existing offerings and the possible development of
additional services (such as the hosting and sale of customized Websites and,
eventually, the hosting of electronic commerce).
The Company's strategy for revenue generation is to develop a critical mass
of advertising customers who purchase enhanced advertisements on the On'Village
Yellow Pages. The Company believes that the most effective way to achieve this
base of advertisers is through joint marketing and sales arrangements with
Independent Publishers. The Company's strategy is to initially seek to enter
into as many arrangements with Independent Publishers as possible by providing
the Independent Publishers with the opportunity, free of charge, to offer their
advertising customers with a means of advertising on the Internet through the
Company's basic "QuickStart Ad". In exchange for access to the Company's
Internet services, the Independent Publishers agree to directly market and
attempt to resell the Company's enhanced advertising services to the Independent
Publishers' existing base of customers. The Company believes that this strategy
will enable the Company to potentially leverage the Independent Publishers'
existing base of advertising customers and sales and marketing personnel, to
expand the Company's base of advertising customers. The Company anticipates that
once established, this base of advertising customers may not only purchase
enhanced advertising services from the Company, but may also be willing to pay
for basic advertising services in the future. The Company believes that the
Independent Publishers could provide an efficient means of promoting and
marketing the Company's services. To support this effort, the Company plans to
develop a nationwide sales management force dedicated to establishing
relationships with Independent Publishers. See "-- Sales, Marketing and
Distribution."
The Company anticipates that its principal source of revenue, if any, in
the future will be fees paid to the Company by advertising customers, both
indirectly through Independent Publishers and, to a lesser extent, directly, to
obtain enhanced advertisements on the On'Village Yellow Pages, to advertise on
On'Zine and OnTour, and to provide promotions and other offerings on My Place.
To date, the Company's extremely limited revenue has been derived primarily from
sales of enhanced advertisements to businesses located in
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Southern Utah, the location of the Company's test-market site, and from the
contracts entered into with a limited number of Independent Publishers.
The Company believes that distributing and marketing its services widely is
a key to successfully growing its base of users as well as enhancing its
marketability to its advertising customers. Accordingly, the Company is party to
an agreement with Netscape which provides that the Company's yellow page
directory is listed as a yellow page service on Netscape's Web page, accessible
via the "Net Search" button, through April 1998 (subject to either party's
ability to terminate the agreement at any time upon 90 days' prior notice)
pursuant to the Netscape Distinguished Provider Program. The Company is
currently exploring the creation of alternate arrangements with Websites
providers, browser providers and other distribution channels, to replace and/or
supplement its arrangement with Netscape. See "-- Sales, Marketing and
Distribution."
The Company believes that cultivating a distinct brand image will be
critical to differentiating the Company's services. The Company plans to
maximize brand potential by providing consistent higher quality and innovative
services, and by conducting marketing activities that reinforce the Company's
image. The Company also believes that its relationships with Independent
Publishers (who are expected to include the "On'Village" name and address in
participating business listings in the print yellow pages they publish) will be
an important means of generating name recognition. See "Risk Factors -- Reliance
on Intellectual Property Rights; No Assurance of Obtaining Service Mark
Registration."
SALES, MARKETING AND DISTRIBUTION
The Company's sales and marketing efforts, which to date have been
extremely limited, were initially focused on sales by the Company of enhanced
advertisements in the On'Village Yellow Pages directly to businesses located in
Southern Utah, the location of the Company's test-market site. As a result of
these activities, the Company gained valuable information which was applied in
refining the Company's sales techniques, service offerings and technical
systems. In addition, the Company concluded that direct sales efforts would not
be a feasible means of establishing a critical mass of advertising customers,
due to the extensive nature of the required sales and marketing resources.
Accordingly, the Company changed its focus to the establishment of relationships
with Independent Publishers as the primary means of selling and marketing the
Company's services.
RELATIONSHIPS WITH INDEPENDENT PUBLISHERS
The Company's current standard agreement with Independent Publishers
provides that, for a period of one year, the Independent Publisher will offer
its advertising customers the opportunity to advertise on the Company's yellow
page directory through the Company's QuickStart Ad, at no charge to the
Independent Publisher. In exchange for affording the Independent Publishers'
advertising customers the opportunity to advertise on the Company's yellow page
site, the Independent Publisher is required to print the Company's name and
Internet address in its print yellow page directories (including at least one
full page display advertisement in each published directory) and to use its best
efforts to resell the Company's enhanced advertising services. These enhanced
services include priority listings, listings of the Company's other sites,
graphics and logo advertisements, enhanced textual advertisements, including
detailed display banners, listings of businesses by additional categories and
cities, and additional URL and e-mail links. During the term of the agreement,
the Independent Publisher is prohibited from representing or selling the
products of any other on-line or Internet-based yellow page service. The Company
will provide training and consulting services to the Independent Publishers and
will, in some cases, provide the Independent Publishers with the software
necessary to enable the Independent Publishers to directly input certain
enhanced advertisements on the On'Village Yellow Pages. The Company also plans
to sell advertisements on On'Zine, My Place and OnTour through the Independent
Publishers. As of September 30, 1997, the Company had entered into 70
arrangements with Independent Publishers.
In the approximately 12 months following the consummation of the Offering,
the Company plans to add a total of an additional approximately 10 to 15
national and regional sales managers and sales support staff to develop contacts
with Independent Publishers. No assurance can be given that the Company will be
able to
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<PAGE> 40
add such personnel, or that any such personnel will lead to increased sales of
the Company's services. See "-- Employees."
ARRANGEMENT WITH NETSCAPE
In order to provide users with simple and instantaneous access to the
Company's services, the Company entered into an agreement with Netscape which
provides that the Company's services will be listed on Netscape's Web page,
accessible via the "Net Search" button, through April 1998 (subject to each
party's ability to terminate the agreement at any time upon 90 days' prior
notice) pursuant to the Netscape Distinguished Provider Program. Currently, two
competing yellow page services, as well as a number of leading navigational
services with yellow page directories, are also listed. The Company believes
that a significant percentage of the limited traffic to the Company's site is
generated through its Netscape listing. No assurance can be given that Netscape
will not terminate the agreement prior to its expiration date, that Netscape
will not enter into similar arrangements with other competing companies (thereby
resulting in an increase in the number of competitive companies listed on
Netscape's Web page), or that Netscape will not develop its own service
offerings competitive with those of the Company. If Netscape were to choose to
terminate the agreement, or if Netscape were to develop and market its own
competitive services or promote competing services from other third parties, the
Company would likely suffer a significant decrease in the traffic to its sites,
thereby decreasing the marketability of the Company's services. The Company is
currently exploring the creation of alternate arrangements with Website
providers, browser providers and other distribution channels, to replace and/or
supplement its arrangement with Netscape. No assurance can be given that the
Company will enter into any such arrangements on terms acceptable to the Company
or at all, or that any such arrangements will generate significant traffic to
the Company's on-line sites.
The Company also plans to pursue other means of marketing its services,
including on-line and trade advertising, attendance at Internet trade shows and
advertisements in various print media. The Company may also enter into
cross-marketing strategic arrangements with Internet service providers and
others.
ADVERTISING SERVICES AND PRICING
The Company's services are designed to provide businesses with the ability
to undertake measurable, targeted, cost-effective and interactive advertising on
the Internet. Businesses are afforded the opportunity to target the users of the
Company's yellow page directory in a general fashion, or to narrowcast
advertisements based on the geographic location of the user and by advertising
on the Company's other service offerings, thereby offering the advertiser the
opportunity to engage in high-response, product-specific advertising. For
example, the Company offers registered users of My Place the opportunity to take
advantage of special offers, discounts, and other benefits provided by the
Company's advertising customers and other listed businesses. Additionally, the
Company believes that, because users initiate the search for information
regarding a particular business, users are particularly receptive to the
advertising information they receive, thereby establishing the Company's
services as an attractive and effective platform for delivering information in
an unobtrusive manner.
The Company offers businesses a number of different advertising options,
ranging from simple text to more complicated graphical images. The Company has
bundled a number of its basic options into the QuickStart Ad. The QuickStart Ad
includes an enhanced textual advertisement appearing on the "page behind" of an
advertiser's yellow page listing, as well as a listing of business hours and
credit cards accepted. The QuickStart Ad also sets forth the URL link to an
advertisers' outside web site and e-mail address (if available). Businesses
which advertise through the QuickStart Ad can list their businesses under three
different categories on the Company's yellow page directory, and receive an
expanded listing icon next to their yellow page listing. Advertisers can change
the text of their advertisement at any time. Initially, the Company intends to
provide each advertising client of participating Independent Publishers with a
QuickStart Ad at no charge to the Independent Publisher, in exchange for, among
other things, a commitment by the Independent Publisher to market and resell the
Company's other product offerings. See "-- Sales, Marketing and Distribution;
Relationships with Independent Publishers."
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<PAGE> 41
The Company also offers several enhanced advertising services designed to
increase the visibility and effectiveness of an advertisement, including
priority listings, listings on the Company's My Place and OnTour sites, graphics
and logo advertisements, enhanced textual advertisements, including detailed
display banners, listings of businesses by additional categories and cities, and
additional URL and e-mail links. The suggested retail price of these products
currently range from $20 to $499. In addition, the Company offers advertisers
access to the Company's database of end-users, for the purpose of targeting
advertisements and offering promotional materials. In the future, the Company
also plans to offer businesses the opportunity to purchase advertising space on
the Company's On'Zine sites. These advertisements will be priced on a
case-by-case basis.
TECHNOLOGY
Pursuant to the Company's agreement with Network Publishing, which is
terminable by the Company upon 30 days' notice and by Network Publishing upon
120 days' notice, Network Publishing has agreed to host and maintain the
Company's computer hardware systems. The Company's operating system is developed
and maintained in-house by Mr. Kent Hinkson, the Company's Director of
Technology, a former consultant to Network Publishing. The Company's systems are
currently powered by the Oracle Database software as well as other server
software, and employ multiple T-1 lines from several telephone utilities, with
hardware traffic routing that provides consistent throughput. These T-1 lines
connect the Company's servers to telephone company providers, which employ more
powerful routers and dedicated high speed connection lines. All systems and
maintenance activities, including server hosting, are managed and maintained by
Network Publishing. The Company believes that Network Publishing is capable of
supporting the Company's technological needs for the foreseeable future. Network
Publishing has built and maintained Websites for such major corporations as
Novell, Volkswagen USA, Verifone, The Smithsonian and The Utah Travel Council.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Recent increases in the volume of searches conducted through the Company's
services have strained the capacity of the operating system, hardware and
telecommunications lines deployed by the Company, and has led to slower response
times and operating system failures. To respond to these problems, the Company
has recently leased a new hardware system and has commenced identifying new
operating systems to replace its existing operating system. Although the Company
believes it will be able to identify and purchase such new operating system, no
assurance can be given that the Company will be able to integrate such operating
system with its hardware system in a timely and cost effective manner. In
addition, there can be no assurance that the Company's services and systems will
be able to scale appropriately to any further increases in users and services
offered. The Company is also dependent upon Web browser companies and Internet
and online service providers for access to its services, and users have
experienced and may in the future experience difficulties due to system or
software failures or incompatibilities not within the Company's control. The
Company is also dependent on Network Publishing for prompt delivery,
installation and service of servers and other equipment and services used to
provide the Company's services. Any disruption in the Internet access and
service provided by the Company or Network Publishing could have a material
adverse effect upon the Company's business, results of operations and financial
condition.
COMPETITION
The market for Internet products and services is highly competitive, with
no substantial barriers to entry, and the Company expects that competition will
continue to intensify. The market for the Company's services has only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants with competing products and services. The Company
believes that the principal competitive factors in its market are brand
recognition, ease of use, comprehensiveness, enhancements and value added
benefits, entertainment value, and quality and responsiveness of search results
(i.e., narrowcasting). Although the Company believes that the diverse segments
of the Internet market may provide opportunities for more than one supplier of
services similar to those of the Company, it is possible that a single or few
suppliers may dominate one or more market segments. There can be no assurance
that the Company's competitors will not develop Internet services that are
superior to those of the Company or that achieve greater market acceptance
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<PAGE> 42
than the Company's offerings. Any failure of the Company to provide service
offerings that achieve success in the short-term could result in an
insurmountable loss in marketshare and brand acceptance, and could, therefore,
have a material adverse effect upon the Company's business in the long term.
A number of companies offer competitive services addressing certain of the
Company's target markets. Most of the Company's existing and potential
competitors have significantly greater financial, technical and marketing
resources than the Company. These companies include America Online, Inc.,
Excite, Inc., Lycos, Inc., The McKinley Group, CompuServe Corporation, Prodigy
Services Company, Infoseek Corporation and Yahoo! Corporation. Specifically, the
Company's On'Village Yellow Pages product competes with other Internet Yellow
Page directory services, including BigYellow, BigBook, YellowNet, GTE
SuperPages, Yellow Pages Online, Switchboard, InfoSpace, ZIP2, American Business
Information's Lookup USA and a Netscape Guide by Yahoo! Corporation featuring
the Yellow Page services of five Regional Bell Operating Companies. In addition,
the Company competes with metasearch services that allow a user to search the
databases of several catalogs and directories simultaneously. The Company also
competes indirectly with database vendors that offer information search and
retrieval capabilities with their core database products. In the future, the
Company may encounter competition from providers of Web browser software,
including Netscape and Microsoft Corporation, online services and other
providers of other Internet products and services who elect to incorporate their
own search and retrieval features into their product and service offerings.
Netscape and Pro-CD, as well as a number of the Company's current
advertising customers, have established relationships with certain of the
Company's competitors and future advertising customers, licensees and licensors
may establish similar relationships. In addition, the Company competes with
online services and other Website operators as well as traditional offline media
such as print (including print yellow page directories) and television for a
share of advertisers' total advertising budgets. Competition among current and
future suppliers of Internet navigational and directory services, as well as
competition with other media for advertising placements, could result in
significant price competition and reductions in advertising revenue. There can
be no assurance that the Company will be able to compete successfully against
its current or future competitors.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company relies on a combination of copyright and trademark laws and
contractual provisions to protect its proprietary rights. Litigation may be
necessary to protect the Company's proprietary technology. Any such litigation
may be time-consuming and costly. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's services or to obtain and use information that the Company regards as
proprietary. In addition, there are few barriers to entry into the market for
the Company's services. There can be no assurance, therefore, that any of the
Company's competitors, most of whom have far greater resources than the Company,
will not independently develop technologies that are substantially equivalent or
superior to the Company's technologies. See "-- Competition."
The Company has applied for a service mark registration for "On'Village."
Although this application was initially denied, the Company has responded to the
denial, arguing that the registration should be granted. There can be no
assurance, however, that the Company's application will be approved. The Company
intends to focus its efforts on achieving brand recognition for its products;
therefore, failure of the Company to obtain the "On'Village" service mark
registration and the use of the name by third parties, could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company will continue to evaluate the registration of additional
service marks and trademarks, as appropriate.
In addition, the Company relies on certain technology and data licensed
from third parties, and may be required to license additional technology and
data in the future, for use in providing services to users and advertising
customers. The Company's ability to generate fees from advertising and,
eventually, Internet commerce, may also depend on data encryption and
authentication technologies that the Company may be required to license from
third parties. There can be no assurance that these third party technology
licenses will be available or will continue to be available to the Company on
acceptable commercial terms, or at all.
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<PAGE> 43
There has been substantial litigation in the computer industry regarding
intellectual property rights. There can be no assurance that the Company will
not commence litigation to protect its position or third parties will not in the
future claim infringement by the Company with respect to current or future
services, trademarks or other rights (including the use of the "On'Village"
name), or that the Company will not counterclaim against any such parties in
such actions. Any such claims or counterclaims could be time-consuming, result
in costly litigation, or require the Company to redesign its services, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. Although the Company will take steps that it
considers appropriate to protect its intellectual property rights, the Company
believes its future success will depend primarily on its ability to rapidly
introduce new services and enhancements to its existing services, rather than
upon legal protections afforded existing intellectual property.
GOVERNMENT REGULATION
The Company may be subject to Sections 5 and 12 of the Federal Trade
Commission Act (the "FTC Act"), which regulate advertising in all media,
including the Internet, and require advertisers to have substantiation for
advertising claims before disseminating advertisements. The FTC Act prohibits
the dissemination of false, deceptive, misleading and unfair advertising, and
grants the Federal Trade Commission ("FTC") enforcement powers to impose and
seek civil and criminal penalties, consumer redress, injunctive relief and other
remedies upon persons who disseminate prohibited advertisements. The Company
could be subject to liability under the FTC Act if it were found to have
participated in creating and/or disseminating a prohibited advertisement with
knowledge, or reason to know that the advertising was false or deceptive. The
FTC has recently brought several actions charging deceptive advertising via the
Internet, and is actively seeking new cases involving advertising via the
Internet.
The Company may also be subject to the provisions of the recently enacted
Communications Decency Act (the "CDA"), which, among other things, imposes
substantial monetary fines and/or criminal penalties on anyone that distributes
or displays certain prohibited material over the Internet or knowingly permits a
telecommunications device under its control to be used for such purposes.
Although the manner in which the CDA will be interpreted and enforced and its
effect on the Company's operations cannot yet be fully determined, the CDA could
subject the Company to substantial liability. The CDA could also dampen the
growth of the Internet generally and decrease the acceptance of the Internet as
an advertising medium.
Other federal, state or local laws, regulations and policies, either now
existing or that may be adopted in the future, may apply to the business of the
Company and may subject the Company to significant liabilities, significantly
dampen growth in Internet usage, prevent the Company from offering certain
Internet content or services, or otherwise cause a material adverse effect on
the Company's business, results of operations and financial condition. These
laws, regulations, and policies may apply to matters such as, but not limited
to, copyright, trademark, unfair competition, antitrust, property ownership,
negligence, defamation, indecency, obscenity, personal privacy, trade secrecy,
encryption, taxation and patents.
EMPLOYEES
As of September 1, 1997, the Company had 22 full-time and three part-time
employees, including five in research and technology, eight in sales and
marketing and 12 in finance and administration. The Company believes that its
relations with its employees are satisfactory. The Company is not a party to any
collective bargaining agreements. The Company's future success depends on its
continuing ability to attract and retain highly qualified technical and
management personnel. To enable the Company to pursue its business strategy, the
Company plans to add an additional approximately 30 employees in the
approximately 12 months following the Offering in the areas of marketing,
product development and administration (including a total of approximately 10 to
15 national and regional sales managers and sales support staff). Competition
for employees in the Company's industry is intense, and there can be no
assurance that the Company will be able to attract or retain highly qualified
personnel in the future.
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FACILITIES
The Company's principal administrative, sales, and marketing facility is
located in an approximately 6,300 square foot facility in Calabasas, California.
The five-year lease, which commenced in June 1997, provides for monthly payments
of approximately $8,800 during the first 12 months of the lease term, with
monthly payments of approximately $11,000 for the remaining 48 months and an
option to extend the lease for an additional three years. The Company believes
that its existing facility will be adequate for the Company's requirements for
the foreseeable future.
LEGAL PROCEEDINGS
The Company is not currently engaged in any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are the directors, director nominees and executive officers
of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- --------------------------------------------
<S> <C> <C>
Jack B. Tracht+ 48 Chief Executive Officer and Director
Robert D. Tracht 43 President, Chief Operating Officer and
Director
Jeff W. Walden 43 Senior Vice President of Marketing and
Director
James E. Austin 58 Senior Vice President of Sales, Secretary
and Director
William A. Rossi 39 Vice President and Chief Financial Officer
Nicholas M. Mitsakos*+ 37 Director Nominee
David A. Searls*+ 49 Director Nominee
</TABLE>
- ---------------
+ Proposed member of the Compensation Committee.
* Proposed member of the Audit Committee.
JACK B. TRACHT is a co-founder of the Company and has served as a Director
since the Company's inception in November 1995 and as the Company's Chief
Executive Officer since May 1996. From November 1995 to May 1996, Mr. Tracht
served as a Vice President of the Company. From 1987 to 1995, Mr. Tracht was
President and a principal of Inland Pacific Edge Inc., a distributor of apparel
and footwear to mass marketers in the U.S. and abroad. Mr. Tracht has over 20
years of experience in marketing, designing and merchandising various product
lines. Mr. Tracht has served in various positions in retail and wholesale
management at Allied Department Store Group, Great American Clothing Company and
Point Sportswear, a division of Alpha Pacific Corporation. Mr. Tracht is the
brother of Robert D. Tracht.
ROBERT D. TRACHT is a co-founder of the Company and has served as its
President and a Director since the Company's inception in November 1995, and has
served as the Company's Chief Operating Office since May 1996. From March 1995
to January 1997 Mr. Tracht served as the Company's Chief Financial Officer. Mr.
Tracht is the founder and a principal of Robert Tracht Enterprises, Inc.
("RTE"), a domestic and international wholesaler and distributor of apparel and
athletic footwear with a European giftware merchandising division, and has
served as that company's President since 1987. Mr. Tracht has over 20 years of
experience in the apparel, merchandising and accessory wholesale industry. Prior
to 1987, Mr. Tracht served as Regional Sales Manager for a division of Jordache
Jeans and Englishtown Sportswear. Mr. Tracht is the brother of Jack B. Tracht.
JEFF W. WALDEN is a co-founder of the Company and has served as a Director
since the Company's inception in November 1995 and as the Company's Senior Vice
President of Marketing since May 1996. From November 1995 to May 1996, Mr.
Walden served as a Vice President of the Company. Mr. Walden's career spans 20
years across the apparel and giftware industries, where he developed, marketed
and merchandised numerous product lines. Mr. Walden is a principal in RTE where,
since 1990, he has managed its wholesale trading division. From 1986 to 1990,
Mr. Walden served as Vice President of American Marketing Works Incorporated's
branded division, which included the Body Glove brand. From 1981 to 1986, Mr.
Walden served as Vice President of PLSA, Inc., a manufacturer of men's and
women's outerwear apparel. Prior thereto, Mr. Walden served as Vice President of
Marketing and Sales of Alpha Pacific Corporation and as Vice President of
Marketing of American Characters International, Inc.
JAMES E. AUSTIN is a co-founder of the Company and has served as a Director
since the Company's inception in November 1995 and as the Company's Senior Vice
President of Sales since May 1996. From November 1995 to May 1996, Mr. Austin
served as a Vice President of the Company. For over 30 years Mr. Austin has been
involved in the selling and merchandising of sportswear lines. For almost 20
years, Mr. Austin headed his own independent sales representative organization,
representing sportswear manufacturers such as Body Glove, Bugle Boy and B.U.M.
Equipment. From 1994 to 1995, Mr. Austin was employed
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<PAGE> 46
by Authentic Image Marketing as National Sales Manager for its surf and
sportswear product line. From 1993 to 1994, he was employed by Inland Pacific
Edge, Inc. as a National Marketing Representative, and from 1991 to 1992 was a
sales representative for Yes Clothing Co. Mr. Austin previously served as
Regional Vice President at Point Sportswear, a division of the Alpha Pacific
Corporation and held various sales and other positions at Sprenger's Men's Wear,
Manhattan Shirt Company and Europa Sport. Mr. Austin was also a partner in
Retail Trends, a developer of retail franchises.
WILLIAM A. ROSSI joined the Company in February 1997 and has served as Vice
President and Chief Financial Officer since March 1997. Previously, Mr. Rossi
was Vice President and General Manager for the SunMed Service division of
Sunrise Medical, Inc., a publicly held manufacturer and distributor of home
medical equipment, from January 1995 to February 1997. From July 1991 to
December 1994, he served as Controller and then Vice President and Controller
for Sunrise Medical, Inc. Mr. Rossi is a certified public accountant in the
State of California.
NICHOLAS M. MITSAKOS will commence service as a member of the Company's
Board of Directors upon consummation of the Offering. Since April 1984, Mr.
Mitsakos has been the Chief Executive Officer of Mitsakos & Co., a private
investment company which focuses on providing venture capital to technology,
media, telecommunications and entertainment companies. Mr. Mitsakos has also
served as Chief Executive Officer of Mitsakos Holdings, LLC, a global investment
fund which focuses on publicly traded equities, since April 1989. Since November
1995, Mr. Mitsakos has been the Chairman of the Board of Capri Entertainment,
Inc., a music and new media venture. He also serves as a Director to InterVU, an
Internet-based services company, as an advisor to Berkeley Networks, Inc., an
Internet software and hardware networking company, and as an advisor to Morgan
Interactive, Inc., a computer animation company. Mr. Mitsakos serves on the
Boards of the UCLA Medical School Center for Cerebral Palsy and the Young
Musician's Foundation. Since 1993, Mr. Mitsakos has also been a part-time
instructor at the UCLA Anderson School of Business. Mr. Mitsakos graduated summa
cum laude from the University of Southern California and earned a Masters in
Business Administration from Harvard University.
DAVID A. SEARLS will commence service as a member of the Company's Board of
Directors upon consummation of the Offering. From 1992 to the present, Mr.
Searls has served as President of Searls, Inc., a computer consulting firm.
Since 1978, Mr. Searls has served as creative director and, most recently, head
of the public relations division and a director of Hodskins Simone & Searls, a
private advertising agency Mr. Searls co-founded in 1978.
Directors serve until the next annual meeting or until their successors are
elected or appointed. Officers are elected by and serve at the discretion of the
Board of Directors. Other than as described above, there are no family
relationships among the officers or directors of the Company.
KEY EMPLOYEES
The following individuals are additional key employees of the Company:
HOWARD M. FITES has served as the Company's Web Master and Senior Editor
since the Company's inception in November 1995. Mr. Fites' responsibilities at
the Company include working with the Company's Director of Technology in
maintaining the Company's computer assisted design program, which includes
Hypertext Markup Language ("HTML") scripting, graphic design, and data
optimization. He also is in charge of implementing the production of the
Company's advertising, marketing and promotional efforts. For the five years
prior to joining the Company, Mr. Fites developed computer generated advertising
programs and Websites for commercial clients through Pinstripe Design, a company
he founded in 1982.
KENT HINKSON has served as the Company's Director of Technology since April
1997. For the seven years prior to joining the Company, Mr. Hinkson acted as an
independent consultant and software engineer, pursuant to which he defined
hardware and support requirements, designed systems, and programmed, tested and
implemented final hardware/software solutions for various corporations. Mr.
Hinkson was a consultant for Network Publishing and, together with the Company,
designed all of the Company's existing systems.
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<PAGE> 47
BOARD COMMITTEES AND DESIGNATED DIRECTORS
The Board of Directors intends to establish an Audit Committee and a
Compensation Committee. The functions of the Audit Committee will be to
recommend annually to the Board of Directors the appointment of the independent
public accountants of the Company, discuss and review the scope and the fees of
the prospective annual audit and review the results thereof with the independent
public accountants, review and approve non-audit services of the independent
public accountants, review compliance with existing major accounting and
financial policies of the Company, review the adequacy of the financial
organization of the Company and review management's procedures and policies
relative to the adequacy of the Company's internal accounting controls.
The functions of the Compensation Committee will be to review and approve
annual salaries and bonuses for all executive officers and review, approve and
recommend to the Board of Directors the terms and conditions of all employee
benefit plans or changes thereto. Messrs. Mitsakos and Searls will serve as
members of the Audit Committee and Messrs. J. Tracht, Mitsakos and Searls will
serve as members of the Compensation Committee.
The Company has agreed for a period of five years from the date of this
Prospectus if requested by the Representative, to nominate a designee of the
Representative who is reasonably acceptable to the Company to the Company's
Board of Directors. The Representative has informed the Company that it does not
intend to make such a request in the near future.
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Non-employee directors receive $500 per
meeting plus out-of-pocket expenses for attending such meetings. In addition,
each non-employee director of the Company will be granted options to purchase
2,000 shares of Class A Common Stock, at fair market value on the date of
commencement of service on the Company's Board of Directors, provided that
unvested options shall terminate upon the termination of the non-employee
director's service on the Board of Directors. All options granted to
non-employee directors vest in full 12 months after grant. Non-employee
directors are not precluded from serving the Company in any other capacity and
receiving compensation therefor.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company
for its fiscal year ended December 31, 1996 to Jack B. Tracht, the Chief
Executive Officer of the Company. No executive officer of the Company received
salary and bonus in excess of $100,000 in such fiscal year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------------------
FISCAL YEAR ENDED
DECEMBER 31, ANNUAL SALARY
----------------- -------------
<S> <C> <C>
Jack B. Tracht, Chief Executive Officer.......... 1996 $17,697
</TABLE>
- ---------------
(1) Mr. Tracht began accruing a salary in October 1996 at an annual rate of
$92,500. No cash payments were made to Mr. Tracht in 1996.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement (the "Employment
Agreement") with each of Jack B. Tracht, the Company's Chief Executive Officer;
Robert D. Tracht, the Company's President and Chief Operating Officer; Jeff W.
Walden, the Company's Senior Vice President of Marketing; and James E. Austin,
the Company's Senior Vice President of Sales, in January 1997. The term of each
Employment Agreement commences on the closing of the Offering and expires at the
end of the 37th month after such date; provided, however, that the term may be
extended by mutual agreement between the Company and the employee. Each
Employment Agreement provides that in consideration for the respective
employee's services, he is to be paid a salary of $92,500 during the first 13
month period of the Employment Agreement. In
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<PAGE> 48
addition, each employee will receive increases in salary and bonuses as deemed
appropriate by the Board of Directors after such 13 month period. Each
Employment Agreement also provides that in the event the employee is terminated
for "good cause," he shall not be entitled to any severance, and in the event
the employee is terminated for any reason other than "good cause", he shall be
entitled to severance pay equal to the lesser of (x) a lump sum amount equal to
one year's salary based on his then-current annual salary (excluding any bonuses
or fringe benefits) or (y) the remaining salary due under the term of the
Employment Agreement plus a continuation of the disability and health insurance
policies provided for in the Employment Agreement. Each Employment Agreement
contains standard non-compete, non-solicitation and confidentiality provisions.
Pursuant to a letter agreement entered into in February 1997, the Company
agreed to provide Mr. William A. Rossi a base annual salary of $78,000 for
serving as the Company Vice President and Chief Financial Officer and agreed to
grant to Mr. Rossi options to purchase an aggregate of 20,000 shares of Class A
Common Stock at an exercise price equal to their fair market value on the date
of grant, under the Company's Option Plan. Options to purchase 7,000 shares of
Class A Common Stock at an exercise price of $4.00 per share were granted to Mr.
Rossi in August 1997 and the letter agreement provides for the grant of options
to purchase 6,000 and 7,000 shares of Class A Common Stock in February 1998 and
1999, respectively. In addition, in August 1997, Mr. Rossi received options to
purchase 500 shares of Class A Common Stock at an exercise price of $4.00 per
share.
The Company entered into an employment agreement with Mr. Kent Hinkson, the
Company's Director of Technology, in April 1997. The agreement provides for a
base annual salary of $70,000, plus bonuses and annual salary increases as
deemed appropriate by the Board of Directors. In addition, Mr. Hinkson is
entitled to additional compensation equal to 1% of the Company's net revenue
(the "Incentive Compensation"). The agreement may be terminated at any time by
the Company for "good cause", and upon 30 days' notice, at any time without
cause. Mr. Hinkson may terminate the agreement at any time upon 120 days'
notice. The agreement provides that in the event Mr. Hinkson is terminated for
"good cause" he shall not be entitled to any severance, and in the event he is
terminated for any reason other than "good cause," he shall be entitled to
severance pay equal to the Incentive Compensation for a period of three years
from the date of termination. In the event Mr. Hinkson terminates the agreement,
he shall be entitled to the Incentive Compensation for a period of (x) one year
following the date of termination, if the termination occurs during the first
year of the agreement, (y) two years following the date of termination, if the
termination occurs during the second year of the agreement, and (z) three years
following the date of termination, if the termination occurs after the second
year of the agreement. Mr. Hinkson's agreement contains standard non-compete,
non-solicitation and confidentiality agreements.
STOCK OPTION PLAN
In January and September 1997, respectively, the Board of Directors and the
Company's shareholders approved the Company's 1997 Stock Option Plan and an
amendment thereto (as amended, the "Option Plan"). The Option Plan provides for
the grant of options to officers, directors and other key employees of the
Company to purchase up to an aggregate of 300,000 shares of Class A Common
Stock. The Option Plan is administered by the Board of Directors or a committee
of the Board of Directors and is currently administered by the entire Board of
Directors, which has complete discretion to select the optionee and to establish
the terms and conditions of each option, subject to the provisions of the Option
Plan. Options granted under the Option Plan may be "incentive stock options" as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonqualified options, and will be designated as such.
The exercise price of incentive stock options may not be less than 100% of
the fair market value of the Company's Class A Common Stock as of the date of
grant (110% of the fair market value if the grant is to an employee who owns
more than 10% of the total combined voting power of all classes of capital stock
of the Company). The Code currently limits to $100,000 the aggregate value of
Class A Common Stock that may be acquired in any one year pursuant to incentive
stock options under the Option Plan or any other option plan adopted by the
Company. Nonqualified options may be granted under the Option Plan at an
exercise price less than the fair market value of the Class A Common Stock on
the date of grant. Nonqualified options also may be granted without regard to
any restriction on the amount of Class A Common Stock that may be acquired
pursuant to such options in any one year.
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<PAGE> 49
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination would immediately terminate, and any options that are exercisable
would terminate 90 days (one year in the case of termination by reason of death
or disability) following termination of employment except in the event of
termination for cause. In the event of termination for cause, all unexercised
options would terminate 30 days after termination.
Options may not be exercised more than ten years after the grant (five
years after the grant if the grant is an incentive stock option to an employee
who owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). Options granted under the Option Plan may be
transferable under certain limited circumstances. Under the Option Plan, shares
subject to cancelled or terminated options are reserved for subsequently granted
options. The number of options outstanding and the exercise price thereof are
subject to adjustment in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends. The Option Plan is effective
for ten years, unless sooner terminated or suspended.
As of the date of this Prospectus, options to purchase 30,000 shares were
outstanding at an exercise price of $4.00 per share, and options to purchase
270,000 shares were available for grant under the Option Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As allowed by the California Corporations Code, the Company's Restated
Articles of Incorporation provide that the liability of the directors of the
Company for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by or in the
right of the Company for breach of a director's duties to the Company or its
shareholders except for liabilities: (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) for acts
or omissions that a director believes to be contrary to the best interest of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction from which a director derived an
improper personal benefit; (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders; (vi) with respect to certain
transactions or the approval of transactions in which a director has a material
financial interest; and (vii) expressly imposed by statute for approval of
certain improper distributions to shareholders or certain loans or guarantees.
This provision does not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. The Company's Amended and
Restated Bylaws require the Company to indemnify its officers and directors to
the full extent permitted by law, including circumstances in which
indemnification would otherwise be discretionary. Among other things, the
Amended and Restated Bylaws require the Company to indemnify directors and
officers against certain liabilities that may arise by reason of their status or
service as directors and officers and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, the provision is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Such limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Company has entered into indemnification agreements ("Indemnification
Agreement(s)") with each of its directors and officers. Each such
Indemnification Agreement provides that the Company will indemnify the
indemnitee against expenses, including reasonable attorneys' fees, judgements,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any civil or criminal action or administrative
proceeding arising out of his performance of his duties as a director or
officer, other than an action instituted by the director or officer. Such
indemnification is available if the indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the
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<PAGE> 50
Company, and, with respect to any criminal action, had no reasonable cause to
believe his conduct was unlawful. The Indemnification Agreements also require
that the Company indemnify the director or other party thereto in all cases to
the fullest extent permitted by applicable law. Each Indemnification Agreement
permits the director or officer that is party thereto to bring suit to seek
recovery of amounts due under the Indemnification Agreement and to recover the
expenses of such a suit if he is successful.
The Company has obtained directors' and officers' liability insurance.
CERTAIN TRANSACTIONS
During the year ended December 31, 1996, the Company incurred approximately
$10,400 of expenses relating to certain bookkeeping services provided to the
Company by RTE. Robert D. Tracht, the Company's President and a director, and
Jeff W. Walden, the Company's Senior Vice President of Marketing and a director,
are each principals of RTE. As of January 31, 1997, RTE ceased providing these
services to the Company.
From the Company's inception in November 1995 through May 1997, the
Company's principal administrative, sales, and marketing facility was leased
from RTE. During the year ended December 31, 1996 and the six months ended June
30, 1997, the Company made total payments with respect to the lease of
approximately $10,700 and $7,400, respectively.
In March 1996, Robert D. Tracht advanced the Company approximately $5,480
to fund the purchase by the Company of two computers. A portion of the proceeds
of the Bridge Financing were used to repay this amount.
From November 1995 through October 1996, Messrs. J. Tracht, R. Tracht,
Walden, and Austin made loans to the Company each in the aggregate principal
amount of $20,000. Such loans bore interest at a rate of 10% per annum and the
principal and accrued interest on each loan was due in January 1999. In December
1996, the principal amount and accrued interest on such loans ($85,800 in the
aggregate) were contributed to the capital of the Company.
The Company believes that each of the foregoing transactions was on terms
at least as favorable to the Company as those that could have been obtained from
nonaffiliated third parties.
All material transactions between the Company and its officers, directors
or principal shareholders or other affiliates are now subject to ratification or
approval in accordance with applicable state corporation law. Under California
law as currently in effect, each contract or transaction between the Company and
a director or officer or an entity in which he or she has a financial interest
generally must be approved or ratified by a majority of the Company's
shareholders who do not have an interest in such transaction; or a majority of
the Board of Directors (or a committee of the Board of Directors) who do not
have a financial interest in such contract or transaction, if such contract or
transaction is just and reasonable as to the Company at the time it is
authorized; or such contract or transaction must be just and reasonable to the
Company at the time it is authorized, approved or ratified.
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<PAGE> 51
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, by
(i) each person who is known by the Company to own beneficially more than 5% of
the Company's outstanding Common Stock; (ii) each of the Company's directors,
director nominees and executive officers; and (iii) all officers, directors and
director nominees of the Company as a group (a) prior to the Offering, and (b)
as adjusted to give effect to the sale of the 1,900,000 Units offered hereby.
<TABLE>
<CAPTION>
PERCENT OF
OWNERSHIP AND PERCENT
AMOUNT AND TOTAL OF PERCENT OF
NATURE OF VOTING POWER OWNERSHIP TOTAL VOTING
BENEFICIAL BEFORE THE AFTER THE POWER AFTER THE
NAME AND ADDRESS(1) OWNERSHIP(2) OFFERING OFFERING OFFERING
- -------------------------------------------- ------------ ------------- --------- ---------------
<S> <C> <C> <C> <C>
Jack B. Tracht.............................. 264,091(3) 22.0% 8.5% 16.7%
Robert D. Tracht............................ 264,091(3) 22.0 8.5 16.7
James E. Austin............................. 264,091(3) 22.0 8.5 16.7
Jeff W. Walden.............................. 264,091(3) 22.0 8.5 16.7
William A. Rossi............................ 7,500(4) * * *
Nicholas M. Mitsakos(5)..................... -- -- -- --
David A. Searls(5).......................... -- -- -- --
All executive officers, directors and
director nominees as a group (7
persons).................................. 1,063,364 88.1 34.2 66.9
</TABLE>
- ---------------
* Less than 1%.
(1) The address of each individual is c/o the Company at 26135 Mureau Road,
Suite 100, Calabasas, California 91302.
(2) Nature of beneficial ownership of securities is direct and arises from sole
voting power and sole investment power, subject to community property laws
where applicable.
(3) Includes 176,061 Escrow Shares owned by each individual, or a total of
704,244 Escrow Shares for all executive officers, directors and director
nominees, as a group. See "-- Escrow Shares." All shares owned are shares of
Class B Common Stock. Each share of Class B Common Stock entitles the holder
thereof to five votes per share. See "Description of Securities."
(4) Consists of 7,500 shares of Class A Common Stock issuable upon the exercise
of options currently exercisable.
(5) Excludes options to purchase 2,000 shares of Class A Common Stock to be
granted to such individual upon consummation of the Offering, none of which
will be exercisable within 60 days of the date of this Prospectus.
