<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-11217
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
JAVELIN SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3571 52-1945748
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2882C WALNUT AVENUE, TUSTIN, CALIFORNIA 92780; (714) 734-1390
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
RICHARD P. STACK, PRESIDENT AND CHIEF EXECUTIVE OFFICER
2882C WALNUT AVENUE, TUSTIN, CALIFORNIA 92780; (714) 734-1390
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------
Copies to:
<TABLE>
<S> <C>
JEREMY D. GLASER, ESQ. RUSSELL M. FRANDSEN, ESQ.
ALLEN, MATKINS, LECK, GAMBLE & MALLORY LLP RADCLIFF, FRANDSEN, TRICKER & DONGELL
18400 VON KARMAN AVENUE, 4TH FLOOR 777 SOUTH FIGUEROA, 40TH FLOOR
IRVINE, CALIFORNIA 92612 LOS ANGELES, CALIFORNIA 90017
(714) 553-1313 (213) 614-1990
</TABLE>
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<PAGE>
JAVELIN SYSTEMS, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM
SB-2 REGISTRATION STATEMENT.
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEMS
AND HEADINGS LOCATION IN PROSPECTUS
------------------------------ -------------------------------------------
<C> <S> <C>
1. Front of Registration
Statement and Outside Front
Cover of Prospectus.......... Facing Page; Cover Page of Prospectus.
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front and Outside Back Cover Pages
of Prospectus; Additional Information.
3. Summary Information and Risk
Factors...................... Prospectus Summary; Risk Factors.
4. Use of Proceeds............... Use of Proceeds.
5. Determination of Offering
Price........................ Cover Page of Prospectus; Underwriting.
6. Dilution...................... Dilution.
7. Selling Security Holders...... Security Ownership of Certain Beneficial
Owners and Management; Selling
Stockholders.
8. Plan of Distribution.......... Cover Page of Prospectus; Underwriting.
9. Legal Proceedings............. Business--Legal Proceedings.
10. Directors, Executive Officers,
Promoters and Control
Persons...................... Management.
11. Security Ownership of Certain
Beneficial Owners and
Management................... Security Ownership of Certain Beneficial
Owners and Management.
12. Description of Securities..... Description of Capital Stock.
13. Interest of Named Experts and
Counsel...................... Not Applicable.
14. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Description of Capital Stock--Certain
Provisions of Delaware Law and Charter
Documents; Underwriting.
15. Organization Within Last Five
Years........................ Management--Certain Transactions.
16. Description of Business....... Prospectus Summary; Business.
17. Management's Discussion and
Analysis or Plan of
Operation.................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations.
18. Description of Property....... Business--Properties.
19. Certain Relationships and
Related Transactions......... Management--Certain Transactions.
20. Market for Common Equity and
Related Stockholder Matters.. Cover Page of Prospectus; Description of
Capital Stock; Shares Eligible For Future
Sale; Dividend Policy.
21. Executive Compensation........ Management--Executive Compensation.
22. Financial Statements.......... Selected Financial Data; Index to Financial
Statements.
23. Changes in and Disagreements
with Accountants on
Accounting and Financial
Disclosure................... Not Applicable.
</TABLE>
<PAGE>
PROSPECTUS
850,000 SHARES
[LOGO]
COMMON STOCK
All of the 850,000 shares of common stock, $.01 par value (the "Common
Stock"), offered hereby are being sold by Javelin Systems, Inc. (the
"Company"). Prior to this offering there has been no public market for the
Company's Common Stock. The initial public offering price was determined by
negotiations between the Company and Meridian Capital Group, Inc. (the
"Representative"). See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq SmallCap Market under the symbol
"JVLN," subject to the official notice of issuance.
----------------
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING AT PAGE 6 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
----------------
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>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $5.00 $0.50 $4.50
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Total(3)................................. $4,250,000 $425,000 $3,825,000
</TABLE>
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(1) Excludes a non-accountable expense allowance payable to Meridian Capital
Group, Inc., the representative (the "Representative") of the several
Underwriters (the "Underwriters"), and the value of warrants to be issued
to the Representative or its designees to purchase up to 85,000 shares of
Common Stock (the "Representative's Warrants"). The Company (and the
Selling Stockholders (as defined below) with respect to the over-allotment
option) has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses, other than underwriting discounts and
commissions, payable by the Company, estimated to be approximately
$497,000, including the Representative's non-accountable expense
allowance.
(3) The Company and certain stockholders of the Company (the "Selling
Stockholders") have granted the Underwriters a 45-day option to purchase
up to 111,250 and 16,250 additional shares of Common Stock, respectively,
on the same terms and conditions as set forth above solely to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to the Company
will be $4,887,500, $488,750 and $4,398,750, respectively, and the Selling
Stockholders will receive proceeds of $73,125. See "Selling Stockholders"
and "Underwriting."
----------------
The shares of Common Stock are being offered severally by the Underwriters
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. The Underwriters reserve
the right to reject any order in whole or in part and to withdraw, cancel or
modify the offer without notice. It is expected that delivery of the shares
will be made at the offices of Meridian Capital Group, Inc., Newport Beach,
California, on or about October 31, 1996.
----------------
MERIDIAN CAPITAL GROUP, INC.
SHARPE CAPITAL, INC.
The date of this Prospectus is October 25, 1996.
<PAGE>
[COLOR PHOTOGRAPHS]
Established in 1995, Javelin Systems provides quick service restaurants, full
service restaurants, hospitality and retail establishments with a hardware
solution for transaction processing, in-store controls, and management
information.
Javelin Systems Inc.'s customer-base includes companies such as, Hospitality
Systems, Inc., Positran Inc., Custom Business Solutions, Inc., POSNET Computer
Inc. and Touch Menus, whose customers include:
[LOGO BURGER KING]
[LOGO CHART HOUSE]
[LOGO KOO-KOO-ROO]
[LOGO MIMIS CAFE]
[LOGO TACO BELL]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING AUDITED FINANCIAL STATEMENTS CERTIFIED BY ITS INDEPENDENT AUDITORS
AND QUARTERLY REPORTS FOR EACH OF THE FIRST THREE QUARTERS OF EACH FISCAL YEAR
CONTAINING UNAUDITED FINANCIAL INFORMATION.
This Prospectus refers to certain trademarks of the Company and certain
companies other than the Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information contained in this Prospectus (i) assumes that there
has been no exercise of (a) the Underwriters' over-allotment option, (b)
outstanding options to purchase shares of Common Stock granted or to be granted
under the Company's 1996 Stock Incentive Award Plan and (c) outstanding
warrants to purchase shares of Common Stock issued in connection with the
Company's calendar year 1996 private placement and (ii) reflects a 4,300 for 1
stock split of the Common Stock effected in August 1996.
THE COMPANY
Javelin Systems, Inc. (the "Company") designs, develops, markets and sells
open system touch screen point-of-sale ("POS") computers primarily for the
foodservice industry. The Company's POS systems integrate substantially all of
the functionality of a standard desktop PC into a small footprint, network
ready package and run on industry standard operating systems, such as
Microsoft's DOS, Windows, Windows 95 and Windows NT. The Company's POS systems
provide quick service restaurants ("QSR"), full service restaurants and
hospitality and retail establishments with a hardware solution for transaction
processing, in-store controls and management information. The Company's systems
are sealed to protect against spillage and other foreign matter entering the
interior electronic chamber. The Company's systems are currently being marketed
by a number of original equipment manufacturers ("OEMs") and value added
resellers ("VARs"). The Company believes it has achieved a strategic advantage
by introducing higher performance POS systems that integrate many of the most
recent technological innovations.
While PC-based systems have become the standard platform in most industries,
the foodservice POS industry is a unique vertical market that has not kept pace
with the technological developments and productivity gains associated with most
other industries. Traditional POS systems have typically been proprietary and
inflexible and could not be easily integrated into the organization's
management information system. In response to these industry conditions, the
Company has elected to focus its efforts on the development and sale of open
system PC-based hardware that addresses the increasing industry demand for open
system restaurant management software written around Microsoft operating
systems and hardware that uses Intel or similar microprocessors.
The Company believes that it has established a competitive advantage because
of its engineering, product management and marketing experience refined in the
PC industry. The Company's growth strategies include enhancing its emerging
position as a leading OEM supplier by: incorporating the latest PC technology
in its POS systems in order to achieve a technological advantage; focusing on
rapidly launching new products in order to achieve product-to-market time
advantage; outsourcing manufacturing and maximizing in-house design expertise
in order to reduce production and overhead costs; using OEMs and VARs to
provide more comprehensive and accelerated market penetration; and expanding
the sale of its products into additional industries. These strategies have
resulted in the rapid deployment of the Company's products in numerous
establishments, such as some Taco Bell, Kenny Rogers Roasters and Blimpies
locations.
The Company's products are primarily distributed through strategic
relationships with OEMs and VARs, which allows the Company to take advantage of
the existing name recognition and market position of its strategic partners and
reach a broader market for its products while avoiding incurring significant
expenditures for sales, marketing, technical support and service. In addition,
the Company works closely with POS software providers in order to market the
Company's products to the software providers' VARs, thereby enabling the VARs
to offer a complete POS solution.
The Company's products are manufactured by third party contract manufacturers
located in Hong Kong and California.
The Company was incorporated in Delaware on September 19, 1995, and its
principal office is located at 2882C Walnut Avenue, Tustin, California 92780.
Its telephone number is (714) 734-1390.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............... 850,000 shares
Common Stock to be outstanding after the offering. 2,954,250 shares(1)
Risk factors...................................... This offering involves a
high degree of risk. See
"Risk Factors."
Use of proceeds by the Company.................... To fund increased inventory
and accounts receivable,
repay approximately
$725,000 of indebtedness,
increase marketing
expenditures, add marketing
and sales personnel,
increase capital
expenditures, including
purchasing test equipment
and tooling, increase
engineering and operations
personnel and for working
capital and other general
corporate purposes. See
"Use of Proceeds."
Nasdaq SmallCap Market symbol..................... JVLN
</TABLE>
- --------
(1) Excludes (i) 111,250 shares which may be purchased from the Company by the
Underwriters to cover over-allotments, if any, (ii) 85,000 shares of Common
Stock issuable upon exercise of the Representative's Warrants, (iii)
300,000 shares of Common Stock issuable in the future upon exercise of
options granted or to be granted under the Company's 1996 Stock Incentive
Award Plan (the "Incentive Plan") and (iv) 165,000 shares of Common Stock
issuable upon exercise of warrants (the "Private Placement Warrants")
issued to certain investors in connection with the Company's calendar year
1996 private placement (the "1996 Private Placement"). See "Underwriting;"
"Management--Stock Incentive Award Plan" and "Description of Capital
Stock."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
INCEPTION TO
JUNE 30, 1996(1)
----------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................................... $1,463,627
Cost of sales................................................ 1,104,171
----------
Gross profit................................................. 359,456
Operating expenses........................................... 375,002
----------
Operating loss............................................... (15,546)
Interest expense............................................. 38,796
----------
Net loss..................................................... $ (54,342)
==========
Net loss per share(2)........................................ $ (0.03)
==========
Shares used in computing net loss per share(2)............... 2,086,260
==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA(3):
Cash................................................. $ 6,404 $3,209,626
Working capital...................................... 232,246 3,485,468
Total assets......................................... 951,313 4,154,535
Long-term debt and notes payable to stockholders, net
of current portion.................................. 75,000 --
Total stockholders' equity........................... 195,019 3,523,241
</TABLE>
- --------
(1) The Company commenced business on September 19, 1995, accordingly, the
fiscal year ended June 30, 1996 contains less than twelve months.
(2) See Note 1 of Notes to Financial Statements for a description of the
calculation of net loss per share.
(3) The Balance Sheet Data does not include approximately $600,000 of
indebtedness incurred after June 30, 1996 that will also be repaid out of
the proceeds of this offering. See "Use of Proceeds."
(4) Adjusted to give effect to the sale by the Company of the 850,000 shares of
Common Stock offered hereby at the initial public offering price and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing any shares of Common Stock offered hereby. An
investment in the Common Stock offered hereby is speculative in nature and
involves a high degree of risk.
START-UP COMPANY; LACK OF OPERATING HISTORY
The Company was incorporated in September 1995 and commenced shipment of its
initial products in December 1995. Consequently, the Company has an unproven
track record and extremely limited operating history upon which an evaluation
of the Company and its prospects can be based. Because of the Company's
extremely limited operating history, the Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. To address these
risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified personnel,
continue to develop and improve its technologies and products and continue to
expand its customer base and distribution network. There can be no assurance
that the Company will be successful in addressing such risks. Moreover,
because of the relatively short period of time during which the Company has
been in operation, there can be no assurance that the Company will be able to
successfully market its products over an extended period of time. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HISTORY OF OPERATING LOSSES; CONTINUED PROFITABILITY UNCERTAIN; EXPECTED NON-
RECURRING INTEREST EXPENSE
From September 1995 through the present, the Company has expended
significant resources in developing its technologies and products and
establishing distribution channels for its products, which has resulted in the
Company incurring net losses of approximately $54,300 from inception through
June 30, 1996. During the quarter ended June 30, 1996, however, the Company
was profitable with net income of approximately $86,000. There can be no
assurance that the Company will be able to realize sufficient revenues in the
future to sustain profitable operations.
In connection with the Company's 1996 Private Placement, the Company issued
promissory notes and the Private Placement Warrants. The Private Placement
Warrants, in general, provide that the holders thereof are entitled to
purchase the number of shares of Common Stock that results from dividing the
principal amount of the promissory notes issued to the investors by the actual
per share initial public offering price of the Company's Common Stock (or, in
some instances, 50% of the per share initial public offering price). Based on
the foregoing formula, an aggregate of 165,000 shares of Common Stock will be
issuable upon exercise of the Private Placement Warrants. The aggregate
exercise price for the issuance of the Common Stock upon exercise of all of
the Private Placement Warrants is $23.00. Consequently, upon consummation of
the offering contemplated hereby, the Company will incur a non-recurring, non-
cash interest charge in the amount of approximately $635,000 in connection
with the issuance of the Private Placement Warrants, most of which will be
expensed in the quarter in which the offering contemplated hereby is
consummated. This interest expense is attributable to the imputation of
interest based upon the fair market value of the Private Placement Warrants
and does not represent a cash expense of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EVOLVING TECHNOLOGY AND MARKET; DEPENDENCE UPON SINGLE PRODUCT
The point-of-sale ("POS") system industry is characterized by evolving
technology and industry standards. The Company's POS systems presently consist
of the NexDisplay-4 POS computer, which is sold in various configurations to
meet the needs of the Company's customers. The Company is in the process of
developing additional POS systems and intends to introduce several new POS
products during the current fiscal year,
6
<PAGE>
although no assurance can be given that the Company will be successful in
developing any new products. The Company's success will depend, in part, on
its ability to maintain and enhance its existing products and broaden its
product offerings by developing and introducing new products that keep pace
with technological developments in a cost effective manner, respond to
evolving customer preferences and requirements and achieve market acceptance.
Lack of market acceptance for the Company's existing or new products, the
Company's failure to introduce new products in a timely or cost-effective
manner, or the Company's failure to achieve a technological advantage over its
competition while also remaining price competitive, would materially adversely
affect the Company's results of operations and financial condition. There can
be no assurance that the Company will be successful in its product development
efforts. In addition, there can be no assurance that the Company's products,
even if successfully developed, will achieve timely market acceptance.
Moreover, the introduction of products embodying new technology and the
emergence of new industry standards could render the Company's existing
products obsolete and unmarketable. The Company's future success will depend
on its ability to continue to develop and manufacture new competitive products
and to enhance its existing products, both of which will require continued
investment in engineering and product development. The success of product
enhancements and new products depends on a variety of factors, including
product selection and specification, timely and efficient completion of
product design, cost effective implementation of manufacturing and assembly
processes and effective sales and marketing efforts. There can be no assurance
that the Company will be able to successfully manage all of the diverse
aspects of successful new product development in order to develop and maintain
competitive products.
COMPETITION
The market for POS products is highly competitive, and the Company expects
this competition to increase as open systems architecture in POS products
becomes more common. The principal elements of the competition in the
Company's markets include product features and performance, price, quality and
reliability, brand awareness, compatibility with open systems, accuracy of
touch-screen input, quality of display, and level of customer service. The
Company's products compete with a number of products designed to provide user
friendly touch screen workstations. Most of the Company's competitors, as well
as certain potential competitors, are more established, benefit from greater
name recognition, have significantly greater financial, technological,
production and marketing resources, and have more extensive distribution
networks than the Company.
The Company believes its use of open systems architecture in POS systems is
an important competitive element. Several of the Company's competitors
currently also offer open system POS systems and the Company believes that the
number of competitors offering open systems solutions will grow over the next
several years. The Company anticipates that a significant source of such
future competition may be from existing competitors in the POS market that the
Company believes are currently attempting to develop POS systems utilizing
open systems architecture. Due to the greater sales, marketing, product
development and financial resources of the Company's competitors, the Company
anticipates that competition from these competitors will intensify in the
future. In order to effectively compete against these competitors, the Company
will need to grow and attain sufficient size to have the resources to timely
develop new products in response to evolving technology and customer demands
and to sell products through a broad distribution channel in competition with
these other existing and potential competitors. No assurance can be given that
the Company will be able to grow sufficiently to enable it to compete
effectively in this marketplace.
The Company's competitors include a substantial number of large well-
established companies including International Business Machines (IBM), Micros
Systems, Inc., PAR Technology Corporation, ATT/GIS, Panasonic and Olivetti,
each of which also offers open systems architecture POS systems. Although the
Company believes that it currently has a competitive advantage with respect to
these competitors from a technological and cost standpoint, including
compatibility with open systems, there can be no assurance that the Company
will be able to maintain its competitive advantage or that these existing
substantial competitors, or new competitors, will not develop competitive
products utilizing open systems architecture and with favorable pricing.
Moreover, the Company has little or no proprietary barriers to entry that
could keep its competitors from developing similar
7
<PAGE>
products and technology or selling competing products in the Company's
markets. The Company anticipates that as the existing and potential
competitors increasingly perceive the market opportunity for open systems
architecture POS systems, these competitors will try to "clone" market leading
products and sell such cloned products at significantly reduced prices. There
can be no assurance that such competitors will not develop products that are
competitive with or superior to the Company's products or achieve greater
market acceptance.
Increased competition from manufacturers or distributors of products similar
to or competitive with the Company's products could result in price
reductions, reduced margins and loss of market share or could render the
Company's technology obsolete, all of which could have a material adverse
effect on the Company's results of operations and financial condition. There
can be no assurance that the Company will be able to successfully compete in
this marketplace or develop sufficient new products to remain competitive, and
any failure to do so could have a material adverse effect on its results of
operations and financial condition. See "Business--Competition."
MANAGEMENT OF COMPANY GROWTH
The rapid execution necessary for the Company to fully exploit the market
for its products requires an effective planning and management process. The
Company's future operating results will depend on its ability to expand its
sales and marketing organization, successfully develop and market enhanced and
new products and implement and manage new and evolving distribution channels.
The Company is a relatively new company and has been experiencing significant
revenue and personnel growth. This growth will continue to make significant
demands on the Company's management, resources and operations. To manage its
growth effectively, the Company intends to continue to improve its
operational, financial, sales and marketing systems and to hire and train new
employees and better manage its current employees. The Company does not
currently have a full-time Chief Financial Officer, but intends to commence a
search for a Chief Financial Officer following consummation of this offering.