ESCROW SHARES
In connection with the Offering, the holders of the Company's Class B
Common Stock have placed 800,000 of such shares into escrow pursuant to an
escrow agreement ("Escrow Agreement") with American Stock Transfer and Trust, as
escrow agent. The Escrow Shares are not assignable or transferable; however, the
Escrow Shares may be voted.
(a) Of the Escrow Shares, one-half (representing 400,000 shares of
Class B Common Stock) will be released from escrow, on a pro rata basis,
if, and only if, one or more of the following conditions are met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings or charges as audited and
determined by the Company's independent certified
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<PAGE> 52
public accountants (the "Minimum Pretax Income") amounts to at least
$3.0 million for the fiscal year ending December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $4.5 million for
the fiscal year ending December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $6.0 million
for the fiscal year ending December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $7.5 million for
the fiscal year ending December 31, 2001;
(v) commencing on the date of this Prospectus and ending 18 months
after the date of this Prospectus, the bid price of the Company's Class
A Common Stock averages in excess of $11.00 per share (subject to
adjustment in the event of any reverse stock splits or other similar
events) for 30 consecutive business days;
(vi) commencing 18 months after the date of this Prospectus and
ending 36 months after the date of this Prospectus, the bid price of the
Company's Class A Common Stock averages in excess of $15.00 per share
(subject to adjustment in the event of any reverse stock splits or other
similar events) for 30 consecutive business days; or
(vii) during the periods specified in (v) or (vi) above, the
Company is acquired by or merged into another entity in a transaction in
which the value of the per share consideration received by the
shareholders of the Company on the date of such transaction or at any
time during the applicable period set forth in (v) or (vi),
respectively, equals or exceeds the applicable levels set forth in (v)
or (vi), respectively.
(b) The remaining Escrow Shares (representing 400,000 shares of Class
B Common Stock) will be released from escrow, on a pro rata basis, if, and
only if, one or more of the following conditions is met:
(i) the Minimum Pretax Income amounts to at least $3.4 million for
the fiscal year ending on December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $5.2 million for
the fiscal year ending on December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $6.9 million
for the fiscal year ending on December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $8.6 million for
the fiscal year ending on December 31, 2001;
(v) commencing on the date of this Prospectus and ending 18 months
after the date of this Prospectus, the bid price of the Company's Class
A Common Stock averages in excess of $12.50 per share (subject to
adjustment in the event of any reverse stock splits or other similar
events) for 30 consecutive business days;
(vi) commencing 18 months after the date of this Prospectus and
ending 36 months after the date of this Prospectus, the bid price of the
Company's Class A Common Stock averages in excess of $16.50 per share
(subject to adjustment in the event of any reverse stock splits or other
similar events) for 30 consecutive business days; or
(vii) during the periods specified in (v) or (vi) above, the
Company is acquired by or merged into another entity in a transaction in
which the value of the per share consideration received by the
shareholders of the Company on the date of such transaction or at any
time during the applicable period set forth in (v) or (vi),
respectively, equals or exceeds the applicable levels set forth in (v)
or (vi), respectively.
The Minimum Pretax Income amounts set forth above (i) shall be calculated
exclusively of any extraordinary earnings, including, but not limited to, any
charge to income resulting from release of the Escrow Shares and (ii) shall be
increased proportionately, with certain limitations, in the event additional
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<PAGE> 53
shares of Common Stock or securities convertible into, exchangeable for or
exercisable into Common Stock are issued after completion of the Offering. The
bid price amounts set forth above are subject to adjustment in the event of any
stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Shares, including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Shares. If none of the applicable Minimum Pretax Income or bid price levels set
forth above have been met by April 15, 2002, the Escrow Shares, as well as any
dividends or other distributions made with respect thereto, will be cancelled
and contributed to the capital of the Company. The Company expects that the
release of the Escrow Shares to officers, directors, employees and consultants
of the Company will be deemed compensatory and, accordingly, will result in a
substantial charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could substantially
increase the loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period or periods during which such shares are, or
become probable of being, released from escrow. Although the amount of
compensation expense recognized by the Company will not affect the Company's
total shareholders' equity (due to a corresponding increase in additional
paid-in capital) it may have a negative effect on the market price of the
Company's securities. The Escrow Agreement cannot be terminated or amended in
any material respect without the prior consent of the holders of all of the
Company's Common Stock.
The Minimum Pretax Income and bid price levels set forth above were
determined by negotiation between the Company and the Representative and should
not be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
DESCRIPTION OF SECURITIES
The following description of the capital stock of the Company and certain
provisions of the Company's Restated Articles of Incorporation and Amended and
Restated Bylaws is a summary and is qualified in its entirety by the provisions
of the Restated Articles of Incorporation and Amended and Restated Bylaws, which
have been filed as exhibits to the Company's Registration Statement, of which
this Prospectus is a part.
The authorized capital stock of the Company currently consists of
20,200,000 shares of Common Stock, which consists of 18,800,000 shares of Class
A Common Stock and 1,400,000 shares of Class B Common Stock, and 5,000,000
shares of Preferred Stock. As of the date of this Prospectus, there were
1,199,996 shares of Class B Common Stock outstanding, held of record by eight
shareholders, and no shares of Class A Common Stock or Preferred Stock
outstanding.
UNITS
Each Unit consists of one share of Class A Common Stock and one Warrant.
Each Warrant entitles the holder thereof to purchase one share of Class A Common
Stock. The Class A Common Stock and Warrants included in the Units are
transferable separately from and after the Separation Date.
COMMON STOCK
The holders of Class A Common Stock and Class B Common Stock vote as a
single class on all matters submitted to a vote of the shareholders, with each
share of Class A Common Stock entitled to one vote and each share of Class B
Common Stock entitled to five votes, except as otherwise provided by law. The
holders of Common Stock are entitled to cumulative voting rights with respect to
the election of directors upon giving notice as required by law. Subject to
preferences that may be applicable to any shares of Preferred Stock issued in
the future, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefore. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any then outstanding Preferred Stock. Each
share of Class B Common Stock converts automatically into one share of
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<PAGE> 54
Class A Common Stock upon its sale or transfer if, after such sale or transfer,
such share is not beneficially owned by (i) the holder of such share of Class B
Common Stock immediately prior to such sale or transfer or (ii) another holder
of Class B Common Stock. Holders of Common Stock have no preemptive rights and,
other than with respect to conversions of shares of Class B Common Stock into
Class A Common Stock as aforementioned, no right to convert their Common Stock
into any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of the Offering
will be, fully paid and nonassessable.
REDEEMABLE WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company, the
Representative, and American Stock Transfer and Trust Company (the "Transfer and
Warrant Agent"). A copy of the Warrant Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
The holder of each Warrant is entitled, upon payment of the exercise price
of $6.50, to purchase one share of Class A Common Stock. Unless previously
redeemed, the Warrants are exercisable from and after the Separation Date
through the fifth anniversary of the effective date of this Prospectus, provided
that at such time a current prospectus relating to the underlying Class A Common
Stock is in effect and the underlying Class A Common Stock is qualified for sale
or exempt from qualification under applicable state securities laws. The
Warrants included in the Units offered hereby are transferable separately from
the Class A Common Stock issued with such Warrants as part of the Units from and
after the Separation Date. The Warrants are subject to redemption, as described
below.
REDEMPTION
The Warrants are subject to redemption by the Company commencing one year
from the date of this Prospectus, upon 30 days' written notice, at a price of
$.05 per Warrant, if the average closing bid price of the Class A Common Stock
for any 30 consecutive trading days ending within 15 days of the date on which
the notice of redemption is given shall have exceeded $9.10 per share. Holders
of Warrants will automatically forfeit their rights to purchase the shares of
Class A Common Stock issuable upon exercise of such Warrants unless the Warrants
are exercised before the close of business on the business day immediately prior
to the date set for redemption. All of the outstanding Warrants, except for
those underlying the Unit Purchase Option, must be redeemed if any Warrants are
redeemed. A notice of redemption shall be mailed to each of the registered
holders of the Warrants by first class mail, postage prepaid, upon 30 days'
notice before the date fixed for redemption. The notice of redemption shall
specify the redemption price, the date fixed for redemption, the place where the
Warrant certificates shall be delivered and the redemption price to be paid, and
that the right to exercise the Warrants shall terminate at 5:00 p.m. (New York
City time) on the business day immediately preceding the date fixed for
redemption.
GENERAL
The Warrants may be exercised upon surrender of the certificate or
certificates therefor on or prior to the expiration or the redemption date (as
explained above) at the offices of the Warrant Agent with the form of "Election
to Purchase" on the reverse side of the certificate or certificates completed
and executed as indicated, accompanied by payment (in the form of certified or
cashier's check payable to the order of the Company) of the full exercise price
for the number of Warrants being exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of shares
issuable upon exercise thereof upon the occurrence of certain events, including
issuances of Common Stock (or securities convertible, exchangeable or
exercisable into Common Stock) at less than market value, stock dividends, stock
splits, mergers, sale of substantially all of the Company's assets, and for
other extraordinary events; provided, however, that no such adjustment shall
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<PAGE> 55
be made upon, among other things, (i) the issuance or exercise of options or
other securities under the Company's Stock Option Plan or other employee benefit
plans or (ii) the sale or exercise of outstanding options or warrants or the
Warrants offered hereby.
The Company is not required to issue fractional shares of Class A Common
Stock, and in lieu thereof will make a cash payment based upon the current
market value of such fractional shares. The holder of the Warrants will not
possess any rights as a shareholder of the Company unless and until he exercises
the Warrants.
The Warrants do not confer upon holders any voting or any other rights as
shareholders of the Company.
PREFERRED STOCK
Shares of Preferred Stock may be issued without shareholder approval. The
Board of Directors is authorized to issue such shares in one or more series and
to fix the rights, preferences, privileges, qualifications, limitations and
restrictions thereof, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series, without any vote or action by the shareholders. No shares of Preferred
Stock will be outstanding upon the closing of the Offering and the Company has
no present intention to issue any shares of Preferred Stock. Any Preferred Stock
to be issued could rank prior to the Common Stock with respect to dividend
rights and rights on liquidation. The Board of Directors, without shareholder
approval, may issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of holders of Common Stock and
discourage, delay or prevent a change in control of the Company.
UNIT PURCHASE OPTION
Upon the closing of the Offering, the Company has agreed to grant to the
Representative and its designees, the Unit Purchase Option to purchase up to
190,000 Units. The Units issuable upon exercise of the Unit Purchase Option
will, when so issued, be identical to the Units offered hereby except that the
Warrants included in the Unit Purchase Option will not be subject to redemption
by the Company until the Unit Purchase Option has been exercised and the
underlying Warrants are outstanding. The Unit Purchase Option cannot be
transferred, sold, assigned or hypothecated for three years, except to any
officer of the Representative or members of the selling group or their officers.
The Unit Purchase Option is exercisable during the two-year period commencing
three years from the date of this Prospectus at an exercise price of $7.50 per
Unit (150% of the initial public offering price) subject to adjustment in
certain events. The holders of the Unit Purchase Option have certain demand and
piggyback registration rights relating to their options and the underlying
securities. See "Underwriting."
TRANSFER AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, assuming the Underwriters' over-allotment
option is not exercised, the Company will have 3,099,996 shares of Common Stock
outstanding. Of these shares, the 1,900,000 shares of Class A Common Stock sold
hereunder will be freely transferable without restriction or registration under
the Securities Act, unless held by persons deemed to be "affiliates" of the
Company (as that term is defined in Rule 144 under the Securities Act ("Rule
144")). The 1,199,996 shares of Class B Common Stock currently outstanding are
"restricted securities" within the meaning of Rule 144 (the "Restricted Shares")
and may not be sold unless they are registered under the Securities Act or sold
pursuant to Rule 144 or another exemption from registration. Pursuant to Rule
144, all of the Restricted Shares will be eligible for resale commencing 90 days
after consummation of the Offering (upon which resale they will automatically
convert into shares of Class A Common Stock). However, all of the existing
shareholders, executive officers, directors and director
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<PAGE> 56
nominees of the Company have agreed that they will not sell any of the Company's
securities owned by them for a period of 13 months from the date of this
Prospectus without the consent of the Representative. In addition, the holders
of shares of Class B Common Stock have agreed to place an aggregate of 800,000
of such shares in escrow.
Holders of Restricted Shares must comply with the requirements of Rule 144
in order to sell their shares in the open market without violating the
Securities Act. In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate of the Company, who
has beneficially owned shares for at least one year is entitled to sell in the
open market within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then-outstanding shares of the Company's
Common Stock or (ii) the average weekly public trading volume during the four
calendar weeks preceding such sale. The holding period of shares of a
non-affiliate for this purpose includes the holding period of all prior
non-affiliate holders, provided that if an affiliate has held such shares at any
time, the holding period shall commence upon the sale to a non-affiliate by the
last affiliate to hold the shares. Sales under Rule 144 are also subject to
certain limitations on the manner of sale, notice requirements, and availability
of current public information about the Company. A non-affiliate who holds
restricted securities and who has not been affiliated with the Company during
the three-month period preceding the proposed sale thereof may sell such
securities without regard to the conditions imposed by Rule 144 if at least two
years have elapsed from the sale of such securities by the Company or any
affiliate. As defined in Rule 144, an "affiliate" of an issuer is a person that
directly or indirectly controls, or is controlled by, or is under common control
with the issuer of the securities. The foregoing is a summary of the provisions
of Rule 144 and is not intended to be complete.
The Bridge Financing investors and the Additional Bridge Financing investor
have agreed with the Company not to exercise, sell, transfer, assign,
hypothecate or otherwise dispose of their Public Bridge Warrants for a period of
one year following the closing of the Offering. The Company has agreed to
register for resale on behalf of such investors the 1,262,500 Public Bridge
Warrants and the shares of Common Stock underlying such Public Bridge Warrants
upon expiration of such one-year period.
The Representative has demand and "piggy-back" registration rights with
respect to the securities underlying the Unit Purchase Option. See
"Underwriting."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
55
<PAGE> 57
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom D.H. Blair Investment Banking Corp. is acting
as Representative, have severally agreed to purchase, and the Company has agreed
to sell to them, severally, the respective number of Units set forth opposite
the name of such Underwriter:
<TABLE>
<CAPTION>
NAME NUMBER OF UNITS
-------------------------------------------------------------- ---------------
<S> <C>
D. H. Blair Investment Banking Corp. .........................
---------------
Total......................................................... 1,900,000
============
</TABLE>
It is expected that Blair & Co. will distribute as a selling group member a
substantial portion (up to approximately 52%, including the Underwriters'
over-allotment option) of the Units offered hereby. Blair & Co. is substantially
owned by family members of J. Morton Davis. Mr. Davis is the sole stockholder of
the Representative.
The Underwriters have advised the Company that they propose to offer the
Units to the public at the public offering price set forth on the cover page of
this Prospectus. The Underwriters may allow to selected dealers who are members
of the National Association of Securities Dealers, Inc. (the "NASD") concessions
not in excess of $. per Unit, of which not in excess of $. per Unit may
be reallowed to other dealers who are members of the NASD. After the initial
offering, the public offering price, concession and the reallowance may be
changed by the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Representative a non-accountable expense allowance of
3% of the gross proceeds derived from the sale of the Units offered hereby,
including any Units purchased pursuant to the Underwriters' over-allotment
option, $20,000 of which has been paid as of the date of this Prospectus.
The Representative has informed the Company that it does not expect sales
to any discretionary accounts to exceed 5% of the total number of shares of
Class A Common Stock offered hereby.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period commencing on the date of this Prospectus, to purchase from
the Company at the public offering price, less underwriting discounts and
commissions, up to 285,000 additional Units for the purpose of covering over-
allotments, if any, subject to the right of the Representative to elect, in its
sole discretion, to exercise such option individually, and not as Representative
of the several Underwriters.
The Company has agreed to sell to the Representative and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 190,000 Units
substantially identical to the Units being offered hereby, except that the
Warrants included therein are subject to redemption by the Company at any time
after the Unit Purchase Option has been exercised and the underlying Warrants
are outstanding. The Unit Purchase Option will be exercisable during the
two-year period commencing three years from the date of this Prospectus at an
exercise price of $7.50 per Unit (150% of the initial public offering price),
subject to adjustment in certain events to protect against dilution, and are not
transferable for a period of three years from the date of this Prospectus except
to officers of the Representative or to members of the Representative's selling
group or officers thereof. The Company has agreed to register the securities
issuable upon exercise thereof under the Securities Act on two separate
occasions (the first at the Company's expense and the second
56
<PAGE> 58
at the expense of the holders of the Unit Purchase Option) during the four-year
period commencing one year from the date of this Prospectus. The Unit Purchase
Option includes a provision permitting the holder to elect a cashless exercise
of the Unit Purchase Option pursuant to which the holder may exercise a portion
of the Unit Purchase Option in exchange for a decrease in the total number of
Units underlying the Unit Purchase Option. The Company has also granted certain
piggy-back rights to holders of the Unit Purchase Options.
The Representative has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the
Offering, although it has not yet selected any such designee. Such designee may
be a director, officer, partner, employee or affiliate of the Representative.
During the five-year period from the date of this Prospectus, in the event
the Representative originates financing or a merger, acquisition, joint venture,
product or technology licensing arrangement, research and development
sponsorship or similar transaction to which the Company is a party, the
Representative will be entitled to receive a finder's fee in consideration for
origination of such transaction. The fee is based on a percentage of the
consideration paid in the transaction, ranging from 7% of the first $5,000,000
to 2% of any consideration in excess of $14,000,000.
The Representative acted as placement agent in connection with the Bridge
Financing in January 1997 and, in connection therewith, received a placement
agent fee of $200,000 and a non-accountable expense allowance of $60,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
In May, June and July 1997, the Representative loaned the Company an
aggregate of $432,000 principal amount and a corporation controlled by a family
member of the sole stockholder of the Representative, loaned the Company
$190,000 principal amount, all of which loans were utilized for working capital
purposes, including general and administrative expenses. All of such loans bear
interest at the rate of 10% per annum and will be paid, along with accrued
interest thereon, from the proceeds of the Offering. See "Use of Proceeds."
The directors, director nominees, executive officers and holders of the
shares of the Company's Common Stock have agreed not to sell or otherwise
dispose of any of their shares of Common Stock for a period of 13 months from
the date of this Prospectus without the prior written consent of the
Representative.
The Company has agreed not to solicit Warrant exercises other than through
the Representative, unless the Representative declines to make such
solicitation. Upon any exercise of the Warrants after one year from the date of
this Prospectus, the Company will pay the Representative a fee of 5% of the
aggregate exercise price for Warrant exercises solicited in writing by the
Representative or its representatives or agents, if (i) the market price of the
Company's Class A Common Stock on the date the Warrant is exercised is greater
than the then exercise price of the Warrants; (ii) the exercise of the Warrant
was solicited in writing by a member of the NASD; (iii) the Warrant is not held
in a discretionary account; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the
Warrants; and (v) the solicitation of exercise of the Warrant was not in
violation of Regulation M, which was recently adopted to replace Rule 10b-6 and
certain other rules promulgated under the Exchange Act. The Warrant Agreement
requires that such holder of the Warrant designates in writing that the exercise
of the Warrant was solicited by a member of the NASD.
Regulation M may prohibit Blair & Co. or any other soliciting broker-dealer
from engaging in any market making activities with regard to the Company's
securities for the period from five business days (or such other applicable
period as Regulation M may provide) prior to any solicitation by the
Representative of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Representative may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, Blair & Co. may be unable to
provide a market for the Company's securities during certain periods while the
Warrants are exercisable.
The Commission is conducting an investigation concerning various business
activities of the Representative and Blair & Co., a selling group member which
will distribute a substantial portion of the Units. The Company has been advised
by the Representative that the investigation has been ongoing since at least
1989
57
<PAGE> 59
and that it is cooperating with the investigation. The Representative cannot
predict whether this investigation will ever result in any type of formal
enforcement action against the Representative or Blair & Co.
In July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with the
NASDR District Business Conduct Committee for District No. 10 to resolve
allegations of NASD rule and securities law violations in connection with
mark-up and pricing practices and adequacy of disclosures to customers regarding
market-making activities of Blair & Co. in connection with certain securities
issues during the period from June 1993 through May 1995 where Blair & Co. was
the primary selling group member. NASDR alleged the firm failed to accurately
calculate the contemporaneous cost of securities in instances where the firm
dominated and controlled after-market trading, thereby causing the firm to
charge its customers excessive mark-ups. NASDR also alleged the firm did not
make adequate disclosure to customers about its market-making activities in two
issues. As part of the settlement, Blair & Co. has consented to a censure and
has agreed to pay a $2.0 million fine, make $2.4 million in restitution to
retail customers, employ an independent consultant for two years to review and
make recommendations to strengthen the firm's compliance procedures, and has
undertaken for 12 months not to sell to its retail customers (excluding banks
and other institutional investors) more than 60% of the total securities sold in
any securities offering in which it participates as an underwriter or selling
group member. The Chief Executive Officer of Blair & Co. has agreed to settle
failure to supervise charges by consenting to a censure, the imposition of a
$225,000 fine and a 60-day suspension from associating with any NASD member firm
and to take a requalification examination. The firm's head trader has agreed to
settle charges against him by consenting to a censure, the imposition of a
$300,000 fine and a 90-day suspension from associating with any member firm and
has undertaken to take certain requalification examinations. The settlement with
NASDR does not involve or relate to the Representative, its chief executive
officer or any of its other officers or directors.
The Company has been advised that Blair & Co. intends to make a market in
the Company's securities after the Offering. The Company is unable to predict
whether Blair & Co.'s settlement with the NASDR or any unfavorable resolution of
the Commission's investigation will have any effect on such firm's ability to
make a market in the Company's securities and, if so, whether the liquidity or
price of the Company's securities would be adversely affected.
In connection with the Offering, the Underwriters and certain selling group
members may engage in certain transactions that stabilize, maintain or otherwise
affect the market price of the Units, the Class A Common Stock and the Warrants.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such person may bid for or
purchase the Units, the Class A Common Stock and the Warrants for the purpose of
pegging, fixing or maintaining the market price of such securities. The
Underwriters may also create a short position in the Units by selling more Units
in connection with the Offering than they are committed to purchase from the
Company, and in such case the Representative may reduce all or a portion of that
short position by purchasing the Units, the Class A Common Stock and the
Warrants in the open market. The Representative may also elect to reduce any
short position by exercising all or any portion of the over-allotment option
described herein. In addition, the Representative may impose "penalty bids" on
certain Underwriters and selling group members. This means that if the
Representative purchases Class A Common Stock or Warrants in the open market to
reduce the Underwriters' short position or to stabilize the price of the Class A
Common Stock or the Warrants, it may reclaim the amount of the selling
concession from the Underwriters and selling group members who sold those shares
of Class A Common Stock and Warrants as part of the Offering. Any of the
transactions described in this paragraph may stabilize or maintain the market
price of the Units, the Class A Common Stock and the Warrants at a level above
that which might otherwise prevail in the open market.
Neither the Company nor the Underwriters may make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Units, the Class A Common Stock and
the Warrants. In addition, neither the Company nor the Underwriters make any
representation that the Underwriters or any selling group members will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
58
<PAGE> 60
Prior to the Offering, there has been no market for any of the securities
offered hereby. Accordingly, the initial public offering price of the Units and
the exercise prices and other terms of the Warrants have been determined by
negotiations between the Company and the Representative and are not necessarily
related to the Company's assets, net worth or other established criteria of
value. Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of, and prospects for, the
industry in which the Company competes, the Company's management, the Company's
financial condition, the Company's capital structure and such other factors as
were deemed relevant.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Troy & Gould Professional Corporation, Los Angeles, California.
Certain legal matters will be passed upon for the Underwriters by Bachner,
Tally, Polevoy & Misher LLP, New York, New York.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods as set forth in
their report (which contains an explanatory paragraph regarding uncertainties as
to the Company's ability to continue as a going concern) appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act,
with respect to the securities offered by this Prospectus. This Prospectus omits
certain information contained in the Registration Statement, as permitted by the
Rules and Regulations of the Commission. For further information, reference is
made to the Registration Statement and to the other schedules filed therewith,
which may be examined without charge at the Washington, D.C. office of the
Commission and copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fees prescribed by the Commission. The Company is an
electronic filer, and the Commission maintains a Website that contains reports,
proxy and information statements and other information regarding the Company at
www.sec.gov/edgarhp.htm. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance such statement is qualified by reference to each
such contract or document.
59
<PAGE> 61
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.............................. F-2
FINANCIAL STATEMENTS
Balance sheets................................................................ F-3
Statements of operations...................................................... F-4
Statements of shareholders' equity (deficit).................................. F-5
Statements of cash flows...................................................... F-6
NOTES TO FINANCIAL STATEMENTS................................................... F-7-F-15
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
On'Village Communications, Inc.
We have audited the accompanying balance sheets of On'Village
Communications, Inc. (a development stage company), as of December 31, 1995 and
1996, and the statements of operations, shareholders' equity (deficit) and cash
flows for the period November 13, 1995 (Inception) to December 31, 1995 and for
the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of On'Village Communications,
Inc., as of December 31, 1995 and 1996 and the results of its operations and its
cash flows for the period November 13, 1995 (Inception) to December 31, 1995 and
for the year ended December 31, 1996.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
had a working capital deficiency of $522,303 and a shareholders' deficit of
$337,958 as of December 31, 1996. These matters raise substantial doubt as to
the Company's ability to continue as a going concern. The Company's future
operations are dependent upon generating funds to finance the marketing and
expansion of its operations and the repayment of notes payable. Management plans
to generate these funds through an initial public offering of common stock and
warrants as more fully discussed in Note 2. There is no assurance that the
initial public offering will be successful. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Los Angeles, California
February 26, 1997
F-2
<PAGE> 63
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents.......................... $ 27,526 $ 25,518 $ 207,921
Restricted cash.................................... -- -- 78,000
Accounts receivable, net of allowance for doubtful
accounts of $0, $3,671 and $7,671............... -- 20,335 30,331
Prepaid expenses and other assets.................. 5,000 10,588 --
-------- ---------- -----------
Total current assets................................. $ 32,526 $ 56,441 $ 316,252
-------- ---------- -----------
Property and equipment, net (Note 3)................. -- 11,340 13,906
Other assets
License agreements, net of accumulated amortization
of $6,250, $190,061, and $42,000 (Note 7)....... 93,750 81,605 58,000
Deposit............................................ -- -- 16,661
Deferred loan fees, net of accumulated amortization
of $0, $0 and $135,178.......................... -- 30,554 178,591
Deferred offering costs............................ -- 60,846 253,039
-------- ---------- -----------
Total assets....................................... $126,276 $ 240,786 $ 836,449
======== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable................................... $ 915 $ 58,771 $ 24,857
Accrued expenses................................... 2,252 180,701 359,688
Royalties and production costs payable............. -- 17,861 2,653
Deferred revenues.................................. -- 29,744 65,906
Accrued license cost (Note 7)...................... 60,000 100,000 60,000
Notes payable (Note 4)............................. -- 191,667 2,222,300
-------- ---------- -----------
Total current liabilities............................ 63,167 578,744 2,735,404
Long-term liabilities
Notes payable-related parties (Note 5)............. 48,000 -- --
-------- ---------- -----------
Total liabilities.................................... 111,167 578,744 2,735,404
Commitments (Note 6)
Shareholders' equity (deficit) (Notes 2, 10 and 11)
Preferred Stock, 5,000,000 shares authorized;
none issued and outstanding................... -- --
Class A Common Stock, 18,800,000 shares
authorized; none issued and outstanding....... -- --
Class B Common Stock, 1,400,000 shares
authorized; 1,111,962, 1,199,996 and 1,199,996
shares issued and outstanding................. 33,684 152,940 152,940
Additional paid-in capital......................... -- 105,800 475,800
Deficit accumulated during the development stage... (18,575) (596,698) (2,527,695)
-------- ---------- -----------
Total shareholders' equity (deficit)................. 15,109 (337,958) (1,898,955)
-------- ---------- -----------
Total liabilities and shareholders' equity
(deficit).......................................... $126,276 $ 240,786 $ 836,449
======== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 64
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 13, 1995
SIX MONTHS ENDED (INCEPTION) TO
NOVEMBER 13, 1995 ------------------------------- JUNE 30, 1997
(INCEPTION) TO YEAR ENDED JUNE 30, 1996 JUNE 30, 1997 (CUMULATIVE)
DECEMBER 31, 1995 DECEMBER 31, 1996 -------------- -------------- -----------------
----------------- ----------------- (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue............................. $ -- $ 65,548 $ 40,925 $ 23,914 $ 89,462
--------- --------- ---------- ------------ -----------
Costs and expenses
Cost of revenue................... 6,250 114,052 51,998 63,031 183,333
Research and development.......... -- -- -- 59,249 59,249
General and administrative........ 12,325 357,552 173,716 961,632 1,331,509
Selling and marketing............. -- 152,365 24,187 487,651 640,016
--------- --------- ---------- ------------ -----------
Total costs and expenses............ 18,575 623,969 249,901 1,571,563 2,214,107
--------- --------- ---------- ------------ -----------
Operating loss...................... $ (18,575) $(558,421) $ (208,976) $ (1,547,649) $(2,124,645)
--------- --------- ---------- ------------ -----------
Net interest expense................ -- 19,702 -- 383,348 403,050
Net loss............................ $ (18,575) $(578,123) $ (208,976) $ (1,930,997) $(2,527,695)
========= ========= ========== ============ ===========
Net loss per common share........... $ (0.02) $ (0.67) $ (0.25) $ (2.13)
========= ========= ========== ============
Weighted average common shares
outstanding....................... 818,344 858,499 850,777 906,378
========= ========= ========== ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 65
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD NOVEMBER 13, 1995 (INCEPTION) TO
DECEMBER 31, 1995, FOR THE YEAR
ENDED DECEMBER 31, 1996
AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON SHARES ADDITIONAL DURING THE
-------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTALS
--------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash from
initial contribution ($.03 per
share), November 1995................ 1,056,364 $ 32,000 -- -- $ 32,000
Issuance of common stock in exchange
for services ($.03 per share),
November 1995........................ 55,598 1,684 -- -- 1,684
Net loss............................... -- -- -- (18,575) (18,575)
--------- -------- --------- ----------- -----------
Balance, December 31, 1995............. 1,111,962 33,684 -- (18,575) 15,109
Issuance of common stock in exchange
for services ($.03 per share),
January 1996......................... 27,799 842 -- -- 842
Issuance of common stock in exchange
for services ($.03 per share),
February 1996........................ 13,900 421 -- -- 421
Issuance of common stock for cash
($3.52 per share), June 1996......... 28,342 100,000 -- -- 100,000
Issuance of common stock in exchange
for services ($1.00 per share),
October 1996......................... 17,993 17,993 -- -- 17,993
Issuance of warrants in conjunction
with notes payable (Note 4).......... -- -- 20,000 -- 20,000
Contribution of notes payable and
accrued interest to capital (Note
5)................................... -- -- 85,800 -- 85,800
Net loss............................... -- -- -- (578,123) (578,123)
--------- -------- --------- ----------- -----------
Balance, December 31, 1996............. 1,199,996 $152,940 $ 105,800 $ (596,698) $ (337,958)
Issuance of warrants in conjunction
with notes payable (unaudited) (Note
4)................................... 370,000 370,000
Net loss (unaudited)................... (1,930,997) (1,930,997)
--------- -------- --------- ----------- -----------
Balance, June 30, 1997 (unaudited)..... 1,199,996 $152,940 $ 475,800 $(2,527,695) $(1,898,955)
========= ======== ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 66
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOVEMBER 13, 1995
NOVEMBER 13, 1995 SIX MONTHS ENDED (INCEPTION) TO
(INCEPTION) TO YEAR ENDED ----------------------------- JUNE 30, 1997
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997 (CUMULATIVE)
----------------- ----------------- ------------- ------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net loss............................ $ (18,575) $(578,123) $(208,976) $(1,930,997) $(2,527,695)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Provision for doubtful
accounts..................... -- 3,671 -- 4,000 7,671
Depreciation and amortization... 6,250 185,216 35,416 125,005 316,471
Amortization of financing costs
and original issue
discount..................... -- 11,667 -- 303,812 315,479
Issuance of common stock for
services..................... 1,684 19,256 1,263 -- 20,940
Increase (decrease) in cash from
changes in:
Restricted cash................... -- -- -- (78,000) (78,000)
Accounts receivable............... -- (24,006) (28,356) (13,996) (38,002)
Prepaid expenses and other
assets.......................... (5,000) (5,588) (95,248) 10,588 --
License agreement................. (100,000) (171,666) -- (100,000) (371,666)
Deposits.......................... -- -- -- (16,661) (16,661)
Accounts payable.................. 915 57,856 12,706 (33,914) 24,857
Accrued expenses.................. 2,252 184,249 126,007 178,987 365,488
Accrued license costs............. 60,000 40,000 -- (40,000) 60,000
Royalties and production costs
payable......................... -- 17,861 9,417 (15,208) 2,653
Deferred revenues................. -- 29,744 -- 36,162 65,906
--------- --------- --------- ----------- -----------
Net cash used for operating
activities.......................... (52,474) (229,863) (147,771) (1,570,222) (1,852,559)
--------- --------- --------- ----------- -----------
Cash flows from investing activities
Purchase of property and
equipment......................... -- (12,745) (5,480) (3,966) (16,711)
--------- --------- --------- ----------- -----------
Net cash used for investing
activities.......................... -- (12,745) (5,480) (3,966) (16,711)
--------- --------- --------- ----------- -----------
Cash flows from financing activities
Net proceeds from issuance of common
stock............................. 32,000 100,000 -- -- 132,000
Net proceeds from private
placements........................ 48,000 232,000 128,000 2,148,785 2,428,785
Repayment of notes payable.......... -- -- -- (200,000) (200,000)
Registration costs.................. -- (91,400) -- (192,194) (283,594)
--------- --------- --------- ----------- -----------
Net cash provided by financing
activities.......................... 80,000 240,600 128,000 1,756,591 2,077,191
--------- --------- --------- ----------- -----------
Increase (decrease) in cash and cash
equivalents......................... 27,526 (2,008) (25,251) 182,403 207,921
Cash and cash equivalents, at
beginning of period................. -- 27,526 27,526 25,518 --
--------- --------- --------- ----------- -----------
Cash and cash equivalents, at end of
period.............................. $ 27,526 $ 25,518 $ 2,275 $ 207,921 $ 207,921
========= ========= ========= =========== ===========
Supplemental disclosure of cash flow
information
Cash paid during the period for:
Interest.......................... $ 148 $ -- $ -- $ 10,469 $ 10,617
Income taxes...................... 800 -- -- 1,600 2,400
========= ========= ========= =========== ===========
Supplemental disclosure of non-cash
activity
Issuance of common stock in exchange
for services...................... 1,684 19,256 1,263 -- 20,940
========= ========= ========= =========== ===========
Contribution of notes payable and
accrued interest to capital (Note
5)................................ -- 85,800 -- -- 85,800
========= ========= ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 67
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
On'Village Communications, Inc. (the "Company") is engaged in the
development, publishing and marketing of Web-based services designed to help
users access information on the Internet, while at the same time providing
advertisers with an efficient and innovative means of reaching targeted
audiences. The Company's primary service offering is "On'Village Yellow Pages,"
an on-line national yellow page directory service.
The Company is still considered to be in the development stage as revenues
derived from operations have not been significant and the Company is still
primarily involved in raising capital and negotiating agreements with
independent local yellow page publishers.
Basis of Presentation
The unaudited interim financial statements for the six month periods ended
June 30, 1996 and 1997 and for the period November 13, 1995 (Inception) to June
30, 1997 included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and, in the opinion of the Company, reflect all adjustments (consisting only of
normal recurring adjustments) and disclosures which are necessary for a fair
presentation. The results of operations for the six month period ended June 30,
1997 are not necessarily indicative of the results for the full year.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are recorded net of allowances for returns and doubtful
accounts of $3,671 at December 31, 1996 and $7,671 at June 30, 1997.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, which is generally five
years.
License Agreements
The Company has entered into a licensing agreement pursuant to which the
Company licenses a database of business listings and agrees to market, sell and
promote an Internet-based yellow page directory comprised
F-7
<PAGE> 68
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
of the information derived from the database. The minimum annual royalty has
been capitalized and is being amortized over one year, which is the minimum term
of the agreement (Note 7).
Deferred Offering Costs
Deferred offering costs represent costs incurred in connection with the
Company's proposed public offering. The costs of the public offering will be
offset against the proceeds therefrom if the offering is successfully completed
or will be expensed if the offering is abandoned.
Income Taxes
The Company had elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
federal corporate income taxes on its taxable income unless the shareholders
revoke the S Corporation election. Instead, the Company's shareholders are
liable for individual federal income taxes. Accordingly, no provision for income
taxes has been made.
In January 1997, the Company filed an election to revoke its S Corporation
status and to become taxed under the provisions of Subchapter C of the Internal
Revenue Code.
Revenue Recognition
The Company enters into advertising agreements with its customers and
recognizes revenue ratably over the term of the advertisements. Any cash
received prior to the completion of the earnings process is classified as
deferred revenue.
Net Loss per Share
Net loss per common share is computed by dividing the net loss for each
period by the weighted average number of common shares plus the weighted average
of dilutive common share equivalents outstanding during the period as adjusted
for the effect of Securities and Exchange Commission Staff Accounting Bulletin
(SAB) No. 83. Pursuant to SAB No. 83, common stock issued by the Company at a
price less than the anticipated initial public offering price during the twelve
months immediately preceding the initial filing of the offering together with
common stock equivalents issued during such period with an exercise price less
than the anticipated initial public offering price, are treated as outstanding
for all periods presented. Net loss per share is computed using the treasury
stock method. Common share equivalents consist of stock options and warrants.
Common stock equivalents are considered dilutive for earnings per share if the
average stock price exceeds the exercise price during the period. The common
stock equivalents are weighted from the beginning of the earliest quarter in
which they become dilutive. The weighted average number of common shares used in
the net loss per share calculation was reduced by the 800,000 shares of Class B
Common Stock placed in escrow in connection with the proposed initial public
offering.
Stock Split
In October 1996, the Company effected a stock split of its common stock on
a 6.94975 shares for 1 share basis. All share and per share data included herein
have been retroactively adjusted to reflect this event.
New Accounting Pronouncements
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting
F-8
<PAGE> 69
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
Standards Board (FASB) is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Earlier or retroactive applications is not
permitted. The new standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The Company does not expect adoption of SFAS No. 125 to have a material effect
on its financial position or results of operations.
Statements of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128) issued by the FASB is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Earlier application
is not permitted. SFAS 128 requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the income statement. It also requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This statement
also requires restatement of all prior period EPS data presented. The Company
does not expect adoption of SFAS No. 128 to have a material effect on its
Results of Operations.
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company does not expect adoption of SFAS No. 129
to have a material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined the effect
on its financial position or results of operations from the adoption of this
statement.
Statements of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997
(although the FASB is encouraging earlier application). The new standard
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
It also requires that public business enterprises report certain information
about their products and services, the geographic areas in which they operate
and their major customers. The Company has not determined the effect on its
financial position or results of operations from the adoption of this statement.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, royalties
and production costs payable, and notes payable approximate fair value because
of the short maturity of these instruments. It is not practicable to estimate
the fair value of the related party notes payable due to their related party
nature.
NOTE 2 -- GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As of December 31, 1996, the
Company had a working capital deficiency of $522,303 and a shareholders'
deficiency of $337,958. These factors raise substantial doubt about the
Company's ability to continue as a going concern. In
F-9
<PAGE> 70
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
January 1997, the Company raised approximately $1,680,000, after deduction of
all offering related expenses and commissions, in a private placement of notes
and warrants. Management plans to generate additional funds necessary to
continue to operate the Company through an initial public offering of common
stock and warrants. Management currently estimates that the initial public
offering will generate approximately $7,715,000 after the deduction of all
offering related expenses and commissions. There is no assurance that the
initial public offering will be successful. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount of liabilities that might be necessary
should the Company be unable to continue in existence.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 1997
31, ------------
1996
----------- (UNAUDITED)
<S> <C> <C>
Computers and equipment..................... $12,745 $ 16,711
Less accumulated depreciation............... (1,405) (2,805)
------- --------
Totals...................................... $11,340 $ 13,906
======= ========
</TABLE>
NOTE 4 -- NOTES PAYABLE
In October and November 1996, the Company borrowed an aggregate of
$200,000, in the form of three promissory notes, from three individual
investors. The notes were repaid with a portion of the proceeds from the sale of
the Bridge Units (as defined in Note 9). In connection with the issuance of
these notes, the Company also issued to the investors five-year warrants to
purchase a total of 200,000 shares of the Company's Class B Common Stock at
$3.00 per share. The Company allocated $20,000 of the total proceeds of the
notes to an original issue discount, which represents the estimated fair market
value of these warrants at the date of issue. The unamortized original issue
discount was $8,333 at December 31, 1996. Upon consummation of the sale of the
Bridge Units, each of these warrants automatically converted into Bridge
Warrants (as defined in Note 9).
In January 1997, the Company received approximately $1,680,000 from the
issuance of $2,000,000 principal amount of Bridge Notes and 1,000,000 Bridge
Warrants, net of issuance costs. See Note 9. The Company allocated $370,000 of
the total proceeds of the notes to an original issue discount. The unamortized
original issue discount was $209,700 at June 30, 1997.
In May and June 1997, the Company borrowed an aggregate of $432,000 from an
investment banker. The terms of these notes are similar to the terms of the
Bridge Notes.
NOTE 5 -- NOTES PAYABLE -- RELATED PARTIES
Notes payable consist of a total of $48,000 at December 31, 1995 of
advances made by the four executive officers of the Company. These notes are
unsecured, bear interest at 10% per annum, with principal and interest due
January 1, 1999. In December 1996, the noteholders contributed $85,800 to
capital which was comprised of these notes payable together with additional
advances made during 1996 and accrued interest.
F-10
<PAGE> 71
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 6 -- COMMITMENTS
The Company leased its facility on a month-to-month basis until May 31,
1997. As of June 1, 1997, the Company leases its office space under a
non-cancellable lease agreement which expires in May 2002. The Company also
leases certain office equipment under operating lease agreements which terminate
on various dates in 2000. Minimum commitments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997................................................. $100,373
1998................................................. 188,085
1999................................................. 199,140
2000................................................. 160,661
2001................................................. 132,636
2002................................................. 55,265
--------
$836,160
========
</TABLE>
Total rent expense from November 13, 1995 (Inception) to December 31, 1995
and for the year ended December 31, 1996 was $-0- and $10,738, respectively and
for the six months ended June 30, 1996 (unaudited) and June 30, 1997 (unaudited)
was $4,114 and $19,760, respectively.
In October 1995, the Company entered into an agreement with a company (the
"provider") pursuant to which the Company has agreed to edit, market, sell and
promote Internet yellow pages products. The provider has agreed to build and
maintain the software programs which support the Company's search engine and
other technological components. The Company is committed to pay the provider a
percentage of revenue generated by the Company in exchange for the foregoing
services. Based upon meeting its minimum Web page development requirements, even
if the agreement is cancelled, the Company is committed to pay the provider 1%
of future revenues for these development services. If the agreement is not
cancelled, the Company will be required to pay the provider a stated percentage
of annual revenues as follows:
<TABLE>
<CAPTION>
PERCENT REVENUE
--------------------------------------------- --------------------------------------
<S> <C>
5%.......................................... $0 - $7,499,999
6%.......................................... $7,500,000 - $9,499,999
7%.......................................... $9,500,000 - 12,499,999
7.5%.......................................... [greater than or equal to] $12,500,000
</TABLE>
In March 1997, the Company modified the above agreement whereby the Company
will now be required to pay the provider (i) $2,000 per month for hosting,
maintenance and internet usage and (ii) 1% of future advertising revenues.
In June 1997, in connection with its facility lease agreement, the Company
issued a letter of credit to the lessor in the amount of $78,000. The letter of
credit is collateralized by a certificate of deposit in the amount of $78,000.
According to the terms of the lease, the letter of credit may be cancelled upon
the consummation of an initial public offering by the Company.
F-11
<PAGE> 72
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 7 -- LICENSE AGREEMENTS
In December 1995, the Company entered into a five-year license agreement
with a company that generates a nationwide database of business listings from
print yellow pages (the "licensor"). Pursuant to this agreement, the Company has
agreed to market, sell and promote Internet services in the United States. The
Company is committed to pay an annual royalty based on net advertising revenues
(as defined in the agreement), subject to a minimum annual royalty, and provide
50 electronic bill boards to the licensor free of charge.
In December 1996, the Company entered into an agreement, retroactive to
September 4, 1996, with a company (the "Web Page Provider") that provides that
the Company's services will be listed on the Web Page Provider's Web Page,
accessible via a search button, through March 1997. The Company is committed to
make total payments to the Web Page Provider of $171,666 through March 31, 1997.
In April 1997, the Company entered into a new agreement with the Web Page
Provider, which agreement expires in April 1998. The new agreement provides for
the Web Page Provider to continue providing its services substantially as
provided for under the previous agreement in exchange for $30,000 per month. The
new agreement allows either party to terminate the agreement within 90 days
written notice to the other party.
The assets arising from these agreements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
LIFE 1995 1996 1997
--------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Minimum royalty -- database............ 1 Year $100,000 $100,000 $100,000
Web page provider...................... 7 Months $ -- 171,666 --
-------- -------- -------- --------
100,000 271,666 $100,000
Less accumulated amortization.......... 6,250 190,061 42,000
-------- -------- --------
$ 93,750 $ 81,605 $ 58,000
======== ======== ========
</TABLE>
NOTE 8 -- RELATED PARTY TRANSACTIONS
Included in accounts payable at December 31, 1996, is $5,480 due to an
officer of the Company, for a loan to fund the purchase by the Company of two
computers.
Included in general and administrative expenses for the year ended December
31, 1996, is $10,412 for bookkeeping services and $10,738 for office rent paid
to an entity owned by an officer of the Company. Payments for bookkeeping
services were $0 and $1,213 for the six months ended June 30, 1996 (unaudited)
and June 30, 1997 (unaudited), respectively. Office rent payments totalled $0
and $7,388 for the six months ended June 30, 1996 (unaudited) and June 30, 1997
(unaudited), respectively.
NOTE 9 -- AGREEMENT WITH INVESTMENT BANKER
On October 18, 1996, the Company entered into a letter of intent with an
investment banker relating to a private placement of units, consisting of notes
and warrants, and a proposed initial public offering of units, consisting of
shares of common stock and warrants, of the Company. In conjunction with this
letter of intent, the Company also signed a mergers and acquisitions agreement
with the investment banker that provides for the payment of finder's fees to the
investment banker upon the consummation of certain corporate finance, mergers,
acquisitions and other transactions as specified in the agreement.
F-12
<PAGE> 73
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
The private placement, which was completed in January 1997, consisted of
the sale of 40 units ("Bridge Units") at a purchase price of $50,000 per Bridge
Unit. Each Bridge Unit consisted of one $50,000 promissory note, bearing
interest at 10% per annum and due the earlier of one year after the date of
issuance or the completion of the proposed initial public offering, and warrants
(the "Bridge Warrants") to purchase 25,000 shares of the Company's Class A
Common Stock at $3.00 per share. Each outstanding Bridge Warrant which is not
exercised prior to the proposed initial public offering will automatically be
converted into 25,000 warrants (see description of warrants below). In
conjunction with this private placement, the investment banker received a
placement fee of 10% of the gross proceeds of the private placement, a
non-accountable expense allowance of 3% of the gross proceeds of the private
placement and warrants equal to 10% of the shares of Class A Common Stock
underlying the warrants sold in the private placement (which warrants will be
cancelled upon the issuance to the investment banker of the units referred to
below).
The initial public offering is expected to consist of the sale of 1,900,000
units ("Units"), plus an option for the underwriters to sell an additional
285,000 units to cover overallotments, at an initial public offering price of
$5.00 per Unit. Each Unit is expected to consist of one share of the Company's
Class A Common Stock, and one warrant. Each warrant, upon its exercise at $6.50
per warrant, entitles the holder to purchase one share of the Company's Class A
Common Stock. In conjunction with this proposed initial public offering, the
underwriters are expected to receive an underwriting fee of 10% of the gross
proceeds of the initial public offering, and the investment banker is expected
to receive a non-accountable expense allowance of 3% of the gross proceeds of
the initial public offering and an option to purchase units equal to 10% of the
units sold in the initial public offering (excluding any units sold pursuant to
exercise of the overallotment option).
If the Company consummates the proposed initial public offering, 800,000
shares of the Company's Class B Common Stock shall be subject to an escrow and
subsequent transfer to the Company, without consideration, if the Company does
not attain certain earnings or share price levels for its Class A Common Stock.
In the event any of these escrow shares owned by securityholders of the Company
who are officers, directors, employees or consultants of the Company are
released from escrow, compensation expense will be recorded for financial
reporting purposes.
NOTE 10 -- CAPITAL STOCK TRANSACTIONS
In exchange for consulting services rendered during 1996, the Company
issued 17,993 shares of Class B Common Stock to an individual in October 1996.
In October 1996, the Company amended its Articles of Incorporation to
authorize the issuance of 20,200,000 shares of common stock and 5,000,000 shares
of preferred stock. The Board of Directors is authorized to determine and alter
the rights, preferences, privileges, restrictions and the number of shares of
any series of unissued preferred stock. In addition, the Company effected a
stock split of the Company's common stock on a 6.94975 shares for 1 share basis.
All shares and per share data included herein has been retroactively
adjusted to reflect the foregoing amendments.
NOTE 11 -- AMENDMENTS TO ARTICLES OF INCORPORATION
In January 1997, the Company amended its Articles of Incorporation to
create two classes of Common Stock, Class A and Class B. All shares outstanding
as of the date of this amendment were designated as Class B Shares. These Class
B shares will be convertible into Class A shares under certain circumstances
defined within the amended articles of incorporation, and will be identical in
all respects to Class A shares except that on every matter for which one share
of Class A Common Stock is entitled to one vote, each share
F-13
<PAGE> 74
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
of Class B Common Stock will be entitled to five votes. Pursuant to this
amendment, the Company changed its name from "e.ventures, inc." to "On'Village
Communications, Inc."
All shares and per share data included herein has been retroactively
adjusted to reflect the foregoing amendments.
NOTE 12 -- EMPLOYMENT AGREEMENTS
The Company entered into employment agreements (the "Employment Agreement")
with four members of senior management in January 1997. The term of each
Employment Agreement commences on the closing of the initial public offering and
expires at the end of the 37th month after such date; provided, however, that
the term may be extended by mutual agreement between the Company and the
employee. Each Employment Agreement provides that in consideration for the
respective employee's services, he is to be paid a salary of $92,500 during the
first 13 month period of the Employment Agreement. In addition, each employee
will receive increases in salary and bonuses as deemed appropriate by the Board
of Directors after such 13 month period. Each Employment Agreement also provides
that in the event the employee is terminated for "good cause," he shall not be
entitled to any severance, and in the event the employee is terminated for any
reason other than "good cause", he shall be entitled to severance pay equal to
the lesser of (x) a lump sum amount equal to one year's salary based on his
then-current annual salary (excluding any bonuses or fringe benefits) or (y) the
remaining salary due under the term of the Employment Agreement plus a
continuation of the disability and health insurance policies provided for in the
Employment Agreement. Each Employment Agreement contains standard non-compete,
non-solicitation and confidentiality provisions. The four members of senior
management began accruing salaries at a rate based on the above discussed annual
salary as of October 1996.
Pursuant to a letter agreement entered into in February 1997, the Company
agreed to provide Mr. William A. Rossi a base annual salary of $78,000 for
serving as the Company Vice President and Chief Financial Officer and agreed to
grant to Mr. Rossi options to purchase an aggregate of 20,000 shares of Class A
Common Stock at an exercise price equal to their fair market value on the date
of grant, under the Company's Option Plan. Options to purchase 7,000 shares of
Class A Common Stock at an exercise price of $4.00 per share were granted to Mr.
Rossi in August 1997 and the letter agreement provides for the grant of options
to purchase 6,000 and 7,000 shares of Class A Common Stock in February 1998 and
1999, respectively. In addition, in August 1997, Mr. Rossi received options to
purchase 500 shares of Class A Common Stock at an exercise price of $4.00 per
share.
The Company entered into an employment agreement with the Company's
Director of Technology in April 1997. The agreement provides for an annual
salary of $70,000, plus bonuses and annual salary increases as deemed
appropriate by the Board of Directors. In addition, the employee is entitled to
additional compensation equal to 1% of the Company's net revenue (the "Incentive
Compensation"). The agreement may be terminated at any time by the Company for
"good cause", and upon 30 days' notice, at any time without cause. Mr. Hinkson
may terminate the agreement at any time upon 120 days' notice. The agreement
provides that in the event Mr. Hinkson is terminated for "good cause" he shall
not be entitled to any severance, and in the event he is terminated for any
reason other than "good cause," he shall be entitled to severance pay equal to
the Incentive Compensation for a period of three years from the date of
termination. In the event Mr. Hinkson terminates the agreement, he shall be
entitled to the Incentive Compensation for a period of (x) one year following
the date of termination, if the termination occurs during the first year of the
agreement, (y) two years following the date of termination, if the termination
occurs during the second year of the agreement, and (z) three years following
the date of termination, if the termination occurs after the second year of the
agreement. Mr. Hinkson's agreement contains standard non-compete,
non-solicitation and confidentiality agreements.
F-14
<PAGE> 75
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 13 -- STOCK OPTION PLAN
In January 1997, the Board of Directors and the Company's shareholders
approved the Company's 1997 Stock Option Plan (the "Option Plan"). The Option
Plan provides for the grant of options to officers, directors and other key
employees of the Company to purchase up to an aggregate of 200,000 shares of
Class A Common Stock. The exercise price of incentive stock options may not be
less than 100% of the fair market value of the Company's Class A Common Stock as
of the date of grant (110% of the fair market value if the grant is to an
employee who owns more than 10% of the total combined voting power of all
classes of capital stock of the Company). Nonqualified options may be granted
under the Option Plan at an exercise price less than the fair market value of
the Class A Common Stock on the date of grant. Nonqualified options also may be
granted without regard to any restriction on the amount of Class A Common Stock
that may be acquired pursuant to such options in any one year. Options may not
be exercised more than ten years after the grant (five years after the grant if
the grant is an incentive stock option to an employee who owns more than 10% of
the total combined voting power of all classes of capital stock of the Company).
As of February 26, 1997, options to purchase 200,000 shares were available for
grant under the Option Plan. In September 1997, the Board of Directors and the
Company's shareholders approved an amendment to the Option Plan, increasing the
number of shares issuable to 300,000 shares. The Company issued 30,000 options,
exercisable at $4.00 per share, under the Option Plan in August 1997.
NOTE 14 -- SUBSEQUENT EVENTS
In July 1997, the Company issued a $190,000 principal amount promissory
note to a corporation controlled by a family member of the sole stockholder of
the Company's investment banker. The Note is payable, together with interest, at
a rate of 10% per annum, on the earlier of six months from its issuance, the
closing of an initial public offering and the closing of any private financing
providing gross proceeds to the Company of at least $1,000,000.
In September 1997, the Company issued a $250,000 principal amount
promissory note and 62,500 Bridge Warrants to one institutional investor. The
promissory note is payable, together with interest at the rate of 10% per annum,
on the earlier of March 15, 1998 or the closing of the Company's initial public
offering. In the event the promissory note is not repaid in full by October 27,
1997, the holder shall be entitled to receive Bridge Warrants to purchase an
additional 10,000 shares of Class A Common Stock for each seven-day period that
the promissory note remains unpaid (up to a maximum of 62,500 additional Bridge
Warrants).
F-15
<PAGE> 76
======================================================
NO DEALER, SALESMAN 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. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 20
Dividend Policy....................... 22
Dilution.............................. 23
Capitalization........................ 24
Selected Financial Data............... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 32
Management............................ 44
Certain Transactions.................. 49
Principal Shareholders................ 50
Description of Securities............. 52
Shares Eligible for Future Sale....... 54
Underwriting.......................... 56
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 59
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1997 (25 DAYS FROM 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 IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
LOGO
1,900,000 UNITS
CONSISTING OF
1,900,000 SHARES OF CLASS A COMMON STOCK AND
1,900,000 REDEEMABLE CLASS A WARRANTS
------------------------
PROSPECTUS
------------------------
D.H. BLAIR
INVESTMENT BANKING CORP.
, 1997
======================================================
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As allowed by the California Corporations Code, the Company's Restated
Articles of Incorporation provide that the liability of the directors of the
Company for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by or in the
right of the Company for breach of a director's duties to the Company or its
shareholders except for liabilities: (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) for acts
or omissions that a director believes to be contrary to the best interest of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction from which a director derived an
improper personal benefit; (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders; (vi) with respect to certain
transactions or the approval of transactions in which a director has a material
financial interest; and (vii) expressly imposed by statute for approval of
certain improper distributions to shareholders or certain loans or guarantees.
This provision does not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. The Company's Amended and
Restated Bylaws require the Company to indemnify its officers and directors to
the full extent permitted by law, including circumstances in which
indemnification would otherwise be discretionary. Among other things, the
Amended and Restated Bylaws require the Company to indemnify directors and
officers against certain liabilities that may arise by reason of their status or
service as directors and officers and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
Section 317 of the California Corporations Code ("Section 317") provides
that the Company may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (other than action by
or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee, or agent of the Company or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation or enterprise, against expenses, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the Company, and, with
respect to any criminal action or proceeding, had no cause to believe his
conduct was unlawful.
Section 317 also provides that the Company may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted under similar standards, except that no indemnification may be made in
respect to any claim, issue or matter as to which such persons shall have been
adjudged to be liable to the Company unless and only to the extent that the
court in which such action or suit was brought shall determine that despite the
adjudication of liability, such person is fairly and reasonably entitled to be
indemnified for such expenses which the court shall deem proper.
Section 317 also provides that to the extent a director or officer of the
Company has been successful in the defense of any action, suit or proceeding
referred to in the previous paragraphs or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification authorized by
Section 317 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the Company may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against
II-1
<PAGE> 78
him or incurred by him in any such capacity or arising out of his status as such
whether or not the Company would have the power to indemnify him against such
liabilities under Section 317.
The Company has entered into agreements with its directors and executive
officers that require the Company to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Company or any of its affiliated enterprises, provided such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Company and, with respect to any criminal proceeding,
had no reasonable cause to believe his or her conduct was unlawful. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of all expenses to be
incurred in connection with the issuance and distribution of the securities that
are the subject of this Registration Statement. All amounts shown, other than
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq fee, are estimates only.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 19,890
NASD fee.......................................................... 7,062
Nasdaq fee........................................................ 9,000
Printing and engraving expenses................................... 150,000
Accounting fees and expenses...................................... 65,000
Legal fees and expenses........................................... 175,000
Blue Sky filing fees and expenses................................. 50,000
Transfer agent's fees and expenses................................ 5,000
Representative's nonaccountable expense allowance (3%)............ 327,750*
Miscellaneous expenses............................................ 69,048
--------
Total................................................... $877,750
========
</TABLE>
- ---------------
* Assumes the exercise of the over-allotment option (i.e., $10,925,000 of Units
sold in total).
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth all of the unregistered sales of securities
by the Company since the Company's inception in November 1995.
<TABLE>
<CAPTION>
DATE PURCHASER SECURITIES PURCHASED (1) CONSIDERATION
- --------------- ------------------- -------------------------------------------- -------------
<S> <C> <C> <C>
November 1995 Jack B. Tracht 264,091 shares of Class B Common Stock $ 8,000
November 1995 Robert D. Tracht 264,091 shares of Class B Common Stock $ 8,000
November 1995 James E. Austin 264,091 shares of Class B Common Stock $ 8,000
November 1995 Jeff W. Walden 264,091 shares of Class B Common Stock $ 8,000
November 1995 Howard M. Fites 55,598 shares of Class B Common Stock (2)
January 1996 James C. Neil 27,799 shares of Class B Common Stock (3)
February 1996 James C. Neil 13,900 shares of Class B Common Stock (3)
June 1996 Ki T. Lee 28,342 shares of Class B Common Stock $ 100,000
October 1996 James Goldberg 17,993 shares of Class B Common Stock (4)
</TABLE>
II-2
<PAGE> 79
<TABLE>
<CAPTION>
DATE PURCHASER SECURITIES PURCHASED (1) CONSIDERATION
- --------------- ------------------- -------------------------------------------- -------------
<S> <C> <C> <C>
October 1996 Steve Gorlin $100,000 principal amount of 10% Notes and $ 100,000
warrants to purchase 100,000 shares of Class
B Common Stock (which warrants were
subsequently exchanged for Bridge Warrants)
November 1996 Brynde Berkowitz $50,000 principal amount of 10% Notes and $ 50,000
warrants to purchase 50,000 shares of Class
B Common Stock (which warrants were subse-
quently exchanged for Bridge Warrants)
November 1996 Marc Roberts $50,000 principal amount of 10% Notes and $ 50,000
warrants to purchase 50,000 shares of Class
B Common Stock (which warrants were subse-
quently exchanged for Bridge Warrants)
January 1997 Bridge Financing $2,000,000 principal amount of 10% Notes and $ 2,000,000
warrants to purchase 1,000,000 shares of
Class A Common Stock(5)
September 1997 Beech Glen, Inc. $250,000 principal amount 10% Note and $ 250,000
warrants to purchase up to an aggregate of
125,000 shares of Class A Common Stock(6)
</TABLE>
- ---------------
(1) Reflects the Recapitalization, including an approximately 6.94975-for-1
stock split effected in October 1996.
(2) Shares issued to an employee for services.
(3) Shares issued to the Company's law firm for legal services.
(4) Shares issued for consulting services.
(5) Issued solely to a total of 42 individual and institutional accredited
investors in connection with a private placement pursuant to Rule 506 of
Regulation D of the Securities Act in which D.H. Blair Investment Banking
Corp. acted as placement agent and received $260,000 in fees and expenses.
(6) Issued to one institutional accredited investor in connection with a private
placement pursuant to Rule 506 of Regulation D of the Securities Act.
The Company believes that the issuances of securities pursuant to the
foregoing transactions were exempt from registration under the Securities Act of
1933, as amended, by virtue of Section 4(2) thereof as transactions not
involving public offerings. Except as indicated above, all securities referenced
in the preceding table were sold for cash.
ITEM 27. EXHIBITS
(a) The following exhibits, which are furnished with this Registration
Statement or incorporated herein by reference, are filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ ------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation of the Company.*
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen Class A Common Stock Certificate.*
4.2 Form of Warrant Agreement by and among the Company, American Stock Transfer &
Trust Company and the Representative (including the form of Warrant
certificate).
4.3 Form of Representative's Unit Purchase Option.*
4.4 Warrant Agreement dated January 9, 1997 by and among the Company, American
Stock Transfer & Trust Company and the Representative.*
</TABLE>
II-3
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ ------------------------------------------------------------------------------
<C> <S>
4.5 Escrow Agreement, dated as of January 21, 1997, among the Company, American
Stock Transfer & Trust Company and the shareholders of the Company listed on
the signature page thereto (the "Escrow Agreement).*
4.6 Amended and Restated Escrow Agreement dated as of August 19, 1997.
5.1 Opinion of Troy & Gould Professional Corporation.*
10.1 1997 Stock Option Plan.*
10.2 Employment Agreement, dated as of January 24, 1997, between the Company and
Jack B. Tracht (the "J. Tracht Employment Agreement").*
10.3 Employment Agreement, dated as of January 24, 1997, between the Company and
Robert D. Tracht (the "R. Tracht Employment Agreement").*
10.4 Employment Agreement, dated as of January 24, 1997, between the Company and
James E. Austin (the "Austin Employment Agreement").*
10.5 Employment Agreement, dated as of January 24, 1997, between the Company and
Jeff W. Walden (the "Walden Employment Agreement").*
10.6 Form of Indemnification Agreement.*
10.7 Agreement, executed as of May 1997, between the Company and Netscape
Communications Corporation.**
10.8 Agreement, dated as of October 24, 1996, between the Company and Network
Publishing, Inc.*
10.9 License Agreement, dated December 1, 1995, between the Company and Pro CD,
Inc.**
10.10 Form of Independent Publisher Agreement*
10.11 Amendment to the 1997 Stock Option Plan.*
10.12 Amended Agreement, dated as of March 21, 1997, between the Company and Network
Publishing, Inc.*
10.13 Service Agreement, dated March 21, 1997, between the Company and Network
Publishing, Inc.*
10.14 Employment Agreement, dated April 9, 1997, between the Company and Kent
Hinkson.*
10.15 Standard Office Lease for Calabasas Commerce Center -- Building No. 3, by and
between Arden Realty Limited Partnership and the Company.*
10.16 Equipment Lease, dated April 21, 1997, between the Company and Riviera Finance
East Bay.
10.17 Letter Agreement, effective as of February 10, 1997, between the Company and
William A. Rossi.
10.18 Amendment to J. Tracht Employment Agreement, dated September 22, 1997.
10.19 Amendment to R. Tracht Employment Agreement, dated September 22, 1997.
10.20 Amendment to Austin Employment Agreement, dated September 22, 1997.
10.21 Amendment to Walden Employment Agreement, dated September 22, 1997.
11.1 Statement regarding computation of net loss per share.*
23.1 Consent of BDO Seidman LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit 5.1).*
24.1 Power of Attorney.*
27.1 Financial Data Schedule*
99.1 Consent of Nicholas M. Mitsakos*
99.2 Consent of David A. Searls*
</TABLE>
II-4
<PAGE> 81
- ---------------
* Previously filed.
** Incomplete version previously filed; portions for which confidential
treatment have been requested previously filed supplementally.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers, and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the Registrant shall treat the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act
as part of this Registration Statement as of the time the Commission
declares it effective.
(2) For the purpose of determining any liability under the Securities
Act, the Registrant shall treat each post-effective amendment that contains
a form of prospectus as a new registration statement relating for the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement;
(iii) To include any additional or changed material information
with respect to the plan of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 82
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on September
30, 1997.
ON'VILLAGE COMMUNICATIONS, INC.
By: /s/ JACK B. TRACHT
------------------------------------
Jack B. Tracht
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- -------------------------- -------------------
<S> <C> <C>
/s/ JACK B. TRACHT Chief Executive Officer September 30, 1997
- --------------------------------------------- and Director (Principal
Jack B. Tracht Executive Officer)
* President, Chief Operating September 30, 1997
- --------------------------------------------- Officer and Director
Robert D. Tracht
* Senior Vice President of September 30, 1997
- --------------------------------------------- Sales and Director
James E. Austin
* Senior Vice President of September 30, 1997
- --------------------------------------------- Marketing and Director
Jeff W. Walden
/s/ WILLIAM ROSSI Vice President and Chief September 30, 1997
- --------------------------------------------- Financial Officer
William Rossi (Principal Financial and
Accounting Officer)
*By: /s/ JACK B. TRACHT
- ---------------------------------------------
Jack B. Tracht, Attorney-in-Fact
</TABLE>
II-6
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.........................................
3.1 Restated Articles of Incorporation of the Company*.....................
3.2 Amended and Restated Bylaws of the Company.............................
4.1 Specimen Class A Common Stock Certificate*.............................
4.2 Form of Warrant Agreement by and among the Company, American Stock
Transfer & Trust Company and the Representative (including form of
Warrant certificate)...................................................
4.3 Form of Representative's Unit Purchase Option*.........................
4.4 Warrant Agreement dated January 9, 1997 by and among the Company,
American Stock Transfer & Trust Company and the Representative*........
4.5 Escrow Agreement, dated as of January 21, 1997, among the Company,
American Stock Transfer & Trust Company and the shareholders of the
Company listed on the signature page thereto*..........................
4.6 Amended and Restated Escrow Agreement, dated as of August 19, 1997.....
5.1 Opinion of Troy & Gould Professional Corporation*......................
10.1 1997 Stock Option Plan.*...............................................
10.2 Employment Agreement, dated as of January 24, 1997, between the Company
and Jack B. Tracht (the "J. Tracht Employment Agreement")*.............
10.3 Employment Agreement, dated as of January 24, 1997, between the Company
and Robert D. Tracht (the "R. Tracht Employment Agreement")*...........
10.4 Employment Agreement, dated as of January 24, 1997, between the Company
and James E. Austin (the "Austin Employment Agreement")*...............
10.5 Employment Agreement, dated as of January 24, 1997, between the Company
and Jeff W. Walden (the "Walden Employment Agreement")*................
10.6 Form of Indemnification Agreement*.....................................
10.7 Agreement, executed as of May 1997, between the Company and Netscape
Communications Corporation**...........................................
10.8 Agreement, dated as of October 24, 1996, between the Company and
Network Publishing, Inc.*..............................................
10.9 License Agreement, dated December 1, 1995, between the Company and Pro
CD, Inc.**.............................................................
10.10 Form of Independent Publisher Agreement*...............................
10.11 Amendment to the 1997 Stock Option Plan.*
10.12 Amended Agreement, dated as of March 21, 1997, between the Company and
Network Publishing, Inc.* .............................................
10.13 Service Agreement, dated March 21, 1997, between the Company and
Network Publishing, Inc.* .............................................
10.14 Employment Agreement, dated April 9, 1997, between the Company and Kent
Hinkson*...............................................................
10.15 Standard Office Lease for Calabasas Commerce Center -- Building No. 3,
by and between Arden Realty Limited Partnership and the Company.*......
10.16 Equipment Lease, dated April 21, 1997, between the Company and Riviera
Finance East Bay.
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- -------------
<C> <S> <C>
10.17 Letter Agreement, effective as of February 10, 1997, between the
Company and William A. Rossi.
10.18 Amendment to J. Tracht Employment Agreement, dated September 22, 1997.
10.19 Amendment to R. Tracht Employment Agreement, dated September 22, 1997.
10.20 Amendment to Austin Employment Agreement, dated September 22, 1997.
10.21 Amendment to Walden Employment Agreement, dated September 22, 1997.
11.1 Statement regarding computation of net loss per share*
23.1 Consent of BDO Seidman LLP
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit
5.1)*
24.1 Power of Attorney*
27.1 Financial Data Schedule*
99.1 Consent of Nicholas M. Mitsakos*
99.2 Consent of David A. Searls*
</TABLE>
- ---------------
* Previously filed.
** Incomplete version previously filed; portions for which confidential
treatment have been requested previously filed supplementally.
<PAGE> 1
EXHIBIT 1.1
1,900,000 Units
(each Unit consisting of (i) one share of Class A Common Stock and
(ii) one redeemable Class A Warrant to purchase
one share of Class A Common Stock)
ON'VILLAGE COMMUNICATIONS, INC.
UNDERWRITING AGREEMENT
September __, 1997
D.H. Blair Investment Banking Corp.
As Representative of the Several Underwriters
44 Wall Street
New York, New York 10005
On'Village Communications, Inc., a California corporation (the
"Company"), proposes to issue and sell to the underwriters named in Schedule A
(the "Underwriters") pursuant to this Agreement (the "Agreement"), an aggregate
of 1,900,000 Units, each unit being hereinafter referred to as a "Unit" and
consisting of (i) one share of Class A Common Stock ("Shares") and (ii) one
redeemable Class A Warrant ("Warrants") to purchase one share of Class A Common
Stock at a price of $6.50 from the Separation Date (as defined in the Warrant
Agreement) to _______ __, 2002. The Warrants are subject to redemption, in
certain instances commencing one year from the date of this Agreement. In
addition, the Company proposes to grant to the Underwriters (or at its option,
the Representative individually), the option referred to in Section 2(b) to
purchase all or any part of an aggregate of 285,000 additional Units. Unless
the context otherwise indicates, the term "Units" shall include the 285,000
additional Units referred to above.
The aggregate of 1,900,000 Units to be sold by the Company, together
with all or any part of the 285,000 Units which the Underwriters have the
option to purchase, and the Shares and the Warrants comprising such Units, are
herein called the "Units." The Class A Common Stock of the Company to be
outstanding after giving effect to the sale of the Shares is herein called the
"Class A Common Stock." The Shares and Warrants included in the Units
(including the Units which the Underwriters have the option to purchase) are
herein collectively called the "Securities."
You have advised the Company that you and the other Underwriters
desire to purchase, severally, the Units, and that you have been authorized by
the Underwriters to execute this agreement on their behalf. The Company
confirms the agreements made by it with respect to the purchase of the Units by
the several Underwriters on whose behalf you are signing this Agreement as
follows:
<PAGE> 2
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) A registration statement (File No. 333-22811) on Form
SB-2 relating to the public offering of the Units, including a form of
prospectus subject to completion, copies of which have heretofore been
delivered to you, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission under the Act and one or more amendments to such registration
statement may have been so filed. After the execution of this Agreement, the
Company will file with the Commission either (i) if such registration
statement, as it may have been amended, has been declared by the Commission to
be effective under the Act, either (A) if the Company relies on Rule 434 under
the Act, a Term Sheet (as hereinafter defined) relating to the Units that shall
identify the Preliminary Prospectus (as hereinafter defined) that it
supplements containing such information as is required or permitted by Rules
434, 430A and 424(b) under the Act or (B) if the Company does not rely on Rule
434 under the Act a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment shall have
been filed, in such registration statement), with such changes or insertions as
are required by Rule 430A under the Act or permitted by Rule 424(b) under the
Act and in the case of either clause (i)(A) or (i)(B) of this sentence, as have
been provided to and approved by the Representative prior to the execution of
this Agreement, or (ii) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the Act,
an amendment to such registration statement, including a form of prospectus, a
copy of which amendment shall be furnished to and approved by the
Representative prior to the execution of this Agreement.
As used in this Agreement, the term "Registration Statement" means
such registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and including
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means (A) if the Company relies on Rule 434 under the Act, the
Term Sheet relating to the Shares and Warrants that is first filed pursuant to
Rule 424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements; (B) if the Company does
not rely on Rule 434 under the Act, the prospectus first filed with the
Commission pursuant to Rule 424(b) under the Act or (C) if the Company does not
rely on Rule 434 under the Act and if no prospectus is required to be filed
pursuant to said Rule 424(b), such term means the prospectus included in the
Registration Statement; except that if such registration statement or
prospectus is amended or such prospectus is supplemented, after the effective
date of such registration statement and prior to the Option Closing Date (as
hereinafter defined), the terms "Registration Statement" and "Prospectus"
shall include such registration statement and prospectus as so amended, and the
term "Prospectus"
-2-
<PAGE> 3
shall include the prospectus as so supplemented, or both, as the case may be;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference to the "date" of a Prospectus that
includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. At the time the Registration
Statement becomes effective and at all times subsequent thereto up to and on
the Closing Date (as hereinafter defined) or the Option Closing Date (as
hereafter defined), as the case may be, (i) the Registration Statement and
Prospectus will conform in all material respects to the requirements of the Act
and the Rules and Regulations; and (ii) the Registration Statement will not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make statements therein not
misleading and the Prospectus will not include any untrue statement of material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that the Company makes no representations, warranties or agreements as to
information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of the Underwriters specifically for
use in the preparation thereof. It is understood that the statements set forth
in the Prospectus on page 2 with respect to stabilization, under the heading
"Underwriting," and on page 25 with respect to the relationship between the
Representative and the investors in the Bridge Financings, under the heading
"Capitalization - Bridge Financing," "Risk Factors - Possible Adverse Effect on
Liquidity of the Company's Securities Due to Investigation by the Securities
and Exchange Commission of the Representative and D.H. Blair & Co. and Recent
Settlement by Blair & Co. with NASD" and "Risk Factors - Possible Restrictions
on Market Making Activities in the Company's Securities," and on page 44 with
respect to the Representative's intentions to request a nominee to the Board of
Directors, under the heading "Management - Board Committees and Designated
Directors" and the identity of counsel to the Underwriters under the heading
"Legal Matters" constitute the only information furnished in writing by or on
behalf of the several Underwriters for inclusion in the Registration Statement
and Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction
of its incorporation, with full power and authority (corporate and other) to
own its properties and conduct its business as described in the Prospectus and
is duly qualified to do business as a foreign corporation and is in good
standing in all other jurisdictions in which the nature of its business or the
character or location of its properties requires such qualification, except
where failure to so qualify will not materially affect the Company's business,
properties or financial condition.
(d) The authorized, issued and outstanding capital stock
of the Company as of June 30, 1997 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued and are
fully paid and non-assessable; except as set forth in the
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<PAGE> 4
Prospectus, no options, warrants, or other rights to purchase, agreements or
other obligations to issue, or agreements or other rights to convert any
obligation into, any shares of capital stock of the Company have been granted
or entered into by the Company; and the capital stock conforms to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Units and the Shares are duly authorized, and
when issued and delivered pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. Neither the filing of the Registration
Statement nor the offering or sale of the Units as contemplated in this
Agreement gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Class A Common
Stock, except as described in the Registration Statement.
The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits
provided by the warrant agreement pursuant to which such Warrants are to be
issued (the "Warrant Agreement"), which will be substantially in the form filed
as an exhibit to the Registration Statement. The shares of Class A Common
Stock issuable upon exercise of the Warrants have been reserved for issuance
upon the exercise of the Warrants and when issued in accordance with the terms
of the Warrants and Warrant Agreement, will be duly and validly authorized,
validly issued, fully paid and non-assessable and free of preemptive rights and
no personal liability will attach to the ownership thereof. The Warrant
Agreement has been duly authorized and, when executed and delivered pursuant to
this Agreement, will have been duly executed and delivered and will constitute
the valid and legally binding obligation of the Company enforceable in
accordance with its terms. The Warrants and the Warrant Agreement conform to
the respective descriptions thereof in the Registration Statement and
Prospectus.
The Shares and the Warrants contained in the Unit Purchase Option have
been duly authorized and, when duly issued and delivered, such Warrants will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms and entitled to the benefits provided by the Unit
Purchase Option. The Shares included in the Unit Purchase Option (and the
shares of Class A Common Stock issuable upon exercise of such Warrants) when
issued and sold, will be duly authorized, validly issued, fully paid and
non-assessable and free of preemptive rights and no personal liability will
attach to the ownership thereof.
(f) This Agreement, the Unit Purchase Option, the M/A
Agreement (as defined herein) and the Escrow Agreement (as defined herein)
have been duly and validly authorized, executed and delivered by the Company.
The Company has full power and lawful authority to authorize, issue and sell
the Units to be sold by it hereunder on the terms and conditions set forth
herein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery
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<PAGE> 5
or with the authorization, issue and sale of the Units or the Unit Purchase
Option, except such as may be required under the Act or state securities laws.
(g) Except as described in the Prospectus and except as
would not have a material adverse effect on the Company's business, properties
or financial condition (a "Material Adverse Effect"), the Company is not in
violation, breach or default of or under, and consummation of the transactions
herein contemplated and the fulfillment of the terms of this Agreement will not
conflict with, or result in a breach or violation of, any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the property or
assets of the Company pursuant to the terms of any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company is
a party or by which the Company may be bound or to which any of the property or
assets of the Company is subject, nor will such action result in any violation
of the provisions of the articles of incorporation or the by-laws of the
Company, as amended, or any statute or any order, rule or regulation applicable
to the Company of any court or of any regulatory authority or other
governmental body having jurisdiction over the Company.