See "Management." There can be no assurance that the Company will be able to
identify, hire, train and retain qualified individuals or otherwise manage its
growth effectively, and such failure could have a material adverse effect on
the Company's results of operations and financial condition. Although the
Company believes that it has made adequate allowances for the costs and risks
associated with its planned expansion, there can be no assurance that the
Company's operations and financial systems, procedures or controls will be
adequate to support the Company's operations or that Company management will
be able to achieve the rapid execution necessary to fully exploit the market
for the Company's products. See "Risk Factors--Dependence on Key Personnel;
Limited Experience."
In addition, the Company plans to increase its operating expenses following
consummation of the offering contemplated hereby in order to expand its
product line, increase its sales and marketing operations, develop new
distribution channels and broaden its customer support capabilities. See "Use
of Proceeds." There can be no assurance that such internal expansion will be
successfully implemented, that the cost of such expansion will not exceed the
revenues generated, or that the Company's sales and marketing organization
will be able to successfully compete against the significantly more extensive
and well-funded sales and marketing operations of many of the Company's
current or potential competitors. If the Company is unable to effectively
manage its internal expansion, the Company's results of operations and
financial condition could be materially adversely affected. Moreover, the
foregoing expenses will, by necessity, be incurred prior to any potential
positive impact on revenues. If such expenses are not subsequently followed by
sufficient increased revenues, the Company's operating results and financial
condition would be materially adversely affected.
EVOLVING DISTRIBUTION CHANNELS
The Company's distribution strategy is to develop multiple distribution
channels. The Company has historically sold its products through original
equipment manufacturers ("OEMs") and value added resellers ("VARs" and
collectively with OEMs, "Resellers") and intends to continue to utilize these
distribution channels in the future. The Company's net sales have been
significantly dependent on sales by Resellers, with such sales representing
approximately 99% of the Company's net sales since inception. Any factors,
such as
8
<PAGE>
general adverse economic conditions, high inventory levels, intellectual
property issues, financial condition, marketing considerations or government
regulations and restrictions, that affect the ability of the Company's
Resellers to sell the Company's products will adversely affect the Company's
sales and could have a material adverse impact on the Company's results of
operations and financial condition. The use by the Company of these secondary
distribution channels to sell its products may limit the Company's knowledge
of the requirements and concerns of the end users of the Company's products
and thereby reduce the ability of the Company to anticipate or react quickly
to changes in the market for POS products. There is no assurance that
circumstances affecting the Company's Resellers will not have an adverse
effect on the Company.
Moreover, there can be no assurance that the Company will be able to attract
Resellers that will be able to market the Company's products effectively and
will be qualified to provide timely and cost-effective customer support and
service or that the Company will be able to manage conflicts among its
Resellers. In addition, the Company's agreements with Resellers typically do
not restrict Resellers from distributing competing products, and in most cases
may be terminated by either party without cause. The inability to recruit,
manage or retain important Resellers, or their inability to penetrate their
respective market segments, could materially adversely affect the Company's
results of operations and financial condition. See "Business--Product
Distribution."
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
During its fiscal year ended June 30, 1996, the Company derived
approximately 30% and 24%, respectively, of its total net sales from Touch
Menus and Positran, Inc., respectively. No other customers accounted for more
than 10% of the Company's net sales during the fiscal year ended June 30,
1996. Any significant decrease in sales to the Company's principal customers,
including Touch Menus or Positran, Inc., or any termination of existing
relationships with any of the Company's principal Resellers which are not
offset by increases in sales to other existing or new Resellers, could have a
material adverse effect upon the Company's results of operations and financial
condition. See "Business--Product Distribution."
DEPENDENCE UPON INDEPENDENT SOFTWARE PROVIDERS
The Company's business strategy is to produce PC-based open system hardware
for the POS industry. The Company does not develop or sell software.
Consequently, the Company is dependent upon third party software providers to
develop new and improved software that runs on the Company's hardware
platform. As in other sectors of the computer industry, hardware sales are
often driven by advances in software technology. Accordingly, if software
providers do not continue to provide state-of-the art software that runs on
the Company's hardware, the Company's results of operations and financial
condition could be materially adversely affected. See "Business--Products."
VARIABILITY IN OPERATING RESULTS
As a result of the Company's extremely limited operating history, the
Company does not have historical financial data on which to base planned
operating expenses. Accordingly, the Company's expense levels are based in
part on its expectations as to future revenues and to a large extent are
fixed. Moreover, the Company typically operates with no backlog. As a result,
quarterly sales and operating results generally depend on the volume and
timing of and ability to fulfill orders received within the quarter, which are
difficult to forecast. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected changes in revenues.
Accordingly, any significant shortfall of demand for the Company's products in
relation to the Company's expectations would have an immediate adverse impact
on the Company's results of operations and financial condition.
The Company may experience significant fluctuations in future operating
results due to a number of factors including, among other things, demand for
the Company's products, the size and timing of customer orders, new or
increased competition, delays in product enhancements and new product
introductions, quality control difficulties, changes in market demand, market
acceptance of new products, product returns, seasonality in product purchases
by Resellers and end users, the mix of domestic and international revenues,
fluctuations in
9
<PAGE>
costs of components, pricing trends in the POS systems industry in general and
in the specific markets in which the Company is active and general economic
conditions. Any of these factors could cause operating results to vary
significantly from prior periods. Significant variability in orders during any
period may have a material adverse impact on the Company's cash flow, and any
significant decrease in orders could have a material adverse impact on the
Company's results of operations and financial condition. As a result, the
Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as any
indication of future performance and that one or more periods of favorable
results should not be relied upon as an indication of future favorable
results. Fluctuations in the Company's operating results could cause the price
of the Company's Common Stock to fluctuate substantially. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
FUTURE CAPITAL REQUIREMENTS
The Company expects that the estimated net proceeds from the offering
contemplated hereby, together with other available funds, will enable the
Company to maintain its current and planned operations for the next 18 to 24
months. There can be no assurance that the net proceeds from this offering
will be sufficient to enable the Company to increase its revenues in an amount
sufficient to sustain profitable operations. To the extent that the proceeds
from this offering and cash flow from operations, if any, are insufficient to
fund the Company's activities, the Company will be required to raise
additional funds through equity or debt financings. No assurance can be given
that such financings will be available on terms acceptable to the Company, if
at all, and, if available, such financings may result in further dilution to
the Company's stockholders and/or in additional interest expense. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LACK OF PATENTS
The Company holds no patents and believes that its competitive position is
not materially dependent upon patent protection. The Company believes that
most of the technology used in the design and manufacture of most of the
Company's products is generally known and available to others. Consequently,
there can be no assurances that others will not develop, market and sell
products substantially equivalent to the Company's products or utilizing
technologies similar to those used by the Company. Although the Company
believes that its products do not infringe on any third party's patents, there
can be no assurance that the Company will not become involved in litigation
involving patents or proprietary rights. Patent and proprietary rights
litigation entails substantial legal and other costs, and there can be no
assurance that the Company will have the necessary financial resources to
defend or prosecute its rights in connection with any such litigation.
Responding to, defending or bringing claims related to the Company's rights to
its intellectual property may require the Company's management to redirect its
resources to address such claims, which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Intellectual Property."
CONTROL BY EXISTING STOCKHOLDERS
Upon consummation of this offering, the Company's directors and officers
will collectively beneficially own approximately 62.5% of the Company's Common
Stock (or approximately 60.2% if the Underwriters' over-allotment option is
exercised in full). Consequently, these persons will have the ability to
control the election of all the Company's directors, to determine the outcome
of most corporate actions submitted to the vote of the Company's stockholders
and to generally control the affairs and management of the Company. See
"Security Ownership of Certain Beneficial Owners and Management." In addition,
such concentration of ownership and control may have the effect of delaying,
deferring or preventing a change of control in the Company. See "Description
of Capital Stock."
DEPENDENCE ON KEY PERSONNEL; LIMITED EXPERIENCE
The Company's success is dependent, in part, upon the continued services of
certain key executive officers, including Richard P. Stack, the Company's
President and Chief Executive Officer, C. Norman Campbell, the
10
<PAGE>
Company's Vice President Engineering, and Alexander J. Nelson, the Company's
Vice President, Sales and Marketing. Mr. Stack is 31 years old and he has had
approximately four years of experience as chief executive officer of a
privately held company engaged in the business of manufacturing and
distributing personal computers and components in South Africa which he
founded and grew to approximately $6 million in annual revenues prior to its
sale. None of the Company's executive officers has previously been involved in
the manufacturing or sale of POS systems nor have had previous executive
experience with a publicly-traded company. Consequently, it is possible that
the Company's future business or results of operation may be negatively
impacted by the limited experience of the Company's executive officers.
Moreover, the loss of any one of the Company's key executive officers could
have a material adverse effect on the Company's results of operations. The
Company intends to purchase key man life insurance on Mr. Campbell in the
amount of $2 million. The continued success of the Company will also be
dependent upon its ability to attract and retain highly qualified technical,
marketing, sales and other personnel necessary in order to manage the
Company's anticipated growth. There can be no assurance that the Company will
be able to recruit and retain such personnel. See "Management."
DILUTION
Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution of $3.81 per share in net tangible book value of the
Common Stock from the initial public offering price of $5.00 per share. The
exercise of existing and/or future warrants and options may also have an
additional dilutive effect on the interests of the investors in this offering.
See "Dilution."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
A substantial portion of the net proceeds of this offering has been
allocated for working capital and will be used for such specific purposes as
management may determine. Accordingly, management will have broad discretion
with respect to the expenditure of substantial portions of the net proceeds of
this offering. See "Use of Proceeds."
POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND
CERTAIN CHARTER PROVISIONS
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). The Preferred Stock
may be issued in one or more series, the terms of which may be determined at
the time of issuance by the Board of Directors, without further action by the
Company's stockholders, and may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions as determined by the Board of Directors. Although the Company has
no present plans to issue any shares of Preferred Stock following consummation
of this offering, the issuance of any additional shares of Preferred Stock in
the future could affect the rights of the holders of Common Stock and thereby
reduce the value of the Common Stock. In particular, specific rights granted
to future holders of Preferred Stock could be used to restrict the Company's
ability to merge with or sell its assets to a third party, thereby preserving
control of the Company by its present owners. In addition, the Company's
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws contain provisions creating a classified board. These provisions,
together with certain provisions of Delaware law, may also have the effect of
delaying or preventing changes in control or management of the Company which
could adversely affect the market price of the Company's Common Stock. See
"Description of Capital Stock."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop
after completion of this offering or, if developed, that it will be sustained.
There can be no assurance that the market price of the Common Stock will not
decline below the initial offering price. The market for securities of early
stage companies has been highly volatile, often as a result
11
<PAGE>
of factors unrelated or disproportionate to the operating performance of such
companies. The Common Stock will be traded on the Nasdaq SmallCap Market,
which market has experienced and is likely to experience in the future
significant price and volume fluctuations, which could adversely affect the
price of the Common Stock without regard to the operating performance of the
Company. The Company believes factors such as quarterly fluctuations in
financial results, increased competition from existing and new competitors and
developments in the POS industry could contribute to the volatility of the
price of its Common Stock, causing it to fluctuate significantly. These
factors as well as general economic conditions such as recessions or high
interest rates, may adversely affect the market price of the Common Stock.
NO DIVIDENDS
The Company has never paid any cash dividends on shares of its Common Stock
and does not anticipate that it will pay dividends in the foreseeable future.
The Company intends to apply any earnings to fund the development of its
business. See "Dividend Policy."
LIMITED EXPERIENCE OF THE REPRESENTATIVE
The Representative does not have substantial experience in acting as lead
underwriter in public offerings. The Representative has previously
participated in two public offerings as lead underwriter. There can be no
assurance that the Representative's lack of experience will not adversely
affect the offering contemplated hereby or the ability to maintain a market
for the Company's Common Stock following the completion of the offering. The
Representative does not currently act as a market maker. Accordingly, the
market for the Company's Common Stock could be adversely affected if other
firms are unwilling to make a market in the Company's Common Stock. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares by existing stockholders could lead to a decline in
the market price of the Company's Common Stock. Because all of the Company's
Common Stock sold prior to this offering was sold pursuant to Rule 504 of
Regulation D, none of such shares of Common Stock are "restricted securities"
as defined in Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"). Consequently, in the absence of agreements
with the Representative, all of the 2,104,250 shares of outstanding Common
Stock could be sold immediately following the effective date of this offering.
However, 1,840,400 shares owned by officers and directors of the Company and
247,600 shares owned by Selling Stockholders and other existing stockholders
of the Company which would otherwise be available for sale in the public
market, may not be sold, with certain exceptions, until the expiration of the
lock-up agreements with the Representative. See "Shares Eligible for Future
Sale" and "Underwriting."
POSSIBLE EFFECT OF OUTSTANDING OPTIONS AND WARRANTS
As of September 30, 1996, there were 300,000 shares of Common Stock reserved
for issuance as restricted stock or upon exercise of outstanding stock options
granted and available for grant under the Company's Incentive Plan. Of such
reserved shares, there were 191,000 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options and 109,000 shares
were available for future grant. None of the outstanding options are currently
exercisable. In addition, 165,000 shares of Common Stock are reserved for
issuance upon the exercise of the Private Placement Warrants, and 85,000
shares of Common Stock are reserved for issuance upon the exercise of the
Representative's Warrants. In the event a significant number of outstanding
options and/or warrants were to be exercised in any period, the trading price
of the Common Stock may be adversely impacted. See "Shares Eligible for Future
Sale" and "Description of Capital Stock."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by it hereby, at the initial public offering price of $5.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses, are estimated to be approximately $3,328,000 ($3,812,000 if
the Underwriters' over-allotment option is exercised in full). The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders.
The Company anticipates that it will use approximately $1,750,000 of the net
proceeds of this offering to finance increases in inventory and accounts
receivable. The cash demands of the Company's anticipated revenue growth will
depend upon the rate of sales growth, the timeliness of customer payments for
purchases, and the availability of receivables and inventory financing from
third parties. There can be no assurances, however, that the Company will
continue to realize growth in its revenues or that the Company will be able to
obtain financing from third parties. See "Risk Factors."
The Company anticipates that it will use approximately $725,000 of the net
proceeds of this offering to repay principal plus interest of indebtedness
held by certain investors (the "Investors") including approximately $50,000 of
which will be paid to The Steven J. Goodman Charitable Remainder Trust of
which Steven J. Goodman, a director of the Company, is the trustee and an
income beneficiary and approximately $25,000 to the Jay Louis Kear Family
Trust of which Jay L. Kear, a director of the Company, is the trustee.
$600,000 of the indebtedness to the Investors was incurred after June 30,
1996. All of the indebtedness held by the Investors bears interest at 10%.
Pursuant to the terms of the promissory notes related to the indebtedness held
by the Investors, approximately $100,000 of such indebtedness becomes due and
payable two years from the date of issuance of the notes related thereto,
approximately $625,000 of such indebtedness becomes due and payable one year
from the date of issuance of the notes related thereto and the repayment of
all of such indebtedness accelerates and becomes due and payable on the
effective date of an initial public offering of the Company. All of this
indebtedness was incurred primarily to fund the Company's operations and for
working capital.
The Company anticipates that it will use approximately $300,000 of the net
proceeds of this offering for the expansion of its marketing and sales
activities, including hiring additional marketing and sales personnel.
The Company anticipates that it will use approximately $275,000 of such net
proceeds for the development of enhanced versions of its existing products and
new products. See "Business-Products." It is anticipated that development of
these products will include the construction of additional beta units, field
testing, and the initiation of manufacturing of production units, as well as
expenditures for engineering design services and purchases of tooling and test
equipment.
The Company anticipates that it will use approximately $250,000 of the net
proceeds of this offering for salaries and other costs associated with the
hiring of additional engineering and operations personnel.
The balance of the net proceeds are expected to be used for working capital
and general corporate purposes.
The Company has not determined the exact amounts it plans to expend on each
of such uses or the timing of such expenditures. The amounts actually expended
for each such use, if any, are at the discretion of the Company and may vary
significantly depending upon a number of factors, including expenses, delays
and complications frequently encountered by companies in the early stage of
development and experiencing significant growth, changes in the Company's
future revenue growth, changes in the Company's product development plans or
activities, the amount of cash generated by the Company's operations, and
changing competitive or economic conditions. See "Risk Factors--Broad
Discretion in Application of Proceeds." There can be no assurance that the
Company's estimates will prove accurate, that product introduction efforts
will not require considerable additional expenditures, or that unforeseen
expenses will not occur. Pending their use as set forth above, the net
proceeds of this offering will be invested in United States government or
governmental agency securities, short-term insured certificates of deposit,
short term bankers' acceptances or money market funds invested primarily in
United States government or governmental agency securities.
13
<PAGE>
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and does
not anticipate that it will pay dividends in the foreseeable future. The
Company intends to apply any earnings to the development and expansion of its
business.
14
<PAGE>
DILUTION
As of June 30, 1996, the Company had a net tangible book value of
approximately $193,503 or $0.09 per share. "Net tangible book value" per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of common stock issued and outstanding. After giving
effect to the sale of the Common Stock offered by the Company hereby at the
initial public offering price of $5.00 per share, and assuming no other
changes in the net tangible book value after June 30, 1996, the Company's net
tangible book value (after deduction of underwriting discounts and commissions
and estimated offering expenses) at June 30, 1996 would have been
approximately $3,523,241 or $1.19 per share. This represents an immediate
increase in net tangible book value of $1.10 per share to existing
stockholders and an immediate dilution to new investors of $3.81 per share.
Dilution is determined by subtracting net tangible book value per share after
the offering from the amount of cash paid by a new investor for a share of
Common Stock. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $5.00
Net tangible book value per share as of June 30, 1996........ $0.09
Increase per share attributable to new investors............. 1.10
-----
Net tangible book value per share after the offering......... 1.19
-----
Dilution per share to new investors.......................... $3.81
=====
</TABLE>
The following table summarizes the differences in the total consideration
and the average price per share of Common Stock paid or contributed by
existing stockholders and to be paid by the purchasers of Common Stock in this
offering at the initial public offering price of $5.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
---------------------- ----------------------AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ---------- ----------- -----------------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(2)........ 2,104,250 71.23% $ 239,206 5.33% $0.11
New investors........... 850,000 28.77 4,250,000 94.67 5.00
----------- -------- ----------- -------
Total................. 2,954,250 100.00% $ 4,489,206 100.00%
=========== ======== =========== =======
</TABLE>
- --------
(1) As of June 30, 1996, assumes no issuance of 40,000 shares of Common Stock
issuable upon exercise of the Private Placement Warrants at an aggregate
exercise price for all such shares of $4.00. Also assumes no issuance of
the following shares of Common Stock upon exercise of options and warrants
granted and/or issued subsequent to June 30, 1996: (i) 300,000 shares of
Common Stock reserved for issuance under the Company's Incentive Plan, of
which 111,000 shares are issuable upon exercise of options granted in
August 1996 at exercise prices of $3.50 per share, 60,000 shares are
issuable upon exercise of options granted in August and September 1996 at
exercise prices of $4.50 per share and 20,000 shares are issuable upon
exercise of an option granted in September 1996 at an exercise price of
$2.50 per share, (ii) 125,000 shares of Common Stock issuable upon
exercise of additional Private Placement Warrants issued after June 30,
1996 at an aggregate exercise price for all of such Warrants of $19.00 and
(iii) 85,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants at an exercise price of $6.25 per share. See
"Management--Stock Incentive Award Plan"; "Management--Certain
Transactions"; "Underwriting" and "Description of Capital Stock."