(h) Subject to the qualifications stated in the
Prospectus, the Company has good and marketable title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to its business; all of the material
leases and subleases under which the Company is the lessor or sublessor of
properties or assets or under which the Company holds properties or assets as
lessee or sublessee as described in the Prospectus are in full force and
effect, and, except as described in the Prospectus, the Company is not in
default in any material respect with respect to any of the terms or provisions
of any of such leases or subleases, and no claim has been asserted by anyone
adverse to rights of the Company as lessor, sublessor, lessee or sublessee
under any of the leases or subleases mentioned above, or affecting or
questioning the right of the Company to continued possession of the leased or
subleased premises or assets under any such lease or sublease except as
described or referred to in the Prospectus; and the Company owns or leases all
such properties described in the Prospectus as are necessary to its operations
as now conducted and, except as otherwise stated in the Prospectus, as proposed
to be conducted as set forth in the Prospectus.
(i) BDO Seidman LLP, who have given their reports on
certain financial statements filed and to be filed with the Commission as a
part of the Registration Statement, which are incorporated in the Prospectus,
are with respect to the Company, independent public accountants as required by
the Act and the Rules and Regulations.
(j) The financial statements, together with related
notes, set forth in the Prospectus (or if the Prospectus is not in existence,
the most recent Preliminary Prospectus) or the Registration Statement present
fairly the financial position and results of operations and changes in cash
flow position of the Company on the basis stated in the Registration Statement,
at the respective dates and for the respective periods to which they apply.
Said statements and related notes have been prepared in accordance with
generally accepted accounting principles
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<PAGE> 6
applied on a basis which is consistent during the periods involved. The
information set forth under the captions "Dilution", "Capitalization", and
"Selected Financial Data" in the Prospectus fairly present, on the basis stated
in the Prospectus, the information included therein. The pro forma financial
information filed as part of the Registration Statement or included in the
Prospectus (or preliminary prospectus) has been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, and includes all adjustments necessary to present fairly the pro
forma financial condition and results of operations at the respective dates and
for the respective periods indicated and all assumptions used in preparing such
pro forma financial statements are reasonable.
(k) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), the
Company has not incurred any liabilities or obligations, direct or contingent,
not in the ordinary course of business, or entered into any transaction not in
the ordinary course of business, which is material to the business of the
Company, and there has not been any change in the capital stock of, or any
incurrence of short-term or long-term debt by, the Company or any issuance of
options, warrants or other rights to purchase the capital stock of the Company
or any adverse change or any development involving, so far as the Company can
now reasonably foresee a prospective adverse change in the condition (financial
or other), net worth, results of operations, business, key personnel or
properties of it which would be material to the business or financial condition
of the Company and the Company has not become a party to, and neither the
business nor the property of the Company has become the subject of, any
material litigation whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not
now pending or, to the knowledge of the Company, threatened, any action, suit
or proceeding to which the Company is a party before or by any court or
governmental agency or body, which might result in any material adverse change
in the condition (financial or other), business prospects, net worth, or
properties of the Company, nor are there any actions, suits or proceedings
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race; and no labor disputes involving the employees of
the Company exist or are imminent which might be expected to adversely affect
the conduct of the business, property or operations or the financial condition
or results of operations of the Company.
(m) Except as disclosed in the Prospectus, the Company
has filed all necessary federal, state and foreign income and franchise tax
returns and has paid all taxes shown as due thereon; and there is no tax
deficiency which has been or to the knowledge of the Company might be asserted
against the Company.
(n) Except as disclosed in the Prospectus, the Company
has sufficient licenses, permits and other governmental authorizations
currently required for the conduct of its business or the ownership of its
properties as described in the Prospectus and is in all material respects
complying therewith and owns or possesses adequate rights to use all material
patents, patent applications, trademarks, service marks, trade-names, trademark
registrations, service
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<PAGE> 7
mark registrations, copyrights and licenses necessary for the conduct of such
business and had not received any notice of conflict with the asserted rights
of others in respect thereof. To the best knowledge of the Company, none of
the activities or business of the Company are in violation of, or cause the
Company to violate, any law, rule, regulation or order of the United States,
any state, county or locality, or of any agency or body of the United States or
of any state, county or locality, the violation of which would have a Material
Adverse Effect.
(o) The Company has not, directly or indirectly, at any
time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(p) On the Closing Dates (hereinafter defined) all
transfer or other taxes (including franchise, capital stock or other tax, other
than income taxes, imposed by any jurisdiction) if any, which are required to
be paid in connection with the sale and transfer of the Units to the several
Underwriters hereunder will have been fully paid or provided for by the Company
and all laws imposing such taxes will have been fully complied with.
(q) All contracts and other documents of the Company
which are, under the Rules and Regulations, required to be filed as exhibits to
the Registration Statement have been so filed.
(r) The Company has not taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Class A Common
Stock to facilitate the sale or resale of the Units hereby.
(s) The Company has no subsidiaries and does not own any
equity interest in any other corporation, joint venture, partnership or other
business entity.
(t) The Company has not entered into any agreement
pursuant to which any person is entitled either directly or indirectly to
compensation from the Company for services as a finder in connection with the
proposed public offering.
(u) Except as previously disclosed in writing by the
Company to the Representative, no officer, director or stockholder of the
Company has any affiliation or association with any member of the National
Association of Securities Dealers Inc. ("NASD").
(v) The Company is not, and upon receipt of the proceeds
from the sale of the Units will not be, an "investment company" within the
meaning of the Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
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<PAGE> 8
(w) The Company has not distributed and will not
distribute prior to the First Closing Date (as hereinafter defined) any
offering material in connection with the offering and sale of the Units other
than the Preliminary Prospectus, Prospectus, the Registration Statement or the
other materials permitted by the Act, if any.
(x) The conditions for use of Form SB-2, as set forth in
the General Instructions thereto, have been satisfied.
(y) There are no business relationships or related-party
transactions of the nature described in Item 404 of Regulation S- B involving
the Company and any person described in such Item that are required to be
disclosed in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) and that have not been so disclosed.
(z) The Company has complied with all provisions of
Section 517.075 Florida Statutes relating to doing business with the government
of Cuba or with any person or affiliate located in Cuba.
2. Purchase, Delivery and Sale of the Units.
(a) Subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties, and
agreements herein contained, the Company agrees to issue and sell to the
Underwriters, and each such Underwriter agrees, severally and not jointly, to
buy from the Company at $4.50 per Unit, at the place and time hereinafter
specified, the number of Units set forth opposite the names of the Underwriters
in Schedule A attached hereto (the "First Units") plus any additional Units
which such Underwriters may become obligated to purchase pursuant to the
provisions of Section 9 hereof. The First Units shall consist of 1,900,000
Units to be purchased from the Company.
Delivery of the First Units against payment therefor shall
take place at the offices of D.H. Blair Investment Banking Corp., 44 Wall
Street, New York, N.Y. (or at such other place as may be designated by
agreement between you and the Company) at 10:00 a.m., New York time, on _______
__ , 1997, or at such later time and date as you may designate, such time and
date of payment and delivery for the First Units being herein called the "First
Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option to the several
Underwriters (or, at the Representative's option, to the Representative,
individually) to purchase all or any part of an aggregate of an additional
285,000 Units at the same price per Unit as the Underwriters shall pay for the
First Units being sold pursuant to the provisions of subsection (a) of this
Section 2 (such additional Units being referred to herein as the "Option
Units"). This option may be exercised within 30 days after the effective date
of the Registration Statement upon notice by the Representative in writing to
the Company advising as to the amount of Option Units as to which the option is
being exercised,
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<PAGE> 9
the names and denominations in which the certificates for such Option Units are
to be registered and the time and date when such certificates are to be
delivered. Such time and date shall be determined by the Representative but
shall not be earlier than four nor later than ten full business days after the
exercise of said option, nor in any event prior to the First Closing Date, and
such time and date is referred to herein as the "Option Closing Date." Delivery
of the Option Units against payment therefor shall take place at the offices of
D.H. Blair Investment Banking Corp., 44 Wall Street, New York, N.Y. The number
of Option Units to be purchased by each Underwriter, if any, shall bear the
same percentage to the total number of Option Units being purchased by the
several Underwriters pursuant to this subsection (b) as the number of Units
such Underwriter is purchasing bears to the total number of the First Units
being purchased pursuant to subsection (a) of this Section 2, as adjusted, in
each case by the Representative in such manner as the Representative may deem
appropriate. The Option granted hereunder may be exercised only to cover
overallotments in the sale by the Underwriters of First Units referred to in
subsection (a) above. In the event the Company declares or pays a dividend or
distribution on its Class A Common Stock, whether in the form of cash, shares
of Class A Common Stock or any other consideration, prior to the Option Closing
Date, such dividend or distribution shall also be paid on the shares of Class A
Common stock underlying the Option Units on the Option Closing Date.
(c) The Company will make the certificates for the
securities comprising the Units to be purchased by the Underwriters hereunder
available to you for checking at least two full business days prior to the
First Closing Date or the Option Closing Date (which are collectively referred
to herein as the "Closing Dates"). The certificates shall be in such names and
denominations as you may request, at least two full business days prior to the
Closing Dates. Time shall be of the essence and delivery at the time and place
specified in this Agreement is a further condition to the obligations of each
Underwriter.
Definitive certificates in negotiable form for the Units to be
purchased by the Underwriters hereunder will be delivered by the Company to you
for the accounts of the several Underwriters against payment of the respective
purchase price by the several Underwriters, by certified or bank cashier's
checks or, at the Representative's option, by wire transfer in New York
Clearing House funds, payable to the order of the Company.
In addition, in the event the Underwriters (or the
Representative, individually) exercise the option to purchase from the Company
all or any portion of the Option Units pursuant to the provisions of subsection
(b) above, payment for such Units shall be made to or upon the order of the
Company by certified or bank cashier's checks payable in New York Clearing
House funds at the offices of D.H. Blair Investment Banking Corp., at the time
and date of delivery of such Units as required by the provisions of subsection
(b) above, against receipt of the certificates for such Units by the
Representative for the respective accounts of the several Underwriters
registered in such names and in such denominations as the Representative may
request.
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<PAGE> 10
It is understood that you, individually and not as Representative of
the several Underwriters, may (but shall not be obligated to) make any and all
payments required pursuant to this Section 2 on behalf of any Underwriters
whose check or checks shall not have been received by the Representative at the
time of delivery of the Units to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder. It is also
understood that you individually rather than all of the Underwriters may (but
shall not be obligated to) purchase the Option Units referred to in subsection
(b) of this Section 2, but only to cover overallotments.
It is understood that the several Underwriters propose to
offer the Units to be purchased hereunder to the public upon the terms and
conditions set forth in the Registration Statement, after the Registration
Statement becomes effective.
3. Covenants of the Company. The Company covenants and agrees
with the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective as promptly as possible. If
required, the Company will file the Prospectus or any Term Sheet that
constitutes a part thereof and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rules 434 and
424(b) under the Act. Upon notification from the Commission that the
Registration Statement has become effective, the Company will so advise you and
will not at any time, whether before or after the effective date, file the
Prospectus, Term Sheet or any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a copy or to which you or your counsel shall have
objected in writing or which is not in compliance with the Act and the Rules
and Regulations. At any time prior to the later of (A) the completion by all
of the Underwriters of the distribution of the Units contemplated hereby (but
in no event more than nine months after the date on which the Registration
Statement shall have become or been declared effective) and (B) 25 days after
the date on which the Registration Statement shall have become or been declared
effective, the Company will prepare and file with the Commission, promptly upon
your request, any amendments or supplements to the Registration Statement or
Prospectus which, in your opinion, may be necessary or advisable in connection
with the distribution of the Units.
As soon as the Company is advised thereof, the Company will
advise you, and confirm the advice in writing, of the receipt of any comments
of the Commission, of the effectiveness of any post-effective amendment to the
Registration Statement, of the filing of any supplement to the Prospectus or
any amended Prospectus, of any request made by the Commission for amendment of
the Registration Statement or for supplementing of the Prospectus or for
additional information with respect thereto, of the issuance by the Commission
or any state or regulatory body of any stop order or other order or threat
thereof suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Units for offering in any jurisdiction,
or of the institution of any proceedings for any of such purposes, and will use
its
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<PAGE> 11
best efforts to prevent the issuance of any such order, and, if issued, to
obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to
the use of such copies for the purposes permitted by the Act. The Company
authorizes the Underwriters and dealers to use the Prospectus in connection
with the sale of the Units for such period as in the opinion of counsel to the
several Underwriters the use thereof is required to comply with the applicable
provisions of the Act and the Rules and Regulations. In case of the happening,
at any time within such period as a Prospectus is required under the Act to be
delivered in connection with sales by an underwriter or dealer of any event of
which the Company has knowledge and which materially affects the Company or the
securities of the Company, or which in the opinion of counsel for the Company
or counsel for the Underwriters should be set forth in an amendment of the
Registration Statement or a supplement to the Prospectus in order to make the
statements therein not then misleading, in light of the circumstances existing
at the time the Prospectus is required to be delivered to a purchaser of the
Units or in case it shall be necessary to amend or supplement the Prospectus to
comply with law or with the Rules and Regulations, the Company will notify you
promptly and forthwith prepare and furnish to you copies of such amended
Prospectus or of such supplement to be attached to the Prospectus, in such
quantities as you may reasonably request, in order that the Prospectus, as so
amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material facts necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which
they are made, not misleading. The preparation and furnishing of any such
amendment or supplement to the Registration Statement or amended Prospectus or
supplement to be attached to the Prospectus shall be without expense to the
Underwriters, except that in case any Underwriter is required, in connection
with the sale of the Units to deliver a Prospectus nine months or more after
the effective date of the Registration Statement, the Company will upon request
of and at the expense of such Underwriter, amend or supplement the Registration
Statement and Prospectus and furnish such Underwriter with reasonable
quantities of prospectuses complying with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934 and the rules and
regulations thereunder in connection with the offering and issuance of the
Units.
(b) The Company will use its best efforts to qualify to
register the Units for sale under the securities or "blue sky" laws of such
jurisdictions as the Representative may designate and will make such
applications and furnish such information as may be required for that purpose
and to comply with such laws, provided the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or to execute a
general consent of service of process in any jurisdiction in any action other
than one arising out of the offering or sale of the Units. The Company will,
from time to time, prepare and file such statements and reports as are or may
be required to continue such qualification in effect for so long a period as
the Representative may reasonably request.
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<PAGE> 12
(c) If the sale of the Units provided for herein is not
consummated for any reason caused by the Company, the Company shall pay all
costs and expenses incident to the performance of the Company's obligations
hereunder, including but not limited to, all of the expenses itemized in
Section 8, including the actual accountable out-of-pocket expenses of the
Representative up to a maximum of $285,000.
(d) The Company will use its best efforts to (i) cause a
registration statement under the Securities Exchange Act of 1934 to be declared
effective concurrently with the completion of this offering and will notify the
Representative in writing immediately upon the effectiveness of such
registration statement, and (ii) if requested by the Representative, to obtain
a listing on the Pacific Stock Exchange and to obtain and keep current a
listing in the Standard & Poors or Moody's Industrial OTC Manual.
(e) For so long as the Company is a reporting company
under either Section 12(g) or 15(d) of the Securities Exchange Act of 1934, the
Company, at its expense, will furnish to its stockholders an annual report
(including financial statements audited by independent public accountants), in
reasonable detail and at its expense, will furnish to you during the period
ending five (5) years from the date hereof, (i) as soon as practicable after
the end of each fiscal year, a balance sheet of the Company and any of its
subsidiaries as at the end of such fiscal year, together with statements of
income, surplus and cash flow of the Company and any subsidiaries for such
fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal quarters of each
fiscal year, unaudited consolidated summary financial information of the
Company for such quarter in reasonable detail; (iii) as soon as they are
available, a copy of all reports (financial or other) mailed to security
holders; (iv) as soon as they are available, a copy of all non-confidential
reports and financial statements furnished to or filed with the Commission or
any securities exchange or automated quotation system on which any class of
securities of the Company is listed; and (v) such other information as you may
from time to time reasonably request.
(f) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e) above
will be on a consolidated basis to the extent the accounts of the Company and
its subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
(g) The Company will deliver to the Representative at or
before the First Closing Date (if and to the extent not previously delivered)
two signed copies of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto, and
will deliver to the several Underwriters such number of conformed copies of the
Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the several Underwriters may
reasonably request. The Company will deliver to or upon the order of the
several Underwriters, from time to time until the effective date of the
Registration Statement, as many copies of any Preliminary Prospectus filed with
the Commission prior to the effective date of the Registration Statement as the
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<PAGE> 13
Underwriters may reasonably request. The Company will deliver to the
Underwriters on the effective date of the Registration Statement and thereafter
for so long as a Prospectus is required to be delivered under the Act, from
time to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriters may from time to time reasonably
request. The Company, not later than (i) 5:00 p.m., New York City time, on the
date of determination of the public offering price, if such determination
occurred at or prior to 12:00 noon, New York City time, on such date or (ii)
6:00 p.m., New York City time, on the business day following the date of
determination of the public offering price, if such determination occurred
after 12:00 noon, New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any
amendment or supplement thereto as the Underwriters may reasonably request for
purposes of confirming orders that are expected to settle on the First Closing
Date.
(h) The Company will make generally available to its
security holders and to the registered holders of its Warrants and deliver to
you as soon as it is practicable to do so but in no event later than 90 days
after the end of twelve months after its current fiscal quarter, an earnings
statement (which need not be audited) covering a period of at least 12
consecutive months beginning after the effective date of the Registration
Statement, which shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale
of the Units for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 under the Act.
(j) The Company will, promptly upon the Representative's
request, prepare and file with the Commission any amendments or supplements to
the Registration Statement, Preliminary Prospectus or Prospectus and take any
other action, which in the reasonable opinion of Bachner, Tally, Polevoy &
Misher LLP, counsel to the several Underwriters, may be reasonably necessary or
advisable in connection with the distribution of the Units, and will use its
best efforts to cause the same to become effective as promptly as possible.
(k) The Company will reserve and keep available that
maximum number of its authorized but unissued securities which are issuable
upon exercise of the Unit Purchase Option outstanding from time to time.
(l) For a period of thirteen months from the First
Closing Date, no current officer, current director or stockholder of the
Company (the "Principal Stockholders") will directly or indirectly, publicly
offer, sell (including any short sale), grant any option for the sale of,
acquire any option to dispose of, or otherwise dispose of any shares of Common
Stock or other securities of the Company, without the prior written consent of
the Representative. In order to enforce this covenant, the Company shall
impose stop-transfer instructions with respect to the shares owned by the
Principal Stockholders until the end of such period.
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<PAGE> 14
(m) Prior to completion of this offering, the Company
will make all filings required, including registration under the Securities
Exchange Act of 1934, to obtain the listing of the Units, Class A Common Stock,
and Warrants on the Nasdaq SmallCap Market (or a listing on such other market
or exchange as the Representative consents to), and will use its best efforts
to effect and maintain such listing for at least five years from the date of
this Agreement.
(n) The Company and each of the Principal Stockholders
represents that it or he has not taken and agree that it or he will not take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Units, Shares or the Warrants or to facilitate
the sale or resale of the Securities.
(o) On the Closing Date and simultaneously with the
delivery of the Units, the Company shall execute and deliver to the
Representative, the Unit Purchase Option. The Unit Purchase Option will be
substantially in the form of the Representative's Unit Purchase Option filed as
an Exhibit to the Registration Statement.
(p) During the 18 month period commencing on the date of
this Agreement, the Company will not, without the prior written consent of the
Representative, grant options to employees to purchase shares of Class A Common
Stock at an exercise price less than the greater of (i) the initial public
offering price of the Units (without allocating any value to the Warrants) or
(ii) the fair market value of the Class A Common Stock on the date of grant.
During the six month period commencing on the date of this Agreement, the
Company will not, without the prior written consent of the Representative,
grant options to any current executive officer of the Company except for the
grant to William A. Rossi of options to purchase _______ shares of Class A
Common Stock. During the three year period commencing on the date of this
Agreement, the Company will not, without the prior written consent of the
Representative, offer or sell any of its securities pursuant to Regulation S
under the Act.
(q) Except as contemplated by Section 3(z), the Company
will not, without the prior written consent of the Representative, grant
registration rights to any person which are exercisable sooner than 13 months
from the First Closing Date.
(r) Jack B. Tracht shall be the Chief Executive Officer,
Robert D. Tracht shall be the President and Chief Operating Officer and Jeff W.
Walden and James E. Austin will each be a Senior Vice President of the Company
on the Closing Dates. The Company has obtained key person life insurance on
the lives of each of Jack B. Tracht, Robert D. Tracht, Jeff W. Walden and James
E. Austin, respectively, in an amount of not less than $2 million and will use
its best efforts to maintain such insurance during the three year period
commencing on the First Closing Date or the term of their employment, whichever
period is longer. In the event Jack B. Tracht's employment is terminated prior
to the three year period commencing on the First Closing Date, the Company will
obtain a comparable policy on the life of his successor for the balance of the
three year period. For a period of thirteen months from
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<PAGE> 15
the First Closing Date, the compensation of the executive officers of the
Company shall not be increased from the compensation levels disclosed in the
Prospectus.
(s) On the Closing Date and simultaneously with the
delivery of the Units the Company shall deliver to you, individually and not as
representative of the Underwriters, an agreement with you regarding mergers,
acquisitions, joint ventures and certain other forms of transactions, in the
form previously delivered to the Company by you (the "M/A Agreement").
(t) So long as any Warrants are outstanding, the Company
shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act and
without any lapse of time between the effectiveness of any such post-effective
amendments and cause a copy of each Prospectus, as then amended, to be
delivered to each holder of record of a Warrant and to furnish to the several
Underwriters and dealers as many copies of each such Prospectus as such
Underwriter or dealer may reasonably request. The Company shall not call for
redemption any of the Warrants unless a registration statement covering the
securities underlying the Warrants has been declared effective by the
Commission and remains current at least until the date fixed for redemption.
In addition, for so long as any Warrant is outstanding, the Company will
promptly notify the Representative of any material change in the business,
financial condition or prospects of the Company.
(u) Upon the exercise of any Warrant or Warrants after
_______ __, 1998, the Company will pay D.H. Blair Investment Banking Corp., a
fee of 5% of the aggregate exercise price of the Warrants, of which 1% may be
reallowed to the dealer who solicited in writing the exercise (which may also
be the Representative) if (i) the market price of the Company's Class A Common
Stock is greater than the exercise price of the Warrants on the date of
exercise; (ii) the exercise of the Warrant was solicited by a member of the
National Association of Securities Dealers, Inc., (iii) the Warrantholder
designates in writing that the exercise of the Warrant was solicited by a
member of the National Association of Securities Dealers, Inc. and designates
in writing the broker-dealer to receive compensation for such exercise; (iv)
the Warrant is not held in a discretionary account; (v) the disclosure of
compensation arrangements has been made in documents provided to customers,
both as part of the original offering and at the time of exercise, and (vi) the
solicitation of the Warrant was not in violation of Regulation M promulgated
under the Securities Exchange Act of 1934, as amended. The Company agrees not
to solicit the exercise of any Warrants other than through D.H. Blair
Investment Banking Corp. and will not authorize any other dealer to engage in
such solicitation without the prior written consent of D.H. Blair Investment
Banking Corp.
(v) For a period of five (5) years from the Effective
Date the Company (i) at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit) the
Company's financial statements for each of the first three (3) fiscal quarters
prior to the announcement of quarterly financial information, the filing of the
Company's 10-Q quarterly report and the mailing of quarterly financial
information to stockholders and (ii) shall not change its accounting firm
without the prior written consent of the
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<PAGE> 16
Chairman or the President of the Representative which consent shall not be
withheld in connection with a change to any "Big 6" accounting firm.
(w) As promptly as practicable after the Closing Date,
the Company will prepare, at its own expense, hard cover "bound volumes"
relating to the offering, and will distribute at least four of such volumes to
the individuals designated by the Representative or counsel to the
Representative.
(x) For a period of five years from the First Closing
Date (i) the Representative shall have the right, but not the obligation, to
designate one director of the Board of Directors of the Company and (ii) the
Company shall engage a public relations firm reasonably acceptable to the
Representative.
(y) The Company shall, for a period of six years after
date of this Agreement, submit reports to the Secretary of the Treasury and to
stockholders, as the Secretary may require, pursuant to Section 1202 of the
Internal Revenue Code, as amended, or regulations promulgated thereunder, in
order for the Company to qualify as a "small business" so that stockholders may
realize special tax treatment with respect to their investment in the Company.
(z) The Company shall, within nine months after the First
Closing Date, file a registration statement pursuant to the Act, covering the
Warrants and the shares of Class A Common Stock issuable upon exercise of the
Warrants (the "Bridge Securities"), held by the holders ("Bridge Lenders") of
the Warrants issued in connection with the Company's private placement
completed in January 1997 and use its best efforts to cause such registration
statement to become effective upon the expiration of the lock-up agreement
between each Bridge Lender and the Company relating to the Bridge Securities.
4. Conditions of Underwriters' Obligation. The obligations of
the several Underwriters to purchase and pay for the Units which they have
respectively agreed to purchase hereunder, are subject to the accuracy (as of
the date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become
effective and you shall have received notice thereof not later than
10:00 A.M., New York time, on the date on which the amendment to the
registration statement originally filed with respect to the Units or
to the Registration Statement, as the case may be, containing
information regarding the initial public offering price of the Units
has been filed with the Commission, or such later time and date as
shall have been agreed to by the Representative; if required, the
Prospectus or any Term Sheet that constitutes a part thereof and any
amendment or supplement thereto shall have been filed with the
Commission in the manner and within the time period required by Rule
434 and 424(b) under the Act; on or prior to the Closing Dates no stop
order suspending the effectiveness of the Registration Statement shall
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<PAGE> 17
have been issued and no proceedings for that or a similar purpose
shall have been instituted or shall be pending or, to the knowledge of
the Company, shall be contemplated by the Commission; any request on
the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of Bachner, Tally,
Polevoy & Misher LLP, counsel to the Underwriters;
(b) At the First Closing Date, you shall have received
the opinion, dated as of the First Closing Date, of Troy & Gould
Professional Corporation, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect
that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of California, and has all requisite
corporate power and authority to own its properties and
conduct its business as described in the Registration
Statement and Prospectus. The Company is duly qualified or
licensed to do business as a foreign corporation and is in
good standing as a foreign corporation in the State of Utah;
(ii) to the best knowledge of such counsel, (a)
the Company has obtained, or is in the process of obtaining,
all material licenses, permits and other governmental
authorizations necessary to the conduct of its business as
described in the Prospectus, (b) such licenses, permits and
other governmental authorizations as have been obtained are in
full force and effect, and (c) the Company is in all material
respects complying therewith;
(iii) the authorized capitalization of the Company
as of June 30, 1997 is as set forth under "Capitalization" in
the Prospectus; all shares of the Company's outstanding stock
requiring authorization for issuance by the Company's board of
directors have been duly authorized, validly issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus; to the best of such counsel's
knowledge, the outstanding shares of Class A Common Stock of
the Company have not been issued in violation of the
preemptive rights of any shareholder and the shareholders of
the Company do not have any preemptive rights or other rights
to subscribe for or to purchase, nor, except as described in
the Prospectus, are there any restrictions upon the voting or
transfer of any of the Shares; the Class A Common Stock, the
Warrants, the Unit Purchase Option and the Warrant Agreement
conform to the respective descriptions thereof contained in
the Prospectus; the Shares have been, and the shares of Class
A Common Stock to be issued upon exercise of the Warrants and
the Unit Purchase Option, upon
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<PAGE> 18
issuance in accordance with the terms of such Warrants, the
Warrant Agreement and Unit Purchase Option have been duly
authorized and, when issued and delivered in accordance with
the terms of such documents, will be duly and validly issued,
fully paid and non-assessable, free of preemptive rights and
no personal liability will attach to the ownership thereof;
all prior sales by the Company of the Company's securities
have been made in compliance with or under an exemption from
registration under the Act and applicable state securities
laws and no shareholders of the Company have any rescission
rights with respect to Company securities; a sufficient number
of shares of Class A Common Stock has been reserved for
issuance upon exercise of the Warrants and Unit Purchase
Option and to the best of such counsel's knowledge, neither
the filing of the Registration Statement nor the offering or
sale of the Units as contemplated by this Agreement gives rise
to any registration rights or other rights, other than those
which have been waived or satisfied for or relating to the
registration of any shares of Class A Common Stock;
(iv) this Agreement, the Unit Purchase Option, the
Warrant Agreement, the M/A Agreement and the Escrow Agreement
have been duly and validly authorized, executed and delivered
by the Company and, if the laws of the State of California
were to govern the enforcement of such documents (as to which
such counsel need express no opinion), each constitutes a
legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its 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);
(v) the certificates evidencing the shares of
Class A Common Stock are in valid and proper legal form; the
Warrants will be exercisable for shares of Class A Common
Stock of the Company in accordance with the terms of the
Warrants and at the prices therein provided for; the shares of
Class A Common Stock of the Company issuable upon exercise of
the Warrants have been duly authorized and reserved for
issuance at all times during the term of the Warrants upon
such exercise and such shares, when issued upon such exercise
in accordance with the terms of the Warrants and at the price
provided for, will be duly and validly issued, fully paid and
non-assessable;
(vi) such counsel knows of no pending or
threatened legal or governmental proceedings to which the
Company is a party which could
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<PAGE> 19
materially adversely affect the business, property, financial
condition or operations of the Company; or which question the
validity of the Securities, this Agreement, the Warrant
Agreement, the Unit Purchase Option, the M/A Agreement or the
Escrow Agreement or of any action taken or to be taken by the
Company pursuant to this Agreement, the Warrant Agreement, the
Unit Purchase Option, the M/A Agreement or the Escrow
Agreement and no such proceedings are known to such counsel
to be contemplated against the Company; to the best of such
counsel's knowledge, there are no governmental proceedings or
regulations required to be described or referred to in the
Registration Statement which are not so described or referred
to;
(vii) to the best of such counsel's knowledge, the
Company is not in violation of or default under, nor will the
execution and delivery of this Agreement, the Unit Purchase
Option, the Warrant Agreement, the M/A Agreement or the Escrow
Agreement and the incurrence of the obligations herein and
therein set forth and the consummation of the transactions
herein or therein contemplated, result in a breach or
violation of, or constitute a default under the certificate or
articles of incorporation or by-laws, in the performance or
observance of any material obligations, agreement, covenant or
condition contained in any bond, debenture, note or other
evidence of indebtedness or in any contract, indenture,
mortgage, loan agreement, lease, joint venture or other
agreement or instrument to which the Company is a party or by
which it or any of its properties may be bound or in violation
of any material order, rule, regulation, writ, injunction, or
decree of any government, governmental instrumentality or
court, domestic or foreign;
(viii) based on oral advice of the SEC the
Registration Statement has become effective under the Act, and
to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is
in effect, and no proceedings for that purpose have been
instituted or are pending before, or threatened by, the
Commission; the Registration Statement and the Prospectus
(except for the financial statements and other financial data
and statistical data contained therein, or omitted therefrom,
as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements
of the Act and the Rules and Regulations;
(ix) such counsel has participated in the
preparation of the Registration Statement and the Prospectus
and although such counsel has not independently verified and
need not pass upon, and need not assume responsibility for,
the accuracy, completeness or fairness of the statements
contained in the Registration Statement on the basis of the
foregoing but
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<PAGE> 20
without independent check or verification, no fact has come to
the attention of such counsel to cause such counsel to have
reason to believe that the Registration Statement or any
amendment thereto at the time it became effective or as of the
Closing Dates contained any untrue statement of a material
fact required to be stated therein or omitted to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading or that the
Prospectus or any supplement thereto contains any untrue
statement of a material fact or omits to state a material fact
necessary in order to make statements therein, in light of the
circumstances under which they were made, not misleading
(except, in the case of both the Registration Statement and
any amendment thereto and the Prospectus and any supplement
thereto, for the financial statements, notes thereto and other
financial or statistical information and schedules contained
therein, as to which such counsel need express no opinion);
(x) all descriptions in the Registration
Statement and the Prospectus, and any amendment or supplement
thereto, of contracts and other documents are accurate in all
material respects and fairly present the information required
to be shown, and such counsel is familiar with all contracts
and other documents referred to in the Registration Statement
and the Prospectus and any such amendment or supplement or
filed as exhibits to the Registration Statement, and such
counsel does not know of any contracts or documents of a
character required to be summarized or described therein or to
be filed as exhibits thereto which are not so summarized,
described or filed;
(xi) no authorization, approval, consent, or
license of any governmental or regulatory authority or agency
is necessary in connection with the authorization, issuance,
transfer, sale or delivery of the Units by the Company, in
connection with the execution, delivery and performance of
this Agreement by the Company or in connection with the taking
of any action contemplated herein, or the issuance of the Unit
Purchase Option or the Securities underlying the Unit Purchase
Option, other than registrations or qualifications of the
Units under applicable state or foreign securities or Blue Sky
laws and registration under the Act;
(xii) the statements in the Registration Statement
under the captions "Business", "Use of Proceeds",
"Management", and "Description of Securities" have been
reviewed by such counsel and insofar as they refer to
descriptions of agreements, statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions,
are correct in all material respects except that such counsel
need express no opinion with respect to the statements set
forth in the caption "Business -- Government Regulation" "Risk
Factors - Government Regulation and
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<PAGE> 21
Legal Uncertainties" or any other statement regarding
trademark or copyright law;
(xiii) the Units, the Class A Common Stock and the
Warrants have been duly authorized for quotation on the Nasdaq
SmallCap Market; and
(xiv) to such counsel's knowledge, there are no
business relationships or related-party transactions of the
nature described in Item 404 of Regulation S-B involving the
Company, and any person described in such Item that are
required to be disclosed in the Prospectus and which have not
been so disclosed.
(c) At the First Closing Date, you shall have received
the opinion, addressed to the Underwriters, dated as of the First
Closing Date, of Cole, Raywid & Braverman LLP, regulatory counsel to
the Company, in form and substance satisfactory to counsel for the
Underwriters, to the effect that:
(i) The information in the Prospectus under the
captions entitled "Risk Factors -- Government Regulation and
Legal Uncertainties" and "Business of the Company" insofar as
it pertains to legal and regulatory matters, has been reviewed
and analyzed by us and in our opinion accurately and
adequately describes in all material respects the nature and
extent to which the Company's operations and proposed business
may be subject to government regulations and guidelines in the
United States.
(ii) The business as presently conducted by the
Company and as proposed to be conducted as stated in the
Prospectus does not, to our knowledge, violate any rules,
regulations or policies of the Federal Trade Commission, the
Department of Justice or the Federal Communications
Commission.
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as you or counsel for the Underwriters shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law other than the law of the United
States or of the State of California upon opinions of counsel satisfactory to
you, in which case the opinion shall state that they have no reason to believe
that you and they are not entitled to so rely.
(d) All corporate proceedings and other legal matters
relating to this Agreement, the Registration Statement, the Prospectus and
other related matters shall be satisfactory to or approved by Bachner, Tally,
Polevoy & Misher LLP, counsel to the
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<PAGE> 22
Underwriters, and you shall have received from such counsel a signed opinion,
dated as of the First Closing Date, together with copies thereof for each of
the other Underwriters, with respect to the validity of the issuance of the
Units, the form of the Registration Statement and Prospectus (other than the
financial statements and other financial data contained therein), the execution
of this Agreement and other related matters as you may reasonably require. The
Company shall have furnished to counsel for the several Underwriters such
documents as they may reasonably request for the purpose of enabling them to
render such opinion.
(e) You shall have received a letter prior to the
effective date of the Registration Statement and again on and as of the First
Closing Date from BDO Seidman LLP, independent public accountants for the
Company, substantially in the form approved by you, and including estimates of
the Company's revenues and results of operations for the period ending at the
end of the month immediately preceding the effective date and results of the
comparable period during the prior fiscal year.
(f) At the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
with the same effect as if made on and as of the Closing Dates and the Company
shall have performed all of its obligations hereunder and satisfied all the
conditions on its part to be satisfied at or prior to such Closing Date; (ii)
the Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations, and shall in all
material respects conform to the requirements thereof, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein (with respect to the Prospectus, in light of the
circumstances in which they were made) not misleading; (iii) there shall have
been, since the respective dates as of which information is given, no material
adverse change, or any development involving a prospective material adverse
change, in the business, properties, condition (financial or otherwise),
results of operations, capital stock, long-term or short-term debt or general
affairs of the Company from that set forth in the Registration Statement and
the Prospectus, except changes which the Registration Statement and Prospectus
indicate might occur after the effective date of the Registration Statement,
and the Company shall not have incurred any material liabilities or entered
into any agreement not in the ordinary course of business other than as
referred to in the Registration Statement and Prospectus; and (iv) except as
set forth in the Prospectus, no action, suit or proceeding at law or in equity
shall be pending or threatened against the Company which would be required to
be set forth in the Registration Statement, and no proceedings shall be pending
or threatened against the Company before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, condition (financial or otherwise), results of operations or general
affairs of the Company, and (v) you shall have received, at the First Closing
Date, a certificate signed by each of the Chairman of the Board or the
President and the principal financial or accounting officer of the Company,
dated as of the First Closing Date, evidencing compliance with the provisions
of this subsection (f).
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<PAGE> 23
(g) Upon exercise of the option provided for in Section
2(b) hereof, the obligations of the several Underwriters (or, at its option,
the Representative, individually) to purchase and pay for the Option Units
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain
effective at the Option Closing Date, and no stop order
suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been instituted
or shall be pending, or, to your knowledge or the knowledge of
the Company, shall be contemplated by the Commission, and any
reasonable request on the part of the Commission for
additional information shall have been complied with to the
satisfaction of Bachner, Tally, Polevoy & Misher LLP, counsel
to the Underwriters.
(ii) At the Option Closing Date there shall have
been delivered to you the signed opinions of Troy & Gould
Professional Corporation and Cole, Raywid & Braverman LLP,
counsels for the Company, dated as of the Option Closing Date,
in form and substance satisfactory to Bachner, Tally, Polevoy
& Misher LLP, counsel to the several Underwriters, together
with copies of such opinion for each of the other several
Underwriters, which opinions shall be substantially the same
in scope and substance as the opinions furnished to you at the
First Closing Date pursuant to Section 4(b) and (c) hereof,
except that such opinion, where appropriate, shall cover the
Option Units.
(iii) At the Option Closing Date there shall have
been delivered to you a certificate of the Chairman of the
Board or the President and the principal financial or
accounting officer of the Company, dated the Option Closing
Date, in form and substance satisfactory to Bachner, Tally,
Polevoy & Misher LLP, counsel to the several Underwriters,
substantially the same in scope and substance as the
certificate furnished to you at the First Closing Date
pursuant to Section 4(f) hereof.
(iv) At the Option Closing Date there shall have
been delivered to you a letter in form and substance
satisfactory to you from BDO Seidman LLP, dated the Option
Closing Date and addressed to the Underwriters confirming the
information in their letter referred to in Section 4(e) hereof
and stating that nothing has come to their attention during
the period from the ending date of their review referred to in
said letter to a date not more than five business days prior
to the Option Closing Date, which would require any change in
said letter if it were required to be dated the Option Closing
Date.
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<PAGE> 24
(v) All proceedings taken at or prior to the
Option Closing Date in connection with the sale and issuance
of the Option Units shall be satisfactory in form and
substance to you, and you and Bachner, Tally, Polevoy & Misher
LLP, counsel to the several Underwriters, shall have been
furnished with all such documents, certificates, and opinions
as you may request in connection with this transaction in
order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company or
its compliance with any of the covenants or conditions
contained herein.
(h) No action shall have been taken by the Commission or
the NASD the effect of which would make it improper, at any time prior to the
Closing Date, for members of the NASD to execute transactions (as principal or
agent) in the Units, Class A Common Stock or the Warrants and no proceedings
for the taking of such action shall have been instituted or shall be pending,
or, to the knowledge of the Representative or the Company, shall be
contemplated by the Commission or the NASD. The Company represents that at the
date hereof it has no knowledge that any such action is in fact contemplated by
the Commission or the NASD. The Company shall have advised the Underwriters of
any NASD affiliation of any of its officers, directors, stockholders or their
affiliates.