(2) If the Underwriters' over-allotment option is exercised in full, the sale
of 111,250 shares by the Company and 16,250 shares by the Selling
Stockholders in the offering will reduce the number of shares held by
existing stockholders to 2,088,000 or approximately 68.11% and will
increase the number of shares held by new investors to 977,500 or
approximately 31.89% of the total shares of Common Stock outstanding after
this offering.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at June
30, 1996 and (ii) as adjusted to reflect the receipt of the net proceeds from
the sale of the 850,000 shares of Common Stock offered hereby by the Company
at the initial public offering price of $5.00 per share and the application of
the estimated net proceeds as described in "Use of Proceeds." This table
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Prospectus. The following table does not include
approximately $600,000 of indebtedness that was incurred after June 30, 1996
and that will be repaid out of the proceeds of this offering. See "Use of
Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
AS
ACTUAL ADJUSTED
--------- ----------
<S> <C> <C>
Long-term debt and notes payable to stockholders, net of
current portion......................................... $ 75,000 $ --
--------- ----------
Stockholders' equity:
Preferred stock, $0.01 par value:1,000,000 shares
authorized, no shares issued and outstanding..........
Common stock, $0.01 par value: 10,000,000 shares
authorized, 2,104,250 shares issued and outstanding,
actual, 2,954,250 shares issued and outstanding, as
adjusted(1)........................................... 369,206 3,697,428
Deferred charge related to warrants issued in connection
with notes payable(2)................................... (119,845) --
Accumulated deficit(2)................................... (54,342) (174,187)
--------- ----------
Total stockholders' equity............................... 195,019 3,523,241
--------- ----------
Total capitalization..................................... $ 270,019 $3,523,241
========= ==========
</TABLE>
- --------
(1) As of June 30, 1996, assumes no issuance of 40,000 shares of Common Stock
issuable upon exercise of the Private Placement Warrants at an aggregate
exercise price for all such shares of $4.00. Also assumes no issuance of
the following shares of Common Stock upon exercise of options and warrants
granted and/or issued subsequent to June 30, 1996: (i) 300,000 shares of
Common Stock reserved for issuance under the Company's Incentive Plan, of
which 111,000 shares are issuable upon exercise of options granted in
August 1996 at exercise prices of $3.50 per share, 60,000 shares are
issuable upon exercise of options granted in August and September 1996 at
exercise prices of $4.50 per share and 20,000 shares are issuable upon
exercise of an option granted in September 1996 at an exercise price of
$2.50 per share, (ii) 125,000 shares of Common Stock issuable upon
exercise of additional Private Placement Warrants issued after June 30,
1996 at an aggregate exercise price for all of such shares of $19.00 and
(iii) 85,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants at an exercise price of $6.25 per share. Also
excludes 111,250 shares which may be purchased from the Company by the
Underwriters to cover over-allotments, if any. See "Management--Stock
Incentive Award Plan"; "Management--Certain Transactions"; "Underwriting"
and "Description of Capital Stock."
(2) The remaining unamortized deferred charge related to warrants issued in
connection with notes payable will be recognized as interest expense as a
result of the retirement of the related notes payable upon the completion
of the offering contemplated herein as discussed in "Use of Proceeds."
16
<PAGE>
SELECTED FINANCIAL DATA
Selected financial data set forth below as of June 30, 1996 and for the
period from September 19, 1995 (inception) to June 30, 1996 has been derived
from, and are qualified by reference to, the Financial Statements of the
Company included elsewhere herein which have been audited by Ernst & Young
LLP, independent auditors. The selected financial data set forth below should
be read in conjunction with the Financial Statements (including the notes
thereto) and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
INCEPTION TO
JUNE 30, 1996(1)
----------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $1,463,627
Cost of sales............................................. 1,104,171
----------
Gross profit.............................................. 359,456
Research and development.................................. 46,771
Selling and marketing..................................... 83,495
General and administrative................................ 244,736
----------
Operating loss............................................ (15,546)
Interest expense.......................................... 38,796
----------
Net loss.................................................. $ (54,342)
==========
Net loss per share(2)..................................... $ (0.03)
==========
Shares used in computing net loss per share............... 2,086,260
==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
BALANCE SHEET DATA(3):
Working capital............................................. $232,246
Total assets................................................ 951,313
Long-term debt and notes payable to stockholders, net of
current portion............................................ 75,000
Total stockholders' equity.................................. 195,019
</TABLE>
- --------
(1) The Company commenced business on September 19, 1995, accordingly, the
fiscal year ended June 30, 1996 contains less than twelve months.
(2) See Note 1 of Notes to Financial Statements for a description of the
calculation of net loss per share.
(3) The Balance Sheet Data does not include approximately $600,000 of
indebtedness incurred after June 30, 1996 that will be repaid out of the
proceeds of this offering. See "Use of Proceeds."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including, but not limited to those discussed in "Risk Factors" and elsewhere
in this Prospectus.
GENERAL
Javelin Systems, Inc. (the "Company") designs, develops, markets and sells
open system touch screen POS computers primarily for the foodservice industry.
From September 19, 1995 (the date of incorporation) to December 31, 1995,
management of the Company devoted substantially all of its efforts to the
raising of capital and the design and refinement of its NexDisplay-4 system.
RESULTS OF OPERATIONS
Fiscal Year Ended June 30, 1996
The Company's 1996 fiscal year reflects results of operations for the period
from September 19, 1995 (date of incorporation) to June 30, 1996.
The Company's fiscal 1996 revenues totaled $1,463,627. These revenues were
realized primarily during the period from January 1, 1996 through June 30,
1996 and were solely from the sale of 777 NexDisplay-4 systems. Based upon
current market conditions and the competitive products currently available in
the market, management does not anticipate significant price erosion for this
product for the next twelve months. Management intends to introduce two
additional products in the fiscal year ending June 30, 1997: the NexDisplay-P
system and the Wheelman kitchen monitor. See "Business--Products."
Cost of sales for fiscal 1996 amounted to $1,104,171. Prior to June 1996,
the Company performed the final assembly and testing of its products in-house.
Commencing July 1996, substantially all of the Company's manufacturing and
assembly process is being performed by outside contractors. Management
anticipates that for the foreseeable future it will continue to outsource
substantially all of the manufacturing and assembly process. Management
anticipates that if the Company's revenues continue to increase, the cost per
unit may decrease in the fiscal year ending June 30, 1997 due primarily to
reductions in prices from the Company's suppliers and contract manufacturers
resulting from increased volume of purchases by the Company.
Research and development expenses for fiscal 1996 amounted to $46,771. Such
expenses consisted primarily of payroll costs. The amount of research and
development expenses incurred prior to the Company's incorporation that
benefitted the Company were less than $500. For the fiscal year ending June
30, 1997, management anticipates a substantial increase in product development
costs primarily due to the anticipated introduction of several product
enhancements and new products.
Selling and marketing expenses for fiscal 1996 amounted to $83,495. Such
expenses consisted primarily of commissions of $16,852, salaries of $35,792
and travel and entertainment of $27,882. Management anticipates that such
expenses will increase substantially in the fiscal year ending June 30, 1997
as the Company implements its strategy to expand its product line,
distribution network and markets.
General and administrative expenses for fiscal 1996 amounted to $244,736.
Such expenses consisted primarily of payroll costs of $73,288, consulting fees
of $62,812, office supplies of $25,411, rent of $16,596 and printing of
$10,087. For the fiscal year ending June 30, 1997 management anticipates a
substantial increase in general and administrative costs, primarily related to
payroll costs as the Company expands its personnel and costs associated with
being a public company.
18
<PAGE>
Interest expense for fiscal 1996 amounted to $38,796. Such expense included
interest of $10,155 related to warrants issued in connection with certain
promissory notes (see Note 3 of Notes to the Financial Statements). For the
fiscal year ending June 30, 1997, management anticipates a substantial
increase in interest expense due to the amortization of interest related to
the above-mentioned warrants as well as additional amortized interest expected
to be incurred in connection with the issuance of additional warrants in July
and August 1996 (See Note 8 of Notes to the Financial Statements). This non-
recurring interest expense is attributable to the imputation of interest based
upon the fair market value of the Private Placement Warrants and does not
represent a cash expense of the Company.
A provision for federal and state income taxes was not required since the
Company incurred losses for fiscal 1996.
The Company does not anticipate that inflation will have a significant
impact on the Company's results of operations in the foreseeable future.
QUARTERLY RESULTS OF OPERATIONS FOR EACH OF THE QUARTERS IN THE FISCAL YEAR
ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PERIOD ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996
----------------- -------------- -------------
<S> <C> <C> <C>
Net sales........................ $ 2,407 $275,238 $1,185,982
Cost of sales.................... 2,591 221,198 880,382
-------- -------- ----------
Gross profit (loss).............. (184) 54,040 305,600
Operating expenses
Research and development....... 5,975 13,869 26,927
Selling and marketing.......... 2,501 21,520 59,474
General and administrative..... 72,516 77,228 94,992
-------- -------- ----------
Total operating expenses......... 80,992 112,617 181,393
-------- -------- ----------
Operating income (loss).......... (81,176) (58,577) 124,207
Interest expense................. -- 621 38,175
-------- -------- ----------
Net income (loss)................ $(81,176) $(59,198) $ 86,032
======== ======== ==========
</TABLE>
A comparison of the results of operations for the period September 19, 1995
to December 31, 1995 is not provided since the Company's activities for such
period were primarily limited to the raising of capital and the design and
refinement of its NexDisplay-4 system.
Quarter Ended June 30, 1996 Compared to Quarter Ended March 31, 1996
Net sales for the quarter ended June 30, 1996 increased by $910,744 or 331%
to $1,185,982 as compared to net sales of $275,238 for the quarter ended March
31, 1996. As discussed above, the Company's net sales since inception have
been derived solely from the sale of its NexDisplay-4 system and the increase
in sales was due to the continued acceptance in the market of the NexDisplay-4
system. Operating expenses increased to $181,393 for the quarter ended June
30, 1996 from $112,617 for the quarter ended March 31, 1996, an increase of
60%. The increase in operating expenses was due to the higher level of sales
activity during the quarter ended June 30, 1996 and consists primarily of
additional personnel and related compensation costs within substantially all
functional areas of the Company's operations. Interest expense increased to
$38,175 during the quarter ended June 30, 1996 from $621 for the quarter ended
March 31, 1996 due primarily to increased borrowings under a line of credit
and promissory notes, including the issuance of the Private Placement
Warrants, the proceeds of which were used to fund working capital and other
operating requirements.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its incorporation, the Company has financed its operations and capital
expenditures with cash provided by securities issuances and financing
arrangements.
As of June 30, 1996, the Company had cash of $6,404. Since that date through
August 30, 1996, the Company raised an additional $600,000 through the
issuance of promissory notes and warrants. Cash used in operating activities
amounted to $558,330 for fiscal 1996. Cash used in investing activities
amounted to $37,833 for fiscal 1996 and represented primarily the purchase of
furniture, fixtures and equipment. Cash from financing activities for fiscal
1996 amounted to $602,567 and consisted primarily of proceeds from the
issuances of the Company's Common Stock of $85,050, borrowings under a line of
credit of $206,552 and proceeds from the issuance of notes payable of
$312,481. The Company has notified the issuer of the line of credit that the
Company does not intend to renew the line of credit beyond its termination
date of December 4, 1996.
The Company believes that the estimated net proceeds of this offering,
combined with other available funds, will be adequate to meet the Company's
anticipated cash needs during the next 18 to 24 months. If the anticipated
proceeds of this offering and other available funds are insufficient, or if
working capital requirements are greater than anticipated, the Company could
be required to raise additional financing. There can be no assurance that the
Company will be successful in obtaining additional equity or debt financing,
or, if available, that any such additional financing will be on terms
favorable to the Company or its stockholders. Significant additional dilution
may be incurred by investors in this offering as a result of such additional
financings and the Company may incur additional interest expense. See "Risk
Factors--Future Capital Requirements."
20
<PAGE>
BUSINESS
GENERAL
Javelin Systems, Inc. (the "Company") designs, develops, markets and sells
open system touch screen point-of-sale ("POS") computers primarily for the
foodservice industry. The Company's POS systems integrate substantially all of
the functionality of a standard desktop PC into a small footprint, network
ready package and run on industry standard operating systems, such as
Microsoft's DOS, Windows, Windows 95 and Windows NT. The Company's POS systems
provide quick service restaurants ("QSR"), full service restaurants and
hospitality and retail establishments with a hardware solution for transaction
processing, in-store controls and management information. The Company's
systems are sealed to protect against spillage and other foreign matter
entering the interior electronic chamber. The Company's systems are currently
being marketed by a number of original equipment manufacturers ("OEMs") and
value added resellers ("VARs"). The Company believes it has achieved a
strategic advantage by introducing higher performance POS systems that
integrate many of the most recent technological innovations.
The market for POS systems is divided into four major foodservice market
segments: QSRs, full service restaurants, hotel restaurants, and noncommercial
foodservice. According to Restaurant Consulting Group, Inc., a foodservice
industry market research firm based in Skokie, Illinois ("RCG"), the total
number of restaurants in the United States as of the Spring of 1995 was
394,420. The Company is primarily a supplier to the QSR and full service
restaurant segments and intends to increase its penetration into the hotel
restaurant and noncommercial foodservice segments.
The Company's products are primarily distributed through strategic
relationships with OEMs and VARs (collectively, "Resellers"). Over 90% of the
Company's net sales were within the United States during the fiscal year ended
June 30, 1996.
The Company was incorporated in the State of Delaware on September 19, 1995
and commenced shipments of its products in December 1995.
INDUSTRY BACKGROUND
While PC-based systems have become the standard platform in most industries,
the foodservice POS industry can be characterized as a unique vertical market
that has not kept pace with the technological developments and productivity
gains associated with most other industries. Rather than utilizing PC-based
systems, until recently, the solutions provided by foodservice POS vendors
have been of proprietary design and high cost. In addition, while in other
areas of the computer industry most companies have decided to specialize
either on software or hardware, in the foodservice industry, there are still
major players trying to develop both hardware and software.
The Company believes that the foodservice POS industry provides a major
market opportunity because of the scope of the overall restaurant industry and
the current shift towards open systems restaurant management software written
around Microsoft operating systems and hardware that uses Intel or similar
microprocessors. In responding to this market shift, the Company has elected
to focus its efforts on the development and sale of open system PC-based
hardware for the foodservice POS industry.
The Market Opportunity
Market Segments. The Company intends to target the following market
segments:
Quick Service Restaurants. This market is the largest segment within the
foodservice industry with approximately 206,000 units in the United States as
of the Spring of 1995 according to RCG. The fast food restaurants were
generally the first to accept the latest touch screen technology like the
NexDisplay-4. The Company's products have been sold by its Resellers to some
Taco Bell, Blimpies, and Kenny Rogers Roasters restaurants.
21
<PAGE>
Full Service Restaurants. According to RCG, this segment represented
approximately 111,000 units in the United States as of the Spring of 1995. The
Company has found this segment to be more price sensitive and more likely to
adopt technology later in the product life cycle. The Company's product has
been accepted in this market in head to head challenges with similar featured
products like the Micros and IBM 4695. The Company's products have been sold
by its Resellers to certain Chart House, Claim Jumper and Billboard Cafe
restaurants, and to the American Culinary Institute.
Hotel Restaurants. According to Technomic, Inc., a foodservice market
research firm based in Chicago, Illinois, this segment represented
approximately 20,260 units in the United States in 1995. The Company believes
that the casino, theme park, and cruise line industries are potential growth
areas within this segment.
Industrial Process Control. The Company's product has been accepted as an
operator interface by Mitsubishi/Siltec, a leading supplier of manufacturing
equipment to the semiconductor industry. The market potential for the
Company's products in this segment is currently unknown. The Company intends
to conduct a market research study on this segment before the end of 1996.
The Company believes that the foodservice industry, in particular, presents
a significant market opportunity for the Company's products because managers
in the foodservice industry face the following unique challenges that are
addressed by the Company's products:
. A perishable inventory that must be replenished every few days, that
cannot be easily counted and is subject to employee theft.
. Entry-level sales force with varying degrees of communication skills and
high turnover.
. Customer demands for high speed order processing.
. Multiple order entry locations within one restaurant and multiple
restaurants within one organization.
. Frequent menu and price changes which must be updated at the POS device.
. These management hurdles are compounded by the incompatibility of
electronic components with the hostile environment of high heat, steam,
grease, and flying food.
The Javelin Contribution
Traditional POS systems have typically been proprietary and inflexible and
could not be easily integrated into the organization's management information
system. For example, proprietary software solutions are limited in terms of
their ability to address the unique customization and management control
requirements in the highly dynamic foodservice environment. Additionally,
traditional hardware designs have not been optimized in terms of processing
speed, networking capabilities, food counter footprint and ruggedness.
Against this backdrop of inadequate proprietary systems, foodservice
companies are seeking greater compatibility with state of the art PC product
offerings such as the Microsoft NT operating system and Pentium chip powered
hardware. The Company believes that it is well situated to capitalize on this
market opportunity because of its engineering, product management and
marketing experience refined in the PC industry.
BUSINESS STRATEGY
The Company's objective is to be a significant worldwide OEM supplier of POS
systems to the foodservice industry and, over time, the Company intends to
explore other opportunities for sale of its POS systems in other industries.
In order to pursue this objective, the Company intends to implement the
following business strategies:
Maintain Technological Advantage. The Company's strategy is to continue to
develop new POS systems incorporating the latest PC technology. The Company
intends to maintain and enhance its product development process with the goal
of obsoleting its own products before the competition does. This strategy has
been successful for many leading technology companies such as Intel. The
Company intends to continue to build an engineering team composed of PC
industry veterans in order to design and enhance products that integrate the
latest PC technology.
22
<PAGE>
Maintain Product-to-Market Time Advantage. In the fast paced computer
industry, the window of opportunity to launch a product and capture a new
market is months, not years. Because a significant portion of the Company's
management is experienced in the PC industry, the Company believes that it
will be able to quickly launch new products in the POS system industry
incorporating the latest PC technologies.
Maintain Cost Advantage. The Company's strategy is to continue to outsource
the manufacturing and assembly of its products in order to maintain low
overhead and production costs. The Company also intends to control its costs
by utilizing components that are generally available in the PC industry. The
Company believes that it will be able to maintain a cost advantage in the
future because the Company utilizes in-house design capabilities and
integrates the design and manufacturing engineering of its products, which
reduces engineering costs and costly design changes.
Expand Third Party Distribution Channels. The Company uses OEMs and VARs,
and, in the future, intends to also use independent distributors, to sell its
products. The Company intends to concentrate on building a technically
proficient sales force that will support the third party sales channels and
build long term customer loyalty.
Expand into New Markets. The Company believes that its technology is suited
for other industries in addition to the foodservice industry, such as
industrial process control. The Company intends to sell its existing products
into these new markets and develop new products for these markets if it
determines that there is large volume potential.
No assurance can be given that the Company will be able to successfully
implement any of the foregoing business strategies and achieve its objectives.
PRODUCTS
NexDisplay-4(TM)
The Company currently derives 100% of its sales from the NexDisplay-4 and
derivative versions of that product. The NexDisplay-4 is a small footprint,
high performance color touch screen computer. Unlike standard off-the-shelf PC
products, the NexDisplay-4 has been designed and manufactured for harsh
environments and optimized with features required by the foodservice industry,
such as an integrated customer display. As a result of the product's inherent
flexibility, the product has been successfully marketed and sold as a POS
workstation, a customer activated system, and as an industrial operator
interface. The Company offers a private labeling program for large customers
and will be offering 4-5 different packaging styles to allow for product
differentiation in the market. The Company will be introducing an enhanced
version of the NexDisplay-4 (estimated release date: fourth quarter of
calendar 1996) with the goal of reducing the product cost, increasing
performance and increasing reliability. The suggested retail price to end
users of the current product is approximately $3,400.