(i) If any of the conditions herein provided for in this
Section shall not have been fulfilled as of the date indicated, this Agreement
and all obligations of the several Underwriters under this Agreement may be
cancelled at, or at any time prior to, each Closing Date by the Representative.
Any such cancellation shall be without liability of the Underwriters to the
Company.
5. Conditions of the Obligations of the Company. The obligation
of the Company to sell and deliver the Units is subject to the condition that
at the Closing Dates, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued under the Act or any proceedings
therefor initiated or threatened by the Commission.
If the condition to the obligations of the Company provided for in
this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company to sell and deliver the Units on
exercise of the option provided for in Section 2(b) hereof shall be affected.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act against any losses, claims, damages or liabilities,
joint or several (which shall, for all purposes of this Agreement, include, but
not be limited to, all reasonable costs of defense and investigation and all
attorneys' fees), to which such Underwriter or such controlling person may
become subject, under the Act or otherwise, and will reimburse, as incurred,
such Underwriters
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<PAGE> 25
and such controlling persons for any legal or other expenses reasonably
incurred in connection with investigating, defending against or appearing as a
third party witness in connection with any losses, claims, damages or
liabilities, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in (A) the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, (B) any blue sky application or other document executed by
the Company specifically for that purpose or based upon written information
furnished by the Company filed in any state or other jurisdiction in order to
qualify any or all of the Units under the securities laws thereof (any such
application, document or information being hereinafter called a "Blue Sky
Application"), or arise out of or are based upon the omission or alleged
omission to state in the Registration Statement, any Preliminary Prospectus,
Prospectus, or any amendment or supplement thereto, or in any Blue Sky
Application, a material fact required to be stated therein or necessary to make
the statements therein (in the case of the Preliminary Prospectus or
Prospectus, in light of the circumstances under which they were made) not
misleading; provided, however, that the Company will not be liable in any such
case to the extent, but only to the extent, that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Underwriters specifically for use in the preparation of the Registration
Statement or any such amendment or supplement thereof or any such Blue Sky
Application or any such preliminary Prospectus or the Prospectus or any such
amendment or supplement thereto. This indemnity will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter severally, but not jointly, will
indemnify and hold harmless the Company, each of its directors, each nominee
(if any) for director named in the Prospectus, each of its officers who have
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities (which shall, for all purposes of this Agreement, include, but not
be limited to, all costs of defense and investigation and all attorneys' fees)
to which the Company or any such director, nominee, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto (i) in reliance upon and in
conformity with written information furnished to the Company by you or by any
Underwriter through you specifically for use in the preparation thereof and
(ii) relates to the transactions effected by the Underwriters in connection
with the offer and sale of the Units contemplated hereby. This indemnity
agreement will be in addition to any liability which the Underwriters may
otherwise have.
-25-
<PAGE> 26
(c) Promptly after receipt by an indemnified party under
this Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section, notify in writing the indemnifying party
of the commencement thereof; but the omission to so notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section. In case any such action
is brought against any indemnified party, and it notifies the indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, subject
to the provisions herein stated, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that if the indemnified party is an Underwriter or a person who controls such
Underwriter within the meaning of the Act, the fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the indemnifying
party or (ii) the named parties to any such action (including any impleaded
parties) include both such Underwriter or such controlling person and the
indemnifying party and in the judgment of the Underwriter, it is advisable for
the Underwriter or controlling persons to be represented by separate counsel
(in which case the indemnifying party shall not have the right to assume the
defense of such action on behalf of such Underwriter or such controlling
person, it being understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys for the Underwriter and controlling
persons, which firm shall be designated in writing by you). No settlement of
any action against an indemnified party shall be made without the consent of
the indemnifying party, which shall not be unreasonably withheld in light of
all factors of importance to such indemnifying party.
7. Contribution.
In order to provide for just and equitable contribution under the Act
in any case in which (i) any Underwriter makes claim for indemnification
pursuant to Section 6 hereof but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case, notwithstanding the fact
that the express provisions of Section 6 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and any such Underwriter shall contribute to the
-26-
<PAGE> 27
aggregate losses, claims, damages or liabilities to which they may be subject
(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees) in either such case (after contribution from others) in such
proportions that all such Underwriters are responsible in the aggregate for
that portion of such losses, claims, damages or liabilities represented by the
percentage that the underwriting discount per Unit appearing on the cover page
of the Prospectus bears to the public offering price appearing thereon, and the
Company shall be responsible for the remaining portion, provided, however, that
if such allocation is not permitted by applicable law then the relative fault
of the Company and the Underwriters and controlling persons, in the aggregate,
in connection with the statements or omissions which resulted in such damages
and other relevant equitable considerations shall also be considered. The
relative fault shall be determined by reference to, among other things, whether
in the case of an untrue statement of a material fact or the omission to state
a material fact, such statement or omission relates to information supplied by
the Company, or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The Company and the Underwriters agree that it would
not be just and equitable if the respective obligations of the Company and the
Underwriters to contribute pursuant to this Section 7 were to be determined by
pro rata or per capita allocation of the aggregate damages (even if the
Underwriters in the aggregate were treated as one entity for such purpose) or
by any other method of allocation that does not take account of the equitable
considerations referred to in the first sentence of this Section 7. No person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) shall be entitled to contribution from any person who is not guilty
of such fraudulent misrepresentation. As used in this paragraph, the word
"Company" includes any officer, director, or person who controls the Company
within the meaning of Section 15 of the Act. If the full amount of the
contribution specified in this paragraph is not permitted by law, then any
Underwriter and each person who controls such Underwriter shall be entitled to
contribution from the Company, its officers, directors and controlling persons
to the full extent permitted by law. The foregoing contribution agreement
shall in no way affect the contribution liabilities of any persons having
liability under Section 11 of the Act other than the Company and the
Underwriters. No contribution shall be requested with regard to the settlement
of any matter from any party who did not consent to the settlement; provided,
however, that such consent shall not be unreasonably withheld in light of all
factors of importance to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or
the sale of the Units to the Underwriters is consummated, the Company will pay
all costs and expenses incident to the performance of this Agreement by the
Company including, but not limited to, the fees and expenses of counsel to the
Company and of the Company's accountants; the costs and expenses incident to
the preparation, printing, filing and distribution under the Act of the
Registration Statement (including the financial statements therein and all
amendments and exhibits thereto), Preliminary Prospectus and the Prospectus, as
amended or supplemented, or the Term Sheet, the fee of the NASD in connection
with the filing required by the NASD relating to the offering of the Units
contemplated hereby; all expenses, including reasonable fees and disbursements
of
-27-
<PAGE> 28
counsel to the Underwriters, in connection with the qualification of the Units
under the state securities or blue sky laws which the Representative shall
designate; the cost of printing and furnishing to the several Underwriters
copies of the Registration Statement, each Preliminary Prospectus, the
Prospectus, this Agreement, the Agreement among Underwriters, Selling
Agreement, Underwriters' Questionnaire, Underwriters' Power of Attorney and the
Blue Sky Memorandum, any fees relating to the listing of the Units, Class A
Common Stock and Warrants on the Nasdaq Small Cap Market or any other
securities exchange, the cost of printing the certificates representing the
securities comprising the Units, the fees of the transfer agent and warrant
agent, the cost of publication of at least three "tombstones" of the offering
(at least one of which shall be in national business newspaper and one of which
shall be in a major New York newspaper) and the cost of preparing at least four
hard cover "bound volumes" relating to the offering, in accordance with the
Representative's request. The Company shall pay any and all taxes (including
any transfer, franchise, capital stock or other tax imposed by any
jurisdiction) on sales to the Underwriters hereunder. The Company will also
pay all costs and expenses incident to the furnishing of any amended Prospectus
or of any supplement to be attached to the Prospectus as called for in Section
3(a) of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company
shall at the First Closing Date pay to the Representative, in its individual
rather than representative capacity, a non-accountable expense allowance of
$285,000 of which $20,000 has been paid. In the event the overallotment option
is exercised, the Company shall pay to D.H. Blair Investment Banking Corp. the
Option Closing Date an additional amount equal to 3% of the gross proceeds
received upon exercise of the overallotment option. In the event the
transactions contemplated hereby are not consummated by reason of any action by
the Underwriters (except if such prevention is based upon a breach by the
Company of any covenant, representation or warranty contained herein or because
any other condition to the Underwriters' obligations hereunder required to be
fulfilled by the Company is not fulfilled) the Company shall be liable for the
actual out-of-pocket accountable expenses of the Representative, including
legal fees up to a maximum of $40,000. In the event the transactions
contemplated hereby are not consummated by reason of any action of the Company
or because of a breach by the Company of any covenant, representation or
warranty herein, the Company shall be liable for the actual out-of-pocket
accountable expenses of you, including legal fees, up to a maximum of $285,000.
In the event the offering is not consummated for any reason, any portion of the
non-accountable expense allowance previously paid to you which is not accounted
for shall be returned to the Company.
(c) No person is entitled either directly or indirectly
to compensation from the Company, from any Underwriter or from any other person
for services as a finder in connection with the proposed offering, and the
Company agrees to indemnify and hold harmless the Underwriters, against any
losses, claims, damages or liabilities, joint or several (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees), to which the Underwriters
or persons may become subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
claim of any person (other than an employee of the party claiming indemnity)
-28-
<PAGE> 29
or entity that he or it is entitled to a finder's fee in connection with the
proposed offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
9. Substitution of Underwriters.
If any Underwriters shall for any reason not permitted hereunder
cancel their obligations to purchase the First Units hereunder, or shall fail
to take up and pay for the number of First Units set forth opposite their
respective names in Schedule A hereto upon tender of such First Units in
accordance with the terms hereof, then:
(a) If the aggregate number of First Units which such
Underwriter or Underwriters agreed but failed to purchase does not exceed 10%
of the total number of First Units, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the First Units which such defaulting Underwriter or Underwriters agreed but
failed to purchase.
(b) If any Underwriter or Underwriters so default and the
agreed number of First Units with respect to which such default or defaults
occurs is more than 10% of the total number of First Units, the remaining
Underwriters shall have the right to take up and pay for (in such proportion as
may be agreed upon among them) the First Units which the defaulting Underwriter
or Underwriters agreed but failed to purchase. If such remaining Underwriters
do not, at the First Closing Date, take up and pay for the First Units which
the defaulting Underwriter or Underwriters agreed but failed to purchase, the
time for delivery of the First Units shall be extended to the next business day
to allow the several Underwriters the privilege of substituting within
twenty-four hours (including nonbusiness hours) another underwriter or
underwriters satisfactory to the Company. If no such underwriter or
underwriters shall have been substituted as aforesaid, within such twenty-four
hour period, the time of delivery of the First Units may, at the option of the
Company, be again extended to the next following business day, if necessary, to
allow the Company the privilege of finding within twenty-four hours (including
nonbusiness hours) another underwriter or underwriters to purchase the First
Units which the defaulting Underwriter or Underwriters agreed but failed to
purchase. If it shall be arranged for the remaining Underwriters or
substituted Underwriters to take up the First Units of the defaulting
Underwriter or Underwriters as provided in this Section, (i) the Company or the
Representative shall have the right to postpone the time of delivery for a
period of not more than seven business days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the respective
numbers of First Units to be purchased by the remaining Underwriters or
substituted Underwriters shall be taken at the basis of the underwriting
obligation for all purposes of this Agreement.
If in the event of a default by one or more Underwriters and the
remaining Underwriters shall not take up and pay for all the First Units agreed
to be purchased by the
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<PAGE> 30
defaulting Underwriters or substitute another underwriter or underwriters as
aforesaid, the Company shall not find or shall not elect to seek another
underwriter or underwriters for such First Units as aforesaid, then this
Agreement shall terminate.
If, following exercise of the option provided in Section 2(b) hereof,
any Underwriter or Underwriters shall for any reason not permitted hereunder
cancel their obligations to purchase Option Units at the Option Closing Date,
or shall fail to take up and pay for the number of Option Units, which they
become obligated to purchase at the Option Closing Date upon tender of such
Option Units in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Units of the defaulting Underwriters in the manner provided in Section 9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not
take up and pay for all such Option Units, the Underwriters shall be entitled
to purchase the number of Option Units for which there is no default or, at
their election, the option shall terminate, the exercise thereof shall be of no
effect.
As used in this Agreement, the term "Underwriters" includes any person
substituted for any Underwriter under this Section. In the event of
termination, there shall be no liability on the part of any nondefaulting
Underwriter to the Company, provided that the provisions of this Section 9
shall not in any event affect the liability of any defaulting Underwriter to
the Company arising out of such default.
10. Effective Date.
The Agreement shall become effective upon its execution except that
you may, at your option, delay its effectiveness until 11:00 A.M., New York
time on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective date of the
Registration Statement as you in your discretion shall first commence the
initial public offering by the Underwriters of any of the Units. The time of
the initial public offering shall mean the time of release by you of the first
newspaper advertisement with respect to the Units, or the time when the Units
are first generally offered by you to dealers by letter or telegram, whichever
shall first occur. This Agreement may be terminated by you at any time before
it becomes effective as provided above, except that Sections 3(c), 6, 7, 8, 13,
14 and 15 shall remain in effect notwithstanding such termination.
11. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7, 8,
13, 14, 15 and 16 hereof, may be terminated at any time prior to the First
Closing Date, and the option referred to in Section 2(b) hereof, if exercised,
may be cancelled at any time prior to the Option Closing Date, by you if in
your judgment it is impracticable to offer for sale or to enforce contracts
made by the Underwriters for the resale of the Units agreed to be purchased
hereunder by reason of (i) the Company having sustained a material loss,
whether or not insured, by reason of fire, earthquake, flood, accident or other
calamity, or from any labor dispute or court or government action, order or
decree; (ii) trading in securities on the New York Stock Exchange, the American
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<PAGE> 31
Stock Exchange, the Nasdaq SmallCap Market or the Nasdaq National Market having
been suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the date
hereof); (iv) a banking moratorium having been declared by federal or New York
state authorities; (v) an outbreak of international hostilities or other
national or international calamity or crisis or change in economic or political
conditions having occurred; (vi) a pending or threatened legal or governmental
proceeding or action relating generally to the Company's business, or a
notification having been received by the Company of the threat of any such
proceeding or action, which could materially adversely affect the Company;
(vii) except as contemplated by the Prospectus, the Company is merged or
consolidated into or all or substantially all of the capital stock or assets of
the Company are acquired by another company or group or there exists a binding
legal commitment for the foregoing or any other material change of ownership or
control occurs; (viii) the passage by the Congress of the United States or by
any state legislative body or federal or state agency or other authority of any
act, rule or regulation, measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is reasonably believed likely by
the Representative to have a material impact on the business, financial
condition or financial statements of the Company or the market for the
securities offered pursuant to the Prospectus; (ix) any adverse change in the
financial or securities markets beyond normal market fluctuations having
occurred since the date of this Agreement, or (x) any material adverse change
having occurred, since the respective dates of which information is given in
the Registration Statement and Prospectus, in the earnings, business prospects
or general condition of the Company, financial or otherwise, whether or not
arising in the ordinary course of business.
(b) If the Representative elects to prevent this
Agreement from becoming effective or to terminate this Agreement as provided in
this Section 11 or in Section 10, the Company shall be promptly notified by
you, by telephone or telegram, confirmed by letter.
12. Unit Purchase Option.
At or before the First Closing Date, the Company will sell to D.H.
Blair Investment Banking Corp. (for its own account and not as Representative
of the several Underwriters), or its designees for a consideration of $190, and
upon the terms and conditions set forth in the form of Unit Purchase Option
annexed as an exhibit to the Registration Statement, a Unit Purchase Option to
purchase an aggregate of 190,000 Units. In the event of conflict in the terms
of this Agreement and the Unit Purchase Option, the language of the Unit
Purchase Option shall control.
13. Representations, Warranties and Agreements to Survive
Delivery.
The respective indemnities, agreements, representations, warranties
and other statements of the Company or its Principal Stockholders, where
appropriate, and the undertakings set forth in or made pursuant to this
Agreement will remain in full force and effect,
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<PAGE> 32
regardless of any investigation made by or on behalf of the Underwriters, the
Company or any of its officers or directors or any controlling person and will
survive delivery of and payment of the Units and the termination of this
Agreement.
14. Notice.
Any communications specifically required hereunder to be in writing,
if sent to the Underwriters, will be mailed, delivered and confirmed to them at
D.H. Blair Investment Banking Corp., 44 Wall Street, New York, New York 10005,
with a copy sent to Bachner, Tally, Polevoy & Misher LLP, 380 Madison Avenue,
New York, New York 10017, or if sent to the Company, will be mailed, delivered
and confirmed to it at On'Village Communications, Inc., 26135 Mureu Road, Suite
100, Calabasas, California 91502, with a copy to Troy & Gould Professional
Corporation, 1801 Century Park East, Suite 1600, Los Angeles, California
90067, Attention: Lawrence Schnapp.
15. Parties in Interest.
The Agreement herein set forth is made solely for the benefit of the
several Underwriters, the Company and, to the extent expressed, the Principal
Stockholders, any person controlling the Company or any of the several
Underwriters, and directors of the Company, nominees for directors (if any)
named in the Prospectus, its officers who have signed the Registration
Statement, and their respective executors, administrators, successors, assigns
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser,
as such purchaser, from any of the Underwriters of the Units. All of the
obligations of the Underwriters hereunder are several and not joint.
16. Applicable Law.
This Agreement will be governed by, and construed in accordance with,
the laws of the State of New York applicable to agreements made and to be
entirely performed within New York.
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<PAGE> 33
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the several Underwriters in
accordance with its terms.
Very truly yours,
ON'VILLAGE COMMUNICATIONS, INC.
By: _______________________________________
Jack B. Tracht, Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
D.H. BLAIR INVESTMENT BANKING CORP.
By: ____________________________________
Authorized Officer
For itself and as Representative of the
several Underwriters
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<PAGE> 34
SCHEDULE A
<TABLE>
<CAPTION>
Underwriter Number of Units to be Purchased
- ----------- -------------------------------
<S> <C>
[UNDERWRITER]
Total: ________
Units
============
</TABLE>
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
ON'VILLAGE COMMUNICATIONS, INC.
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICES. The board of directors shall fix the
location of the principal executive office of the corporation at any place
within or outside the State of California. If the principal executive office is
located outside this state, and the corporation has one or more business offices
in this state, the board of directors shall fix and designate a principal
business office in the State of California.
Section 2. OTHER OFFICES. The board of directors or
officers of the corporation may at any time establish branch or
subordinate offices at any place or places where the corporation is
qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place within or outside the State of California designated by the board of
directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETING. The annual meeting of shareholders shall be held
each year on a date and at a time designated by the board of directors. At
each annual meeting directors shall be elected, and any other proper business
may be transacted.
Section 3. SPECIAL MEETING. A special meeting of the shareholders may
be called at any time by the board of directors, or by the chairman of the
board, or by the president, or by one or more shareholders holding shares in the
aggregate entitled to cast not less than l0% of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered
1.
<PAGE> 2
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the chief executive officer, the
president, any vice president, or the secretary of the corporation. The officer
receiving the request shall cause notice to be promptly given to the
shareholders entitled to vote, in accordance with the provisions of Sections 4
and 5 of this Article II, that a meeting will be held at the time requested by
the person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing contained in this
paragraph of this section 3 shall be construed as limiting, fixing or affecting
the time when a meeting of shareholders called by action of the board of
directors may be held.
Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) nor more than sixty (60) days before
the date of the meeting. The notice shall specify the place, date and hour
of the meeting and (i) in the case of a special meeting, the general nature
of the business to be transacted, or (ii) in the case of the annual
meeting, those matters which the board of directors, at the time of giving
the notice, intends to present for action by the shareholders. The notice of
any meeting at which directors are to be elected shall include the name of
any nominee or nominees whom, at the time of the notice, management
intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the articles of incorporation, pursuant to Section 902 of that
Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of
that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section
1900 of that Code, or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares, pursuant to Section 2007 of
that Code, the notice shall also state the general nature of that proposal.
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the
corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office is located.
2.
<PAGE> 3
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices or reports shall be deemed to have been duly
given without further mailing if these shall be available to the shareholder on
written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary,
or any transfer agent of the corporation giving the notice, and shall be filed
and maintained in the minute book of the corporation.
Section 6. QUORUM. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting of shareholders shall
constitute a quorum for the transaction of business. The shareholders present
at a duly called or held meeting at which a quorum is present may continue to
do business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 7. ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual
or special, whether or not a quorum is present, may be adjourned from time to
time by the vote of the majority of the shares represented at that meeting,
either in person or by proxy, but in the absence of a quorum, no other business
may be transacted at that meeting, except as provided in Section 6 of this
Article II.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
fixed, or unless the adjournment is for more than forty-five (45) days from the
date set for the original meeting, in which case the board of directors shall
set a new record date. Notice of any such adjourned meeting shall be given to
each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of Sections 4 and 5 of this Article II. At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
3.
<PAGE> 4
Section 8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 11
of this Article II, subject to the provisions of Sections 702 to 704, inclusive,
of the Corporations Code of California (relating to voting shares held by a
fiduciary, in the name of a corporation, or in joint ownership). The
shareholders' vote may be by voice vote or by ballot; provided, however, that
any election for directors must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of directors,
any shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares that the shareholder is entitled to
vote. If a quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of directors) shall be the act of the shareholders, unless the vote of
a greater number of voting by classes is required by California General
Corporation Law or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one or more
candidates a number of votes greater than the number of shareholder's shares)
unless the candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder has given notice prior to
commencement of the voting of the shareholder's intention to cumulate votes. If
any shareholder has given such a notice, then every shareholder entitled to vote
may cumulate votes for candidates in nomination and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which that shareholder's shares are entitled, or distribute the
shareholder's votes on the same principle among any or all of the candidates, as
the shareholder thinks fit. The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected.
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a written
waiver of notice or a consent to a holding of the meeting, or an approval of the
minutes. The waiver of notice or consent need not specify either the business to
be transacted or the purpose of any annual or special meeting of shareholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in the second paragraph of Section 4 of this Article II,
the waiver of notice or consent shall
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state the general nature of the proposal. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the meeting.
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action which may be taken at any annual or special meeting of shareholders
may be taken without a meeting and without prior notice, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take that action at a meeting at which all shares
entitled to vote on that action were present and voted. In the case of election
of directors, such a consent shall be effective only if signed by the holders of
all outstanding shares entitled to vote for the election of directors; provided,
however, that a director may be elected at any time to fill a vacancy on the
board of directors that has not been filled by the directors, by the written
consent of the holders of outstanding shares having not less than a majority of
the voting power entitled to vote for the election of directors. All such
consents shall be filed with the secretary of the corporation and shall be
maintained in the corporate records. Any shareholder giving a written consent,
or the shareholder's proxy holders, or a transferee of the shares or a personal
representative of the shareholder or their respective proxy holders, may revoke
the consent by a writing received by the secretary of the corporation before
written consents of the number of shares required to authorize the proposed
action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
This notice shall be given in the manner specified in Section 5 of this Article
II. In the case of approval of (i) contracts or transactions in which a director
has a direct or indirect financial interest, pursuant to Section 310 of the
Corporations Code of California, (ii) indemnification of agents of the
corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of that Code, or (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, pursuant to Section 2007 of that Code, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
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Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of any
meeting or to vote or entitled to give consent to corporate action without a
meeting, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days before the date of
any such meeting nor more than sixty (60) days before any such action without a
meeting, and in this event only shareholders of record on the date so fixed are
entitled to notice and to vote or to give consents, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the California General
Corporation Law.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining shareholders entitled to
give consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the date on which the first written
consent is given, or (ii) when prior action of the board has been taken, shall
be at the close of business on the date on which the board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
action, whichever is later.
Section 12. PROXIES. Every person entitled to vote for directors or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the shareholder or the
shareholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date of the proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that is irrevocable shall be governed by the provisions of Sections
705(e) and 705(f) of the Corporations Code of California.
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Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the board of directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (l) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of the voting
power or their proxies present at the meeting shall determine whether one (l) or
three (3) inspectors are to be appointed. If any person appointed as inspector
fails to appear or fails or refuses to act, the chairman of the meeting may, and
upon the request of any shareholder or a shareholder's proxy shall, appoint a
person to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence of a quorum,
and the authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
Section 14. NOMINATIONS FOR DIRECTOR; SHAREHOLDER PROPOSALS.
(a) Nomination of Directors. Nominations for election of
members of the Board of Directors may be made by the Board of Directors or by
any shareholder of any outstanding class of voting stock of the corporation
entitled to vote for the election of directors in accordance with this Section
14.
(b) Other Proposals. Any shareholder of the corporation
entitled to vote at any annual or special meeting of shareholders may make
nominations for the election of directors and other proposals for inclusion on
the agenda of any such meeting provided such shareholder complies with the
timely notice provisions set forth in this Section 14 (as well as any additional
requirements under any applicable law or regulation).
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(c) Timely Notice by Shareholders. A shareholder's notice shall be
delivered to or mailed and received at the principal executive offices
of the corporation (i) in the case of any special meeting and of the first
annual meeting held after the effective date of these Amended and Restated
Bylaws, not less than thirty (30) days nor more than sixty (60) days prior to
the meeting date specified in the notice of such meeting; provided, however,
that if less than forty (40) days' notice or prior public disclosure of the date
of such meeting is given or made to shareholders, notice by shareholder to be
timely must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of such meeting was mailed or
such public disclosure was made, and (ii) in the case of any subsequent annual
meeting, not less than ninety (90) days prior to the day and month on which, in
the immediately preceding year, the annual meeting for such year had been held.
Such shareholder's notice shall set forth (A) as to each person whom the
shareholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, the class and number of
shares of the corporation which are beneficially owned by such person that are
required to be disclosed in solicitations of the proxies with respect to
nominees for election as directors, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including, without limitation, such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director, if elected); (B) as to each action item required to be
included on the agenda, a description, in sufficient detail, of the purpose and
effect of the proposal to the extent necessary to properly inform all
shareholders entitled to vote thereon prior to any such vote; and (C) as to the
shareholder giving the notice, (i) the name and address, as they appear on the
corporation's books, of such shareholder and (ii) the class and number of shares
of the corporation which are beneficially owned by such shareholder.
(d) Failure to Provide Timely Notice, Etc. No person nominated
by a shareholder shall be elected as a director of the corporation unless
nominated in accordance with the procedures set forth in this Section 14. The
chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that a nomination or other proposal by a shareholder was not
properly brought before the meeting, and, if the chairman shall so determine, he
shall so declare to the meeting and such nomination or other proposal shall be
disregarded.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the California General
Corporation Law and any limitations in the articles of incorporation and
these bylaws relating to action
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required to be approved by the shareholders or by the outstanding shares, the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
Without prejudice to these general powers, and subject to the same
limitations, the directors shall have the power to:
(a) Select and remove all officers, agents, and employees of
the corporation; prescribe any powers and duties for them that are consistent
with law, with the articles of incorporation, and with these bylaws; fix their
compensation; and require from them security for faithful service.
(b) Change the principal executive office or the principal
business office in the State of California from one location to another; cause
the corporation to be qualified to do business in any other state, territory,
dependency, or country and conduct business within or without the State of
California; and designate any place within or without the State of California
for the holding of any shareholders' meeting, or meetings, including annual
meetings.
(c) Adopt, make and use a corporation seal; prescribe the
forms of certificates of stock; and alter the form of the seal and certificates.
(d) Authorize the issuance of shares of stock of the
corporation on any lawful terms, in consideration of money paid, labor done,
services actually rendered, debts or securities canceled, or tangible or
intangible property actually received.
(e) Borrow money and incur indebtedness on behalf of the
corporation, and cause to be executed and delivered for the corporation's
purposes, in the corporate name, promissory notes, bonds, debentures, deeds of
trust, mortgages, pledges, hypothecations, and other evidences of debt and
securities.
Section 2. NUMBER OF DIRECTORS.
(a) The authorized number of directors shall be not less than
four nor more than seven. The exact number of directors shall be fixed from time
to time by resolution of the Board of Directors, except that in the absence of
any such designation, such number shall be four.
(b) The maximum or minimum authorized number of directors may
only be changed by an amendment of this Section approved by the vote or written
consent of the holders of outstanding shares entitled to vote possessing a
majority of the voting power of the Corporation; provided, however, that an
amendment reducing the minimum number to a number less than five shall not be
adopted if the votes cast against its adoption at a meeting (or the shares not
consenting in the case of action by
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written consent) exceed 16-2/3% of such outstanding shares; and provided
further, that in no case shall the stated maximum authorized number of directors
exceed two times the stated minimum number of authorized directors minus one.
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of the shareholders to hold office until the next
annual meeting. Each director, including a director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
Section 4. VACANCIES. Vacancies in the board of directors may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director, except that a vacancy created by the removal of a
director by the vote or written consent of the shareholders or by court order
may be filled only by the vote of the shares entitled to vote possessing a
majority of the voting power of the Corporation represented at a duly held
meeting at which a quorum is present, or by the written consent of holders of a
majority of the outstanding shares entitled to vote possessing a majority of the
voting power of the Corporation. Each director so elected shall hold office
until the next annual meeting of the shareholders and until a successor has been
elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist in the event of the death, resignation, or removal of any director, or if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of directors is increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be voted for at that
meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election by
written consent shall require the consent of the outstanding shares entitled to
vote possessing a majority of the voting power of the Corporation.
Any director may resign effective on giving written notice to the
chairman of the board, the chief executive officer, the president, the
secretary, or the board of directors, unless the notice specifies a later time
for that resignation to become effective. If the resignation of a director is
effective at a future time, the board of directors may elect a successor to take
office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
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Section 5. PLACE OF MEETING AND MEETINGS BY TELEPHONE. Regular meetings
of the board of directors may be held at any place within or outside the State
of California that has been designated from time to time by resolution of the
board. In the absence of such a designation, regular meetings shall be held at
the principal executive office of the corporation. Special meetings of the board
shall be held at any place within or outside the State of California that has
been designated in the notice of the meeting or, if not stated in the notice or
there is no notice, at the principal executive office of the corporation. Any
meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all directors participating in the meeting
can hear one another, and all such directors shall be deemed to be present in
person at the meeting.
Section 6. ANNUAL MEETING. Immediately following each annual meeting of
shareholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers, and the transaction
of other business. Notice of this meeting shall not be required.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of
directors shall be held without call at such time as shall from time to time be
fixed by the board of directors. Such regular meetings may be held without
notice.
Section 8. SPECIAL MEETINGS. Special meetings of the board of directors
for any purpose or purposes may be called at any time by the chairman of the
board, the chief executive officer or the president or any vice president
or the secretary or any three directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. In case the notice is mailed,
it shall be deposited in the United States mail at least four (4) days before
the time of the holding of the meeting. In case the notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.
Section 9. QUORUM. A majority of the authorized number of directors shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 11 of this Article III. Every act or decision done or
made by a majority of the directors present at a meeting duly held at which a
quorum is
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present shall be regarded as the act of the board of directors, subject to the
provisions of Section 310 of the Corporations Code of California (as to approval
of contracts or transactions in which a director has a direct of indirect
material financial interest), Section 311 of that Code (as to appointment of
committees), and Section 317(e) of that Code (as to indemnification of
directors). A meeting at which a quorum is initially present may continue to
transaction business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
Section 10. WAIVER OF NOTICE. The transaction of any meeting of the
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes. The waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. Notice of a meeting shall also be deemed given to any director who
attends the meeting without protesting, before or at its commencement, the lack
of notice to that director.
Section 11. ADJOURNMENT. A majority of the directors present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given, unless the meeting is adjourned
for more than twenty-four (24) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting, in the manner specified
in Section 8 of this Article III, to the directors who were not present at the
time of the adjournment.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to
that action. Such action by written consent shall have the same force and effect
as a unanimous vote of the board of directors. Such written consent or consents
shall be filed with the minutes of the proceedings of the board.
Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
board of directors. This Section 14 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer, 0
agent, employee, or otherwise, and receiving compensation for those services.
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ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF DIRECTORS. The board of directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the board. The board may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. Any committee, to the extent provided in
the resolution of the board, shall have all the authority of the board, except
with respect to:
(a) the approval of any action which, under the General
Corporation Law of California, also requires shareholder's approval or approval
of the outstanding shares;
(b) the filling of vacancies on the board of directors
or in any committee;
(c) the fixing of compensation of the directors for serving on the
board or on any committee;
(d) the amendment or repeal of bylaws or the adoption of
new bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation,
except at a rate or in a periodic amount or within a price range determined by
the board of directors; or
(g) the appointment of any other committees of the board of
directors or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, Sections 5 (place of meetings and
meetings by telephone), 7 (regular meetings), 8 (special meetings and notice), 9
(quorum), 10 (waiver of notice), 11 (adjournment), 12 (notice of adjournment),
and 13 (action without meeting), with such changes in the context of those
bylaws as are necessary to substitute the committee and its members for the
board of directors and its members, except that the time of regular meetings of
committees may be determined either by resolution of the board of directors or
by resolution of the committee; special meetings of the committees may also be
called by resolution of the board of directors; and notice of special meetings
of committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the
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government of any committee not inconsistent with the provisions of these
bylaws.
ARTICLE V
OFFICERS AND EMPLOYEES
Section 1. OFFICERS. The officers of the corporation shall be a chief
executive officer, a president, a chief operating officer, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, a treasurer, one or more assistant treasurers, and
such other officers as may be appointed in accordance with the provisions of
Section 3 of this Article V. Any number of offices may be held by the same
person.
Section 2. ELECTION OF OFFICERS. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article V, shall be chosen by the board of
directors, and each shall serve at the pleasure of the board, subject to the
rights, if any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The board of directors may appoint,
and may empower the chief executive officer or the president to appoint, such
other officers as the business of the corporation may require, each of whom
shall hold office for such period, have such authority and perform such duties
as are provided in the bylaws or as a board of directors may from time to time
determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights,
if any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the board of directors, at any regular
or special meeting of the board, or, except in case of an officer chosen by the
board of directors, by an officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these bylaws for regular appointments to that
office.
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Section 6. CHIEF EXECUTIVE OFFICER. The chief executive officer of the
Corporation shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the officers of the Corporation.
He shall, if present, preside at meetings of the shareholders and of the board
of directors as the chairman of the board, and exercise and perform such other
powers and duties as may be from time to time assigned to him by the board of
directors or prescribed by the bylaws.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the board of directors to the chief executive officer, the
president shall be the chief operating officer of the Corporation and shall,
subject to the control of the board of directors and the chief executive
officer, have general supervision, direction, and control of the business of the
Corporation. In the absence of the chief executive officer, he shall preside at
all meetings of the shareholders and at all meetings of the board of directors.
He shall have the general powers and duties of management usually vested in the
office of president of a corporation, and shall have such other powers and
duties as may be prescribed by the board of directors, the chief executive
officer or the bylaws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
president, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors, by the bylaws, by the chief executive officer and by the
president.
Section 9. SECRETARY. The secretary shall keep or cause to be kept, at
the principal executive office or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice given, the names
of those present at directors' meetings or committee meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
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The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required by the bylaws or by
law to be given, and he shall keep the seal of the corporation if one be
adopted, in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by the bylaws.
Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any directors.
The chief financial officer shall deposit all monies and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the board of directors. He shall disburse
the funds of the corporation as may be ordered by the board of directors, shall
render to the chief executive officer, the president and directors, whenever
they request it, an account of all of his transactions as chief financial
officer and of the financial condition of the corporation, and shall have other
powers and perform such other duties as may be prescribed by the board of
directors or the bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS, AND EXPENSES. For the purposes of this
Article, "agent" means any person who is or was a director, officer, employee,
or other agent of this corporation, or is or was serving at the request of this
corporation as a director, officer, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise,
or was a director, officer, employee, or agent of a foreign or domestic
corporation which was a predecessor corporation of this corporation or of
another enterprise at the request of such predecessor corporation; "proceeding"
means any threatened, pending or completed action or proceeding, whether civil,
criminal, administrative, or investigative; and "expenses" includes, without
limitation, attorneys' fees and any expenses of establishing a
right to indemnification under Section 4 or Section 5(c) of this
Article VI.
Section 2. ACTIONS OTHER THAN BY THE CORPORATION. Subject to the
provisions of Section 5, Section 8 and Section 9 of this Article, this
corporation shall indemnify any person who was or is a party, or is threatened
to be made a party, to any proceeding (other than an action by or in the right
of this corporation) by
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reason of the fact that such person is or was an agent of this corporation,
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceeding if that person acted in
good faith and in a manner that person reasonably believed to be in the best
interests of this corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of that person was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in the best interests of this corporation or
that the person had reasonable cause to believe that the person's conduct was
unlawful.
Section 3. ACTIONS BY THE CORPORATION. Subject to the provisions of
Section 5, Section 8 and Section 9 of this Article, this corporation shall
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action by or in the right of this
corporation to procure a judgment in its favor by reason of the fact that person
is or was an agent of this corporation, against expenses actually and reasonably
incurred by that person in connection with the defense or settlement of that
action if that person acted in good faith, in a manner that person believed to
be in the best interests of this corporation and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would use
under similar circumstances. No indemnification shall be made under this Section
3:
(a) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable to this corporation in the
performance of that person's duty to this corporation, unless and only to the
extent that the court in which that action was brought shall determine upon
application that, in view of all the circumstances of the case, that person is
fairly and reasonably entitled to indemnity for the expenses which the court
shall determine;
(b) Of amounts paid in settling or otherwise disposing of a
threatened or pending action, without court approval; or
(c) Of expenses incurred in defending a threatened or pending
action which is settled or otherwise disposed of without court approval.
Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
this corporation has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article, or in defense of any claim,
issue, or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.
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Section 5. REQUIRED APPROVAL. Except as provided in Section 4 of this
Article, any indemnification under this Article shall be made by this
corporation only if authorized in the specific case on a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in Sections 2 or 3 of this
Article, by:
(a) A majority vote of a quorum consisting of directors
who are not parties to the proceeding;
(b) Approval by the affirmative vote of a majority of the
shares of this corporation entitled to vote represented at a duly held meeting
at which a quorum is present or by the written consent of holders of a majority
of the outstanding shares entitled to vote. For this purpose, the shares owned
by the person to be indemnified shall not be considered outstanding or entitled
to vote thereon; or
(c) The court in which the proceeding is or was pending, on
application made by this corporation or the agent or the attorney or other
person rendering services in connection with the defense, whether or not such
application by the agent, attorney, or other person is opposed by this
corporation.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this corporation before the final disposition of
the proceeding on receipt of an undertaking by or on behalf of the agent to
repay the amount if it shall be determined ultimately that the agent is not
entitled to be indemnified as authorized in this Article.
Section 7. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than directors
and officers of this corporation or any subsidiary hereof may be entitled by
contract or otherwise.
Section 8. LIMITATIONS. No indemnification or advance shall be made under
this Article, except as provided in Section 4 or Section 5(c), in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the
articles, a resolution of the shareholders, or an agreement in effect at the
time of the accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 9. INSURANCE. Upon and in the event of a determination by the
board of directors of this corporation to purchase such insurance, this
corporation shall purchase and
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maintain insurance on behalf of any agent of the corporation against any
liability asserted against or insured by the agent in such capacity or arising
out of the agent's status as such whether or not this corporation would have the
power to indemnify the agent against that liability under the provisions of this
section.