NexDisplay-P(TM) (estimated release date: fourth quarter of calendar 1996)
The Company intends to release a Pentium version of the NexDisplay in the
fourth quarter of 1996. The modular design of the NexDisplay-4 ensures that
the unit can be upgraded to a Pentium version by simply replacing the system
board which slides out on rails. This product will offer roughly double the
performance of the previous version. The NexDisplay-P will be optimized to run
process intensive operating systems like Windows 95 and Windows NT.
Wheelman(TM) (estimated release date: first quarter of calendar 1997)
The typical Taco Bell restaurant uses 4 POS workstations like the
NexDisplay-4 and 7 kitchen monitors. A kitchen monitor receives POS orders via
a local area network from the front counter and displays the order to
23
<PAGE>
the food preparers in the kitchen. This high speed communication allows the
restaurant production team to operate more efficiently. The Company intends to
release a state of the art kitchen monitor which integrates a networked single
board computer inside a ruggedized 14 inch CRT.
PRODUCT DISTRIBUTION
The Company's products are primarily distributed through strategic
relationships with OEMs and VARs. These Resellers typically provide
installation, support and service directly to their customers. By distributing
its products through Resellers, the Company has been able to take advantage of
the existing name recognition and market position of its Resellers and reach a
broader market for its products while avoiding incurring significant
expenditures for sales, marketing, technical support and service. The Company
intends to continue to distribute its products through Resellers and intends
to expand its national and international distribution network by using the
following channels:
Original Equipment Manufacturers (OEMs)
The Company currently sells its products to several OEM foodservice POS
companies with significant market presence in the industry. The Company's
current OEMs include Touch Menus, Positran, Inc., Hospitality Systems, Inc.
and POSNET Computers, Inc. The OEMs market the Company's products under their
own name and sell either through dealers or directly. Because of the high
likelihood of the Company's product being offered by more than one OEM into an
end user account, the Company offers the OEM an opportunity to choose their
own customized design. The OEM is charged for mechanical design, prototyping,
and tooling. Sales to OEMs and resellers represented 99% of the Company's net
sales during the fiscal year ended June 30, 1996. One of the Company's
principal strategies is to increase the number of OEMs selling its products.
Value Added Resellers (VARs)
The Company also sells its products to VARs who integrate POS software sold
by independent software companies with the Company's hardware product for
resale to foodservice companies. The Company works closely with POS software
providers in order to market the Company's products to the software provider's
VARs. Approximately 45 VARs have purchased POS systems from the Company, none
of which have individually purchased a significant amount of products. The
Company believes that utilizing VARs is advantageous to the Company because
VARs generally have existing geographically diverse customers, focus their
businesses on providing customized solutions to their customers and maintain
their own sales and technical support staff. The Company believes that VARs
find the Company's product attractive because the addition of the Company's
hardware solution provides the VAR with an integrated product that facilitates
an immediate penetration by the VAR into the markets of competitors offering
full turnkey solutions such as Micros Systems, Inc. and Sulcus Computer
Corporation.
The Company has begun utilizing CompUSA, Inc. as an independent distributor
for the sale of its products to certain VARs and end users. The Company does
not have any written distribution agreement with CompUSA, Inc. but, instead,
sells products to CompUSA, Inc. based upon the receipt of purchase orders.
During the fiscal year ended June 30, 1996, sales of the Company's products
to Touch Menus and Positran, Inc. accounted for approximately 30% and 24%,
respectively, of the Company's net sales. No other customer accounted for more
than 10% of the Company's net sales in the fiscal year ended June 30, 1996.
MARKETING AND SALES
The Company's marketing and sales staff currently consists of a marketing
coordinator who reports directly to the Company's Vice President, Sales and
Marketing. The Company's marketing department includes product development,
marketing communications and market development. To date, the Company has not
engaged in significant marketing activities due to its limited financial
resources. The Company consults with the Company's Resellers to assist in
identifying potential product enhancements and new products. The Company
believes that this marketing feedback is a critical component in the Company's
ability to achieve a competitive advantage in terms of rapid and seamless
design innovation as well as accelerating the time to market for product
enhancements and new products. The Company currently markets its products with
a Company brochure and
24
<PAGE>
participates in trade shows both in the United States and abroad. The Company
also focuses on additional methods to promote its products, including product
refinement, new product introduction and competitive pricing, all with the
goal of increasing the distribution of the Company's products. Following
consummation of this offering, the Company intends to commence more
significant marketing activities, including targeted trade advertising and
public relations.
The Company's marketing and sales staff is also responsible for the
development and support of the Company's domestic and international
distribution network. The sales staff is augmented by two independent sales
representatives. Commissions to sales representatives are negotiated on a
customer-by-customer basis and the Company has no long term agreements with
any of its sales representatives. The Company intends to expand its sales
force to a total of three salespersons in 1996, each of whom will be given
regional responsibilities but will be based out of the Company's executive
offices located in Tustin, California. The Company maintains a computerized
order entry system at its Tustin office to track incoming orders and orders in
process.
The Company sells to a technically sophisticated customer base that is
expected to handle most technical problems without reliance on the Company,
thereby reducing the need for the Company to maintain a large in-house
technical support department. The Company's technical support staff currently
consists of one person responsible for telephonic support and return
merchandise authorization. The Company expects that an increased volume of
sales will place an increased burden on its technical support staff and
intends to add at least one more technician in 1996.
SOURCES OF MANUFACTURING AND QUALITY ASSURANCE
The Company's products are manufactured by third party contract
manufacturers located in Hong Kong and California. The Company imports the
motherboard utilized in its products from Sunwood Services Limited
("Sunwood"), a Hong Kong-based company owned by John R. Amos, a founder and
stockholder of the Company, under purchase orders submitted from time to time.
See "Management--Certain Transactions." The Company has identified other
United States-based manufacturers capable of manufacturing the Company's
motherboard. In addition, the Company purchases its LCD displays from All
American, a distributor located in California, and is in the process of
transitioning its purchases of LCD displays to Lucky Goldstar. The Company's
products are assembled in California by an ISO 9000 certified manufacturer,
although the Company is not ISO 9000 certified. The Company normally must
place orders 60 days in advance and current terms are open account. The
Company has no written long term contracts with the manufacturers of its
products or with any suppliers of the components used in the Company's
products; however, the Company has submitted a purchase order for an aggregate
of 5,000 units of LCD components utilized in its products, which are
deliverable over 12 months commencing October 1, 1996. Moreover, the Company
historically has placed orders for products and components based on its
projected sales over the next approximately 90 days and does not normally have
binding purchase orders for products at the time it places its orders with its
manufacturers and suppliers. Consequently, the Company is subject to
significant risk if actual sales of its products do not approximate its
projected sales. To date, the Company has not experienced any material delays
in the delivery of its products or components; however, delivery schedules are
subject to various factors beyond the control of the Company and any delays in
the future could adversely affect the Company's results of operations. The
Company currently maintains an approximately 15 to 20 days supply of products
in its inventory. However, the Company believes that a 60 day supply is more
desirable, and the Company intends to increase its inventory of products
following consummation of this offering. Because the Company orders components
and has products manufactured in advance of binding commitments for the sale
of its products, and because the Company does not have firm contracts with any
of its Resellers providing for a minimum purchase requirements, no assurance
can be given that the Company will be able to continue to appropriately match
its inventory levels to its actual sales in the future.
Although the Company does not conduct the day-to-day manufacturing or
assembly of its products, the Company oversees the manufacturing process from
component selection to the specification of assembly and test procedures.
Although the manufacturing and substantially all of the assembly of the
Company's products are currently performed by outside contractors, the Company
has the ability to undertake limited production runs, customization, and
product upgrades at its facility.
25
<PAGE>
The principal components that make up the Company's products are standard
electronics available from a wide variety of suppliers. Certain of the
components utilized in the Company's products, however, are currently provided
by a single supplier. The Company believes that, with respect to these
components, there are a number of alternative suppliers that could supply
components that could be integrated into the Company's products without any
significant interruption in the Company's operations. No assurance can be
given, however, that the Company will be able to successfully obtain
alternative sources of supply for all of its components, or that the Company
will be able to redesign its products on an appropriate time-table to
incorporate alternative components. Any significant interruption in the supply
of components could have a material adverse effect on the Company's results of
operations and financial condition.
BACKLOG
As of June 30, 1996, the Company did not have any significant backlog.
COMPETITION
The market for POS products is highly competitive, and the Company expects
this competition to increase as open systems architecture in POS products
becomes more common. The principal elements of the competition in the
Company's markets include product features and performance, price, quality and
reliability, brand awareness, compatibility with open systems, accuracy of
touch-screen input, quality of display, and level of customer service. The
Company's products compete with a number of products designed to provide user
friendly touch screen workstations. Most of the Company's competitors, as well
as certain potential competitors, are more established, benefit from greater
name recognition, have significantly greater financial, technological,
production and marketing resources, and have more extensive distribution
networks than the Company.
The Company believes its use of open systems architecture in POS systems is
an important competitive element. Several of the Company's competitors
currently also offer open systems POS systems and the Company also believes
that the number of competitors offering open systems solutions will grow over
the next several years. The Company anticipates that a significant source of
such future competition may be from existing competitors in the POS market
that the Company believes are currently attempting to develop POS systems
utilizing open systems architecture. Due to the greater sales, marketing,
product development and financial resources of the Company's competitors, the
Company anticipates that competition from these competitors will intensify in
the future. In order to effectively compete against these competitors, the
Company will need to grow and attain sufficient size to have the resources to
timely develop new products in response to evolving technology and customer
demands and to sell products through a broad distribution channel in
competition with these other existing and potential competitors. No assurance
can be given that the Company will be able to grow sufficiently to enable it
to compete effectively in this marketplace.
The Company's competitors include a substantial number of large well-
established companies including International Business Machines (IBM), Micros
Systems, Inc., PAR Technology Corporation, ATT/GIS, Panasonic and Olivetti,
each of which also offers open systems architecture POS systems. Although the
Company believes that it currently has a competitive advantage with respect to
these competitors from a technological and cost standpoint, including
compatibility with open systems, there can be no assurance that the Company
will be able to maintain its competitive advantage or that these existing
substantial competitors, or new competitors, will not develop competitive
products utilizing open systems architecture and with favorable pricing.
Moreover, the Company has little or no proprietary barriers to entry that
could keep its competitors from developing similar products and technology or
selling competing products in the Company's markets. The Company anticipates
that as the existing and potential competitors increasingly perceive the
market opportunity for open systems architecture POS systems, these
competitors will try to "clone" market leading products and sell such cloned
products at significantly reduced prices. There can be no assurance that such
competitors will not develop products that are competitive with or superior to
the Company's products or achieve greater market acceptance.
Increased competition from manufacturers or distributors of products similar
to or competitive with the Company's products could result in price
reductions, reduced margins and loss of market share or could render
26
<PAGE>
the Company's technology obsolete, all of which could have a material adverse
effect on the Company's results of operations and financial condition. There
can be no assurance that the Company will be able to successfully compete in
this marketplace or develop sufficient new products to remain competitive, and
any failure to do so could have a material adverse effect on its results of
operations and financial condition. See "Risk Factors--Competition."
GOVERNMENTAL REGULATION
The Company's operations are subject to a number of federal, state and local
laws relating to health, safety and labor matters. The Company believes its
business is operated in substantial compliance with all material applicable
government regulations. There can be no assurance that future regulations will
not require the Company to modify its products, business or operations to meet
health, safety or labor requirements, or that the Company will be able, for
financial or other reasons, to comply with such future requirements. Failure
to comply with future governmental regulations could subject the Company to
fines and injunctions, which could result in a material adverse effect on the
Company's results of operations and financial condition. Although the Company
is not aware of any claim involving violation of health, safety or labor laws
or regulations, there can be no assurance that such claim may not arise in the
future, which may have a material adverse effect on the Company.
INTELLECTUAL PROPERTY
The Company relies on nondisclosure agreements to protect its intellectual
property. The Company holds no patents and believes that its competitive
position is not materially dependent upon patent protection. The Company
believes that most of the current technology used in the design and
manufacture of most of the Company's products is generally known and available
to others. Before the Company was incorporated, Sunwood, the Company's
motherboard manufacturer located in Hong Kong, was supplying the Company's
existing motherboard technology to a North American POS company located in
Canada, and Sunwood will continue to have the rights to sell the existing
technology to that POS company only for sale in Canada. Sunwood and its
principal, John R. Amos, have transferred to the Company all of the
proprietary rights related to the motherboard utilized in the Company's
products and neither Sunwood nor Mr. Amos has any rights to any future
technology developed by the Company.
EMPLOYEES
As of September 30, 1996, the Company had approximately 12 full-time
employees, including 3 employed in sales and marketing, 6 employed in research
and development, engineering, technical support and production, and 3 employed
as administrative and support staff. The Company also employed as of that date
one temporary production employee and may from time to time augment its
temporary staffing. None of the Company's employees are represented by unions
and the Company considers its employee relations to be good.
PROPERTIES
The Company's executive offices, research and product development,
warehousing and distribution facilities are currently housed in a single
leased industrial unit comprised of approximately 3,950 square feet located in
Tustin, California. Under the terms of the lease, the Company presently pays
rent of approximately $2,764 per month with scheduled increases during the
second and third years of the lease to approximately $2,843 and $2,922 per
month, respectively. The lease expires on October 31, 1998. The Company
believes that its existing facilities are adequate to meet its needs for at
least the next 9 months to one year.
LEGAL PROCEEDINGS
There are currently no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.
27
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Richard P. Stack.................... 31 President, Chief Executive Officer
and Director
C. Norman Campbell.................. 42 Vice President, Engineering and
Director
Alexander J. Nelson................. 40 Vice President, Sales and Marketing
Lawrence W. McCorkle................ 36 Controller, Treasurer and Secretary
Steven J. Goodman(1)(2)............. 56 Director
Jay L. Kear(1)(2)................... 59 Director
</TABLE>
- --------
(1) Member of Audit Committee of the Board of Directors
(2) Member of Compensation Committee of the Board of Directors
RICHARD P. STACK. Mr. Stack has been President, Chief Executive Officer and
a Director of the Company since the Company's inception in September 1995.
Prior to that time, from 1991 through September 1995, Mr. Stack was Managing
Director of Hi-Technology Supply, a manufacturer and distributor of personal
computers and components located in South Africa which he founded and grew to
approximately $6 million in annual sales and 15 employees prior to its sale to
a South Africa-based personal computer and component manufacturing company.
Prior to that time, from 1988 through 1991, Mr. Stack was employed by Pan
American Airlines in technical management positions. Mr. Stack holds a B.A.
degree from the University of California at Berkeley.
C. NORMAN CAMPBELL. Mr. Campbell has been Vice President, Engineering, and a
Director of the Company since its inception in September 1995. Prior to that
time, from May 1991 through September 1995, Mr. Campbell served in various
engineering management positions, including Director of Research and
Development, for Advanced Logic Research ("ALR"), a publicly-traded $200
million revenue per year high end file server manufacturing company. Mr.
Campbell was responsible for the design of ALR's first PCI bus and first
Pentium Pro computers. At the time of Mr. Campbell's departure from ALR in
September 1995, he was the principal designer of the Evolution QSMP-6 (Quad
Pentium Pro high end file server), Revolution MP (dual Pentium file server,
PCI/EISA), Evolution V STE (mini tower dual Pentium, PCI/EISA), Evolution 5 ST
(mini tower Pentium PCI/ISA), and Evolution X (Pentium desktop PC, PCI/ISA).
Mr. Campbell has acted as a consultant to the computer industry with such
companies as Intel, ITT, Orange Micro Inc. and IBC (UK). Mr. Campbell attended
Burlington College.
ALEXANDER J. NELSON. Mr. Nelson joined the Company in October 1995 as Vice
President, Sales and Marketing. Mr. Nelson has over 20 years experience in
sales and marketing management with growing businesses in the electronics
industry. Prior to joining the Company, from 1992 through 1995, he was Vice
President, Sales and Marketing and co-founder of Interactive Computer Devices,
Inc., a company engaged in the business of local area network (LAN)
workstations. From 1990 to 1992, Mr. Nelson was Vice President, International
Sales and Marketing for Republic Technology Corporation, a computer
workstation manufacturing company. Mr. Nelson graduated with a B.S. degree in
marketing from the California State University, Fullerton and attended post-
graduate studies at UCLA in international business and marketing.
LAWRENCE W. MCCORKLE. Mr. McCorkle joined the Company in July 1996 as
Controller and was elected Treasurer and Secretary in August 1996. Mr.
McCorkle has over 12 years of experience both in public accounting and in
private industry. From July 1993 to July 1996, Mr. McCorkle was Accounting
Manager for Diedrich Coffee, a chain of specialty coffee houses. Prior to that
time, from July 1988 to July 1993, Mr. McCorkle was
28
<PAGE>
financial manager and a consultant for the Republican Party of Orange County.
Mr. McCorkle received a B.S. degree in Business Administration from Biola
University and has passed the Uniform Certified Public Accounting exam.
STEVEN J. GOODMAN. Mr. Goodman was elected as a Director of the Company in
January 1996. In July 1995, Mr. Goodman joined Tessa Financial Group, Inc., a
regional investment banking firm, as Vice President, Corporate Finance. From
November 1991 through March 1995, Mr. Goodman was West Coast Managing Director
of Creative Business Strategies, Inc., a financial corporate consulting firm.
From 1990 to 1991, Mr. Goodman was a private investor. Mr. Goodman currently
is a director and consultant for Tivoli Industries, Inc., a publicly-held
corporation engaged in the manufacture and sale of specialty lighting.
JAY L. KEAR. Mr. Kear was elected as a Director of the Company in August
1996. Mr. Kear has approximately 35 years of experience in the computer
industry. Since 1988, Mr. Kear has been involved in representing the Noorda
Family Trust and Kear Enterprises in working with and investing in high
technology companies. These activities included assisting companies in their
early growth phase looking forward to either an initial public offering or a
sale or merger. He has in the past served as a director of a number of
companies including Newport Systems, X-Tree, Locus Software Development, and
Phaser Systems, and is currently a director of Wonderware Software Development
Corp., a public corporation engaged in the development and sale of industrial
automation software. Prior to 1988, Mr. Kear held sales, marketing,
engineering, and general management positions with private and public
companies in the high technology sector. Mr. Kear received a BSME degree from
the University of Southern California and did graduate work at the University
of Rochester and the University of Southern California in an MBA program.
To date, the Company has not found it necessary to retain the services of a
full-time Chief Financial Officer and has instead relied upon Richard P.
Stack, its President and Chief Executive Officer, and an outside consultant
with respect to financial and accounting matters. In July 1996, the Company
hired Lawrence W. McCorkle as its Controller, but Mr. McCorkle has had only
limited involvement in the preparation of the financial information presented
in this Prospectus. Following the consummation of this offering, the Company
intends to commence a search for a Chief Financial Officer with the experience
and salary requirements consistent with the Company's then current revenues
and growth prospects.
BOARD OF DIRECTORS
During the nine months ended June 30, 1996, the Company's Board of Directors
held two meetings and adopted five actions by written consent. The Board of
Directors has established the following committees: (i) an Audit Committee,
which consults with the Company's independent auditors concerning their
engagement and audit plan and report and management letter and, with the
assistance of the independent auditors, monitors the adequacy of the Company's
internal accounting controls and financial management practices; and (ii) a
Compensation Committee, which is responsible for reviewing the compensation
and benefits of the Company's executive officers, making recommendations to
the Board of Directors concerning the compensation and benefits of the
Company's executive officers and administering the Company's 1996 Stock
Incentive Award Plan.
The Board of Directors is divided into three classes, with each class
holding office for staggered three-year terms. The term of Steven J. Goodman
expires in 1997, the term of Jay L. Kear expires in 1998 and the terms of
Richard P. Stack and C. Norman Campbell expire in 1999. All executive officers
of the Company are elected by the Board of Directors and serve at the Board's
discretion. No family relationships exist between any of the officers or
directors of the Company.
DIRECTOR COMPENSATION
The Company's directors who are not also employees of the Company receive
$500 for attendance at each Board of Directors meeting and are reimbursed for
expenses incurred in connection with attendance at Board of Directors'
meetings. No additional compensation is paid for attendance at committee
meetings, whether or not
29
<PAGE>
held on the same date as Board meetings. In August 1996, Jay L. Kear, a
director of the Company, was granted an option to purchase 10,000 shares of
the Company's Common Stock at an exercise price of $4.50 per share. See
"Management--Stock Incentive Award Plan."
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation. The following table sets
forth information regarding compensation for services in all capacities paid
or accrued for the Company's nine-month fiscal year ended June 30, 1996 by the
Company to the Company's chief executive officer. No other executive officer
of the Company had total annual compensation in excess of $100,000 on an
annualized basis during the fiscal year ended June 30, 1996:
SUMMARY COMPENSATION TABLE
(NINE MONTHS)
<TABLE>
<CAPTION>
OTHER ANNUAL
SALARY BONUS COMPENSATION
YEAR ($) ($) ($)(1)
---- ------- ----- ------------
<S> <C> <C> <C> <C>
Richard P. Stack(2)
President, Chief Executive Officer and
Director.................................. 1996 $15,000 $ 0 $898
</TABLE>
- --------
(1) The amounts indicated under the heading "Other Annual Compensation"
represent health insurance benefits.
(2) The Company and Richard P. Stack have entered into an Employment Agreement
dated August 19, 1996 (the "Stack Employment Agreement"). The Stack
Employment Agreement expires on August 19, 1999 (subject to annual
renewals thereafter) and provides for payment to Mr. Stack of an annual
salary of $84,000 through December 31, 1996, $95,000 from January 1, 1997
through December 31, 1997 and $105,000 from and after January 1, 1998. In
addition to his salary, Mr. Stack is reimbursed for all reasonable and
necessary travel and other business expenses incurred in connection with
the performance of his duties, the Company is obligated to pay the premium
for a life insurance policy insuring Mr. Stack's life providing for death
benefits of up to $750,000 and Mr. Stack receives a $100 per month car
allowance. If Mr. Stack's employment with the Company is terminated for
cause (as defined in the Stack Employment Agreement), then Mr. Stack is
entitled to receive his base salary through the date of termination. If
Mr. Stack's employment with the Company is terminated without cause, then
he is entitled to receive payment of his base salary for the greater of
(i) the remaining term of the Stack Employment Agreement or (ii) one year
from the date of termination.
The Company anticipates that Richard P. Stack, the Company's President and
Chief Executive Officer, C. Norman Campbell, the Company's Vice President,
Engineering, and Alexander J. Nelson, the Company's Vice President, Sales and
Marketing, will each earn total compensation in excess of $100,000 during the
fiscal year ending June 30, 1997. The terms of Mr. Stack's Employment
Agreement are described above. The Company and C. Norman Campbell have entered
into an Employment Agreement dated August 19, 1996 (the "Campbell Employment
Agreement"). The Campbell Employment Agreement expires on August 19, 1999
(subject to annual renewals thereafter) and provides for payment to Mr.
Campbell of an annual salary of $84,000 through December 31, 1996, $95,000
from January 1, 1997 through December 31, 1997 and $105,000 from and after
January 1, 1998. In addition to his salary, Mr. Campbell is reimbursed for all
reasonable and necessary travel and other business expenses incurred in
connection with the performance of his duties, the Company is obligated to pay
the premium for a life insurance policy insuring Mr. Campbell's life providing
for death benefits of up to $750,000 and Mr. Campbell receives a $100 per
month car allowance. If Mr. Campbell's employment with the Company is
terminated for cause (as defined in the Campbell Employment Agreement), then
Mr. Campbell is entitled to receive his base salary through the date of
termination. If Mr. Campbell's employment with the Company is terminated
without cause, then he is entitled to receive payment of his base salary for
the greater of (i) the remaining term of the Campbell Employment Agreement or
(ii) one year from the date of termination. The Company does not have any
employment agreements with any other executive officer of the Company.
30
<PAGE>
STOCK INCENTIVE AWARD PLAN
The Company's 1996 Stock Incentive Award Plan (the "Incentive Plan") was
adopted by the Board of Directors and approved by the written consent of the
stockholders in August 1996. The purpose of the Incentive Plan is to attract
and retain qualified personnel, provide additional incentives to employees,
officers, directors and consultants of the Company and promote the success of
the Company's business. Pursuant to the Incentive Plan, the Company may grant
incentive and nonqualified stock options, restricted stock, stock appreciation
rights, dividend equivalents, stock payments and/or performance awards
(collectively "Incentive Awards") to key employees, officers, directors, and
consultants of the Company. As of September 30, 1996, a total of 300,000
shares of Common Stock were reserved for issuance under the Incentive Plan,
191,000 of which are subject to outstanding options.
The Board of Directors has delegated to the Compensation Committee the
discretionary authority to designate the persons to whom Incentive Awards may
be granted (provided that incentive stock options can only be granted to
employees of the Company), determine the time when Incentive Awards will be
granted, the amounts, terms and conditions of such grants (consistent with the
terms of the Incentive Plan), interpret the Incentive Plan, and adopt rules
for the operation of the Incentive Plan.
The maximum term of Incentive Awards granted under the Incentive Plan is ten
years. Incentive Awards granted under the Incentive Plan are nontransferable
and generally expire three months after the termination of the grantee's
service to the Company. In general, if a grantee is permanently disabled or
dies during his or her service to the Company, such Incentive Award may be
exercised up to 12 months following such disability or death.
Stock Options. Under the Incentive Plan, the exercise price of incentive and
non-qualified stock options must equal at least the fair market value of the
Common Stock on the date of grant. In addition, the exercise price of
incentive and non-qualified stock options granted to any person who at the
time of grant owns stock possessing more than 10% of the total combined voting
power of all classes of stock must be at least 110% of the fair market value
of such stock on the date of grant and, with respect to incentive stock
options only, the term of those incentive stock options cannot exceed five
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per optionee.
Stock Appreciation Rights. Stock appreciation rights awarded under the
Incentive Plan vest or become exercisable as determined by the Compensation
Committee. Upon exercise of a stock appreciation right, the grantee is
entitled to receive an amount equal to the excess of the fair market value of
a share of Common Stock on the exercise date of such stock appreciation right
over the fair market value of a share of Common Stock on the date of grant of
such stock appreciation right.
Restricted Stock. Restricted stock granted under the Incentive Plan
generally may not be sold, transferred or otherwise hypothecated until the
restrictions on transferability imposed by the Compensation Committee are
removed or expire. Generally, holders of restricted stock have all the rights
of a stockholder with respect to the restricted stock granted, including the
right to vote the shares and receive all dividends and other distributions
paid or made with respect thereto.
Performance Awards. Performance awards may be granted by the Compensation
Committee based on the performance of the Company's stock over a period
determined by the Compensation Committee or any other measures determined
appropriate by the Compensation Committee. Payment of performance awards
generally will be in cash unless replaced by a stock payment in full or in
part as determined by the Compensation Committee.
Stock Payments and Dividend Equivalents. The Compensation Committee may
grant stock payments to eligible persons for all or any portion of the
compensation (other than base salary) that would otherwise become payable to
such eligible person in cash. The Compensation Committee may also grant
dividend equivalent rights
31
<PAGE>
based on the dividends declared on the stock of the Company on record dates
during the period between the date an option or stock appreciation right is
granted and the date such option or stock appreciation right is exercised or
such other periods as determined by the Compensation Committee. Dividend
equivalents are converted into additional shares of stock or cash in
accordance with a formula determined by the Compensation Committee.
The Board of Directors may amend, suspend, alter or terminate the Incentive
Plan at any time provided that the Board of Directors shall not amend the
Incentive Plan to reduce the minimum option price requirements set forth in
the Incentive Plan, to increase the maximum number of stock appreciation
rights or shares of stock subject to Incentive Awards available for grant
under the Incentive Plan, to provide for the administration of the Incentive
Plan other than by the Board of Directors or the Compensation Committee, to
change the classes of persons eligible to receive Incentive Awards, to extend
the maximum period during which Incentive Awards may be exercised or to extend
the term of the Incentive Plan, without the approval of a majority of the
outstanding voting stock of the Company. The Compensation Committee may, in
its discretion, provide that upon the consummation of certain events,
including the dissolution or liquidation of the Company, the merger or
consolidation of the Company, the sale of all or substantially all of the
assets of the Company, the acquisition of equity securities of the Company
representing 20% or more of the aggregate voting power of the outstanding
equity securities of the Company or a change in the composition of a majority
of the Board of Directors (collectively, a "Terminating Transaction"), that
outstanding Incentive Awards shall become immediately exercisable upon the
occurrence of such events.
Stock Options Granted. No options were granted by the Company during the
Company's fiscal year ended June 30, 1996 to the Chief Executive Officer or
any other executive officer of the Company. In August and September 1996,
options to purchase an aggregate of 191,000 shares of Common Stock of the
Company were granted to certain employees of the Company, including options
with respect to 30,000 shares granted to Alexander J. Nelson, the Company's
Vice President, Sales and Marketing, at an exercise price of $3.50 per share
and an option to purchase 10,000 shares of the Company's Common Stock granted
to Jay L. Kear, a director of the Company, at an exercise price of $4.50 per
share. Each of the options expires five years from the date of grant. The
options granted to Mr. Nelson and Mr. Kear become exercisable at the rate of
40% on the date that is one year from the date of grant, 30% on the second
anniversary of the grant date and 30% on the third anniversary of the grant
date. In addition, the Compensation Committee may, in its discretion, provide
that upon the occurrence of a Terminating Transaction, the options shall
become immediately exercisable with respect to all of the shares subject to
the options. During fiscal 1996, no options to purchase shares of the
Company's Common Stock were exercised by any executive officers of the Company
and no executive officers held any outstanding options to purchase shares of
the Company's Common Stock.
CERTAIN TRANSACTIONS
Prior to this offering, the Company entered into various transactions with
certain officers, directors and affiliates. Any future transactions, including
any loan transactions, between the Company and its officers, directors or
stockholders owning 5% or more of the voting securities of the Company, or
their affiliates, will be subject to approval by a majority of the
disinterested directors after a finding that the proposed transaction is on
terms no less favorable to the Company than could be obtained from an
independent third party.
Since the formation of the Company, the Company has purchased the
motherboard components of its products from Sunwood Services Limited, a Hong
Kong corporation ("Sunwood"), which has the components manufactured by a
contract manufacturer located in Hong Kong. John R. Amos ("J. Amos") is the
sole stockholder of Sunwood and is a stockholder of the Company and a founder
of the Company. The total amount of purchases from Sunwood during the fiscal
year ended June 30, 1996 was approximately $445,000. The Company believes that
the purchases of components from Sunwood have been and currently are on terms
no less favorable to the Company than were and currently are available from
independent third parties.
On October 1, 1995, the Company borrowed $80,481.45 from Richard P. Stack
("R.P. Stack"), the President and Chief Executive Officer and a director of
the Company, $40,000 from Teresa M. McRae ("T. McRae"), the mother of R.P.
Stack, and $12,000 from Richard A. Stack ("R.A. Stack"), the father of
32
<PAGE>
R.P. Stack. In connection with these loans, the Company entered into non-
interest bearing convertible promissory notes with each of R.P. Stack, T.
McRae and R.A. Stack, which were due and payable on demand. On April 1, 1996,
May 1, 1996 and May 31, 1996, each of R.P. Stack, T. McRae and R.A. Stack,
respectively, elected to convert the aggregate principal amounts outstanding
under their respective notes into 430,000 shares, 86,000 shares and 17,200
shares, respectively, of Common Stock of the Company. The Company believes
that each of the loans and other related transactions between it and each of
R.P. Stack, T. McRae and R.A. Stack were on terms no less favorable to the
Company than were available from independent third parties.
The Company was formed September 19, 1995 by R.P. Stack, C. Norman Campbell
("C.N. Campbell") and J. Amos (collectively, the "Founders"). In connection
with such formation, on September 26, 1995 R.P. Stack purchased 430,000 shares
of Common Stock of the Company in exchange for payment to the Company of
$2,500, C.N. Campbell purchased 288,100 shares of Common Stock of the Company
in exchange for the assignment to the Company of equipment (which C.N.
Campbell acquired in July 1995 at the cost of $1,750) valued at $1,675 by the
Founders based upon the estimated replacement cost of such equipment and C.N.
Campbell's interest in certain intellectual property (which C.N. Campbell and
J. Amos developed in January 1995 at an out-of-pocket cost of less than $500)
valued at less than $500 by the mutual agreement of the Founders, and J. Amos
purchased 77,400 shares of Common Stock of the Company in exchange for the
agreement by J. Amos to pay to the Company $450 (the "Amos Indebtedness"). On
October 1, 1995, the Company borrowed $15,000 from R.P. Stack pursuant to a
promissory note (the "Stack Note") bearing no interest and which provided that
the principal amount of such note was due and payable on October 1, 1996. On
November 1, 1995, C.N. Campbell purchased 288,100 shares of Common Stock of
the Company in exchange for payment to the Company of $1,675. On April 1,
1996, R.P. Stack purchased 430,000 shares of Common Stock of the Company upon
conversion of a convertible promissory note in the amount of $80,481.45. On
May 31, 1996, the Company borrowed $25,000 from J. Amos pursuant to a
promissory note (the "Amos Note") bearing interest at the rate of 10% per
annum and providing that the principal amount of and all accrued and unpaid
interest on such note is due and payable upon the earlier of May 31, 1998 or
the effectiveness of a public offering of the Company. In connection with the
issuance of the Amos Note, the Company granted to J. Amos a warrant to
purchase the number of shares of Common Stock of the Company that results from
dividing 50% of the per share offering price of the Company's Common Stock in
the public offering into $25,000. The aggregate exercise price of such warrant
is $1.00. On July 22, 1996, the Company agreed to cancel the Amos Indebtedness
in exchange for the assignment by J. Amos to the Company of J. Amos' interest
in certain intellectual property (which C.N. Campbell and J. Amos developed in
January 1995 at an out-of-pocket cost of less than $500) valued at $450 by the
mutual agreement of the Founders. On August 6, 1996, the Company granted to
Quinciana D. Campbell, an employee of the Company and the wife of C.N.
Campbell for no consideration, an option to purchase 13,500 shares of Common
Stock of the Company at an exercise price of $3.50 per share under the
Incentive Plan. On August 26, 1996, the Company repaid to R.P. Stack the
principal amount outstanding under the Stack Note.
33
<PAGE>
SECURITY OWNERSHIP
OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996 by each
director and each executive officer of the Company whose compensation is
required to be disclosed in the Summary Compensation Table, each person known
to the Company to be the beneficial owner of more than 5% of the outstanding
Common Stock, and all directors and executive officers of the Company as a
group. Except as otherwise indicated below, the Company believes that each
person listed below has sole voting and investment power with respect to the
shares owned, subject to applicable community property laws.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
BENEFICIAL PRIOR TO THE OFFERING(1) AFTER THE OFFERING(2)
OWNER OR IDENTITY OF -----------------------------------------------------------
GROUP NUMBER PERCENT NUMBER PERCENT
-------------------- -------------- --------------------------- -------------
<S> <C> <C> <C> <C>
Richard P. Stack(3)..... 860,000 40.87% 860,000 29.11%
C. Norman Campbell(3)... 576,200 27.38% 576,200 19.50%
Steven J. Goodman(3).... 306,700(4) 14.51% 306,700 10.35%
Alexander J. Nelson(3).. 107,500 5.11% 107,500 3.64%
Jay L. Kear(3).......... 5,000(5) * 5,000 *
All directors and
executive officers as a
group (6 persons)(6)... 1,855,400 87.55% 1,855,400 62.49%
</TABLE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of September 30, 1996, are
deemed outstanding for computing the percentage of the persons holding
such options but are not deemed outstanding for computing the percentage
of any other person. As of September 30, 1996, no options to acquire
shares of Common Stock were exercisable or became exercisable within 60
days. Includes 15,000 shares of Common Stock subject to warrants
exercisable within 60 days of September 30, 1996. See Footnotes 4 and 5
below.
(2) Assumes the Underwriters' over-allotment option is not exercised. In the
event that the Underwriters' over-allotment option is exercised in full,
the Company will sell an additional 111,250 shares of Common Stock and
certain Selling Stockholders will sell 16,250 shares of Common Stock.
(3) The address of such stockholder is c/o Javelin Systems, Inc., 2882C Walnut
Avenue, Tustin, California 92780.
(4) Includes 296,700 shares issued in favor of The Steven J. Goodman Revocable
Living Trust of which Steven J. Goodman, a director of the Company, is the
sole trustee and the sole beneficiary, and with respect to which Mr.
Goodman has sole voting and investment power. Also, includes 10,000 shares
subject to warrants exercisable within 60 days of September 30, 1996 held
by The Steven J. Goodman Charitable Remainder Trust of which Steven J.
Goodman, a director of the Company, is the sole trustee and an income
beneficiary, and with respect to which Mr. Goodman has sole voting and
investment powers. Mr. Goodman disclaims beneficial ownership of all of
the shares issuable upon exercise of such warrants for all other purposes.
(5) Represents 5,000 shares subject to a warrant exercisable within 60 days of
September 30, 1996 held by the Jay Louis Kear Family Trust of which Jay L.
Kear, a director of the Company, is the trustee.
(6) Includes directors' and executive officers' shares listed above, including
15,000 shares subject to warrants exercisable within 60 days after
September 30, 1996.
34
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information as of September 30, 1996
with respect to each Selling Stockholder that will sell shares of the
Company's Common Stock to the Underwriters if the Underwriters exercise the
over-allotment option granted by the Selling Stockholders and the Company to
the Underwriters. If the over-allotment option is exercised in full, the
Underwriters will purchase an aggregate of 16,250 shares of Common Stock from
the Selling Stockholders as set forth in the following table, and 111,250
shares of Common Stock from the Company. If the over-allotment option is
exercised only in part, the Underwriters have agreed that they first will
purchase from each Selling Stockholder a pro rata portion of the number of
shares to be purchased in connection with the exercise of the over-allotment
option, which pro rata portion shall be determined based upon the number of
shares which each Selling Stockholder has requested to be sold in the offering
and which shall not exceed the number of shares specified in the following
table as being offered by each such Selling Stockholder. If and only if all
Selling Stockholders have sold all of the shares of Common Stock specified in
the following table as being offered by the Selling Stockholders, the
Underwriters will then purchase from the Company any additional shares to be
purchased in connection with such partial exercise of the over-allotment
option, but in no event will more than 111,250 additional shares of Common
Stock be purchased from the Company.
<TABLE>
<CAPTION>
SHARES OF COMMON
NUMBER OF SHARES OF NUMBER OF SHARES OF STOCK OWNED AFTER
COMMON STOCK COMMON STOCK TO BE THE OFFERING
NAME OF OWNED BEFORE OFFERED IN THE -------------------
SELLING STOCKHOLDER THE OFFERING OFFERING NUMBER PERCENT
------------------- ------------------- ------------------- --------- ---------
<S> <C> <C> <C> <C>
Herbert R. and Janice N.