Section 10. FIDUCIARIES OF CORPORATION EMPLOYEE BENEFIT PLAN. This
Article does not apply to any proceeding against any trustee, investment
manager, or other fiduciary of an employee benefit plan in that person's
capacity as such, even though that person may also be an agent of the
corporation as defined in Section 1 of this Article. Nothing contained in this
Article shall limit any right to indemnification to which such a trustee,
investment manager, or other fiduciary may be entitled by contract or otherwise,
which shall be enforceable to the extent permitted by applicable law other than
this Article.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The
corporation shall keep at its principal executive officer or at the office of
its transfer agent or registrar, if either be appointed and as determined by
resolution of the board of directors, a record of its shareholders, giving the
names and addresses of all shareholders and the number and class of shares held
by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting power of the corporation
may (i) inspect and copy the records of shareholders' names and addresses and
share holdings during usual business hours on five (5) days prior written demand
on the corporation and (ii) obtain from the transfer agent of the corporation,
on written demand and on the tender of such transfer agent's usual charges for
such list, a list of the shareholders' names and addresses, who are entitled to
vote for the election of directors, and their share holdings, as of the most
recent record date for which that list has been compiled or as of a date
specified by the shareholder after the date of demand. This list shall be made
available to any such shareholder by the transfer agent on or before the later
of five (5) days after the demand is received or the date specified in the
demand as the date as of which the list is to be compiled. The record of
shareholders shall also be open to inspection on the written demand of any
shareholder or holder of a voting trust certificate, at any time during usual
business hours, for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate. Any inspection and
copying under this Section 1 may be made in person or by an agent or attorney of
the shareholder or holder of a voting trust certificate making the demand.
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Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office, or if its principal executive office
is not in the State of California, at its principal business office in this
state, the original or a copy of the bylaws as amended to date, which shall
be open to inspection by the shareholders at all reasonable times during
office hours. If the principal executive office of the corporation is
outside the State of California and the corporation has no principal business
office in this state, the Secretary shall, upon the written request
of any shareholder, furnish to that shareholder a copy of the
bylaws as amended to date.
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of proceedings of the shareholders and
the board of directors and any committee or committees of the board of directors
shall be kept at such place or places designated by the board of directors, or,
in the absence of such designation, at the principal executive office of the
corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form or in any other form capable of
being converted into written form. The minutes and accounting books and records
shall be open to inspection upon the written demand of any shareholder or holder
of a voting trust certificate, at any reasonable time during usual business
hours, for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate. The inspection may
be made in person or by an agent or attorney, and shall include the right to
copy and make extracts. These rights of inspection shall extend to the records
of each subsidiary corporation of the corporation.
Section 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts of documents.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the California General Corporation
Law is expressly dispensed with, but nothing herein shall be interpreted as
prohibiting the board of directors from issuing annual or other periodic reports
to the shareholders of the corporation as they consider appropriate.
Section 6. FINANCIAL STATEMENTS. A copy of any annual financial
statement and any income statement of the corporation for each quarterly period
of each fiscal year, and any accompanying balance sheet of the corporation as of
the end of each period, that has been prepared by the corporation shall be kept
on file in the principal executive office of the corporation for twelve (12)
months and each such statement shall be exhibited at all reasonable times to any
shareholder demanding an examination of any such
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<PAGE> 21
statement or a copy shall be mailed to any such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding voting power of any class of stock of the corporation makes a
written request to the corporation for an income statement of the corporation
for the three-month, six-month or nine-month period of the then current fiscal
year ended more than thirty (30) days before the date of the request, and a
balance sheet of the corporation as of the end of that period, the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, this report shall likewise be delivered or mailed to
the shareholder or shareholders within thirty (30) days after the request.
The corporation shall also, on the written request of any shareholder,
mail to the shareholder a copy of the last annual, semi-annual, or quarterly
income statement which it has prepared, and a balance sheet as of the end of
that period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall,
within the statutorily required time period, file, with the Secretary of State
of the State of California, on the prescribed form, a statement setting forth
the authorized number of directors, the names and complete business or residence
addresses of all incumbent directors, the names and complete business or
residence addresses of the chief executive officer, secretary, and chief
financial officer, the street address of its principal executive office or
principal business office in this state, and the general type of business
constituting the principal business activity of the corporation, together with a
designation of the agent of the corporation for the purpose of service of
process, all in compliance with Section 1502 of the Corporations Code of
California.
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any
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other lawful action (other than action by shareholders by written consent
without a meeting), the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days before any such action, and in that
case only shareholders of record on the date so fixed are entitled to receive
the dividend, distribution, or allotment of rights or to exercise the rights, as
the case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date so fixed, except as otherwise provided in the
California General Corporation Law.
If the board of directors does not so fix a record date, the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60) day before the date of that action, whichever is later.
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts, or other orders for payment of money, notes, or other evidences of
indebtedness, issued in the name of or payable to the corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time to
time, shall be determined by resolution of the board of directors.
Section 3. CORPORATION CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The
board of directors, except as otherwise provided in these bylaws, may authorize
any officer or officers, agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation, and this
authority may be general or confined to specific instances; and, unless so
authorized or ratified by the board of directors or within the agency power of
an officer, no officer, agent, or employee shall have the power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or for any amount.
Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of the capital stock of the corporation shall be issued to each
shareholder when any of these shares are fully paid, and the board of directors
may authorize the issuance of certificates or shares as partly paid provided
that these certificates shall state the amount of the consideration to be paid
for them and the amount paid. All certificates shall be signed in the name of
the corporation by the chairman of the board or vice chairman of the board or
the president or vice president and by the chief financial officer or an
assistant treasurer or the secretary or any assistant secretary, certifying the
number of shares and the class or series of shares owned by the shareholder. Any
or all of the signatures on the certificate may be facsimile. In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed on a certificate shall have ceased to be that officer,
transfer agent, or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent, or registrar at the date of issuance.
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Section 5. LOST CERTIFICATES. Except as provided in this Section 5, no
new certificates for shares shall be issued to replace an old certificate unless
the latter is surrendered to the corporation and canceled at the same time. The
board of directors may, in case any share certificate or certificate for any
other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the board may require,
including provision for indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft, or destruction of the certificate or the issuance of
the replacement certificate.
Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chief
executive officer, the president, or any vice president, or any other person
authorized by resolution of the board of directors or by any of the foregoing
designated officers, is authorized to vote on behalf of the corporation any and
all shares of any other corporation or corporations, foreign or domestic,
standing in the name of the corporation. The authority granted to these officers
to vote or represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by a proxy duly
executed by these officers.
Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
California General Corporation Law shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or
these bylaws may be amended or repealed by the vote or written consent of
holders of the outstanding shares entitled to vote possessing a majority of the
voting power of the corporation except as otherwise provided by law or by the
Restated Articles of Incorporation.
Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section I of this Article IX, bylaws, other than a
bylaw or an amendment of a bylaw changing the authorized number of directors,
may be adopted, amended or repealed by the board of directors.
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EXHIBIT 4.2
WARRANT AGREEMENT
AGREEMENT, dated as of this ____th day of ___________, 1997, by and
among ON'VILLAGE COMMUNICATIONS, INC., a California corporation ("Company"),
AMERICAN STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant
Agent"), and D.H. BLAIR INVESTMENT BANKING CORP., a New York corporation
("Blair").
W I T N E S S E T H
WHEREAS, in connection with (i) a public offering of up to 2,185,000
units ("Units"), each unit consisting of one (1) share of the Company's Class A
Common Stock ("Common Stock") and one (1) redeemable warrant ("Warrants")
pursuant to an underwriting agreement (the "Underwriting Agreement") dated
_______________, 1997 between the Company and Blair, (ii) the issuance to
Blair or its designees of Unit Purchase Options to purchase an aggregate of
190,000 additional Units, to be dated as of __________, 1997 (the "Unit
Purchase Options"), and (iii) the conversion of 1,262,500 warrants issued in
connection with a private placement by the Company in January 1997 and
September 1997 into 1,262,500 Warrants, the Company may issue up to 3,637,500
Class A Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the Registered Holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties
hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms
shall have the following meanings, unless the context shall otherwise require:
(a) "Aggregate Per Share Price" shall mean the Purchase Price per
share multiplied by the number of shares of Common Stock purchasable upon the
exercise of a Warrant.
(b) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in the
distribution of earnings and assets of the Company without limit as to amount
or percentage, which at the date hereof consists of 18,800,000 shares of Class
A Common Stock, and 1,400,000 shares of Class B Common Stock.
<PAGE> 2
(c) "Corporate Office" shall mean the office of the Warrant Agent
(or its successor) at which at any particular time its principal business shall
be administered, which office is located at the date hereof at 40 Wall Street,
New York, New York.
(d) "Exercise Date" shall mean, as to any Warrant, the date on
which the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(e) "Initial Warrant Exercise Date" shall mean as to each Warrant
the Separation Date.
(f) "Market Price" shall mean shall mean (i) the average closing
bid price of the Class A Common Stock, for thirty (30) consecutive business
days ending on the Calculation Date as reported by Nasdaq, if the Common Stock
is traded on the Nasdaq SmallCap Market, or (ii) the average last reported sale
price of the Class A Common Stock, for thirty (30) consecutive business days
ending on the Calculation Date, as reported by the primary exchange on which
the Class A Common Stock is traded, if the Class A Common Stock is traded on a
national securities exchange, or by Nasdaq, if the Class A Common Stock is
traded on the Nasdaq National Market, or (iii) if the Class A Common Stock is
not traded on the Nasdaq SmallCap Market or on a national securities exchange
or Nasdaq National Market, the average closing bid price of the Class A Common
Stock, for thirty (30) consecutive business days ending on the Calculation
Date, as reported by the National Quotation Bureau, Inc.
(g) "Purchase Price" shall mean the purchase price to be paid upon
exercise of each Warrant in accordance with the terms hereof, which price shall
be $6.50, subject to adjustment from time to time pursuant to the provisions of
Section 9 hereof, and subject to the Company's right to reduce the Purchase
Price upon notice to all Registered Holders of Warrants.
(h) "Redemption Price" shall mean the price at which the Company
may, at its option in accordance with the terms hereof, redeem the Warrants,
which price shall be $0.05 per Warrant.
(i) "Registered Holder" shall mean as to any Warrant and as of any
particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(j) "Separation Date" shall mean __________, 1997 or such earlier
date as Blair may designate.
(k) "Transfer Agent" shall mean American Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as such.
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(l) "Warrant Expiration Date" shall mean 5:00 P.M. (New York
time) on _________, 2002 (subject to extension as provided herein and in
Section 9(e) or, with respect to Warrants which are outstanding as of the
applicable Redemption Date (as defined in Section 8) and specifically excluding
Warrants issuable upon exercise of Unit Purchase Options if the Unit Purchase
Options have not been exercised, the Redemption Date, whichever is earlier);
provided that if such date shall in the State of New York be a holiday or a day
on which banks are authorized or required to close, then 5:00 P.M. (New York
time) on the next following day which in the State of New York is not a holiday
or a day on which banks are authorized or required to close. Upon notice to
all Registered Holders, the Company shall have the right to extend the Warrant
Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) A Warrant initially shall entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase one share of Class A
Common Stock upon the exercise thereof, in accordance with the terms hereof,
subject to modification and adjustment as provided in Section 9.
(b) The Warrants included in the offering of Units will be
detachable and separately transferable from the shares of Class A Common Stock
constituting part of such Units from and after the Separation Date.
(c) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting
Agreement shall be executed by the Company and delivered to the Warrant Agent.
Upon written order of the Company signed by its President, Chief Executive
Officer or Chairman or a Vice President and by its Secretary or an Assistant
Secretary, the Warrant Certificates shall be countersigned, issued and
delivered by the Warrant Agent as part of the Units.
(d) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 3,637,500 shares
of Class A Common Stock, subject to adjustment as described herein, upon the
exercise of Warrants in accordance with this Agreement.
(e) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued on or after the Initial Warrant Exercise Date,
upon the exercise of fewer than all Warrants represented by any Warrant
Certificate, to evidence any unexercised Warrants held by the exercising
Registered Holder, (iii) those issued upon any transfer or exchange pursuant to
Section 6; (iv) those issued in replacement of lost, stolen, destroyed or
mutilated Warrant Certificates pursuant to Section 7; (v) those issued pursuant
to the Unit
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Purchase Option; and (vi) at the option of the Company, in such form as may be
approved by the its Board of Directors, to reflect any adjustment or change in
the Purchase Price, the number of shares of Common Stock purchasable upon
exercise of the Warrants or the Target Price therefor made pursuant to Section
8 hereof.
(f) Pursuant to the terms of the Unit Purchase Options, Blair may
purchase up to 190,000 Units, which include up to 190,000 Warrants.
Notwithstanding anything to the contrary contained herein, the Warrants
underlying the Unit Purchase Option shall not be subject to redemption by the
Company except under the terms and conditions set forth in the Unit Purchase
Options.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed
or engraved thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or
with any rule or regulation of any stock exchange on which the Warrants may be
listed, or to conform to usage or to the requirements of Section 2(c). The
Warrant Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen, or
destroyed Warrant Certificates) and issued in registered form. Warrant
Certificates shall be numbered serially with the letter W on Warrants of all
denominations.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, President or any
Vice President and by its Secretary or an Assistant Secretary, by manual
signatures or by facsimile signatures printed thereon, and shall have imprinted
thereon a facsimile of the Company's seal. Warrant Certificates shall be
manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Warrant Certificates shall cease to be an officer of the
Company or to hold the particular office referenced in the Warrant Certificate
before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates may nevertheless be countersigned by the Warrant Agent,
issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be an officer of the Company
or to hold such office. After countersignature by the Warrant Agent, Warrant
Certificates shall be delivered by the Warrant Agent to the Registered Holder
without further action by the Company, except as otherwise provided by Section
4(a) hereof.
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SECTION 4. Exercise.
(a) Each Warrant may be exercised by the Registered Holder thereof
at any time on or after the Initial Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth herein
and in the applicable Warrant Certificate. A Warrant shall be deemed to have
been exercised immediately prior to the close of business on the Exercise Date
and the person entitled to receive the securities deliverable upon such
exercise shall be treated for all purposes as the holder of those securities
upon the exercise of the Warrant as of the close of business on the Exercise
Date. As soon as practicable on or after the Exercise Date, the Warrant Agent
shall deposit the proceeds received from the exercise of a Warrant and shall
notify the Company in writing of the exercise of the Warrants. Promptly
following, and in any event within five days after the date of such notice from
the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to
be issued and delivered by the Transfer Agent, to the person or persons
entitled to receive the same, a certificate or certificates for the securities
deliverable upon such exercise (plus a Warrant Certificate for any remaining
unexercised Warrants of the Registered Holder), unless prior to the date of
issuance of such certificates the Company shall instruct the Warrant Agent to
refrain from causing such issuance of certificates pending clearance of checks
received in payment of the Purchase Price pursuant to such Warrants.
Notwithstanding the foregoing, in the case of payment made in the form of a
check drawn on an account of Blair or such other investment banks and brokerage
houses as the Company shall approve in writing to the Warrant Agent,
certificates shall immediately be issued without prior notice to the Company or
any delay. Upon the exercise of any Warrant and clearance of the funds
received, the Warrant Agent shall promptly remit the payment received for the
Warrant (the "Warrant Proceeds") to the Company or as the Company may direct in
writing, subject to the provisions of Sections 4(b) and 4(c) hereof.
(b) If, at the Exercise Date in respect of the exercise of any
Warrant after______, 1998, (i) the market price of the Company's Class A Common
Stock is greater than the then Purchase Price of the Warrant, (ii) the exercise
of the Warrant was solicited by a member of the National Association of
Securities Dealers, Inc. ("NASD") as designated in writing on the Warrant
Certificate Subscription Form, (iii) the Warrant was not held in a
discretionary account, (iv) disclosure of compensation arrangements was made
both at the time of the original offering and at the time of exercise; and (v)
the solicitation of the exercise of the Warrant was not in violation of
Regulation M (as such rule or any successor rule may be in effect as of such
time of exercise) promulgated under the Securities Exchange Act of 1934, then
the Warrant Agent, simultaneously with the distribution of the Warrant Proceeds
to the Company shall, on behalf of the Company, pay from the Warrant Proceeds,
a fee of 5% (the "Blair Fee") of the Purchase Price to Blair (of which a
portion may be reallowed by Blair to the dealer who solicited the exercise,
which may also be Blair or D.H. Blair & Co., Inc.). In the event the Blair
Fee is not received within five days of the date on which the Company receives
Warrant Proceeds, then the Blair Fee shall begin accruing interest at an annual
rate of prime plus four percent (4%), payable by the Company to Blair at the
time Blair receives the Blair Fee. Within five days after the exercise, the
Warrant Agent shall send to Blair a copy of the reverse side of each Warrant
exercised. Blair shall reimburse the Warrant Agent, upon request, for its
reasonable expenses
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relating to compliance with this section 4(b). The Company shall pay all fees
and expenses including all blue sky fees and expenses and all out-of-pocket
expenses of Blair, including reasonable legal fees, in connection with the
solicitation, redemption or exchange of the Warrants. In addition, Blair and
the Company may at any time during business hours, examine the records of the
Warrant Agent, including its ledger of original Warrant Certificates returned
to the Warrant Agent upon exercise of Warrants. The provisions of this
paragraph may not be modified, amended or deleted without the prior written
consent of Blair.
(c) In order to enforce the provisions of Section 4(b) above, in
the event there is any dispute or question as to the amount or payment of the
Blair Fee, the Warrant Agent is hereby expressly authorized to withhold payment
to the Company of the Warrant Proceeds unless and until the Company establishes
an escrow account for the purpose of depositing the entire amount of the Blair
Fee, which amount will be deducted from the net Warrant Proceeds to be paid to
the Company. The funds placed in the escrow account may not be released to the
Company without a written agreement from Blair that the required Blair Fee has
been received by Blair.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
(a) The Company covenants that it will at all times reserve and
keep available out of its authorized Class A Common Stock, solely for the
purpose of issue upon exercise of Warrants, such number of shares of Common
Stock as shall then be issuable upon the exercise of all outstanding Warrants.
The Company covenants that all shares of Class A Common Stock which shall be
issuable upon exercise of the Warrants shall, at the time of delivery, be duly
and validly issued, fully paid, nonassessable and free from all taxes, liens
and charges with respect to the issue thereof, (other than those which the
Company shall promptly pay or discharge) and that upon issuance such shares
shall be listed on each national securities exchange, on which the other shares
of outstanding Class A Common Stock of the Company are then listed or shall be
eligible for inclusion in the Nasdaq National Market or the Nasdaq SmallCap
Market if the other shares of outstanding Class A Common Stock of the Company
are so included.
(b) The Company covenants that if any securities to be reserved
for the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will in good faith and as expeditiously as reasonably possible,
endeavor to secure such registration or approval. The Company will use
reasonable efforts to obtain appropriate approvals or registrations under state
"blue sky" securities laws. With respect to any such securities, however,
Warrants may not be exercised by, or shares of Class A Common Stock issued to,
any Registered Holder in any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes
and other governmental charges that may be imposed with respect to the issuance
of Warrants, or the issuance or delivery of any shares upon exercise of the
Warrants; provided, however, that if the
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<PAGE> 7
shares of Class A Common Stock are to be delivered in a name other than the
name of the Registered Holder of the Warrant Certificate representing any
Warrant being exercised, then no such delivery shall be made unless the person
requesting the same has paid to the Warrant Agent the amount of transfer taxes
or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to
requisition the Company's Transfer Agent from time to time for certificates
representing shares of Class A Common Stock issuable upon exercise of the
Warrants, and the Company will authorize the Transfer Agent to comply with all
such proper requisitions. The Company will file with the Warrant Agent a
statement setting forth the name and address of the Transfer Agent of the
Company (if different than the Warrant Agent) for shares of Class A Common
Stock issuable upon exercise of the Warrants.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and upon satisfaction of the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or
his attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly cancelled
by the Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement or resignation as
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<PAGE> 8
Warrant Agent, or, with the prior written consent of Blair, disposed of or
destroyed, at the direction of the Company.
(f) Prior to due presentment for registration of transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary. The Warrants, which are being publicly offered in Units with
shares of Common Stock pursuant to the Underwriting Agreement, will be
detachable from the Common Stock and transferable separately therefrom from and
after the Separation Date.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and
the Warrant Agent of evidence satisfactory to them of the ownership of and
loss, theft, destruction or mutilation of any Warrant Certificate and (in case
of loss, theft or destruction) of indemnity satisfactory to them, and (in the
case of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall ( in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a bona
fide purchaser) countersign and deliver to the Registered Holder in lieu
thereof a new Warrant Certificate of like tenor representing an equal aggregate
number of Warrants. Applicants for a substitute Warrant Certificate shall
comply with such other reasonable regulations and pay such other reasonable
charges as the Warrant Agent may prescribe.
SECTION 8. Redemption.
(a) Subject to the provisions of paragraph 2(f) hereof, on not
less than thirty (30) days notice given at any time after ________ __ , 1998
(the "Redemption Notice"), to Registered Holders of the Warrants being
redeemed, the Warrants may be redeemed, at the option of the Company, at a
redemption price of $0.05 per Warrant, provided the Market Price shall exceed
$9.10 (the "Target Price"), subject to adjustment as set forth in Section 8(f),
below. All Warrants must be redeemed if any are redeemed, provided that the
Warrants underlying the Unit Purchase Option may only be redeemed in compliance
with and subject to the terms and conditions of the Unit Purchase Option. For
purposes of this Section 8, the Calculation Date shall mean a date within 15
days of the mailing of the Redemption Notice. The date fixed for redemption of
the Warrants is referred to herein as the "Redemption Date".
(b) If the conditions set forth in Section 8(a) are met, and the
Company desires to exercise its right to redeem the Warrants, it shall request
Blair to mail a Redemption Notice to each of the Registered Holders of the
Warrants to be redeemed, first class, postage prepaid, not later than the
thirtieth day before the date fixed for redemption, at their last address as
shall appear on the records maintained pursuant to Section 6(b). Any notice
mailed in the manner provided herein shall be conclusively presumed to have
been duly given whether or not the Registered Holder receives such notice.
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<PAGE> 9
(c) The Redemption Notice shall specify (i) the redemption price,
(ii) the Redemption Date, (iii) the place where the Warrant Certificates shall
be delivered and the redemption price paid, (iv) that Blair will assist each
Registered Holder of a Warrant in connection with the exercise thereof and (v)
that the right to exercise the Warrant shall terminate at 5:00 P.M. (New York
time) on the business day immediately preceding the Redemption Date. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or of the Secretary or an
Assistant Secretary of Blair or the Company that notice of redemption has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 P.M.
(New York time) on the business day immediately preceding the Redemption Date.
On and after the Redemption Date, Registered Holders of the Warrants shall have
no further rights except to receive, upon surrender of the Warrant, the
Redemption Price.
(e) From and after the Redemption Date, the Company shall, at the
place specified in the Redemption Notice, upon presentation and surrender to
the Company by or on behalf of the Registered Holder thereof of one or more
Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be
delivered to or upon the written order of such Registered Holder a sum in cash
equal to the Redemption Price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants called for redemption, such Warrants
shall expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the Redemption Price,
shall cease.
(f) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the Target
Price shall be proportionally adjusted by the ratio which the total number of
shares of Common Stock outstanding immediately prior to such event bears to the
total number of shares of Common Stock to be outstanding immediately after such
event.
SECTION 9. Adjustment of Exercise Price and Number of Shares of
Class A Common Stock or Warrants.
(a) Subject to the exceptions referred to in Section 9(g) below,
in the event the Company shall, at any time or from time to time after the date
hereof, sell any shares of Common Stock for a consideration per share less than
the Market Price (as defined in Section 8) on the date of the sale or issue any
shares of Common Stock as a stock dividend to the holders of Common Stock, or
subdivide or combine the outstanding shares of Common Stock into a greater or
lesser number of shares (any such sale, issuance, subdivision or combination
being herein called a "Change of Shares"), then, and thereafter upon each
further Change of Shares, the Purchase Price in effect immediately prior to such
Change of Shares shall be changed to a price (including any applicable fraction
of a cent) determined by multiplying the Purchase Price in
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<PAGE> 10
effect immediately prior thereto by a fraction, the numerator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares and the number of shares of Common Stock
which the aggregate consideration received (determined as provided in subsection
9(f)(F) below) for the issuance of such additional shares would purchase at the
Market Price and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding immediately after the issuance of such
additional shares. Such adjustment shall be made successively whenever such an
issuance is made. For purposes of this Section 9, the Calculation Date shall
mean the date of the sale, issuance, modification or other transaction referred
to in this Section 9.
Upon each adjustment of the Purchase Price pursuant to this
Section 9, the total number of shares of Class A Common Stock purchasable upon
the exercise of each Warrant shall (subject to the provisions contained in
Section 9(b) hereof) be such number of shares (calculated to the nearest
one-hundredth; provided, however, that in no event shall the Aggregate Per
Share Price increase as a result of such rounding calculation) purchasable at
the Purchase Price in effect immediately prior to such adjustment multiplied by
a fraction, the numerator of which shall be the Purchase Price in effect
immediately prior to such adjustment and the denominator of which shall be the
Purchase Price in effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase
Price hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Class A Common Stock purchasable upon the
exercise of each Warrant as hereinabove provided, so that each Warrant
outstanding after such adjustment shall represent the right to purchase one
share of Class A Common Stock. Each Warrant held of record prior to such
adjustment of the number of Warrants shall become that number of Warrants
(calculated to the nearest tenth) determined by multiplying the number one by a
fraction, the numerator of which shall be the Purchase Price in effect
immediately prior to such adjustment and the denominator of which shall be the
Purchase Price in effect immediately after such adjustment. Upon each
adjustment of the number of Warrants pursuant to this Section 9, the Company
shall, as promptly as practicable, cause to be distributed to each Registered
Holder of Warrant Certificates on the date of such adjustment Warrant
Certificates evidencing, subject to Section 10 hereof, the number of additional
Warrants to which such Holder shall be entitled as a result of such adjustment
or, at the option of the Company, cause to be distributed to such Holder in
substitution and replacement for the Warrant Certificates held by him prior to
the date of adjustment (and upon surrender thereof, if required by the Company)
new Warrant Certificates evidencing the number of Warrants to which such Holder
shall be entitled after such adjustment.
(c) In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Company
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<PAGE> 11
shall cause effective provision to be made so that each holder of a Warrant
then outstanding shall have the right thereafter, by exercising such Warrant,
to purchase the kind and number of shares of stock or other securities or
property (including cash) receivable upon such reclassification, capital
reorganization or other change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Class A Common Stock that might have been
purchased upon exercise of such Warrant immediately prior to such
reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 9. The Company shall not effect any
such consolidation, merger or sale unless prior to or simultaneously with the
consummation thereof the successor (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing assets or other
appropriate corporation or entity shall assume, by written instrument executed
and delivered to the Warrant Agent, the obligation to deliver to the holder of
each Warrant such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holders may be entitled to purchase and the
other obligations of the Company under this Agreement. The foregoing
provisions shall similarly apply to successive reclassifications, capital
reorganizations and other changes of outstanding shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(d) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Class A Common Stock purchasable upon exercise
of the Warrants, the Warrant Certificates theretofore and thereafter issued
shall, unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to Section 2(e) hereof, continue to express the Purchase
Price per share, the number of shares purchasable thereunder and the Redemption
Price therefor as the Purchase Price per share, and the number of shares
purchasable and the Redemption Price therefor were expressed in the Warrant
Certificates when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Purchase Price as so adjusted, (ii) the number of
shares of Class A Common Stock purchasable upon exercise of each Warrant after
such adjustment and, if the Company shall have elected to adjust the number of
Warrants, the number of Warrants to which the Registered Holder of each Warrant
shall then be entitled, and the adjustment in Redemption Price resulting
therefrom, and (iii) a statement showing in detail the method of calculation
and the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or to be received by the Company
for any securities issued or sold or deemed to have been issued, (b) the number
of shares of Common Stock outstanding or deemed to be outstanding, and (c) the
Purchase Price in effect immediately prior to such issue or sale and as
adjusted and readjusted (if required by Section 9) on account thereof. The
Company will promptly file such certificate with the Warrant Agent and furnish
a copy thereof to be sent no later than thirty (30) days after the adjustment
by ordinary first class mail to Blair and to each Registered Holder of Warrants
at his last address as it shall appear on
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<PAGE> 12
the registry books of the Warrant Agent. No failure to mail such notice nor
any defect therein or in the mailing thereof shall affect the validity thereof
except as to the holder to whom the Company failed to mail such notice, or
except as to the holder whose notice was defective. If such mailing is not
made within such 30-day period the Warrant Expiration Date shall be extended by
the period of time equal to the period commencing on the 31st day and expires
on the date such mailing is effectuated. The Company will, upon the written
request at any time of Blair, furnish to Blair a report by BDO Seidman LLP, or
other independent public accountants of recognized national standing (which may
be the regular auditors of the Company) selected by the Company to verify such
computation and setting forth such adjustment or readjustment and showing in
detail the method of calculation and the facts upon which such adjustment or
readjustment is based. The Company will also keep copies of all such
certificates and reports at its principal office.
(f) For purposes of Section 9(a) and 9(b) hereof, the following
provisions (A) to (F) shall also be applicable:
(A) The number of shares of Common Stock outstanding at
any given time shall include shares of Common Stock owned or held by
or for the account of the Company and the sale or issuance of such
treasury shares or the distribution of any such treasury shares shall
not be considered a Change of Shares for purposes of said sections.
(B) No adjustment of the Purchase Price shall be made
unless such adjustment would require an increase or decrease of at
least $.10 in the Purchase Price; provided that any adjustments which
by reason of this clause (B) are not required 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(s) so
carried forward, shall require an increase or decrease of at least
$.10 in the Purchase Price then in effect hereunder.
(C) In case of (1) the sale by the Company for cash (or
as a component of a unit being sold for cash) of any rights or
warrants to subscribe for or purchase, or any options for the purchase
of, Common Stock or any securities convertible into or exchangeable
for Common Stock without the payment of any further consideration
other than cash, if any (such securities convertible, exercisable or
exchangeable into Common Stock being herein called "Convertible
Securities"), or (2) the issuance by the Company, without the receipt
by the Company of any consideration therefor, of any rights or
warrants to subscribe for or purchase, or any options for the purchase
of, Common Stock or Convertible Securities, in each case, if (and only
if) the consideration payable to the Company upon the exercise of such
rights, warrants or options shall consist of cash, whether or not such
rights, warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such
rights, warrants or
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<PAGE> 13
options or upon the conversion or exchange of such Convertible
Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Company upon the exercise of such rights,
warrants or options, plus the consideration, if any, received by the
Company for the issuance or sale of such rights, warrants or options,
plus, in the case of such Convertible Securities, the minimum
aggregate amount of additional consideration, other than such
Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights, warrants or options or upon
the conversion or exchange of such Convertible Securities issuable
upon the exercise of such rights, warrants or options) is less than
the Market Price of the Class A Common Stock on the Calculation Date,
then the total maximum number of shares of Common Stock issuable upon
the exercise of such rights, warrants or options or upon the
conversion or exchange of such Convertible Securities (as of the date
of the issuance or sale of such rights, warrants or options) shall be
deemed to be outstanding shares of Common Stock for purposes of
Sections 9(a) and 9(b) hereof and shall be deemed to have been sold
for cash in an amount equal to such price per share.
(D) In case of the sale by the Company for cash of any
Convertible Securities, whether or not the right of conversion or
exchange thereunder is immediately exercisable, and the price per
share for which Common Stock is issuable upon the conversion or
exchange of such Convertible Securities (determined by dividing (x)
the total amount of consideration received by the Company for the sale
of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y)
the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities) is less than
the Market Price of the Class A Common Stock on the Calculation Date,
then the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of such Convertible Securities (as of the
date of the sale of such Convertible Securities) shall be deemed to be
outstanding shares of Common Stock for purposes of Sections 9(a) and
9(b) hereof and shall be deemed to have been sold for cash in an
amount equal to such price per share.
(E) In case the Company shall modify the rights of
conversion, exchange or exercise of any of the securities referred to
in (C) or (D) above or any other securities of the Company
convertible, exchangeable or exercisable for shares of Common Stock,
for any reason other than an event that would require adjustment to
prevent dilution, so that the consideration per share received by the
Company after such modification is less than the Market Price on the
date prior to such modification, the Purchase Price to be in effect
after such modification shall be determined by multiplying the
Purchase Price in effect immediately prior to
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<PAGE> 14
such event by a fraction, of which the numerator shall be the number
of shares of Common Stock outstanding on the Calculation Date plus the
number of shares of Common Stock which the aggregate consideration
receivable by the Company for the securities affected by the
modification would purchase at the Market Price and of which the
denominator shall be the number of shares of Common Stock outstanding
on such date plus the number of shares of Common Stock to be issued
upon conversion, exchange or exercise of the modified securities at
the modified rate. Such adjustment shall become effective as of the
date upon which such modification shall take effect. On the
expiration of any such right, warrant or option or the termination of
any such right to convert or exchange any such Convertible Securities
referred to in Paragraph (C) or (D) above, the Purchase Price then in
effect hereunder shall forthwith be readjusted to such Purchase Price
as would have obtained (a) had the adjustments made upon the issuance
or sale of such rights, warrants, options or Convertible Securities
been made upon the basis of the issuance of only the number of shares
of Common Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such
Convertible Securities and (b) had adjustments been made on the basis
of the Purchase Price as adjusted under clause (a) for all
transactions (which would have affected such adjusted Purchase Price)
made after the issuance or sale of such rights, warrants, options or
Convertible Securities.
(F) In case of the sale for cash of any shares of Common
Stock, any Convertible Securities, any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, the consideration received by the Company
therefore shall be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the Company or any
underwriting discounts or commissions or concessions paid or allowed
by the Company in connection therewith.
(G) In case any event shall occur as to which the
provisions of Section 9 are not strictly applicable but the failure to
make any adjustment would not fairly protect the purchase rights
represented by the Warrants in accordance with the essential intent
and principles of Section 9, then, in each such case, the Board of
Directors of the Company shall in good faith by resolution provide for
the adjustment, if any, on a basis consistent with the essential
intent and principles established in Section 9, necessary to preserve,
without dilution, the purchase rights represented by the Warrants. The
Company will promptly make the adjustments described therein.
(g) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Common Stock purchasable upon the exercise of each Warrant
will be made, however,
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<PAGE> 15
(i) upon the exercise of any of the options presently
outstanding under the Company's Stock Option Plan (the "Plan") for
officers, directors and certain other key personnel of the Company; or
(ii) upon the issuance or exercise of any other securities
which may hereafter be granted or exercised under the Plan or under
any other employee benefit plan of the Company approved by the
Company's stockholders; or
(iii) upon the sale or exercise of the Warrants, including
without limitation the sale or exercise of any of the Warrants
comprising the Unit Purchase Option or upon the sale or exercise of
the Unit Purchase Option; or
(iv) upon the sale of any shares of Common Stock and/or
Convertible Securities in a firm commitment underwritten public
offering, including, without limitation, shares sold upon the exercise
of any overallotment option granted to Blair in connection with such
offering; or
(v) upon the sale by the Company of any shares of Common
Stock and/or Convertible Securities in a private placement for which
the Underwriter is the Placement Agent; or
(vi) upon the issuance or sale of Common Stock or
Convertible Securities upon the exercise of any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Common
Stock or Convertible Securities, whether or not such rights, warrants
or options were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; or
(vii) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities (including the
conversion of Class B Common Stock into Class A Common Stock), whether
or not any adjustment in the Purchase Price was made or required to be
made upon the issuance or sale of such Convertible Securities and
whether or not such Convertible Securities were outstanding on the
date of the original sale of the Warrants or were thereafter issued or
sold.
(h) As used in this Section 9, the term "Common Stock" shall mean
and include the Company's Common Stock authorized on the date of the original
issue of the Units and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Restated Articles of Incorporation as Common Stock
on the date of the original issue of the Units or (i), in the case of any
reclassification, change, consolidation, merger, sale or conveyance
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<PAGE> 16
of the character referred to in Section 9(c) hereof, the stock, securities or
property provided for in such section or (ii), in the case of any
reclassification or change in the outstanding shares of Common Stock issuable
upon exercise of the Warrants as a result of a subdivision or combination or
consisting of a change in par value, or from par value to no par value, or from
no par value to par value, such shares of Common Stock as so reclassified or
changed.
(i) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to Section 9, or as to the
amount of any such adjustment, if required, shall be binding upon the holders
of the Warrants and the Company if made in good faith by the Board of Directors
of the Company.
(j) If and whenever the Company shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding,
the rights, warrants or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this Section 9(j), that
exercise of Warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his Warrants. Such grant by the Company to the holders of
the Warrants shall be in lieu of any adjustment which otherwise might be called
for pursuant to this Section 9.
SECTION 10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Class A Common Stock purchasable
upon the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the
Company nevertheless shall not be required to issue fractions of shares, upon
exercise of the Warrants or otherwise, or to distribute certificates that
evidence fractional shares. With respect to any fraction of a share called for
upon the exercise of any Warrant, the Company shall pay to the Holder an amount
in cash equal to such fraction multiplied by the current market value of such
fractional share, determined as follows:
(1) If the Class A Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges on such
exchange or is traded on the Nasdaq National Market, the current
market value shall be the last reported sale price of the Class A
Common Stock on such exchange or market on the last business day prior
to the date of exercise of this Warrant or if no such sale is made on
such day or no closing sale price is reported, the average of the
closing bid and asked prices for such day on such exchange or market;
or
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<PAGE> 17
(2) If the Class A Common Stock is not listed or admitted
to unlisted trading privileges on a national securities exchange or is
not traded on the Nasdaq National Market, the current market value
shall be the mean of the last reported bid and asked prices reported
by the Nasdaq SmallCap Market or, if not traded thereon, by the
National Quotation Bureau, Inc. on the last business day prior to the
date of the exercise of this Warrant; or
(3) If the Class A Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked prices are
not so reported, the current market value shall be an amount
determined in such reasonable manner as may be prescribed by the Board
of Directors of the Company.
SECTION 11. Warrant Holders Not Deemed Shareholders. No holder
of Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon
exercise of such Warrants for any purpose whatsoever, nor shall anything
contained herein be construed to confer upon the holder of Warrants, as such,
any of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issue or reclassification of stock, change
of par value or change of stock to no par value, consolidation, merger or
conveyance or otherwise), or to receive notice of meetings, or to receive
dividends or subscription rights, until such holder shall have exercised such
Warrants and been issued shares of Common Stock in accordance with the
provisions hereof.
SECTION 12. Rights of Action. All rights of action with respect
to this Agreement are vested in the respective Registered Holders of the
Warrants, and any Registered Holder of a Warrant, without consent of the
Warrant Agent or of the holder of any other Warrant, may, in his own behalf and
for his own benefit, enforce against the Company his right to exercise his
Warrants for the purchase of shares of Common Stock in the manner provided in
the Warrant Certificate and this Agreement.
SECTION 13. Agreement of Warrant Holders. Every holder of a
Warrant, by his acceptance thereof, consents and agrees with the Company, the
Warrant Agent and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books of
the Warrant Agent by the Registered Holder thereof in person or by his attorney
duly authorized in writing and only if the Warrant Certificates representing
such Warrants are surrendered at the office of the Warrant Agent, duly endorsed
or accompanied by a proper instrument of transfer satisfactory to the Warrant
Agent and the Company in their sole discretion, together with payment of any
applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the holder and as
the absolute, true and
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<PAGE> 18
lawful owner of the Warrants represented thereby for all purposes, and neither
the Company nor the Warrant Agent shall be affected by any notice or knowledge
to the contrary, except as otherwise expressly provided in Section 7 hereof.
SECTION 14. Cancellation of Warrant Certificates. If the Company
shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or
Warrant Certificates evidencing the same shall thereupon be delivered to the
Warrant Agent and cancelled by it and retired. The Warrant Agent shall also
cancel the Warrant Certificate or Warrant Certificates following exercise of
any or all of the Warrants represented thereby or delivered to it for transfer
or exchange.