Donica, as joint ten-
ants by the entire-
ties(1)................ 10,750 6,250 4,500 0.15%
Teresa M. McRae(2)...... 86,000 10,000 76,000 2.48%
------ ------ --------- -------
Total .............. 96,750 16,250 80,500 2.63%
====== ====== ========= =======
</TABLE>
- --------
(1) At no time since the date that the Company was formed (September 19, 1995)
has the Selling Stockholder had any position, office or other material
relationship with the Company or any of its predecessors or affiliates.
(2) Teresa M. McRae is the mother of Richard P. Stack, the President, Chief
Executive Officer and a Director of the Company.
35
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, $.01 par value, and 1,000,000 shares of Preferred Stock, $.01
par value. The following description of the Company's capital stock is
qualified in all respects by reference to the Company's Amended and Restated
Certificate of Incorporation ("Certificate of Incorporation"), which has been
filed as an exhibit to the Registration Statement incorporating this
Prospectus.
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may, from time to time, determine, subject
to any preferences which may be granted to the holders of Preferred Stock.
Holders of Common Stock are entitled to one vote per share on all matters on
which the holders of Common Stock are entitled to vote. The Common Stock is
not entitled to preemptive rights and is not subject to redemption or
conversion. Upon liquidation, dissolution or winding-up of the Company, the
assets (if any) legally available for distribution to stockholders are
distributable ratably among the holders of the Common Stock after payment of
all debt and liabilities of the Company and the liquidation preference of any
outstanding class or series of Preferred Stock. All outstanding shares of
Common Stock are, and the shares of Common Stock to be issued pursuant to this
offering will be, when issued and delivered, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to any series of Preferred Stock that the Company may issue
in the future. Certain holders of Common Stock are entitled to the
registration rights discussed below.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series, and
the Board of Directors, without action by the holders of the Common Stock, may
fix or alter the voting rights, redemption provisions (including sinking fund
provisions), dividend rights, dividend rates, liquidation preferences,
conversion rights and any other rights, preferences, privileges and
restrictions of any wholly unissued series of Preferred Stock. The Board of
Directors, without stockholder approval, can issue shares of Preferred Stock
with rights that could adversely affect the rights of the holders of Common
Stock. No shares of Preferred Stock presently are outstanding, and the Company
has no present plans to issue any such shares. The issuance of shares of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and could have the effect of delaying, deferring or preventing a change
in control of the Company or other corporate action.
REPRESENTATIVE'S WARRANTS
The Company has agreed to sell to the Representative warrants to purchase up
to 85,000 shares of Common Stock at an exercise price per share equal to 125%
of the initial public offering price per share (the "Representative's
Warrants"). The Representative's Warrants, which are not transferable (other
than to officers or partners of the Representative) are exercisable for a
period of four years beginning one year from the date of this Prospectus. See
"Underwriting."
PRIVATE PLACEMENT WARRANTS
The Company issued the Private Placement Warrants to accredited investors in
connection with the Company's 1996 Private Placement of $725,000 of promissory
notes. Pursuant to the terms of the Private Placement Warrants, the investors,
in the aggregate, have the right to purchase up to 165,000 shares of the
Company's Common Stock for an aggregate exercise price for all of such shares
of $23.00. The Private Placement Warrants are transferable and may be
exercised at any time after the effectiveness of an underwritten public
offering by the Company. The holders of the Private Placement Warrants are
entitled to the registration rights discussed below.
36
<PAGE>
REGISTRATION RIGHTS
In connection with the sale of 371,950 shares of Common Stock during the
first six months of 1996, the Company granted to the holders of such shares
(the "Private Placement Shares") certain rights to register such shares. In
addition, in connection with the 1996 Private Placement, the Company granted
to the holders of the Private Placement Warrants certain rights to register
the shares of Common Stock issuable upon exercise of the Private Placement
Warrants. If the Company registers any of its Common Stock for its own
account, the holders of the Private Placement Shares and the Private Placement
Warrants are entitled to include their shares of Common Stock in the
registration, subject to certain limitations. Any such shares of Common Stock
not sold in this offering will continue to have the foregoing registration
rights.
The Representative's Warrants have certain rights of registration with
respect to the 85,000 shares of Common Stock issuable upon exercise thereof.
The holders of the shares issuable upon exercise of the Representative's
Warrants may require the Company to file one registration statement under the
Securities Act with respect to such shares. In addition, if the Company
registers any of its Common Stock either for its own account or for the
account of other security holders, the holders of the shares issuable upon
exercise of the Representative's Warrants are entitled to include their shares
of Common Stock in the registration, subject to certain limitations.
The Company generally is required to bear substantially all costs incurred
in connection with any such registrations, other than underwriting discounts
and commissions. The foregoing registration rights could result in substantial
future expense to the Company and could adversely affect any future equity or
debt offerings of the Company.
CERTAIN PROVISIONS OF DELAWARE LAW AND CHARTER DOCUMENTS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware GCL"), an anti-takeover law.
In general, Section 203 of the Delaware GCL prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as the approval of the board of directors and of the
holders of at least two-thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision would be
expected to have an anti-takeover effect, including attempts that might result
in a premium over the market price of the shares of Common Stock held by
stockholders.
As permitted by the Delaware GCL, the Company has included in its
Certificate of Incorporation a provision to eliminate the personal liability
of its directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors to the extent permitted by the Delaware GCL. In
addition, the Amended and Restated Bylaws ("Bylaws") of the Company provide
that the Company is required to indemnify its officers and directors under
certain circumstances, including those circumstances in which indemnification
would otherwise be discretionary, and the Company is required to advance
expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. The Company has
entered into indemnification agreements with its officers and directors
containing provisions that are in some respects broader than the specific
indemnification provisions contained in the Delaware GCL. The indemnification
agreements require the Company, among other things, to indemnify such officers
and directors against certain liabilities that may arise by reason of their
status or service as directors or officers to the fullest extent permitted by
Delaware law and to advance their expenses incurred as a result of any
proceedings against them as to which they could be indemnified. The Company
intends to obtain directors' and officers' liability insurance concurrent with
the effectiveness of this offering. The foregoing provisions of the Company's
Bylaws and indemnification agreements would be available for indemnification
of, and advancing of expenses to, officers and directors of the Company in
connection with liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company
pursuant
37
<PAGE>
to the Company's Bylaws and/or indemnification agreements, or otherwise, the
Company 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. At present, the Company is
not aware of any pending or threatened litigation or proceeding involving a
director, officer, employee or agent of the Company in which indemnification
would be required or permitted. The Company believes that its charter
provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers.
The Company's Certificate of Incorporation and Bylaws provide for the Board
of Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. The provisions of the Certificate of
Incorporation and Bylaws of the Company with respect to the foregoing may be
amended, modified or rescinded by the holders of at least 66 2/3% of the
Company's outstanding voting stock. These provisions could have the effect of
delaying, deferring or preventing a change in control or other corporation
action.
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation, Glendale, California.
38
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 2,954,250 shares of
Common Stock outstanding. All of such outstanding shares will be freely
transferable by persons other than "affiliates" of the Company (as that term
is defined under the Securities Act) without restriction or further
registration under the Securities Act. In addition, all of the 165,000 shares
of Common Stock issuable upon exercise of the Private Placement Warrants will
be similarly freely transferable by persons other than "affiliates" of the
Company. As of September 30, 1996, the Company had 10 holders of record of its
Common Stock and 22 holders of record of its Private Placement Warrants.
Pursuant to the terms of certain lock-up agreements and the Underwriting
Agreement, the Representative has required that 2,088,000 shares of such
Common Stock owned by the Selling Stockholders, officers, directors and other
holders, as well as Common Stock obtained by them upon exercise of stock
options, and all of the 165,000 shares of Common Stock issuable upon exercise
of the Private Placement Warrants, may not be sold until one year from the
effective date of the Registration Statement of which this Prospectus is a
part (the "Effective Date"); provided, however, that holders of 247,600 shares
of Common Stock, none of whom are officers or directors of the Company, nor
holders of the Private Placement Warrants, may sell up to fifty percent (50%)
of the shares of Common Stock held by them at the Effective Date after the
expiration of 180 days from the Effective Date.
With respect to persons who are deemed to be "affiliates" of the Company, in
general, under Rule 144, as currently in effect, an "affiliate" is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of 1% of the then outstanding shares of Common Stock
(approximately 30,000 shares immediately following the offering) or the
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements and the availability of current public
information about the Company.
In addition to the shares of Common Stock that are currently outstanding, a
total of (a) 300,000 shares of Common Stock have been reserved for issuance
under the Company's Incentive Plan, of which options to acquire 191,000 shares
of Common Stock have been granted, (b) 165,000 shares of Common Stock may be
issued upon the exercise of the Private Placement Warrants, and (c) 85,000
shares of Common Stock may be issued upon the exercise of the Representative's
Warrants. See "Description of Capital Stock;" "Management--Certain
Transactions" and "Management--Stock Incentive Award Plan."
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or
contract (such as the Incentive Plan) is entitled to rely on the resale
provisions of Rule 701, which permits non-affiliates to sell their Rule 701
shares to the extent vested on the Effective Date without having to comply
with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with the holding period restrictions of Rule 144, in
each case commencing 90 days after the Effective Date.
Following the consummation of this offering, the Company may file a
registration statement under the Securities Act to register shares of Common
Stock reserved for issuance under the Incentive Plan, thus permitting the
resale of such shares by non-affiliates in the public market without
restriction under the Securities Act. Such registration statement will become
effective immediately upon its filing.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing stockholders or the effect, if any, that sales of
shares by such stockholders will have on the market price of Common Stock
prevailing from time to time. Sales of a substantial number of shares of
Common Stock by existing stockholders could adversely affect prevailing market
prices.
39
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Meridian Capital Group, Inc.
(the "Representative"), have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase from the
Company the number of shares of Common Stock indicated below opposite their
respective names at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions and that the Underwriters are committed to
purchase all of such shares (other than the Common Stock covered by the over-
allotment option as described below), if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Meridian Capital Group, Inc.................................... 650,000
Sharpe Capital, Inc............................................ 200,000
-------
Total...................................................... 850,000
=======
</TABLE>
The Company has been advised by the Representative that the Underwriters
propose to offer the shares to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain securities dealers
at such price less a concession of not more than $.25 per share, and that the
Underwriters and such dealers may reallow to other dealers, including the
Underwriters, a discount not in excess of $.10 per share. After the public
offering, the public offering price and concessions and discounts may be
changed by the Representative. No change in such terms shall change the amount
of proceeds to be received by the Company as set forth on the cover page of
this Prospectus.
The Company and Selling Stockholders have granted an option to the
Underwriters, exercisable in the discretion of the Representative for a period
of 45 days after the date of this Prospectus, to purchase up to an additional
111,250 shares and 16,250 shares of Common Stock, respectively, at the public
offering price set forth on the cover page of this Prospectus less the
underwriting discounts and commissions. The Representative may exercise this
option only to cover over-allotments, if any. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase pro rata from the Company and each Selling Stockholder
an aggregate percentage of such additional shares approximately equal to the
percentage of shares it was obligated to purchase from the Company pursuant to
the Underwriting Agreement.
The Representative has informed the Company that it does not expect any
sales in excess of 5% of the number of shares of Common Stock offered hereby
to be made to discretionary accounts by the Underwriters.
The Company has agreed to pay the Representative a non-accountable expense
allowance of 3% of the offering proceeds, including any proceeds from the sale
of shares subject to the Underwriter's over-allotment option, if exercised.
The Representative's expenses in excess of the non-accountable expense
allowance, including its legal expenses, will be borne by the Representative.
To the extent that the expenses of the Representative are less than the non-
accountable expense allowance, the excess may be deemed to be compensation to
the Representative.
The Underwriting Agreement provides that the Company (and the Selling
Stockholders, with respect to the over-allotment option) will indemnify the
Underwriters and their controlling persons against certain liabilities
40
<PAGE>
under the Securities Act or will contribute to payments the Underwriters and
their controlling persons may be required to make in respect thereof. The
Company and the Selling Stockholders have 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.
The Company has agreed to sell to the Representative, for a total of $8.50,
warrants (the "Representative's Warrants") to purchase up to 85,000 shares of
Common Stock at an exercise price per share equal to 125% of the initial
public offering price per share. The Representative's Warrants are exercisable
for a period of four years beginning one year from the date of this
Prospectus, and are not transferable for a period of one year except to
officers of the Representative or any successor to the Representative. In
addition, the Company has granted certain rights to the holders of the
Representative's Warrants to register the Common Stock underlying the
Representative's Warrants under the Securities Act.
The Company, the Selling Stockholders, certain other existing stockholders,
the holders of the Private Placement Warrants and the officers and directors
of the Company have agreed not to sell any shares of Common Stock prior to the
expiration of one year from the date of this Prospectus; provided, however,
that the Selling Stockholders and the other existing stockholders (other than
the officers and directors of the Company and the holders of the Private
Placement Warrants) may sell up to fifty percent (50%) of the shares of Common
Stock held by them at the Effective Date after the expiration of 180 days from
the Effective Date. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no market for the Common Stock of the
Company. Accordingly, the initial public offering price has been determined by
negotiations between the Company and the Representative. Among the factors
considered in determining the initial public offering price were the Company's
results of operations, current financial condition and products, the markets
addressed by the Company's products, the Company's future prospects, the
experience of its management, the general condition of the equity securities
market and the demand for similar securities of companies considered
comparable to the Company.
The Representative was registered as a broker/dealer and became a member of
the National Association of Securities Dealers, Inc. in October 1994. The
Representative has previously participated in two public offerings as an
underwriter.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of
the Company and the Securities and Exchange Commission, Washington, D.C. See
"Additional Information."
41
<PAGE>
LEGAL MATTERS
The legality of the issuance of the shares of Common Stock offered hereby
and certain other legal matters will be passed upon for the Company by Allen,
Matkins, Leck, Gamble & Mallory LLP, a limited liability partnership including
professional corporations, Irvine, California. Certain legal matters will be
passed upon for the Underwriters by Radcliff, Frandsen, Tricker & Dongell, Los
Angeles, California.
EXPERTS
The financial statements of Javelin Systems, Inc. at June 30, 1996 and for
the period from September 19, 1995 (date of inception) to June 30, 1996
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A registration statement on Form SB-2, including amendments thereto (herein,
the "Registration Statement") relating to the Common Stock offered hereby has
been filed by the Company with the Securities and Exchange Commission (the
"Commission"). This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office located at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, as well as at the following regional offices:
the New York Regional Office located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and the Chicago Regional Office located at Northwestern
Atrium Center, 500 West Madison Street, Chicago Illinois 60661-2511 and copies
of all or any part thereof may be obtained from the Public Reference Branch of
the Commission upon the payment of certain fees prescribed by the Commission.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The Commission's address on the World Wide
Web is http://www.sec.gov.
42
<PAGE>
JAVELIN SYSTEMS, INC.
FINANCIAL STATEMENTS
FOR THE PERIOD FROM SEPTEMBER 19, 1995
(DATE OF INCEPTION) TO JUNE 30, 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Financial Statements
Balance Sheet............................................................... F-3
Statement of Operations..................................................... F-4
Statement of Stockholders' Equity........................................... F-5
Statement of Cash Flows..................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Javelin Systems, Inc.
We have audited the accompanying balance sheet of Javelin Systems, Inc. as
of June 30, 1996, and the related statements of operations, stockholders'
equity and cash flows for the period from September 19, 1995 (date of
inception) to June 30, 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Javelin Systems, Inc. at
June 30, 1996, and the results of its operations and its cash flows for the
period from September 19, 1995 (date of inception) to June 30, 1996 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Orange County, California
August 15, 1996
except as to Note 8, as to which the
date is August 29, 1996.
F-2
<PAGE>
JAVELIN SYSTEMS, INC.
BALANCE SHEET
JUNE 30, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................. $ 6,404
Accounts receivable............................................... 693,679
Inventories....................................................... 209,350
Other current assets.............................................. 4,107
---------
Total current assets................................................ 913,540
Furniture, fixtures and equipment, at cost:
Computer equipment................................................ 21,960
Furniture and fixtures............................................ 4,455
Leasehold improvements............................................ 4,551
---------
30,996
Less accumulated depreciation and amortization.................... 3,044
---------
27,922
Other assets, net................................................... 9,851
---------
Total assets........................................................ $ 951,313
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................................... $ 206,552
Accounts payable.................................................. 356,769
Accrued expenses.................................................. 32,973
Current maturities of notes payable to stockholders............... 65,000
Current maturities of long-term debt.............................. 20,000
---------
Total current liabilities........................................... 681,294
Notes payable to stockholders, net of current portion............... 25,000
Long-term debt, net of current portion.............................. 50,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares--1,000,000
Issued and outstanding shares--none............................. --
Common stock, $0.01 par value:
Authorized shares--10,000,000
Issued and outstanding shares--2,104,250........................ 369,206
Deferred charge related to warrants issued in connection with
notes payable.................................................... (119,845)
Accumulated deficit............................................... (54,342)
---------
Total stockholders' equity.......................................... 195,019
---------
Total liabilities and stockholders' equity.......................... $ 951,313
=========
</TABLE>
See accompanying notes.
F-3
<PAGE>
JAVELIN SYSTEMS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM SEPTEMBER 19, 1995 (DATE OF INCEPTION) TO JUNE 30, 1996
<TABLE>
<S> <C>
Net sales.......................................................... $1,463,627
Cost of sales...................................................... 1,104,171
----------
Gross profit....................................................... 359,456
Operating expenses:
Research and development......................................... 46,771
Selling and marketing............................................ 83,495
General and administrative....................................... 244,736
----------
Total operating expenses........................................... 375,002
----------
Operating loss..................................................... (15,546)
Interest expense................................................... 38,796
----------
Net loss........................................................... $ (54,342)
==========
Net loss per share................................................. $ (0.03)
==========
Shares used in computing net loss per share........................ 2,086,260
==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
JAVELIN SYSTEMS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 19, 1995 (DATE OF INCEPTION) TO JUNE 30, 1996
<TABLE>
<CAPTION>
DEFERRED
CHARGE RELATED
TO WARRANTS
ISSUED IN
COMMON STOCK CONNECTION
------------------ WITH NOTES ACCUMULATED
SHARES AMOUNT PAYABLE DEFICIT TOTAL
--------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
for cash............... 1,274,950 $ 85,050 $ -- $ -- $ 85,050
Issuance of common stock
for equipment.......... 288,100 1,675 -- -- 1,675
Issuance of common stock
upon conversion of
notes payable.......... 541,200 152,481 -- -- 152,481
Value assigned to war-
rants issued in connec-
tion with notes pay-
able................... -- 130,000 (130,000) -- --
Amortization of deferred
charge................. -- -- 10,155 -- 10,155
Net loss................ -- -- -- (54,342) (54,342)
--------- -------- --------- -------- --------
Balance at June 30,
1996................... 2,104,250 $369,206 $(119,845) $(54,342) $195,019
========= ======== ========= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
JAVELIN SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 19, 1995 (DATE OF INCEPTION) TO JUNE 30, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................... $ (54,342)
Adjustments to reconcile net loss to net cash used in operating ac-
tivities:
Depreciation and amortization.................................... 3,251
Amortization of deferred charge related to warrants.............. 10,155
Changes in operating assets and liabilities:
Accounts receivables........................................... (693,679)
Inventories.................................................... (209,350)
Other current assets........................................... (4,107)
Accounts payable............................................... 356,769
Accrued expenses............................................... 32,973
---------
Net cash used in operating activities.............................. (558,330)
INVESTING ACTIVITIES
Purchase of furniture, fixtures and equipment...................... (29,291)
Other.............................................................. (8,542)
---------
Net cash used in investing activities.............................. (37,833)
FINANCING ACTIVITIES
Net borrowings under line of credit................................ 206,552
Proceeds from issuance of notes payable to related parties......... 222,481
Increase in long-term debt......................................... 90,000
Issuance of common stock........................................... 85,050
Deferred offering costs............................................ (1,516)
---------
Net cash provided by financing activities.......................... 602,567
---------
Net increase in cash............................................... 6,404
Cash at beginning of period........................................ --
---------
Cash at end of period.............................................. $ 6,404
=========
SUPPLEMENTARY DISCLOSURE OF CASH PAID DURING THE PERIOD FOR:
Interest........................................................... $ 28,641
=========
State franchise taxes.............................................. $ 800
=========
SUPPLEMENTARY DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Equipment acquired for common stock................................ $ 1,675
=========
Notes payable converted to common stock............................ $ 152,481
=========
</TABLE>
See accompanying notes.
F-6
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Javelin Systems, Inc. ("the Company") was incorporated in the State of
Delaware under the name of Sunwood Research, Inc. on September 19, 1995. The
Company designs, develops, markets and sells open system touch screen point-
of-sale ("POS") computers, primarily for the foodservice industry.
The Company has incurred losses of $54,342 from inception, primarily due to
the start-up nature of its business. The ability of the Company to establish
itself as a successful operating entity on an ongoing basis is dependent upon
future events, including further marketing of its products and achieving
profitable operations. As discussed in Note 8, the Company plans to sell its
common stock through an initial public offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying financial
statements. Actual results could differ from those estimates.
INVENTORIES
Inventories consist primarily of computer hardware and components and are
stated at the lower of cost (first-in, first-out) or market as follows:
<TABLE>
<S> <C>
Raw materials....................................................... $203,950
Finished goods...................................................... 5,400
--------
$209,350
========
</TABLE>
CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company operates within an industry that is subject to rapid
technological advancement, intense competition and uncertain market
acceptance. The introduction of new technologies, competitors' alternative
products and ultimate market acceptance of the products sold by the Company,
could have a substantial impact on the future operations of the Company.
Financial instruments which potentially subject the Company to a
concentration of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its customers
and collateral is generally not required. Accordingly, the Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential losses which, when realized, have been within the range of
management's expectations. As of June 30, 1996, four customers accounted for
68% of total accounts receivable.
Sales to two customers aggregated 30% and 24%, respectively, of net sales
since inception.
DEFERRED OFFERING COSTS
Deferred offering costs of $1,516 consist of incremental costs incurred in
connection with the planned initial public offering described in Note 8. Such
costs will be offset against the proceeds from the sale of securities upon
successful completion of the planned public offering.
F-7
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation is computed using the straight line method over the estimated
useful lives of the respective assets, generally three years.
WARRANTIES
The Company's products are under warranty for defects in material and
workmanship for one year. Certain components included in the Company's
products are covered by manufacturer's warranties. Costs related to after-sale
service and repair are accrued as warranty expense at the time of sale, and to
date, such costs have been insignificant.
REVENUE RECOGNITION
Revenues from sales of products are recognized upon shipment of the
products. The Company generally does not have any significant remaining
obligations upon shipment of its products. Product returns and sales
allowances, which have not been significant historically, are provided for at
the date of sale.
RESEARCH AND DEVELOPMENT
The Company expenses the cost of research and development as incurred.
Continuous research and development is necessary for the Company to maintain
its competitive position.
ADVERTISING COSTS
The Company expenses the production costs of advertising as incurred. To
date, advertising expenses have not been significant.
TAXES BASED ON INCOME
Deferred taxes are provided for items recognized in different periods for
financial and tax reporting purposes in accordance with Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes.
NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted average number of
common shares and common share equivalents outstanding during the period
presented. Common share equivalents result from the effect of outstanding
options and warrants to purchase common stock. Pursuant to the requirements of
the Securities and Exchange Commission, common shares and common share
equivalents issued by the Company during the twelve months immediately
preceding the proposed initial public offering have been included in the
calculation of the shares used in computing net loss per common share as if
they were outstanding for the entire period presented (using the treasury
stock method and the estimated public offering price of $6 per share in
calculating equivalent shares).
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation (FAS 123) was issued and is effective
for fiscal years that begin after December 15, 1995. The Company intends to
continue to account for employee stock options in accordance with APB Opinion
No. 25 and will make the pro forma disclosures required by FAS 123 in fiscal
1997. Accordingly, the adoption of the standard will not have a material
effect on the Company's financial position or results of operations.
F-8
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. LINE OF CREDIT
The Company has a line of credit with a financial institution under which it
may borrow up to 80% of the Company's eligible accounts receivable (as
defined) with monthly interest based upon the prime rate of a national
financial institution, however, such rate cannot be less than 2.5% per month.
Borrowings under the line of credit are collateralized by substantially all
the assets of the Company. The line of credit expires in December 1996. As of
June 30, 1996, borrowings under the line aggregated $206,552 (2.5% per month)
and there was $20,898 available for future borrowings.
3. STOCKHOLDERS' EQUITY
WARRANTS
In connection with the issuance of various promissory notes through June 30,
1996 the Company granted warrants to acquire the Company's common stock to the
noteholders. The number of shares that can be acquired under the warrants is
based upon the per share offering price in an initial public offering by the
Company. Assuming an offering price of $5 per share, the warrants will entitle
the holders to purchase a total of 40,000 shares of the Company's common stock
for an aggregate purchase price of $4. The outstanding warrants become
exercisable following the effectiveness of a public offering of the Company's
common stock and have no expiration date. The Company has assigned a value of
$130,000 to the warrants which has been accounted for as additional paid in
capital in the accompanying financial statements. The deferred charge related
to the warrants is being amortized over the lives of the related promissory
notes.
4. INCOME TAXES
No provision for federal or state income taxes is required since the Company
has incurred losses since inception.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases
for financial reporting purposes. Temporary differences which give rise to
deferred tax assets are as follows:
<TABLE>
<S> <C>
Net operating loss carryforwards................................... $ 7,200
Accrued liabilities................................................ 10,400
Valuation allowance................................................ (17,600)
--------
Net deferred tax assets............................................ $ --
========
</TABLE>
The Company has incurred operating losses since inception, and due to the
uncertainty regarding future results of operations, the Company has provided a
full valuation allowance against its net deferred tax assets.
At June 30, 1996, the Company has a net operating loss carryforward
available to offset future taxable income of approximately $18,000 which
expires in 2011. Under the change in ownership provisions of the Tax Reform
Act of 1986, net operating loss carryforwards for federal income tax reporting
purposes may be subject to annual limitations. Should a change in ownership
occur, the availability of net operating loss carryforwards may be limited in
future years.
F-9
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE TO STOCKHOLDERS AND LONG-TERM DEBT
Notes payable to stockholders at June 30, 1996 consists of the following:
<TABLE>
<S> <C>
Promissory notes, bearing interest at 10%, due on various dates in
1997 and 1998..................................................... $75,000
Unsecured, noninterest bearing demand note......................... 15,000
-------
90,000
Less current portion............................................... 65,000
-------
$25,000
=======
</TABLE>
Long-term debt at June 30, 1996 consists of the following:
<TABLE>
<S> <C>
Unsecured demand note, bearing interest at 8%....................... $20,000
Promissory notes, bearing interest at 10% due on various dates in
1997 and 1998...................................................... 50,000
-------
70,000
Less current portion................................................ 20,000
-------
$50,000
=======
</TABLE>
Annual maturities of notes payable to stockholders and long-term debt are as
follows:
<TABLE>
<S> <C>
1997................................................................. $85,000
1998................................................................. 75,000
</TABLE>
Promissory notes become due and payable upon the effectiveness of a public
offering of the Company's common stock.
Due to their short-term nature and/or market rate of interest, the fair
values of the Company's notes payable to stockholders, long-term debt and
other financial instruments approximate their carrying values.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities and certain equipment under noncancelable
operating leases which expire at various dates through 1998.
Future minimum annual lease payments at June 30, 1996 are as follows:
<TABLE>
<S> <C>
1997................................................................. $42,853
1998................................................................. 42,718
1999................................................................. 8,767
-------
$94,338
=======
</TABLE>
Rent expense under operating lease agreements aggregated $16,596 for the
period ended June 30, 1996, and is included in general and administrative
expenses in the accompanying statement of operations.
F-10
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED PARTY
During the period ended June 30, 1996, the Company purchased a total of
approximately $445,000 of electronic components from a company owned by a
shareholder and founder of the Company. Included in accounts payable at June
30, 1996, is $73,580 due to that Company.
8. SUBSEQUENT EVENTS
STOCK SPLIT
On August 23, 1996, the Company effected a 4,300-for-1 stock split. All
references in the accompanying financial statements and notes to shares
outstanding and per share amounts have been adjusted to reflect the impact of
this stock split.
STOCK OPTIONS
In August 1996, the Company adopted a stock incentive award plan (the
"Plan") under which the Board of Directors, or a committee appointed for such
purpose, may from time to time grant options, restricted stock or other stock-
based compensation to the directors, officers, eligible employees or
consultants of the Company to acquire up to an aggregate of 300,000 shares of
common stock, in such numbers, under such terms and at such exercise prices as
are determined by the Board or such committee. It is the Company's intention
to grant options under the Plan principally to employees. In August 1996, the
Company granted options to certain employees and a director to purchase an
aggregate of 121,000 shares of its common stock at exercise prices of $3.50 to
$4.50 per share.
BRIDGE FINANCING
In July and August 1996, the Company issued $600,000 of the Company's 10%
Promissory Notes, due on the earlier of (i) one year from the date of the
respective notes, or (ii) the effectiveness of a public offering of the
Company's common stock, together with warrants to purchase shares of the
Company's common stock. The majority of the warrants expire 90 days after the
effectiveness of a public offering of the Company's common stock. The number
of shares of common stock that can be acquired under the warrants will be
based upon the offering price of the Company's common stock in a public
offering. Assuming an initial public offering price of $5 per share, these
warrants will entitle the holders to purchase a total of 125,000 shares of the
Company's common stock for the aggregate exercise price of $19.00.
REGISTRATION STATEMENT
On August 6, 1996, the Board of Directors authorized the Company to file a
registration statement on Form SB-2 with the Securities and Exchange
Commission for an initial public offering of 850,000 shares of common stock at
an estimated offering price of $5.00 to $7.00 per share. In connection with
the offering, the Company will sell the representatives of the underwriters a
warrant, for $8.50, to purchase 85,000 shares of the Company's common stock at
125 percent of the offering price.
F-11
<PAGE>
Hardware Solutions for quick service restaurants, full service restaurants,
hospitality and retail establishments including:
Transaction Processing
In-Store Controls
Management Information
Javelin Systems, Inc. is dedicated to offering the latest in design and
technology.
[COLOR PHOTOGRAPHS]
<PAGE>
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- -------------------------------------------------------------------------------
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 IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF THE
COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 14
Dilution.................................................................. 15
Capitalization............................................................ 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 21
Management................................................................ 28
Security Ownership of Certain Beneficial Owners and Management............ 34
Selling Stockholders...................................................... 35
Description of Capital Stock.............................................. 36
Shares Eligible for Future Sale........................................... 39
Underwriting.............................................................. 40
Legal Matters............................................................. 42
Experts................................................................... 42
Additional Information.................................................... 42
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL NOVEMBER 19, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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[LOGO]
850,000 SHARES
COMMON STOCK
---------------
PROSPECTUS
---------------
MERIDIAN CAPITAL GROUP, INC.
SHARPE CAPITAL, INC.
OCTOBER 25, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws require that directors and officers be indemnified to
the maximum extent permitted by Delaware law.
The Delaware GCL provides that a director or officer of a corporation (i)
shall be indemnified by the corporation for all expenses of litigation or
other legal proceedings when he is successful on the merits, (ii) may be
indemnified by the corporation for the expenses, judgments, fines and amounts
paid in settlement of such litigation (other than a derivative suit) even if
he is not successful on the merits if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation (and, in the case of a criminal proceeding, had no reason to
believe his conduct was unlawful), and (iii) may be indemnified by the
corporation for expenses of a derivative suit (a suit by a stockholder
alleging a breach by a director or officer of a duty owed to the corporation),
even if he is not successful on the merits, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, provided that no such indemnification may be made in
accordance with this clause (iii) if the director or officer is adjudged
liable to the corporation, unless a court determines that, despite such
adjudication but in view of all of the circumstances, he is entitled to
indemnification of such expenses. The indemnification described in clauses
(ii) and (iii) above shall be made upon order by a court or a determination by
(i) a majority of disinterested directors, (ii) if there are no such directors
or if such directors so direct, by independent legal counsel in a written
opinion or (iii) the stockholders that indemnification is proper because the
applicable standard of conduct is met. Expenses incurred by a director or
officer in defending an action may be advanced by the corporation prior to the
final disposition of such action upon receipt of an undertaking by such
director or officer to repay such expenses if it is ultimately determined that
he is not entitled to be indemnified in connection with the proceeding to
which the expenses relate. The Company's Certificate of Incorporation includes
a provision eliminating, to the fullest extent permitted by Delaware law,
director liability for monetary damages for breaches of fiduciary duty.
The Company has entered into indemnity agreements (the "Indemnity
Agreements") with each director or officer designated by the Board of
Directors. The Indemnity Agreements require that the Company indemnify
directors and officers who are parties thereto in all cases to the fullest
extent permitted by Delaware law. Under the Delaware GCL, except in the case
of litigation in which a director or officer is successful on the merits,
indemnification of a director or officer is discretionary rather than
mandatory. Consistent with the Company's Bylaw provision on the subject, the
Indemnity Agreements require the Company to make prompt payment of litigation
expenses at the request of the director or officer in advance of
indemnification provided that he undertakes to repay the amounts if it is
ultimately determined that he is not entitled to indemnification for such
expenses. The advance of litigation expenses is mandatory; under the Delaware
GCL such advance would be discretionary. Under the Indemnity Agreements, the
director or officer is permitted to bring suit to seek recovery of amounts due
under the Indemnity Agreements and is entitled to recover the expenses of
seeking such recovery unless a court determines that the action was not made
in good faith or was frivolous. Without the Indemnity Agreements, the Company
would not be required to pay the director or officer for his expenses in
seeking indemnification recovery against the Company. Under the Indemnity
Agreements, directors and officers are not entitled to indemnity or advancing
of expenses (i) if such director or officer has recovered payment under an
insurance policy for the subject claim, or has otherwise been indemnified
against the subject claim, (ii) for actions initiated or brought by the
director or officer and not by way of defense (except for actions seeking
indemnity or expenses from the Company), (iii) if the director or officer
violated section 16(b) of the Securities Exchange Act of 1934 or similar
provisions of law or (iv) if a court of competent jurisdiction determines that
the director or officer failed to act in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the Company or, with
respect to any proceeding which is of a criminal nature, had reasonable cause
to believe his conduct was unlawful. Absent the Indemnity Agreements,
indemnification that might be made available to directors and officers could
be changed by amendments to the Company's Certificate of Incorporation or
Bylaws.
II-1
<PAGE>
The Company intends to have a policy of directors and officers liability
insurance in effect upon consummation of the offering contemplated hereby
which will insure directors and officers against the cost of defense,
settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
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 all expenses, other than the underwriting
discounts and commissions and the non-accountable expense allowance, payable
by the Registrant in connection with the sale of the Common Stock being
registered. All of the amounts will be paid by the Registrant, and Selling
Stockholders will not be required to pay any portion of such amounts. All of
the amounts are estimates except for the registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
Registration fee................................................ $ 2,606
NASD filing fee................................................. 1,256
Nasdaq inclusion fee............................................ 7,954
Blue sky qualification fees and expenses........................ 18,162
Directors and officers insurance................................ 88,000
Printing and engraving expenses................................. 77,000
Legal fees and expenses......................................... 120,000
Accounting fees and expenses.................................... 45,000
Transfer agent and registrar fees............................... 3,500
Miscellaneous................................................... 5,800
--------
Total......................................................... $369,278
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since inception (September 19, 1995), the Registrant has sold and issued the
following unregistered securities pursuant to an exemption under the
Securities Act:
1. On September 26, 1995, the Registrant issued 430,000 shares of Common
Stock to Richard P. Stack, 288,100 shares of Common Stock to C. Norman
Campbell and 77,400 shares of Common Stock to John R. Amos at a per share
price of approximately $.006 per share. The issuance of the Common Stock was
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated
thereunder because the issuance did not involve a public offering.
2. On November 1, 1995, the Registrant issued 288,100 shares of Common Stock
to C. Norman Campbell and 107,500 shares of Common Stock to Alex Nelson at a
per share price of approximately $.006 per share. The issuance of the Common
Stock was deemed to be exempt from registration under the Securities Act by
virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D
promulgated thereunder because the issuance did not involve a public offering.
3. On January 9, 1996, the Registrant issued 180,600 shares of Common Stock
to The Steven J. Goodman Revocable Living Trust ("Goodman") and 25,800 shares
of Common Stock to GAK Limited, a Delaware limited partnership ("GAK"), of
which Horace and Madeleine Hertz are the general partners, at a per share
price of approximately $.02 per share. The issuance of the Common Stock was
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated
thereunder because the issuance did not involve a public offering.
II-2
<PAGE>
4. On April 1, 1996, the Registrant issued 430,000 shares of Common Stock to
Richard P. Stack at a per share price of approximately $.19 per share upon
conversion of a convertible promissory note originally issued in October 1995.
The issuance of the convertible promissory note and the Common Stock was
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated
thereunder because the issuance did not involve a public offering.
5. On April 3, 1996, the Registrant issued 116,100 shares of Common Stock to
Goodman at a per share price of approximately $.22 per share. The issuance of
the Common Stock was deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of
Regulation D promulgated thereunder because the issuance did not involve a
public offering.
6. On May 1, 1996, the Registrant issued 86,000 shares of Common Stock to
Teresa M. McRae at a per share price of approximately $.47 per share upon
conversion of a convertible promissory note originally issued in October 1995.
The issuance of the convertible promissory note and the Common Stock was
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated
thereunder because the issuance did not involve a public offering.
7. On May 23, 1996, the Registrant issued 38,700 shares of Common Stock to
GAK at a per share price of approximately $.65 per share. The issuance of the
Common Stock was deemed to be exempt from registration under the Securities
Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation
D promulgated thereunder because the issuance did not involve a public
offering.
8. On May 31, 1996, the Registrant issued 17,200 shares of Common Stock to
Richard A. Stack at a per share price of approximately $.70 per share upon
conversion of a convertible promissory note originally issued in October 1995.
The issuance of the convertible promissory note and the Common Stock was
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated
thereunder because the issuance did not involve a public offering.
9. On June 3, 1996, the Registrant issued 10,750 shares of Common Stock to
Herbert R. and Janice N. Donica, as joint tenants by the entireties, at a per
share price of approximately $2.33 per share. The issuance of the Common Stock
was deemed to be exempt from registration under the Securities Act by virtue
of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated
thereunder because the issuance did not involve a public offering.
10. On October 1, 1995, the Registrant issued a Promissory Note in the
amount of $15,000 to Richard P. Stack. The issuance of the Promissory Note was
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated
thereunder because the issuance did not involve a public offering.
11. In February 1996, the Company issued two Promissory Notes, each in the
original principal amount of $20,000, to each of Peter Aiello and Jim Cox. The
Promissory Note issued to Mr. Cox is convertible at his option into shares of
Common Stock at a per share price of $2.50 per share. Effective as of June 30,
1996, Mr. Cox converted his Promissory Note into 8,000 shares of Common Stock.