SECTION 15. Concerning the Warrant Agent. The Warrant Agent acts
hereunder as agent and in a ministerial capacity for the Company, and its
duties shall be determined solely by the provisions hereof. The Warrant Agent
shall not, by issuing and delivering Warrant Certificates or by any other act
hereunder be deemed to make any representations as to the validity, value or
authorization of the Warrant Certificates or the Warrants represented thereby
or of any securities or other property delivered upon exercise of any Warrant
or whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price or the Redemption Price provided in
this Agreement, or to determine whether any fact exists which may require any
such adjustments, or with respect to the nature or extent of any such
adjustment, when made, or with respect to the method employed in making the
same. It shall not (i) be liable for any recital or statement of facts
contained herein or for any action taken, suffered or omitted by it in reliance
on any Warrant Certificate or other document or instrument believed by it in
good faith to be genuine and to have been signed or presented by the proper
party or parties, (ii) be responsible for any failure on the part of the
Company to comply with any of its covenants and obligations contained in this
Agreement or in any Warrant Certificate, or (iii) be liable for any act or
omission in connection with this Agreement except for its own negligence or
wilful misconduct.
The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order
or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board, Chief Executive Officer, President, any
Vice President, its Secretary, or Assistant Secretary (unless other evidence in
respect thereof is herein specifically prescribed). The Warrant Agent shall
not be liable for any action taken, suffered or omitted by it in accordance
with such notice, statement, instruction, request, direction, order or demand
believed by it to be genuine.
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<PAGE> 19
The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; it further agrees to indemnify the Warrant Agent and save
it harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence
or wilful misconduct.
The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or wilful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to the Registered Holder of
each Warrant Certificate at the Company's expense. Upon such resignation, or
any inability of the Warrant Agent to act as such hereunder, the Company shall
appoint a new warrant agent in writing. If the Company shall fail to make such
appointment within a period of 15 days after it has been notified in writing of
such resignation by the resigning Warrant Agent, then the Registered Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for
the appointment of a new warrant agent. Any new warrant agent, whether
appointed by the Company or by such a court, shall be a bank or trust company
having a capital and surplus, as shown by its last published report to its
stockholders, of not less than $10,000,000 or a stock transfer company that is
a registered transfer agent under the Securities Exchange Act of 1934. After
acceptance in writing of such appointment by the new warrant agent is received
by the Company, such new warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named herein
as the Warrant Agent, without any further assurance, conveyance, act or deed;
but if for any reason it shall be necessary or expedient to execute and deliver
any further assurance, conveyance, act or deed, the same shall be done at the
expense of the Company and shall be legally and validly executed and delivered
by the resigning Warrant Agent. Not later than the effective date of any such
appointment the Company shall file notice thereof with the resigning Warrant
Agent and shall forthwith cause a copy of such notice to be mailed to the
Registered Holder of each Warrant Certificate.
Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further
act, provided that such corporation is eligible for appointment as successor to
the Warrant Agent under the provisions of the preceding paragraph. Any such
successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed to the Company and to the Registered Holder of each
Warrant Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like
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<PAGE> 20
effects as though it were not Warrant Agent. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for any
other legal entity.
SECTION 16. Modification of Agreement. Subject to the provisions
of Section 4(b), the parties hereto and the Company may by supplemental
agreement make any changes or corrections in this Agreement (i) that they shall
deem appropriate to cure any ambiguity or to correct any defective or
inconsistent provision or manifest mistake or error herein contained; (ii) to
reflect an increase in the number of Warrants which are to be governed by this
Agreement resulting from a subsequent public offering of Company securities
which includes Warrants having the same terms and conditions as the Warrants
originally covered by or subsequently added to this Agreement under this
Section 16, or (iii) that they may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Warrant Certificates;
provided, however, that this Agreement shall not otherwise be modified,
supplemented or altered in any respect except with the consent in writing of
the Registered Holders of Warrant Certificates representing not less than 50%
of the Warrants then outstanding; and provided, further, that no change in the
number or nature of the securities purchasable upon the exercise of any
Warrant, or the Purchase Price therefor, or the acceleration of the Warrant
Expiration Date, shall be made without the consent in writing of the Registered
Holder of the Warrant Certificate representing such Warrant, other than such
changes as are specifically prescribed by this Agreement as originally executed
or are made in compliance with applicable law.
SECTION 17. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at
the address of such holder as shown on the registry books maintained by the
Warrant Agent; if to the Company, at 26135 Mureu Road, Calabasas, California
91502, attention: Jack B. Tracht, or at such other address as may have been
furnished to the Warrant Agent in writing by the Company; if to the Warrant
Agent, at its Corporate Office; if to Blair, at D.H. Blair Investment Banking
Corp., 44 Wall Street, New York, New York 10005.
SECTION 18. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.
SECTION 19. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the Company and, the Warrant Agent and their
respective successors and assigns, and the holders from time to time of Warrant
Certificates . Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law,
or to impose upon any other person any duty, liability or obligation.
SECTION 20. Termination. This Agreement shall terminate at the
close of business on the earlier of the Warrant Expiration Date or the date
upon which all Warrants (including the warrants issuable upon exercise of the
Unit Purchase Options) have been
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<PAGE> 21
exercised, except that the Warrant Agent shall account to the Company for cash
held by it and the provisions of Section 15 hereof shall survive such
termination.
SECTION 21. Counterparts. This Agreement may be executed in
several counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
ON'VILLAGE COMMUNICATIONS, INC.
By: _______________________________________
Jack B. Tracht, Chief Executive Officer
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By: _______________________________________
Authorized Officer
D.H. BLAIR INVESTMENT BANKING CORP.
By: _______________________________________
Martin A. Bell, Vice Chairman and
General Counsel
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<PAGE> 22
EXHIBIT A
[FORM OF FACE OF WARRANT CERTIFICATE]
No. W __________ Warrants
VOID AFTER ________ __, 2002
WARRANT CERTIFICATE FOR PURCHASE
OF CLASS A COMMON STOCK
ON'VILLAGE COMMUNICATIONS, INC.
This certifies that FOR VALUE RECEIVED __________________ or
registered assigns (the "Registered Holder") is the owner of the number of
redeemable warrants ("Warrants") specified above. Each Warrant represented
hereby initially entitles the Registered Holder to purchase, subject to the
terms and conditions set forth in this Warrant Certificate and the Warrant
Agreement (as hereinafter defined), one fully paid and nonassessable share of
Class A Common Stock ("Class A Common Stock"), of On'Village Communications,
Inc., a California corporation (the "Company") at any time between the
Separation Date (as defined in the Warrant Agreement), and the Expiration Date
(as hereinafter defined), upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly executed, at
the corporate office of American Stock Transfer & Trust Company as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of $6.50
for each Warrant (the "Purchase Price") in lawful money of the United States of
America in cash or by official bank or certified check made payable to
On'Village Communications, Inc.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated ________
__, 1997 by and among the Company, the Warrant Agent and D.H. Blair Investment
Banking Corp. ("Blair").
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Class A Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Class A Common Stock will be
issued. In the case of the exercise of less than all the Warrants represented
hereby, the Company shall cancel this Warrant
A-1
<PAGE> 23
Certificate upon the surrender hereof and shall execute and deliver a new
Warrant Certificate or Warrant Certificates of like tenor, which the Warrant
Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on
________ __, 2002 or such earlier date as the Warrants shall be redeemed. If
such date shall in the State of New York be a holiday or a day on which banks
are authorized to close, then the Expiration Date shall mean 5:00 P.M. (New
York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Warrants represented hereby unless a registration
statement under the Securities Act of 1933, as amended, with respect to such
securities is effective. The Company has covenanted and agreed that it will
file a registration statement and will use its best efforts to cause the same
to become effective and to keep such registration statement current while any
of the Warrants are outstanding. The Warrants represented hereby shall not be
exercisable by a Registered Holder in any state where such exercise would be
unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment with any applicable
transfer fee in addition to any tax or other governmental charge imposed in
connection therewith, for registration of transfer of this Warrant Certificate
at such office, a new Warrant Certificate or Warrant Certificates representing
an equal aggregate number of Warrants will be issued to the transferee in
exchange therefor, subject to the limitations provided in the Warrant
Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
The Warrants represented hereby may be redeemed at the option of the
Company, at a redemption price of $0.05 per Warrant at any time after ________
__, 1998 provided the Market Price (as defined in the Warrant Agreement) for
the Class A Common Stock shall exceed $9.10 per share. Notice of redemption
shall be given not later than the thirtieth day before the date fixed for
redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect
to the Warrants represented hereby except to receive the $0.05 per Warrant upon
surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of
A-2
<PAGE> 24
each Warrant represented hereby (notwithstanding any notations of ownership or
writing hereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary.
The Company has agreed to pay a fee of 5% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
the Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile, by two of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
ON'VILLAGE COMMUNICATIONS, INC.
Dated: ____________________ By: ______________________________
By: ______________________________
[seal]
Countersigned:
_________________________________
AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
By ______________________________
Authorized Officer
A-3
<PAGE> 25
[FORM OF REVERSE OF WARRANT CERTIFICATE]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise _______ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
____________________________________________
____________________________________________
____________________________________________
____________________________________________
[please print or type name and address]
and be delivered to
____________________________________________
____________________________________________
____________________________________________
____________________________________________
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by
this Warrant Certificate, that a new Warrant Certificate for the balance of
such Warrants be registered in the name of, and delivered to, the Registered
Holder at the address stated below.
A-4
<PAGE> 26
The undersigned represents that the exercise of the Warrants evidenced
hereby was solicited by a member of the National Association of Securities
Dealers, Inc. If not solicited by an NASD member, please write "unsolicited"
in the space below. Unless otherwise indicated by listing the name of another
NASD member firm, it will be assumed that the exercise was solicited by D.H.
Blair Investment Banking Corp. or D.H. Blair & Co., Inc.
____________________________________
(Name of NASD Member)
Dated: X _________________________________
____________________________________
____________________________________
Address
____________________________________
Taxpayer Identification Number
____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-5
<PAGE> 27
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
OF TRANSFEREE
____________________________________________
____________________________________________
____________________________________________
____________________________________________
[please print or type name and address]
_________________ of the Warrants represented by this Warrant Certificate, and
hereby irrevocably constitutes and appoints ____________________________________
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the premises.
Dated:________________ X ______________________________
Signature Guaranteed
_________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-6
<PAGE> 28
B-1
<PAGE> 1
EXHIBIT 4.6
AMENDED AND RESTATED ESCROW AGREEMENT
AMENDED AND RESTATED ESCROW AGREEMENT, dated as of the 19th day of
August, 1997 and effective as of the Effective Date, as defined herein, amending
and restating the Escrow Agreement dated as of January 21, 1997, by and among
American Stock Transfer & Trust Company, a New York corporation (hereinafter
referred to as the "Escrow Agent"), On'Village Communications, Inc., a
California corporation (the "Company"), and the stockholders of the Company who
have executed this agreement (hereinafter collectively called the
"Stockholders"), is entered into by and among the Escrow Agent, the Company and
the Stockholders.
WHEREAS, the Company contemplates a public offering ("Public
Offering") of Units ("Units"), each Unit consisting of one share of its Class A
Common Stock (the "Class A Common Stock") and one redeemable Class A Warrant
(the "Class A Warrant") through D.H. Blair Investment Banking Corp. as
underwriter (the "Underwriter") pursuant to a Registration Statement (the
"Registration Statement") on Form SB-2 to be filed with the Securities and
Exchange Commission ("SEC"); and
WHEREAS, the Stockholders have agreed to deposit in escrow an
aggregate of 800,000 shares of Class B Common Stock ("Class B Common Stock"
which, together with the Class A Common Stock, is referred to herein as the
"Common Stock"), upon the terms and conditions set forth herein.
In consideration of the mutual covenants and promises herein
contained, the parties hereto agree as follows:
<PAGE> 2
1. The Stockholders and the Company hereby appoint American Stock
Transfer & Trust Company as Escrow Agent and agree that the Stockholders will,
prior to the Effective Date (as defined herein), deliver to the Escrow Agent to
hold in accordance with the provisions hereof, certificates representing an
aggregate of 800,000 shares of Class B Common Stock owned of record by the
Stockholders in the respective amounts set forth on Exhibit A hereto (the
"Escrow Shares"), together with stock powers executed in blank. The Escrow
Agent, by its execution and delivery of this Agreement hereby acknowledges
receipt of the Escrow Shares and accepts its appointment as Escrow Agent to hold
the Escrow Shares in escrow, upon the terms, provisions and conditions hereof.
2. This Agreement shall become effective upon the date on which the
Securities and Exchange Commission declares effective the Registration Statement
("Effective Date") and shall continue in effect until the earlier of (i) the
date specified in paragraph 4(e) hereof or (ii) the distribution by the Escrow
Agent of all of the Escrow Shares in accordance with the terms hereof (the
"Termination Date"). The period of time from the Effective Date until the
Termination Date is referred to herein as the "Escrow Period."
3. During the Escrow Period, the Escrow Agent shall receive all of the
money, securities, rights or property distributed in respect of the Escrow
Shares then held in escrow, including any such property distributed as dividends
or pursuant to any stock split, merger, recapitalization, dissolution, or total
or partial liquidation of the Company, such property to be held and distributed
as herein provided and hereinafter referred to collectively as the "Escrow
Property."
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<PAGE> 3
4. (a) The Escrow Shares are subject to release to the Stockholders
only in the event the conditions set forth herein are met. The Escrow Agent,
upon notice to such effect from the Company as provided in paragraph 5 hereof,
shall deliver the Escrow Shares, together with stock powers executed in blank,
and the Escrow Property deposited in escrow with respect to such Escrow Shares,
pro rata, to the respective Stockholders, if, and only if, one of the following
conditions is met:
(i) 400,000 of the Escrow Shares and Escrow Property related to
such Escrow Shares will be released in the event that:
(A) the Company's net income before provision for
income taxes (the "Minimum Pretax Income")
equals or exceeds $3,000,000 for the fiscal
year ending December 31, 1998; or
(B) the Minimum Pretax Income equals or exceeds
$4,500,000 for the fiscal year ending December
31, 1999; or
(C) the Minimum Pretax Income equals or exceeds
$6,000,000 for the fiscal year ending December
31, 2000; or
(D) the Minimum Pretax Income equals or exceeds
$7,500,000 for the fiscal year ending December
31, 2001; or
(E) the Closing Price (as defined herein) of the
Company's Class A Common Stock shall average in
excess of $11.00 per share for any 30
consecutive business days during the period
commencing on the Effective Date and ending 18
months from the Effective Date; or
(F) the Closing Price (as defined herein) of the
Company's Class A Common Stock shall average in
excess of $15.00 per share for any 30
consecutive business days during the period
commencing on the 18th month after the
Effective Date and ending 36 months from the
Effective Date; or
(G) the Company is acquired by or merged into
another entity in a transaction in which
stockholders of the Company receive per share
consideration at least equal to the levels set
forth in (E) and (F) above during the
applicable time periods set forth in (E) and
(F) above.
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<PAGE> 4
(ii) the remaining 400,000 of the Escrow Shares and Escrow Property
related to such Escrow Shares will be released in the event
that:
(A) the Company's Minimum Pretax Income equals or
exceeds $3,400,000 for the fiscal year ending
December 31, 1998; or
(B) the Minimum Pretax Income equals or exceeds
$5,200,000 for the fiscal year ending December
31, 1999; or
(C) the Minimum Pretax Income equals or exceeds
$6,900,000 for the fiscal year ending December
31, 2000; or
(D) the Minimum Pretax Income equals or exceeds
$8,600,000 for the fiscal year ending December
31, 2001;
(E) the Closing Price (as defined herein) of the
Company's Class A Common Stock shall average in
excess of $12.50 per share for any 30
consecutive business days during the period
commencing on the Effective Date and ending 18
months from the Effective Date; or
(F) the Closing Price (as defined herein) of the
Company's Class A Common Stock shall average in
excess of $16.50 per share for any 30
consecutive business days during the period
commencing on the 18th month after the
Effective Date and ending 36 months from the
Effective Date; or
(G) the Company is acquired by or merged into
another entity in a transaction in which
stockholders of the Company receive per share
consideration at least equal to the levels set
forth in (E) and (F) above during the
applicable time periods set forth in (E) and
(F) above.
(b) As used in this Section 4, the term "Closing Price" shall be
subject to adjustments in the event of any stock dividend, stock distribution,
stock split or other similar event and shall mean:
(i) If the principal market for the Class A Common Stock is a
national securities exchange or the Nasdaq National Market, the
closing sales price of the Class A Common Stock as reported
by such exchange or market, or on a consolidated tape
reflecting transactions on such exchange or market; or
-4-
<PAGE> 5
(ii) if the principal market for the Class A Common Stock is not a
national securities exchange or the Nasdaq National Market
and the Class A Common Stock is quoted on the Nasdaq SmallCap
Market, the closing bid price of the Class A Common Stock as
quoted on the Nasdaq SmallCap Market; or
(iii) if the principal market for the Class A Common Stock is not a
national securities exchange or the Nasdaq National Market and
the Class A Common Stock is not quoted on the Nasdaq SmallCap
Market, the closing bid for the Class A Common Stock as
reported by the National Quotation Bureau, Inc. ("NQB") or at
least two market makers in the Class A Common Stock if
quotations are not available from NQB but are available from
market makers.
(c) The determination of Minimum Pretax Income shall be determined by
the Company's independent public accountants in accordance with U.S. generally
accepted accounting principles provided that such determination is calculated
exclusive of any extraordinary earnings or charges (including any charges
incurred by the Company in connection with the release from escrow of the Escrow
Shares and any Escrow Property in respect thereof pursuant to the provisions of
this paragraph 4).
(d) In the event of any issuance (such issuance being herein called a
"Change of Shares") of additional shares of Common Stock (or securities
convertible into or exchangeable for Common Stock without the payment of
additional consideration, referred to as "Convertible Securities") after the
Effective Date, then each of the Minimum Pretax Income amounts set forth in
subparagraph (a) above shall be increased to an amount (the "Adjusted Minimum
Pretax Income") calculated in accordance with the formula set forth in
subparagraph (ii) below.
(i) For purposes of the foregoing paragraph, a Change of Shares
shall exclude (a) shares of Common Stock sold in the Public
Offering or (b) Common Stock or Convertible Securities issued
in connection with a stock split or stock dividend or
distribution or (c) shares of Class A Common Stock issued in
exchange for shares of Class B Common Stock but shall include
any shares of Class A Common Stock or Convertible Securities
that are
-5-
<PAGE> 6
issued upon the exercise of the Class A Warrants, the Class B
Warrants or any other options or warrants outstanding as of
the Effective Date or granted after the Effective Date by the
Company.
(ii) Each Adjusted Minimum Pretax Income amount shall be calculated
by multiplying the applicable Minimum Pretax Income amount
prior to the Change of Shares by a fraction, the numerator of
which shall be the weighted average number of shares of Common
Stock outstanding during the fiscal year for which the
determination is being made (including the Escrow Shares and
any shares of Common Stock issuable upon conversion of any
Convertible Securities, but excluding treasury stock), and the
denominator of which shall be the sum of (x) the number of
shares of Common Stock outstanding on the Effective Date
(including the Escrow Shares and any shares of Common Stock
issuable upon conversion of Convertible Securities outstanding
immediately prior to the Effective Date) plus (y) the number
of shares of Class A Common Stock sold by the Company pursuant
to the Prospectus included in the Registration Statement,
after adjustment for any stock dividends, stock splits or
similar events. The Adjusted Minimum Pretax Income amounts
shall be calculated successively whenever such a Change of
Shares occurs.
(e) If the Escrow Agent has not received the notice provided for in
Paragraph 5 hereof on or prior to the earlier of (i) the date of the closing of
a transaction referred to in Subparagraph 4(a)(i)(G) or 4(a)(ii)(G) or (ii)
April 15, 2002, the Escrow Agent shall deliver the certificates representing all
or the remaining Escrow Shares, together with stock powers executed in blank,
and any related Escrow Property to the Company to be placed in the Company's
treasury for cancellation thereof as a contribution to capital. After such date,
the Stockholders shall have no further rights as a stockholder of the Company
with respect to any of the cancelled Escrow Shares.
5. Upon the occurrence or satisfaction of any of the events or conditions
specified in Paragraph 4 hereof, the Company shall promptly give appropriate
notice to the Escrow Agent, the Underwriter (and if the transfer agent of the
Company's Common Stock is
-6-
<PAGE> 7
different from the Escrow Agent, such transfer agent) and present such
documentation as is reasonably required by the Escrow Agent to evidence the
satisfaction of such conditions.
6. It is understood and agreed by the parties to this Agreement as
follows:
(a) The Escrow Agent is not and shall not be deemed to be a trustee
for any party for any purpose and is merely acting as a depository and in a
ministerial capacity hereunder with the limited duties herein prescribed.
(b) The Escrow Agent does not have and shall not be deemed to have any
responsibility in respect of any instruction, certificate or notice delivered to
it or of the Escrow Shares or any related Escrow Property other than faithfully
to carry out the obligations undertaken in this Agreement and to follow the
directions in such instruction or notice provided in accordance with the terms
hereof.
(c) The Escrow Agent is not and shall not be deemed to be liable for
any action taken or omitted by it in good faith and may rely upon, and act in
accordance with, the advice of its counsel without liability on its part for any
action taken or omitted in accordance with such advice. In any event, its
liability hereunder shall be limited to liability for gross negligence, willful
misconduct or bad faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in accordance
with any certificate, instruction, notice, letter, telegram, cablegram or other
written instrument believed by it to be genuine and to have been signed by the
proper party or parties.
(e) The Company agrees (i) to pay the Escrow Agent's reasonable fees
and to reimburse it for its reasonable expenses including reasonable attorney's
fees incurred in connection with duties hereunder and (ii) to save harmless,
indemnify and defend the Escrow
-7-
<PAGE> 8
Agent for, from and against any loss, damage, liability, judgment, cost and
expense whatsoever, including reasonable counsel fees, suffered or incurred by
it by reason of, or on account of, any misrepresentation made to it or its
status or activities as Escrow Agent under this Agreement except for any loss,
damage, liability, judgment, cost or expense resulting from gross negligence,
willful misconduct or bad faith on the part of the Escrow Agent. The obligation
of the Escrow Agent to deliver the Escrow Shares to either the Stockholders or
the Company shall be subject to the prior satisfaction upon demand from the
Escrow Agent, of the Company's obligations to so save harmless, indemnify and
defend the Escrow Agent and to reimburse the Escrow Agent or otherwise pay its
fees and expenses hereunder.
(f) The Escrow Agent shall not be required to defend any legal
proceeding which may be instituted against it in respect of the subject matter
of this Agreement unless requested to do so by the Stockholders and indemnified
to the Escrow Agent's satisfaction against the cost and expense of such defense
by the party requesting such defense. If any such legal proceeding is instituted
against it, the Escrow Agent agrees promptly to given notice of such proceeding
to the Stockholders and the Company. The Escrow Agent shall not be required to
institute legal proceedings of any kind.
(g) The Escrow Agent shall not, by act, delay, omission or otherwise,
be deemed to have waived any right or remedy it may have either under this
Agreement or generally, unless such waiver be in writing, and no waiver shall be
valid unless it is in writing, signed by the Escrow Agent, and only to the
extent expressly therein set forth. A waiver by the Escrow Agent under the term
of this Agreement shall not be construed as a bar to, or waiver of, the same or
any other such right or remedy which it would otherwise have on any other
occasion.
-8-
<PAGE> 9
(h) The Escrow Agent may resign as such hereunder by giving 30 days
written notice thereof to the Stockholders and the Company. Within 20 days after
receipt of such notice, the Stockholders and the Company shall furnish to the
Escrow Agent written instructions for the release of the Escrow Shares and any
related Escrow Property (if such shares and property, if any, have not yet been
released pursuant to Paragraph 4 hereof) to a substitute Escrow Agent which
(whether designated by written instructions from the Stockholders and the
Company jointly or in the absence thereof by instructions from a court of
competent jurisdiction to the Escrow Agent) shall be a bank or trust company
organized and doing business under the laws of the United States or any state
thereof. Such substitute Escrow Agent shall thereafter hold any Escrow Shares
and any related Escrow Property received by it pursuant to the terms of this
Agreement and otherwise act hereunder as if it were the Escrow Agent originally
named herein. The Escrow Agent's duties and responsibilities hereunder shall
terminate upon the release of all shares then held in escrow according to such
written instruction or upon such delivery as herein provided. This Agreement
shall not otherwise be assignable by the Escrow Agent without the prior written
consent of the Company.
7. The Stockholders shall have the sole power to vote the Escrow Shares
and any securities deposited in escrow under this Agreement while they are being
held pursuant to this Agreement.
8. (a) Each of the Stockholders agrees that during the term of this
Agreement he will not sell, transfer, hypothecate, negotiate, pledge, assign,
encumber or otherwise dispose of any or all of the Escrow Shares set forth
opposite his name on Exhibit A hereto, unless and until the Company shall have
given the notice as provided in Paragraph 5.
-9-
<PAGE> 10
This restriction shall not be applicable to transfers upon death, by operation
of law, to family members of the Stockholders or to any trust for the benefit of
the Stockholders, provided that such transferees agree to be bound by the
provisions of this Agreement.
(b) The Stockholders will take any action necessary or appropriate,
including the execution of any further documents or agreements, in order to
effectuate the transfer of the Escrow Shares to the Company if required pursuant
to the provisions of this Agreement.
9. Each of the certificates representing the Escrow Shares will bear
legends to the following effect, as well as any other legends required by
applicable law:
(a) "The sale, transfer, hypothecation, negotiation,
pledge, assignment, encumbrance or other disposition
of the shares evidenced by this certificate are
restricted by and are subject to all of the terms,
conditions and provisions of a certain Amended and
Restated Escrow Agreement entered into among D.H.
Blair Investment Banking Corp., On'Village
Communications, Inc. and its Stockholders, dated as
of August 19, 1997, a copy of which may be obtained
from On'Village Communications, Inc. No transfer,
sale or other disposition of these shares may be made
unless specific conditions of such agreement are
satisfied.
(b) "The shares evidenced by this certificate have not
been registered under the Securities Act of 1933, as
amended. No transfer, sale or other disposition of
these shares may be made unless a registration
statement with respect to these shares has become
effective under said act, or the Company is furnished
with an opinion of counsel satisfactory in form and
substance to it that such registration is not
required."
Upon execution of this Agreement, the Company shall direct the transfer
agent for the Company to place stop transfer orders with respect to the Escrow
Shares and to maintain such orders in effect until the transfer agent and the
Underwriter shall have received written notice from the Company as provided in
Paragraph 5.
-10-
<PAGE> 11
10. Each notice, instruction or other certificate required or permitted by
the terms hereof shall be in writing and shall be communicated by personal
delivery, fax or registered or certified mail, return receipt requested, to the
parties hereto at the addresses set forth below, or at such other address as any
of them may designate by notice to each of the others:
(i) If to the Company, to:
On'Village Communications, Inc.
26135 Mureau Road
Suite 100
Calabasas, California 91302
Attention: Chief Executive Officer
(ii) If to the Stockholders to their respective addresses as set
forth on Exhibit A hereto.
(iii) If to the Escrow Agent, to:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(iv) If to the Underwriter, to:
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
Att: Martin A. Bell, Esq.
Fax: 212-514-7837
All notices, instructions or certificates given hereunder to the Escrow Agent
shall be effective upon receipt by the Escrow Agent. All notices given hereunder
by the Escrow Agent shall be effective and deemed received upon personal
delivery or transmission by fax or, if mailed, five (5) calendar days after
mailing by the Escrow Agent.
A copy of all communications sent to the Company, the Stockholders or
the Escrow Agent shall be sent by ordinary mail to Troy & Gould, 1801 Century
Park East, Suite
-11-
<PAGE> 12
1600, Los Angeles, California 90067, Attention: Lawrence Schnapp, Esq. A copy of
all communications sent to the Underwriter shall be sent by ordinary mail to
Bachner, Tally, Polevoy & Misher LLP, 380 Madison Avenue, New York, NY 10017,
Attention: Alison S.
Newman, Esq.
11. Except as set forth in paragraph 12 hereof, this Agreement may not be
modified, altered or amended in any material respect or cancelled or terminated
except with the prior consent of the holders of all of the outstanding shares of
Common Stock of the Company.
12. In the event that (i) the Registration Statement is not declared
effective by the SEC within one year from the date of the filing of the
Registration Statement with the SEC or (ii) the Public Offering is not
consummated within twenty-five (25) days of the Effective Date of the
Registration Statement, this Agreement shall terminate and be of no further
force and effect and the Escrow Agent, upon written notice from both the Company
and the Underwriter in accordance with paragraph 10 hereof of such termination,
will return the Escrow Shares and any Escrow Property in respect thereof to the
Stockholders.
13. This Agreement shall be governed by and construed in accordance with
the laws of New York and shall be binding upon and inure to the benefit of all
parties hereto and their respective successors in interest and assigns.
14. This Agreement may be executed in several counterparts, which taken
together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers on the day and year first above
written.
-12-
<PAGE> 13
ON'VILLAGE COMMUNICATIONS, INC.
By: ______________________________
Jack Tracht, Chief Executive Officer
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: ______________________
STOCKHOLDERS:
- ---------------
Jack B. Tracht
- ---------------
Robert D. Tracht
- ---------------
Jeff W. Walden
- ---------------
James E. Austin
- ---------------
Howard Fites
-13-
<PAGE> 14
- ---------------
James C. Neil
- ---------------
Ki T. Lee
- ---------------
James Goldberg
-14-
<PAGE> 15
EXHIBIT A
STOCKHOLDERS' LIST
<TABLE>
<CAPTION>
Name and Address Stock
of Stockholder Certificate No. Number of Escrow Shares
- ---------------- --------------- -----------------------
<S> <C> <C>
Robert D. Tracht 10 176,061
16038 Valley Meadow Place
Encino, California 91436
Jeff W. Walden 12 176,061
60 W. Blue Ridge
P.O. Box 158
Tropic, Utah 84776
Jack B. Tracht 14 176,061
32370 Corte Santa Catalina
Temecula, California 92542
James E. Austin 16 176,061
5001 Canoga Avenue
Woodland Hills, California 91364
Howard Fites 18 37,066
44739 Forest Court
Mendocino, California 95460
James C. Neil 20 18,533
819 Harrington Road 22 9,267
Glendale, California 91207
Ki T. Lee 24 18,895
24246 Park Granada
Calabasas, California 91302
James Goldberg 26 11,995
Novato, California
</TABLE>
- --------------------
* All stock numbers reflect a 6.94975-for-1 stock split effected in
October 1996.
-15-
<PAGE> 1
EXHIBIT 10.16
LESSOR: RIVIERA FINANCE EAST BAY LESSEE: ON VILLAGE COMMUNICATIONS, INC.
A Washington Corporation A California Corporation
Address: 16400 Southcenter Pkwy., #305 Address: 848 N. La Cienega Blvd., # 206
Seattle, WA 98188 Los Angeles, CA 90069
(800) 448-6395 (310) 652-8850
1. LEASE OF EQUIPMENT
By this Master Equipment Lease which, together with all Lease
Schedules, Acceptance Certificates, riders, exhibits, amendments and other
documents now or hereafter attached hereto and made a part hereof, is
hereinafter referred to as the "Lease," Lessor leases to Lessee and Lessee
leases from Lessor, subject to terms and conditions contained in this Lease, the
personal property, together with all replacement parts, repairs, additions and
accessories (collectively, the "Equipment") described in any Lease Schedule
which shall become a part hereof. Notwithstanding anything to the contrary
expressed or implied in this Lease, the terms and conditions of this Lease shall
be construed and interpreted as to each Lease Schedule as if a separate but
identical lease shall have been executed between the parties with regard to the
equipment on such Lease Schedule. The Equipment is to be delivered and installed
at On Village Communications, Inc.
================================================================================
This Lease consists of nineteen sections, including the terms and provisions of
any Lease Schedule, Acceptance Certificate, rider, exhibit, amendment or other
document now or hereafter attached hereto and made a part hereof. THIS LEASE
REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE
PARTIES. LESSEE ACKNOWLEDGES AND CERTIFIES THAT NO SUCH ORAL AGREEMENTS EXIST.
This Lease may not be amended, nor may any rights hereunder be waived, except by
an instrument in writing signed by the party charged with such amendment or
waiver. The term "Lessee" as used herein shall mean and include any and all
Lessees who sign hereunder, each of whom shall be jointly and severally bound
hereby. This Lease will not be binding on Lessor until executed by Lessor.
By execution hereof, signer
certified that he or she has read,
accepted and duly executed this
Master Equipment Lease Agreement on
behalf of Lessee.
DATED AS OF: April 21, 1997
Lessor: RIVIERA FINANCE EAST BAY Lessee: ON VILLAGE COMMUNICATIONS, INC.
By: /s/ STEVE J. ALEXANDER By: /s/ ROBERT D. TRACHT
----------------------------- ------------------------------------
Name: Steve J. Alexander Name: Robert David Tracht
Title: Senior Vice President Title: President
Page 1 of 16
<PAGE> 2
Lessee's expense at the location specified on the applicable Lease Schedule. The
Equipment shall be deemed to have been accepted by Lessee for all purposes under
this Lease upon Lessor's receipt of an Acceptance Certificate with respect to
such Equipment, executed by Lessee after receipt of all other documentation
required by Lessor with respect to such Equipment. Lessor shall not be liable or
responsible for any failure or delay in the delivery of the Equipment to Lessee
for whatever reason.
2. TERM & RENT
The lease of each item of Equipment shall commence on the date of the
Acceptance Certificate with respect to such item and shall continue for the
number of months, and any proration thereof, specified in the applicable Lease
Schedule. Rental payments shall be in the amounts and shall be due and payable
as set forth in the applicable Lease Schedule. Lessee shall, in addition, pay
interim rent to Lessor on a pro-rata basis from the Acceptance Date to the Lease
Term Commencement Date set forth in the applicable Acceptance Certificate on
such Lease Term Commencement Date. If any rent or other amount payable hereunder
shall not be paid when due, Lessee shall pay as an administrative and late
charge an amount equal to 5% of the amount of any such overdue payment. In
addition, Lessee shall pay interest on such delinquent payment from 30 days
after the due date until paid at the rate of 1 1/2% per month or the maximum
amount permitted by law, whichever is lower. All payments to be made to Lessor
shall be made to Lessor at the address shown above, or at such other place as
Lessor shall specify in writing. THIS IS A NON-CANCELABLE, NON-TERMINABLE LEASE
FOR THE TERM SET FORTH IN EACH LEASE SCHEDULE HERETO.
3. POSSESSION; INSPECTION; PERSONAL PROPERTY
No right, title or interest in the Equipment shall pass to Lessee other
than the right to maintain possession and use of the Equipment for the full
lease term (provided no Event of Default has occurred) free from interference by
any person claiming by, through, or under Lessor. At its option, Lessor may
require Lessee, at Lessee's expense, to affix labels, plates or markings in a
prominent location on the Equipment indicating Lessor is the owner. Lessor may
enter the premises where the Equipment is located during business hours for the
purpose of inspecting the Equipment and, during the last six months of the term
of this Lease, for the purposes of showing the Equipment to prospective
purchasers or lessees of the Equipment. The Equipment shall always remain
personal property even though the Equipment may hereafter become attached or
affixed to real property. Lessee agrees to give and record such notices and to
take such other action at its own expense as may be necessary to prevent any
third party (other than an assignee of Lessor) from acquiring or having the
right under any circumstances to acquire any interest in the Equipment or this
Lease. In the event such third party does acquire or have the right any interest
in the Equipment or this Lease, Lessee shall remove such third party's interest
within 30 days of its being asserted.
4. DISCLAIMER OF WARRANTIES
LESSOR IS NOT THE MANUFACTURER OF SUPPLIER OF THE EQUIPMENT, NOR THE
AGENT THEREOF, AND MAKES NO EXPRESS OR IMPLIED WARRANTIES AS TO ANY MATER
WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT,
ITS FITNESS FOR A PARTICULAR PURPOSE, ITS DESIGN OR CONDITION, ITS CAPALOS
ANGELES, CA 90069 OR DURABILITY, THE QUALITY OF THE MATERIAL OR WORKMANSHIP OR
CONFORMITY OF THE EQUIPMENT TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE
ORDER RELATING THERETO, OR PATENT INFRINGEMENTS, AND HEREBY DISCLAIMS ANY SUCH
WARRANTY. LESSOR IS NOT RESPONSIBLE FOR ANY REPAIRS OR SERVICE TO THE EQUIPMENT,
DEFECTS THEREIN OR FAILURES IN THE OPERATION THEREOF. Lessee has made the
selection of each item of Equipment and the manufacturer and/or supplier thereof
based on its own judgment and expressly disclaims any reliance upon any
statement or representations made by Lessor. For so long as no Event of Default
has occurred and is continuing, Lessee shall be the beneficiary of, and shall be
entitled to, all rights under any applicable manufacturer's or vendor's
warranties with respect to the Equipment, to the extent permitted by law.
If the Equipment is not delivered, is not properly installed, does not
operate as warranted, becomes obsolete, or is unsatisfactory for any reason
whatsoever, Lessee shall make al claims on
Page 2 of 16
<PAGE> 3
account thereof solely against the manufacturer or supplier and not against
Lessor, and Lessee shall nevertheless pay all rentals and other sums payable
hereunder. Lessee acknowledges that neither the manufacturer of supplier of the
Equipment, nor any sales representative or agent thereof, is an agent of Lessor,
and no agreement or representation as to the Equipment or any other matter by
any such sales representative or agent of the manufacturer or supplier shall in
any way affect Lessee's obligations hereunder.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessee represents and warrants to and covenants with Lessor that:
(a) Lessee has the form of business organization indicated above and is
duly organized and existing in good standing under the laws of the state listed
in the caption of the Lease and is duly qualified to do business wherever
necessary to carry on its present business and operations and to own its
property; (b) this Lease has been duly authorized by all necessary action on the
part of Lessee consistent with its form of organization, does not require any
further shareholder or partner approval, does not require the approval of, or
the giving notice to, any federal, state, local or foreign governmental
authority and does not contravene any law binding on Lessee or contravene any
certificate or articles of incorporation or by-laws or partnership certificate
or agreement, or any agreement, indenture, or other instrument to which Lessee
is a party or by which it may be bound; (c) this Lease has been duly executed
and delivered by authorized officers or partners of Lessee and constitutes a
legal, valid and binding obligation of Lessee enforceable in accordance with its
terms; (d) Lessee has not and will not, directly or indirectly, create, incur or
permit to exist any lien, encumbrance, mortgage, pledge, attachment or security
interest on or with respect to the Equipment or this Lease (except those of
persons claiming by, through or under Lessor); (e) the Equipment will be used
solely in the conduct of Lessee's business and will remain in the location shown
on the applicable Lease Schedule unless Lessor and Lessee otherwise agree, in
writing and Lessee has completed all notifications, filings, recordings and
other actions in such new location as Lessor may reasonably request to protect
Lessor's interest in the Equipment; (f) there are no material adverse changes
in the financial condition or operation of Lessee since the date of its
financial statements provided to Lessor nor any pending or threatened actions or
proceedings before any court or administrative agency which materially adversely
affect Lessee's financial condition or operations and all information so
provided is, and all information hereafter furnished will be, true and correct
in all material respects; (g) Lessee has not and is not now engaged in, and
shall not, during any time that any of Lessee's obligations hereunder are
outstanding, engage in any conduct or activity, including, but not necessarily
limited to, a pattern of racketeering activity, that would subject any of
Lessee's assets to forfeiture; and (h) Lessor has not selected, manufactured or
supplied the Equipment to Lessee and has acquired any Equipment subject hereto
solely in connection with this Lease and Lessee has received and approved the
terms of any purchase order or agreement with respect to the Equipment.
6. INDEMNITY
Lessee assumes the risk of liability for, and hereby agrees to
indemnify and hold safe and harmless, and covenants to defend, Lessor, its
employees, servants and agents from and against: (a) any and all liabilities,
losses, damages, claims and expenses (including legal expenses of every kind and
nature) arising out of the manufacturing, purchase, shipment and delivery to
Lessee, acceptance or rejection, ownership, titling, registration, leasing,
possession, operations, use, return or other disposition of the Equipment,
including, without limitation, any of such as may arise from patent or latent
defects in the Equipment (whether or not discoverable by Lessee), any claims
based on absolute tort liability or warranty and any claims based on patent,
trademark or copyright infringement; (b) any and all loss or damage of or to the
Equipment, normal wear and tear excepted; and (c) any obligation or liability to
the manufacturer and any supplier of the Equipment arising under the purchase
orders issued or assigned to Lessor.
The covenants and indemnities contained in this Section and Section 7
shall survive the termination of this Lease.
7. TAXES AND OTHER CHARGES
Page 3 of 16
<PAGE> 4
Lessee agrees to comply with all laws, regulations and governmental
orders related to this lease and to the Equipment and its use or possession, and
to pay when due, and to defend and indemnify Lessor against liability for all
license fees, assessments, and sales, use, property, excise, privilege and other
taxes (including any related interest or penalties) or other charges or fees now
or hereafter imposed by any governmental body or agency upon any Equipment, or
with respect to the manufacturing, ordering, shipment, purchase, ownership,
delivery, installation, leasing, operations, possession, use, return, or other
disposition thereof or the rentals hereunder (other than taxes on or measured
solely by the net income of Lessor). Any fees, taxes or other lawful charges
paid by Lessor upon failure of Lessee to make such payments shall at Lessor's
option become immediately due from Lessee to Lessor.
If a True Lease Schedule shall be made a part of this Lease, then, with
respect to the Equipment set forth on such True Lease Schedule, Lessor has
assumed the following tax benefits (the "Tax Benefits"): (i) that it will be
entitled to cost recovery deductions under Section 1 68 of the Internal Revenue
Code of 1986, as amended (the "Code"), using a 200% declining balance method of
depreciation as set forth in Section 168(b) of the Code for the applicable
recovery period for such Equipment under Section 168(c) of the Code as set forth
in the True Lease Schedule with respect to the Equipment, and (ii) that Lessor
will be taxed throughout the term of the Lease Schedule at Lessor's federal
corporate income tax rate existing on the date of such Lease Schedule (the
"Assumed Tax Rate"). If, for any reason whatsoever, there shall be a loss,
disallowance, recapture or delay in claiming all or any portion of the Tax
Benefits with respect to modification or improvement to or in respect of any of
the Equipment made or paid for by Lessee, or if there shall be a change in the
Assumed Tax Rate (any loss, disallowance, recapture, delay, inclusion or change
being herein called a "Tax Loss"), then thirty (30) days after written notice to
Lessee by Lessor that a Tax Loss has occurred, Lessee shall pay Lessor a lump
sum amount which, after deduction of all taxes required to be paid by Lessor
with respect to the receipt of such amount, will provide Lessor with an amount
necessary to maintain Lessor's after-tax economic yield and overall net
after-tax cash flows at least the same level that would have been available if
such Tax loss has not occurred, plus any interest, penalties or additions to tax
which may be imposed in connection with such Tax Loss. A Tax Loss shall
conclusively be deemed to have occurred if either (a) a deficiency shall have
been proposed by the Internal Revenue Service or other taxing authority having
jurisdiction, or (b) tax counsel for Lessor has rendered an opinion to Lessor
that such Tax Loss has so occurred. The foregoing indemnity shall continue in
full force and effect notwithstanding the expiration or termination of the Lease
or the Lease Term of the Schedule Equipment and each item thereof.
8. DEFAULT
Lessee shall be in default of this Lease upon the occurrence of any one
of the following events (each an "Event of Default"):
(a) Lessee shall fail to make any payment, of rent or otherwise,
hereunder promptly when due; or (b) Lessee shall fail to perform or observe any
covenant, condition or agreement under this Lease, and such failure continues
for 10 days after notice thereof to Lessee, or shall default in the payment of
any indebtedness to Lessor or any parent, subsidiary or affiliated company of
Lessor under any note, security agreement, equipment lease, title retention or
conditional sales agreement or any instrument or agreement evidencing such
indebtedness with Lessor or any parent, subsidiary or affiliated company of
Lessor, or if Lessee shall default in the performance of or compliance with any
term contained in any agreement or instrument with respect to such indebtedness,
if the effect of such default is to cause or permit such indebtedness to become
due prior to its stated maturity, or if any such indebtedness is not paid by
maturity; or (c) any representation or warranty made by Lessee herein or in any
certificate, agreement, statement or document heretofore or hereafter furnished
Lessor in connection herewith including, without limitation, any financial
information disclosed to Lessor, shall prove to be false or incorrect in any
material respect; or (d) death or judicial declaration of incompetence of
Lessee, if an individual; the commencement of any bankruptcy, insolvency,
arrangement, reorganization, receivership, liquidation or other similar
proceeding by or against Lessee or any of its properties or business, or the
appointment of a trustee, receiver, liquidator or custodian for Lessee or any of
its properties of business, or if Lessee suffers the entry of an order for
relief under Title 11 of the United
Page 4 of 16
<PAGE> 5
States Code; or the making by Lessee of a general assignment or deed of trust
for the benefit of creditors; or (e) the Equipment shall be abused,
substantially damaged or destroyed or Lessor shall reasonably deem the Equipment
to be unsafe or at risk; or (f) Lessee shall default in meeting any of its
trade, tax, borrowing or other obligations as they mature, except to the extent
Lessee is contesting any such obligations is good faith and has established
adequate reserves therefor; or (g) Lessee shall terminate its existence by
merger, consolidation, sale of substantially all of its assets or otherwise; or
(h) Lessor shall determine, in its sole discretion and in good faith, that
Lessee's ability to may any payment hereunder promptly when due or otherwise
comply with the terms of this Lease or any other agreement between Lessor and
Lessee is impaired; or (i) any event or condition set forth in subsections (b),
(c), (d), (e), M, (g), or (h) of this Section 8 shall occur with respect to any
guarantor or other person responsible, in whole or in part, for payment or
performance of this Lease.
Lessee shall promptly notify Lessor of the occurrence of any Event of
Default or the occurrence or existence of any event or condition which, upon the
giving of notice or lapse of time, or both, may become an Event of Default.
9. REMEDIES
Upon the occurrence of any Event of Default, Lessor may, at its sole
option and discretion, to the extent permitted by applicable law, exercise one
or more of the following remedies with respect to any or all of the Equipment
(a) cause Lessee to, upon written demand of Lessor and at Lessee's expense,
promptly return any or all Equipment to such location as Lessor may designate in
accordance with the terms of Section 18, or Lessor, at its option, may enter
upon the premises where the Equipment is located and take immediate possession
of and remove the same by summary proceedings or otherwise, all without
liability to Lessor for or by reason of damage to property or such entry or
taking possession; (b) sell any or all the Equipment at public or private sale
or otherwise dispose of, hold, use, operate, lease to others or keep idle the
Equipment, all as Lessor in its sole discretion may determine and all free and
clear of any rights of Lessee; (c) remedy such default, including making repairs
or modifications to the Equipment, for the account of and the expense of Lessee
and Lessee agrees to reimburse Lessor for all of Lessor's costs and expenses;
(d) by written notice to Lessee, terminate this Lease with respect to any or all
Lease Schedules in default and the Equipment subject thereto, as such notice
shall specify, and, with respect to such terminated Lease Schedules and
Equipment, declare immediately due and payable and recover from Lessee, as
liquidated damages for loss of a bargain and not as a penalty, an amount equal
to the sum of (i) all rental payments accrued and unpaid, plus interest and late
charges thereon, calculated as of the date payment is actually made, plus (ii)
the net present value of all rental payments to become due during the remaining
term of each such Lease Schedule, plus the amount of any purchase or renewal
option or obligation with respect to such Equipment, or, if there is no such
option or obligation, then the fair market value of the Equipment at the end of
such term, as estimated by Lessor in its sole, reasonable discretion, discounted
at a rate of 6% per annum, calculated as of the date payment is actually made,
plus (iii) all other amounts then payable to Lessor hereunder; (e) apply any
deposit or other cash collateral or sale or remarketing proceeds of the
Equipment at any time as it sees fit to reduce any amounts due to Lessor, and
(f) exercise any other right or remedy which may be available to it under
applicable law, or proceed by appropriate court action to enforce the terms
hereof or to recover damages for the breach hereof, including reasonable
attorneys' fees and court costs.
No remedy referred to in this Section 9 is intended to be exclusive,
but each shall be cumulative and in addition to any other remedy referred to
above or otherwise available to Lessor at law or in equity. The exercise or
beginning of exercise by Lessor of any one or more of such remedies shall not
preclude the simultaneous or later exercise by Lessor of any or all such other
remedies and all remedies hereunder shall survive termination of this Lease.
At any sale of the Equipment pursuant to this Section 9, Lessor may bid
for and purchase the Equipment. Notice required, if any, of any sale or other
disposition hereunder by Lessor shall be satisfied by the mailing of such notice
to Lessee at lease seven (7) days prior to the sale or other disposition. In the
event Lessor takes possession and disposes of the Equipment, Lessor shall give
Lessee credit for any sums actually received by Lessor from the disposition of
the Equipment after deductions of expenses of disposition and the amounts due to
Lessor under Section 9(d) above. A
Page 5 of 16
<PAGE> 6
termination shall occur only upon written notice by Lessor and only with respect
to such Equipment as Lessor shall specify in such notice. Termination under this
Section 9 shall not affect Lessee's duty to perform Lessee's obligations
hereunder to Lessor in full. Lessee agrees to reimburse Lessor on demand for any
and all costs and expenses incurred by Lessor in enforcing its rights and
remedies hereunder following the occurrence of an Event of Default, including,
without limitation, reasonable attorneys' fees, and the costs of repossession,
storage, insuring, reletting, selling and disposing of any and all Equipment.
10. ADDITIONAL SECURITY
To the extent necessary to protect the Lessor's interest in any of the
Equipment leased hereunder, Lessee grants, to Lessor a security interest in all
such Equipment. In order more fully to secure its rental payments and all other
obligations to Lessor hereunder, Lessee hereby grants to Lessor a security
interest in any deposit of Lessee to Lessor under Section 3(d) of any Lease
Schedule hereto. Such security deposit shall not bear interest, may be
commingled with other funds of Lessor and shall be immediately restored by
Lessee if applied under Section 9(e). Upon expiration of the term of this Lease
and satisfaction of all of Lessee's obligations, the security deposit shall be
returned to Lessee. The term 'Lessor' as used in this Section 10 shall include
any subsidiary, parent or affiliate of Lessor.
11. NOTICES
Any notices and demands required or permitted to be given under this Lease shall
be given in writing and by regular mail and shall become effective when
deposited in the United States Mail with postage prepaid to Lessor to the
attention of Customer Accounts, and to Lessee at the addresses herein above set
forth, or to such other address as the party to receive notice hereafter
designates by such written notice.
12. USE; REPAIRS; LOSS AND DAMAGE
Lessee will cause the Equipment to be operated in accordance with any
applicable manufacturer's manuals, instructions or requirements by competent and
duly qualified personnel only, in accordance with applicable requirements of
law, if any, and for business purposes only. Lessee at its own cost and expense,
shall keep the Equipment in good repair, condition and working order, in
accordance with any applicable manufacturer's manuals, instructions or
requirements and shall furnish all parts, mechanisms, devices and servicing
required therefor. All such parts, mechanisms and devices shall immediately
become the property of Lessor and part of the Equipment for all purposes hereof.
Lessee hereby assumes all risk of loss, damage or destruction for whatever
reason to the Equipment from and after the earlier of the date (a) on which the
Equipment is ordered, or (b) Lessor pays the purchase price of the Equipment,
and continuing as set forth in Section 18 hereof. If any item of Equipment shall
become lost, stolen, destroyed, damaged beyond repair or rendered permanently
unfit for use for any reason, or in the event of any condemnation, confiscation,
theft or seizure or requisition of title to or use of such item, Lessee shall
promptly pay to lessor an amount equal to the greater of (i) the full
replacement value of such item or (ii) the net present value of all rental
payments then remaining unpaid for the term of the Lease plus the amount of any
purchase or renewal option or obligation with respect to such item or, if there
is no such option or obligation, then the fair market value of the Equipment at
the end of such term, as estimated by Lessor in its sole, reasonable discretion,
discounted at a rate of 6% per annum.
13. INSURANCE
Lessee shall procure and maintain, upon such terms and with such
companies as Lessor may approve, during the entire term of this Lease, at
Lessee's expense, (a) Worker's Compensation and Employer's Liability Insurance,
in the full statutory amounts provided by law; (b) Comprehensive General
Liability Insurance including product/completed operations and contractual
liability coverage, with minimum limits of $1,000,000 each occurrence, and
Combined Single Limit Body Injury and property Damage, $1,000,000 aggregate,
where applicable; and (c) All Risk Physical Damage Insurance, including
earthquake and flood, on each item of Equipment, in an amount not less then the
greater of (i) the full replacement value of such item of (ii) the net present
value of all rental payments then
Page 6 of 16
<PAGE> 7
remaining unpaid for the term of the lease plus the amount of any purchase or
renewal option or obligation with respect to such items or, if there is no such
option or obligation, then the fair market value of the Equipment at the 'end of
such term, as estimated by Lessor in its sole, reasonable discretion,
discounted at a rate of 6% per annum. Lessor will be included as an additional
insured and loss payee as its interest may appear. Such policies shall be
endorsed to provide that the coverage afforded to Lessor shall not be
rescinded, impaired or invalidated by any act or neglect of Lessee. Lessee
agrees to waive Lessee's right and its insurance carrier's right of subrogation
against Lessor for any and all loss or damage.
In addition to the foregoing minimum insurance coverage, Lessee shall
procure and maintain such other insurance coverage's as Lessor may require from
time to time during the term of this Lease. All policies shall contain a clause
requiring the insurer to furnish Lessor with at least 30 days' prior written
notice of any material change, cancellation or non-renewal of coverage. Upon
execution of this Lease, Lessee shall furnish Lessor with a certificate of
insurance of other evidence satisfactory to Lessor that such insurance
coverage's are in effect, provided, however, that Lessor shall be under no duty
either to ascertain the existence of or to examine such insurance coverage or to
advise Lessee in the event such insurance coverage should not comply with the
requirements hereof. In case of failure of Lessee to procure or maintain
insurance, Lessor may at its option obtain such insurance, the cost of which
will be paid by the Lessee of additional rentals. Lessee hereby irrevocably
appoints Lessor as Lessee's attorney-in-fact to file, settle or adjust, and
receive payment of claims under any such insurance policy and to endorse
Lessee's name on any checks, drafts or other instruments of payment of such
claims. Lessee further agrees to give Lessor prompt notice of any damage to, or
loss of, the Equipment, or any part thereof.
14. LIMITATION Of LIABILITY
Lessor shall have no liability in connection with or arising out of the
ownership, leasing, furnishing, performance or use of the Equipment or any
special, indirect, incidental or consequential damages of. any character,
including, without limitation, loss of use of production facilitates or
equipment, loss of profits, property damage or lost production, whether suffered
by Lessee or any third party.
15. FURTHER ASSURANCES
Lessee shall promptly execute and deliver to Lessor such further
documents and take such further action as Lessor may require in order to more
effectively carry out the intent and purpose of this Lease. Lessee shall provide
to Lessor within 120 days after the close of each of Lessee's fiscal years, and
upon Lessor's request, within 45 days of the end of each quarter of Lessee's
fiscal year, a copy of its financial statements prepared in accordance with
generally accepted accounting principles. Lessee shall execute and deliver to
Lessor upon Lessor's request such instruments and assurances as Lessor deems
necessary for the confirmation, preservation or perfection of this Lease and
Lessor's rights hereunder, including, without limitation, such corporate.
resolutions and opinions of counsel as Lessor may request from time to time, and
all schedules, forms, and other reports as may be required to satisfy
obligations imposed by taking authorities. In furtherance thereof, Lessor may
file or record this Lease or a memorandum or a photocopy hereof (which for the
purposes hereof shall be effective as a financing statement) so as to give
notice to third parties, and Lessee hereby appoints Lessor as its
attorney-in-fact to execute, sign, file and record UCC financing statements and
other lien recordation documents with respect to the Equipment where Lessee
fails or refuses to do so after Lessor's written request, and Lessee agrees to
pay or reimburse Lessor for any filing, recording or stamp fees or taxes arising
from any such filings.
16. ASSIGNMENT
This Lease and all rights of Lessor hereunder shall be assignable by
Lessor absolutely or as security, without written notice to Lessee, subject to
the rights of Lessee hereunder. Any such assignment shall not relieve Lessor of
its obligations hereunder unless specifically assumed by the assignee, and
Lessee agrees it shall not assert any defense, rights of set-off or counterclaim
against
Page 7 of 16
<PAGE> 8
any assignee to which Lessor shall have assigned its rights and interests
hereunder, nor hold or attempt to hold such assignee liable for any of Lessor's
obligations hereunder.
LESSEE SHALL NOT ASSIGN OR DISPOSE OF ANY OF ITS RIGHTS OR OBLIGATIONS
UNDER THIS LEASE OR ENTER INTO ANY SUBLEASE WITH RESPECT TO ANY OF THE EQUIPMENT
WITHOUT THE EXPRESS WRITTEN CONSENT OF LESSOR.
17. LESSEE'S OBLIGATIONS UNCONDITIONAL
This Lease is a net lease and Lessee hereby agrees that it shall not be
entitled to any abatement of rents or of any other amounts payable hereunder by
Lessee and that its obligation to pay all rent and any other amounts owing
hereunder shall be absolute and unconditional under all circumstances,
including, without limitation, the following circumstances: (i) set-off,
counterclaim, recoupment, defense or other right which Lessee may have against
Lessor, any seller or manufacturer of any Equipment or anyone else for any
reason whatsoever; (ii) the existence of any liens, encumbrances or rights of
others whatsoever with respect to any Equipment, whether or not resulting from
claims against Lessor not related to the ownership of such Equipment; or (iii)
any other event or circumstances whatsoever. Each rent or other payment made by
Lessee hereunder shall be final and Lessee will not seek to recover all or any
part of such payment from Lessor for any reason whatsoever.
18. RETURN OF EQUIPMENT
Upon expiration of the term of the Lease for each item of Equipment, as
specified in the applicable Lease Schedule, or upon demand of Lessor as provided
in Section 9, Lessee, at its own expense, shall immediately return the Equipment
described in such Lease Schedule in the same condition as when delivered to
Lessee, ordinary wear and tear excepted, to such location as Lessor shall
designate. The Equipment shall be returned free and clear of all liens,
encumbrances and rights of others. The risk of loss of the Equipment shall
remain with Lessee until the returned Equipment is accepted by Lessor or such
other entity to whom the Equipment is returned, and Lessee shall maintain
insurance on the Equipment in accordance with Section 13 until such acceptance
occurs. Unless and until the Equipment is returned and accepted as herein
provided, or otherwise disposed of by written agreement of Lessor and Lessee,
the term of this Lease with respect to such Equipment shall continue on a
month-to-month basis terminable by Lessor upon 30 days advance written notice at
a rent per month equal to the highest monthly rent for the Equipment payable
during the Lease term.
19. ENFORCEABILITY AND GOVERNING LAW
Any provision of this Lease which is unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
unenforceability without invalidating the remaining provisions hereof, and any
such unenforceability in any jurisdiction shall not render unenforceable such
provisions in any other jurisdiction. To the extent permitted by applicable law,
Lessee hereby waives any provisions of law which render any provision hereof
unenforceable in any respect. Any waiver of the terms hereof shall be effective
only in the specific instance and for the specific purpose given. Time is of the
essence in this Lease. The captions in this Lease are for the convenience only
and shall not define or limit any of the terms hereof.
THIS LEASE SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA LESSEE HEREBY CONSENTS AND
SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA FOR THE
PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF ITS OBLIGATIONS
HEREUNDER, AND EXPRESSLY WAIVES ANY OBJECTIONS THAT IT MAY HAVE TO THE VENUE OF
SUCH COURTS. LESSEE HEREBY EXPRESSLY WAIVES TRIAL BY JURY IN ANY ACTION BROUGHT
ON OR WITH RESPECT TO THIS LEASE. Any action by Lessee against Lessor for any
cause of action under this Lease shall be brought within one year after any such
cause of action first occurs.
Page 8 of 16
<PAGE> 9
SCHEDULE A - EQUIPMENT
Attached to and made part of the following documents:
Master Equipment Lease Agreement, #97-020 dated April 21, 1997, between Riviera
Finance East Bay ("Lessor") and On Village Communications, Inc. ("Lessee").
<TABLE>
<CAPTION>
QUANTITY DESCRIPTION SERIAL # AMOUNT
<S> <C> <C> <C>
1 Sony Pentium 20 - 200mhz 2103378 $ 1,799.00
1 Hitachi El33TC EJ025880859 $ 1,999.00
2 Cardinal Modems N/A $ 399.98
1 HP Laserjet 6MP USBB051303 $ 869.00
1 Mustek Color Scanner HWF94FSA2 $ 369.00
1 Hitachi El33TC EJ025880140 $ 1,924.00
1 Hitachi El33TC EJ025880162 $ 1,924.00
1 Hitachi El33TC EB035880020 $ 1,924.00
3 Cardinal Modems N/A $ 599.97
1 Alp Glidepoint Keypad 00A4004995G $ 119.00
1 Tech Media - 200mhz TCP0002174 $ 1,499.00
1 Tech Media - 14" monitor DJ60703668 $ 179.00
1 Cardinal Modem N/A $ 184.99
1 Hitachi El33TC EJ025880173 $ 1,964.00
1 NPR 601 ARE6A96450016 $ 3,054.95
1 Compaq Notebook 268150005 $ 3,059.98
1 Epson Printer and zip drive 1F8E623688 $ 686.93
1 Nextstep workstation CUSTOM $ 7,933.00
1 *Voyager storage array 970430137/00 $67,357.30
1 G5-133 Pro Pentium PC 7007261 $ 1,678.00
1 G5-133 Pro Pentium PC 7007262 $ 1,678.00
1 G5-133 Pro Pentium PC 7007263 $ 1,678.00
1 M55-166 Mini Tower 848106-0004 $ 1,549.00
1 M55-166 Mini Tower 848106-007 $ 1,549.00
1 M55-166 Mini Tower 848106-0030 $ 1,549.00
1 M55-166 Mini Tower 848106-0026 $ 1,549.00
1 Hitachi El33TC EB035880009 $ 1,999.00
TOTAL $111,075.10
</TABLE>
ALL EQUIPMENT WILL BE LOCATED AT THE FOLLOWING ADDRESS:
On Village Communications, Inc. *STORAGE ARRAY IS AT:
848 N. La Cienega Blvd., Suite 206 NETWORK PUBLISHING
Los Angeles, CA 90069 ONE EAST CENTER ST., SUITE 300
PROVO, UT 84601
RIVIERA FINANCE EAST BAY ON VILLAGE COMMUNICATIONS, INC.
By: /s/ STEVE J. ALEXANDER By: /s/ ROBERT D. TRACHT
----------------------------- ------------------------------------
Name: Steve J. Alexander Name: Robert D. Tracht
Title: Senior Vice President Title: President
Page 9 of 16
<PAGE> 10
LEASE SCHEDULE NO. 97-020
Lessee: On Village Communications, Inc.
Address: 848 N. La Cienega Blvd., Suite 206
Los Angeles, CA 90069
Telephone: (310) 652-8850
1. Lessor and Lessee have entered into a Master Equipment Lease
Agreement dated as of April 21, 1997, including this Lease Schedule
(collectively, the "Lease"), pursuant to which Lessor and Lessee have agreed to
lease the equipment described in Schedule A hereto (the "Equipment"). Lessee
reaffirms all of its representations, warranties and covenants set forth in the
Lease, all of the terms and provisions of which are incorporated herein by
reference, as of the date hereof and further certifies to Lessor that Lessee has
selected the Equipment and has received and approved the purchase order,
purchase agreement or supply contract under which the Equipment will be acquired
for purposes of this Lease. To the extent necessary to protect Lessor's interest
in the Equipment, Lessee grants to Lessor a first priority security interest in
the Equipment.
2. The assumed Acquisition Cost of the Equipment is: $500,000.
3. a. Term. The Lease Term is thirty-six (36) months commencing on the
Lease Term Commencement Date as set forth in the Acceptance Certificate to this
Lease Schedule plus any partial period between the Acceptance Date of the
Equipment as set forth in the Acceptance Certificate and the Lease Term
Commencement Date.
b. Rental Payments. Lessee shall pay Lessor thirty-six (36) rental
payments in the following amounts plus any applicable sales/use taxes,
commencing on the Rental Payment Commencement Date set forth in the Acceptance
Certificate and on the 1st day of each month thereafter for the entire Lease
Term:
Amount of Each
Rental Payment Nos. Rental Payment
1-36 3.3558% of Equipment Cost
In the event that the Rental Payments set forth in any Acceptance Certificate
hereto differ from those set forth in this Section 3(b), the Rental Payments
shall be as set forth in the Acceptance Certificate.
c. Lessee agrees to pay Lessor, in advance, the first
(1) rental payment prorata Funding Date.
d. Lessor agrees to pay Lessor a payment in the amount
of 15% of equipment cost to be held by Lessor as a
deposit to secure Lessee's performance under the
Lease.
4. The Equipment will be located at the locations specified in Schedule
A hereto.
5. Lessor will invoice Lessee for all sales, use and/or personal
property taxes as and when due and payable in accordance with applicable law,
unless Lessee delivers to Lessor a valid exemption certificate with respect to
such taxes. Delivery of such certificate shall constitute Lessee's
Page 10 of 16
<PAGE> 11
representation and warranty that no such tax shall become due and payable with
respect to the Equipment and Lessee shall indemnify and hold harmless Lessor
from and against any and all liability or damages, including late charges and
interest which Lessor may incur by reason of the assessment of such tax.
6. The Rental Payments may change for Equipment accepted after June 1,
1997.
Dated as of April 21, 1997. By execution hereof, the signer
certifies that he has read, accepted
and duly executed this Lease Schedule
to the Master Equipment Lease Agreement
on behalf of Lessee.
RIVIERA FINANCE EAST BAY ON VILLAGE COMMUNICATIONS, INC.
By: /s/ STEVE J. ALEXANDER By: /s/ ROBERT D. TRACHT
----------------------------- ------------------------------------
Name: Steve J. Alexander Name: Robert D. Tracht
Title: Senior Vice President Title: President
Page 11 of 16
<PAGE> 12
PURCHASE OPTION RIDER
Purchase Option Rider to Lease Schedule No. 97-020 (the "Schedule") to Master
Equipment Lease Agreement dated as of April 21, 1997, (the "Lease") between the
undersigned parties.
If the Lease Term of the Equipment described in the Schedule has not been
terminated and no Event of Default under the Lease has occurred and is
continuing, Lessee shall have the option to purchase all, but not less than all
of such Equipment at the end of its Lease Term. Lessee shall notify Lessor in
writing of Lessee's intention to exercise such option at least sixty (60) days
prior to the expiration of such Lease Term. The Purchase Option Price of such
Equipment shall be due and payable, in immediately available funds, on the last
day of such Lease Term and shall be an amount equal to $1.00.
The sale of the Equipment by Lessor to Lessee shall be on an AS-IS,
WHERE-IS basis, without recourse to, or warranty by, Lessor.
All capitalized or other terms used herein which are not defined herein
shall have the meaning given to such terms in the Lease.
DATED AS OF: April 21, 1997
RIVIERA FINANCE EAST BAY ON VILLAGE COMMUNICATIONS, INC.
By: /s/ STEVE J. ALEXANDER By: /s/ ROBERT D. TRACHT
----------------------------- ------------------------------------
Name: Steve J. Alexander Name: Robert David Tracht
Title: Senior Vice President Title: President
Page 12 of 16
<PAGE> 13
CORPORATE RESOLUTION
STATE OF CALIFORNIA
COUNTY OF
I, Robert Tracht, President, being duly sworn, do state that I am the duly
elected, qualified and acting President of On Village Communications, Inc., a
California Corporation and that the following resolution was approved by the
Board of Directors of said Corporation on _____________, 1997, at a duly
convened meeting of said Board, at which time a quorum was present and that the
said resolution has not been amended nor repeated:
WHEREAS, Robert Tracht, President, and Bill Rossi, Chief Financial Officer, have
negotiated with Riviera Finance East Bay for a non-cancelable lease of certain
property to wit:
<TABLE>
<CAPTION>
QUANTITY DESCRIPTION SERIAL # AMOUNT
<S> <C> <C> <C>
1 Sony Pentium 20 - 200mhz 2103378 $ 1,799.00
1 Hitachi El33TC EJ025880859 $ 1,999.00
2 Cardinal Modems N/A $ 399.98
1 HP Laserjet 6MP USBB051303 $ 869.00
1 Mustek Color Scanner HWF94FSA2 $ 369.00
1 Hitachi E133TC EJ025880140 $ 1,924.00
1 Hitachi E133TC EJ025880162 $ 1,924.00
1 Hitachi E133TC EB035880020 $ 1,924.00
3 Cardinal Modems N/A $ 599.97
1 Alp Glidepoint Keypad 00A4004995G $ 119.00
1 Tech Media - 200mhz TCP0002174 $ 1,499.00
1 Tech Media - 14" monitor DJ60703668 $ 179.00
1 Cardinal Modem N/A $ 184.99
1 Hitachi E133TC EJ025880173 $ 1,964.00
1 NPR 601 ARE6A96450016 $ 3,054.95
1 Compaq Notebook 268150005 $ 3,059.98
1 Epson Printer and zip drive lF8E623688 $ 686.93
1 Nextstep workstation CUSTOM $ 7,933.00
1 Voyager storage array 970430137/00 $ 67,357.30
1 G5-133 Pro Pentium PC 7007261 $ 1,678.00
1 G5-133 Pro Pentium PC 7007262 $ 1,678.00
1 G5-133 Pro Pentium PC 7007263 $ 1,678.00
1 M55-166 Mini Tower 848106-0004 $ 1,549.00
1 M55-166 Mini Tower 848106-007 $ 1,549.00
1 M55-166 Mini Tower 848106-0030 $ 1,549.00
1 M55-166 Mini Tower 848106-0026 $ 1,549.00
1 Hitachi E133TC EB035880009 $ 1,999.00
TOTAL $111,075.10
</TABLE>
for 36 monthly payments as follows:
Months 1-36 3.3558% of Equipment Cost
The Board of Directors have examined all the terms of said lease.
NOW THEREFORE BE IT RESOLVED, that Robert Tracht, President, and Bill Rossi,
Chief Financial Officer, are directed, empowered and authorized to sign on
behalf of this Corporation the above-referenced non-cancelable lease, (Copy of
which is attached to this resolution and by this reference incorporated herein),
said lease obligating the corporation to pay, among other obligations, lease
payments as outlined above.
/s/ ROBERT D. TRACHT, Pres.
--------------------------------
Robert Tracht, President
Page 13 of 16
<PAGE> 14
THIS SPACE FOR USE OF FILING OFFICER
FINANCING STATEMENT - FOLLOW INSTRUCTIONS CAREFULLY
This Financing Statement is presented for filing pursuant to the Uniform
Commercial Code and will remain effective, with certain exceptions, for 5 years
from date of filing.
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<S> <C>
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A. NAME & TEL. # OF CONTACT AT FILER (optional) B. FILING OFFICE ACCT. # (optional)
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C. RETURN COPY TO: (Name and Mailing Address)
Riviera Finance East Bay
225 Avenue I, Suite 201
Redondo Beach, CA 90277
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D. OPTIONAL DESIGNATION [if applicable]: [ ] LESSOR/LESSEE [ ] CONSIGNOR/CONSIGNEE [ ] NON-UCC FILING
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1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b)
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1a. ENTITY'S NAME
On Village Communications, Inc.
OR --------------------------------------------------------------------------------------------------------------
1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
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1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
848 N. La Cienega Blvd. #206 Los Angeles CA 90069
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1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL
ADD'NL INFO RE OR COUNTRY OF I.D.#, if any
ENTITY DEBTOR ORGANIZATION [ ] NONE
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2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (2a or 2b)
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2a. ENTITY'S NAME
OR --------------------------------------------------------------------------------------------------------------
2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
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2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
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2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL
ADD'NL INFO RE OR COUNTRY OF I.D.#, if any
ENTITY DEBTOR ORGANIZATION [ ] NONE
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3. SECURED PARTY'S (ORIGINAL S/P OR ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME -
insert only one secured party name (3a or 3b)
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3a. ENTITY'S NAME
Riviera Finance East Bay
OR --------------------------------------------------------------------------------------------------------------
3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
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3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
16400 Southcenter Pkwy., #305 Seattle WA 98188
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4. This FINANCING STATEMENT covers the following types or items of property:
Attached Schedule A - List of Equipment, leased by Lessor to Lessee under
Master Lease #97-020 dated as of April 21, 1997, insurance, covering same,
and proceeds of all the foregoing.
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5. CHECK [ ] This FINANCING STATEMENT is signed by the 7. If filed in Florida (check one)
BOX Secured Party instead of the Debtor to perfect [ ] Documentary [ ] Documentary stamp
(if a security interest (a) in collateral already stamp tax paid tax not applicable
applicable) subject to a security interest in another
jurisdiction when it was brought to this state,
or when the debtor's location was changed to this
state, or (b) in accordance with other statutory
provisions (additional data may be required)
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6. REQUIRED SIGNATURE(S) 8. [ ] This FINANCING STATEMENT is to be filed (for record)
(or recorded) in the REAL ESTATE RECORDS
[SIG] On Village Communications, Inc. Attach Addendum (if applicable)
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9. [ ] Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s)
[ADDITIONAL FEE]
[SIG] Riviera Finance East Bay (optional) [ ] All Debtors [ ] Debtor 1 [ ] Debtor 2
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(1) FILING OFFICER COPY - NATIONAL FINANCING STATEMENT (FORM UCC1)(TRANS)(REV. 12/18/95) WOLCOTTS FORM
UCCNAT01
(price class 13C)
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EXHIBIT 10.17
[ON'VILLAGE COMMUNICATIONS LOGO]
January 16, 1997
Mr. Bill Rossi
4546 Rayburn St.
Westlake Village, CA 91362
Dear Bill,
We are quite happy that you are considering the V.P., CFO position at
ON'VILLAGE Communications. We felt very comfortable with you, and believe we
have the potential for a great long term relationship. Below, is a summary of
the compensation package that we would be able to make available should you
decide to join us.
Base Compensation - $78,000 per annun
Stock Option Grants - Options Vested and Exercisable
6 Months from Commencement Date- 7,000
First Anniversary Commencement Date- 7,000
Second Anniversary Commencement Date- 6,000
Above grants are "Incentive Stock Option Grants" available upon joining firm.
Insurance-Group Health Insurance policy paid by Company.
Vacation Days- 3 weeks per Calendar Year to be scheduled with Management
approval. Must be taken in current year, not cumulative.
We look forward to your response, and to a bright future together.
Best Regards, Accepted-Start Date 2/10/97
/s/ Jack Tracht Bill Rossi
Jack Tracht 1/23/97
[ON'VILLAGE COMMUNICATIONS LOGO]
<PAGE> 1
EXHIBIT 10.18
Amendment to Employment Agreement
This Amendment ("Amendment") to Employment Agreement (the "Original
Employment Agreement") dated January 24, 1997, is entered into as of September
22, 1997 between On'Village Communications, Inc., a California corporation (the
"Company") and Jack Tracht ("Employee").
The Original Employment Agreement is hereby amended as follows:
1. Section 12.2 is hereby amended to provide that notices to the
Company shall be sent to the Company at 26135 Mureau Road, Suite 100,
Calabasas, California 91302, Attention: Chief Executive Officer.
2. Section 12.8 is hereby amended to read in its entirety as follows:
"This Agreement shall not be binding upon the parties and shall be
void and of no effect in the event the closing of the Company's IPO has not
occurred on or before December 31, 1997."
3. Except as set forth above, the Original Employment Agreement shall
remain in full force and effect.
4. This Amendment shall be construed in accordance with, and governed
by, the internal laws of the State of California.
5. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment on the
day and year first above written.
EMPLOYEE: THE COMPANY:
ON'VILLAGE COMMUNICATIONS, INC.
By:
- -------------------------------- ------------------------------------
Jack Tracht Robert Tracht
Chief Operating Officer
<PAGE> 1
EXHIBIT 10.19
Amendment to Employment Agreement
This Amendment ("Amendment") to Employment Agreement (the "Original
Employment Agreement") dated January 24, 1997, is entered into as of September
22, 1997 between On'Village Communications, Inc., a California corporation (the
"Company") and Robert Tracht ("Employee").
The Original Employment Agreement is hereby amended as follows:
1. The first sentence of Section 2 is hereby amended to read as
follows:
"Employee agrees to serve the Company as its President and
Chief Operating Officer."
2. Section 12.2 is hereby amended to provide that notices to the
Company shall be sent to the Company at 26135 Mureau Road, Suite 100,
Calabasas, California 91302, Attention: Chief Executive Officer.
3. Section 12.8 is hereby amended to read in its entirety as
follows:
"This Agreement shall not be binding upon the parties
and shall be void and of no effect in the event the closing of the Company's
IPO has not occurred on or before December 31, 1997."
4. Except as set forth above, the Original Employment Agreement
shall remain in full force and effect.
5. This Amendment shall be construed in accordance with, and
governed by, the internal laws of the State of California.
6. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment on the
day and year first above written.
EMPLOYEE: THE COMPANY:
ON'VILLAGE COMMUNICATIONS, INC.
By:
- ------------------------- -------------------------
Robert Tracht Jack Tracht
Chief Executive Officer
<PAGE> 1
EXHIBIT 10.20
Amendment to Employment Agreement
This Amendment ("Amendment") to Employment Agreement (the "Original
Employment Agreement") dated January 24, 1997, is entered into as of September
22, 1997 between On'Village Communications, Inc., a California corporation (the
"Company") and James Austin ("Employee").
The Original Employment Agreement is hereby amended as follows:
1. Section 12.2 is hereby amended to provide that notices to the
Company shall be sent to the Company at 26135 Mureau Road, Suite 100,
Calabasas, California 91302, Attention: Chief Executive Officer.
2. Section 12.8 is hereby amended to read in its entirety as
follows:
"This Agreement shall not be binding upon the parties
and shall be void and of no effect in the event the closing of the Company's
IPO has not occurred on or before December 31, 1997."
3. Except as set forth above, the Original Employment Agreement
shall remain in full force and effect.
4. This Amendment shall be construed in accordance with, and
governed by, the internal laws of the State of California.
5. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment on the
day and year first above written.
EMPLOYEE: THE COMPANY:
ON'VILLAGE COMMUNICATIONS, INC.
By:
- ------------------------- -------------------------
James Austin Jack Tracht
Chief Executive Officer
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EXHIBIT 10.21
Amendment to Employment Agreement
This Amendment ("Amendment") to Employment Agreement (the "Original
Employment Agreement") dated January 24, 1997, is entered into as of September
22, 1997 between On'Village Communications, Inc., a California corporation (the
"Company") and Jeff Walden ("Employee").
The Original Employment Agreement is hereby amended as follows:
1. Section 12.2 is hereby amended to provide that notices to the
Company shall be sent to the Company at 26135 Mureau Road, Suite 100,
Calabasas, California 91302, Attention: Chief Executive Officer.
2. Section 12.8 is hereby amended to read in its entirety as
follows:
"This Agreement shall not be binding upon the parties
and shall be void and of no effect in the event the closing of the Company's
IPO has not occurred on or before December 31, 1997."
3. Except as set forth above, the Original Employment Agreement
shall remain in full force and effect.
4. This Amendment shall be construed in accordance with, and
governed by, the internal laws of the State of California.
5. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment on the
day and year first above written.
EMPLOYEE: THE COMPANY:
ON'VILLAGE COMMUNICATIONS, INC.
By:
- ------------------------- -------------------------
Jeff Walden Jack Tracht
Chief Executive Officer
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Shareholders of
On'Village Communications, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated February 26, 1997,
relating to the financial statements of On'Village Communications, Inc., which
are contained in that Prospectus.
We also consent to the reference to us under the captions "Selected
Financial Data" and "Experts" in the Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
September 30, 1997