The issuance of the Promissory Notes and the Common Stock issued upon
conversion of Mr. Cox's Promissory Note was deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2) of the
Securities Act and Rule 504 of Regulation D promulgated thereunder because the
issuance did not involve a public offering.
12. At various times commencing May 1996 through August 1996, the Registrant
issued Promissory Notes to the following accredited investors in the following
original principal amounts: (1) The Steven J. Goodman Charitable Remainder
Trust (the "Goodman CRT"), $50,000; (2) John R. Amos, $25,000; (3) Kanayo
Partabrai Gangwani, $25,000; (4) Jack S. Kompan, two Promissory Notes
aggregating $50,000; (5) Universal Partners, L.P., a partnership that
specializes in providing bridge financing of which Windy City Bridges, Inc. is
a general partner, $25,000; (6) Scott Robinson, $25,000; (7) Rebecca L.
Gregarek, $12,500; (8) David M. Munch, $25,000;
II-3
<PAGE>
(9) David J. Gregarek, $25,000; (10) Jay Louis Kear Family Trust, $25,000;
(11) Mildred J. Geiss, $37,500; (12) Westerling Family Trust, $100,000; (13)
Yu Family Revocable Trust, $25,000; (14) Kenneth and Linda Bloom, $25,000;
(15) Christopher Neil, $25,000; (16) Izzy Rabinowitz, $50,000; (17) Don R.
Thorne, $50,000; (18) Mark Ratto, $12,500; (19) B.C. Investments, $12,500;
(20) Chris Brown, $50,000; (21) Victor A. Ince and Terry A. Ince, joint
tenants, $25,000; and (22) Caribou Bridge Fund, LLC, $25,000. Concurrent with
the issuance of each of the foregoing Promissory Notes, the Registrant issued
warrants to purchase shares of Common Stock (the "Warrants") in an amount
equal to the number of shares that results from dividing the initial public
offering price into the original principal amount of the Promissory Note, with
the exception of the Promissory Notes issued to Mr. Amos, Mr. Gangwani and
Mr. Kompan which provided for 50% of the initial public offering price being
divided into the original principal amount of their respective Promissory
Notes. The total purchase price for all of the shares of Common Stock issuable
upon the exercise of such Warrants is an aggregate of $1.00 per Warrant, or
$23.00 in the aggregate. The Warrants become exercisable after the Registrant
obtains effectiveness of an underwritten public offering of its Common Stock.
In connection with the sales of certain of the Promissory Notes and Warrants,
the Registrant paid a total of $15,000 in commissions to Spencer Edwards in
its capacity as a selling agent and $27,500 to Meridian Capital Group, Inc. in
its capacity as a selling agent. The issuance of the Promissory Notes and the
Warrants was deemed to be exempt from registration under the Securities Act by
virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D
promulgated thereunder because the issuance did not involve a public offering.
13. In August and September 1996, the Registrant granted options to purchase
an aggregate of 111,000 shares of Common Stock at exercise prices of $3.50 per
share, 60,000 shares at exercise prices of $4.50 per share and 20,000 shares
at exercise prices of $2.50 per share to certain officers, directors, key
employees and consultants under the Registrant's 1996 Stock Incentive Award
Plan. The grant of all such options was deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated under the
Securities Act.
The foregoing information has been adjusted to reflect a 4,300 for 1 stock
split of the Common Stock effected in August 1996.
ITEM 27. EXHIBITS.
The following is a list of exhibits filed as a part of this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement by and between the Registrant and
Meridian Capital Group, Inc.(2)
3.1 Amended and Restated Certificate of Incorporation of Registrant(2)
3.2 Amended and Restated Bylaws of Registrant(2)
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Registrant(2)
3.4 Amendment to Amended and Restated Bylaws of Registrant(2)
4.1 Form of Representative's Warrant Agreement by and between the
Registrant and Meridian Capital Group, Inc.
4.2 Form of Certificate Evidencing Shares of Registrant's Common Stock(2)
5.1 Opinion of Allen, Matkins, Leck, Gamble & Mallory LLP
10.1 1996 Stock Incentive Award Plan of Registrant(2)
10.2 Form of 1996 Director Non-Qualified Stock Option Agreement(2)
10.3 Form of 1996 Employee Non-Qualified Stock Option Agreement(2)
10.4 Employment Agreement dated August 19, 1996 by and between the
Registrant and Richard P. Stack(2)
10.5 Employment Agreement dated August 19, 1996 by and between the
Registrant and C. Norman Campbell(2)
10.6 Form of Indemnity Agreement entered into with each of the Registrant's
officers and directors(2)
10.7 Form of Stockholders Lock-Up Agreement to be entered into by the
stockholders of Registrant(2)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.8 Form of Directors and Officers Lock-Up Agreement to be entered into by
directors and officers of Registrant(2)
10.9 Form of Bridge Investors Lock-Up Agreement to be entered into by the
holders of Warrants to purchase Common Stock of Registrant(2)
10.10 Promissory Note dated October 1, 1995 in the original principal amount
of $80,481.45 payable by the Registrant in favor of Richard P. Stack
(the "R.P. Stack Note")(2)
10.11 Letter Agreement dated April 1, 1996 between the Registrant and
Richard P. Stack regarding the conversion of the R.P. Stack Note into
shares of the Common Stock of the Registrant(2)
10.12 Promissory Note dated October 1, 1995 in the original principal amount
of $40,000 payable by the Registrant in favor of Teresa M. McRae (the
"T. McRae Note")(2)
10.13 Letter Agreement dated May 1, 1996 between the Registrant and Teresa
M. McRae regarding the conversion of the T. McRae Note into shares of
the Common Stock of the Registrant(2)
10.14 Promissory Note dated October 1, 1995 in the original principal amount
of $12,000 payable by the Registrant in favor of Richard A. Stack (the
"R.A. Stack Note")(2)
10.15 Letter Agreement dated May 31, 1996 between the Registrant and Richard
A. Stack regarding the conversion of the R.A. Stack Note into shares
of the Common Stock of the Registrant(2)
10.16 Standard Industrial/Commercial Single-Tenant Lease-Gross dated October
19, 1995 by and between Robert P. Peebles Trust, Dated 4-11-79, and
the Registrant for that certain real property located at 2882C Walnut
Avenue, Tustin, California 92780(2)
10.17 Loan and Security Agreement dated December 4, 1995 by and between Main
Credit Corp. and the Registrant, as amended by that certain letter
agreement dated June 17, 1996(2)
10.18 Accounts Collateral Security Agreement dated December 4, 1995 by and
between Main Credit Corp. and the Registrant(2)
10.19 Inventory Collateral Security Agreement dated December 4, 1995 by and
between Main Credit Corp. and the Registrant(2)
10.20 Equipment Collateral Security Agreement dated December 4, 1995 by and
between Main Credit Corp. and the Registrant(2)
10.21 Stock Purchase Agreement dated January 9, 1996 by and among the
Registrant, the Steven J. Goodman Revocable Living Trust and Richard
P. Stack(2)
10.22 Stock Purchase Agreement dated January 9, 1996 by and among the
Registrant, GAK Limited and Richard P. Stack(2)
10.23 Letter Agreement dated February 15, 1996 between the Registrant and
Jim Cox regarding loan in the original principal amount of $20,000
made by Jim Cox to the Registrant (the "Cox Note")(2)
10.24 Letter Agreement dated June 30, 1996 between the Registrant and Jim
Cox regarding the conversion of the Cox Note into shares of the Common
Stock of Registrant(2)
10.25 Letter Agreement dated February 16, 1996 between the Registrant and
Peter Aiello regarding loan in the original principal amount of
$20,000 made by Peter Aiello to the Registrant(2)
10.26 Stock Purchase Agreement dated April 3, 1996 by and among the
Registrant, the Steven J. Goodman Revocable Living Trust and Richard
P. Stack(2)
10.27 Securities Purchase Agreement dated May 17, 1996 by and between the
Registrant and John R. Amos(2)
10.28 Promissory Note dated May 31, 1996 in the original principal amount of
$25,000 payable by the Registrant in favor of John R. Amos(2)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.29 Warrant dated May 31, 1996 issued by the Registrant in favor of John
R. Amos(2)
10.30 Securities Purchase Agreement dated May 17, 1996 by and between the
Registrant and Jack S. Kompan(2)
10.31 Promissory Note dated May 31, 1996 in the original principal amount of
$25,000 payable by the Registrant in favor of Jack S. Kompan(2)
10.32 Warrant dated May 31, 1996 issued by the Registrant in favor of Jack
S. Kompan(2)
10.33 Securities Purchase Agreement dated May 17, 1996 by and between the
Registrant and Kanayo Partabrai Gangwani(2)
10.34 Promissory Note dated May 31, 1996 in the original principal amount of
$25,000 payable by the Registrant in favor of Kanayo Partabrai
Gangwani(2)
10.35 Warrant dated May 31, 1996 issued by the Registrant in favor of Kanayo
Partabrai Gangwani(2)
10.36 Stock Purchase Agreement dated May 23, 1996 by and among the
Registrant, GAK Limited and Richard P. Stack(2)
10.37 Securities Purchase Agreement dated May 23, 1996 by and between the
Registrant and the Steven J. Goodman Charitable Remainder Trust(2)
10.38 Promissory Note dated May 23, 1996 in the original principal amount of
$50,000 payable by the Registrant in favor of the Steven J. Goodman
Charitable Remainder Trust(2)
10.39 Warrant dated May 23, 1996 issued by the Registrant in favor of the
Steven J. Goodman Charitable Remainder Trust(2)
10.40 Securities Purchase Agreement dated July 2, 1996 by and between the
Registrant and Jack S. Kompan(2)
10.41 Promissory Note dated July 2, 1996 in the original principal amount of
$25,000 payable by the Registrant in favor of Jack S. Kompan(2)
10.42 Warrant dated July 2, 1996 issued by the Registrant in favor of Jack
S. Kompan(2)
10.43 Subscription Agreement dated June 3, 1996 by and between the
Registrant and Herbert R. Donica and Janice N. Donica(2)
10.44 Letter Agreement dated July 22, 1996 between the Registrant and John
R. Amos regarding the transfer of certain intellectual property by
John R. Amos to the Registrant(2)
10.45 Letter Agreement dated July 29, 1996 between the Registrant and C.
Norman Campbell regarding the transfer of certain intellectual
property by C. Norman Campbell to the Registrant(2)
10.46 Purchase Order dated July 29, 1996 between Registrant and LG
Electronics with respect to LCD displays(2)
10.47 Form of Securities Purchase Agreement, including form of Promissory
Note and Warrant, utilized in 1996 Private Placement(2)
11.1 Statement re Calculation of Net Loss Per Share(2)
21.1 Subsidiaries of the Registrant(2)
23.1 Consent of Allen, Matkins, Leck, Gamble & Mallory LLP (included in the
opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney(2)
27 Financial Data Schedule(2)
</TABLE>
- --------
(2) Previously filed.
II-6
<PAGE>
ITEM 28. UNDERTAKINGS.
The small business issuer (the "Registrant") hereby undertakes the
following:
(1) 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.
(2) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act as part of this Registration Statement as of the time the
Commission declared it effective.
(3) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
Registration Statement for the securities offered in the Registration
Statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
Insofar as indemnification for liabilities arising under 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 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 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 whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Registrant hereby undertakes that the Registrant will:
(1) File, during any period in which it offers or sells securities, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in information in the registration
statement; and
(iii) Include additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorizes this Amendment
No. 2 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tustin, State of California, on the
25th day of October, 1996.
Javelin Systems, Inc.
/s/ Richard P. Stack
By: _________________________________
Richard P. Stack, President and
Chief Executive Officer (Principal
Executive Officer)
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard P. Stack President, Chief Executive October 25, 1996
____________________________________ Officer and Director
Richard P. Stack (Principal Executive
Officer)
/s/ C. Norman Campbell* Vice President, Engineering October 25, 1996
____________________________________ and Director
C. Norman Campbell
/s/ Lawrence W. McCorkle* Controller, Treasurer and October 25, 1996
____________________________________ Secretary (Principal
Lawrence W. McCorkle Financial and Accounting
Officer)
/s/ Steven J. Goodman* Director October 25, 1996
____________________________________
Steven J. Goodman
/s/ Jay L. Kear* Director October 25, 1996
____________________________________
Jay L. Kear
</TABLE>
*By: /s/ Richard P. Stack
- -------------------------------
Richard P. Stack
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement by and between the Registrant and
Meridian Capital Group, Inc.(2)..................................
3.1 Amended and Restated Certificate of Incorporation of
Registrant(2)....................................................
3.2 Amended and Restated Bylaws of Registrant(2).....................
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Registrant(2)...................................
3.4 Amendment to Amended and Restated Bylaws of Registrant(2)........
4.1 Form of Representative's Warrant Agreement by and between the
Registrant and Meridian Capital Group, Inc. .....................
4.2 Form of Certificate Evidencing Shares of Registrant's Common
Stock(2).........................................................
5.1 Opinion of Allen, Matkins, Leck, Gamble & Mallory LLP............
10.1 1996 Stock Incentive Award Plan of Registrant(2).................
10.2 Form of 1996 Director Non-Qualified Stock Option Agreement(2)....
10.3 Form of 1996 Employee Non-Qualified Stock Option Agreement(2)....
10.4 Employment Agreement dated August 19, 1996 by and between the
Registrant and Richard P. Stack(2)...............................
10.5 Employment Agreement dated August 19, 1996 by and between the
Registrant and C. Norman Campbell(2).............................
10.6 Form of Indemnity Agreement entered into with each of the
Registrant's officers and directors(2)...........................
10.7 Form of Stockholders Lock-Up Agreement to be entered into by the
stockholders of Registrant(2)....................................
10.8 Form of Directors and Officers Lock-Up Agreement to be entered
into by directors and officers of Registrant(2)..................
10.9 Form of Bridge Investors Lock-Up Agreement to be entered into by
the holders of Warrants to purchase Common Stock of
Registrant(2)....................................................
10.10 Promissory Note dated October 1, 1995 in the original principal
amount of $80,481.45 payable by the Registrant in favor of
Richard P. Stack (the "R.P. Stack Note")(2)......................
10.11 Letter Agreement dated April 1, 1996 between the Registrant and
Richard P. Stack regarding the conversion of the R.P. Stack Note
into shares of the Common Stock of the Registrant(2).............
10.12 Promissory Note dated October 1, 1995 in the original principal
amount of $40,000 payable by the Registrant in favor of Teresa M.
McRae (the "T. McRae Note")(2)...................................
10.13 Letter Agreement dated May 1, 1996 between the Registrant and
Teresa M. McRae regarding the conversion of the T. McRae Note
into shares of the Common Stock of the Registrant(2).............
10.14 Promissory Note dated October 1, 1995 in the original principal
amount of $12,000 payable by the Registrant in favor of Richard
A. Stack (the "R.A. Stack Note")(2)..............................
10.15 Letter Agreement dated May 31, 1996 between the Registrant and
Richard A. Stack regarding the conversion of the R.A. Stack Note
into shares of the Common Stock of the Registrant(2).............
10.16 Standard Industrial/Commercial Single-Tenant Lease-Gross dated
October 19, 1995 by and between Robert P. Peebles Trust, Dated 4-
11-79, and the Registrant for that certain real property located
at 2882C Walnut Avenue, Tustin, California 92780(2)..............
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S> <C>
10.17 Loan and Security Agreement dated December 4, 1995 by and
between Main Credit Corp. and the Registrant, as amended by that
certain letter agreement dated June 17, 1996(2).................
10.18 Accounts Collateral Security Agreement dated December 4, 1995 by
and between Main Credit Corp. and the Registrant(2).............
10.19 Inventory Collateral Security Agreement dated December 4, 1995
by and between Main Credit Corp. and the Registrant(2)..........
10.20 Equipment Collateral Security Agreement dated December 4, 1995
by and between Main Credit Corp. and the Registrant(2)..........
10.21 Stock Purchase Agreement dated January 9, 1996 by and among the
Registrant, the Steven J. Goodman Revocable Living Trust and
Richard P. Stack(2).............................................
10.22 Stock Purchase Agreement dated January 9, 1996 by and among the
Registrant, GAK Limited and Richard P. Stack(2).................
10.23 Letter Agreement dated February 15, 1996 between the Registrant
and Jim Cox regarding loan in the original principal amount of
$20,000 made by Jim Cox to the Registrant (the "Cox Note")(2)...
10.24 Letter Agreement dated June 30, 1996 between the Registrant and
Jim Cox regarding the conversion of the Cox Note into shares of
the Common Stock of Registrant(2)...............................
10.25 Letter Agreement dated February 16, 1996 between the Registrant
and Peter Aiello regarding loan in the original principal amount
of $20,000 made by Peter Aiello to the Registrant(2)............
10.26 Stock Purchase Agreement dated April 3, 1996 by and among the
Registrant, the Steven J. Goodman Revocable Living Trust and
Richard P. Stack(2).............................................
10.27 Securities Purchase Agreement dated May 17, 1996 by and between
the Registrant and John R. Amos(2)..............................
10.28 Promissory Note dated May 31, 1996 in the original principal
amount of $25,000 payable by the Registrant in favor of John R.
Amos(2).........................................................
10.29 Warrant dated May 31, 1996 issued by the Registrant in favor of
John R. Amos(2).................................................
10.30 Securities Purchase Agreement dated May 17, 1996 by and between
the Registrant and Jack S. Kompan(2)............................
10.31 Promissory Note dated May 31, 1996 in the original principal
amount of $25,000 payable by the Registrant in favor of Jack S.
Kompan(2).......................................................
10.32 Warrant dated May 31, 1996 issued by the Registrant in favor of
Jack S. Kompan(2)...............................................
10.33 Securities Purchase Agreement dated May 17, 1996 by and between
the Registrant and Kanayo Partabrai Gangwani(2).................
10.34 Promissory Note dated May 31, 1996 in the original principal
amount of $25,000 payable by the Registrant in favor of Kanayo
Partabrai Gangwani(2)...........................................
10.35 Warrant dated May 31, 1996 issued by the Registrant in favor of
Kanayo Partabrai Gangwani(2)....................................
10.36 Stock Purchase Agreement dated May 23, 1996 by and among the
Registrant, GAK Limited and Richard P. Stack(2).................
10.37 Securities Purchase Agreement dated May 23, 1996 by and between
the Registrant and the Steven J. Goodman Charitable Remainder
Trust(2)........................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S> <C>
10.38 Promissory Note dated May 23, 1996 in the original principal
amount of $50,000 payable by the Registrant in favor of the
Steven J. Goodman Charitable Remainder Trust(2).................
10.39 Warrant dated May 23, 1996 issued by the Registrant in favor of
the Steven J. Goodman Charitable Remainder Trust(2).............
10.40 Securities Purchase Agreement dated July 2, 1996 by and between
the Registrant and Jack S. Kompan(2)............................
10.41 Promissory Note dated July 2, 1996 in the original principal
amount of $25,000 payable by the Registrant in favor of Jack S.
Kompan(2).......................................................
10.42 Warrant dated July 2, 1996 issued by the Registrant in favor of
Jack S. Kompan(2)...............................................
10.43 Subscription Agreement dated June 3, 1996 by and between the
Registrant and Herbert R. Donica and Janice N. Donica(2)........
10.44 Letter Agreement dated July 22, 1996 between the Registrant and
John R. Amos regarding the transfer of certain intellectual
property by John R. Amos to the Registrant(2)...................
10.45 Letter Agreement dated July 29, 1996 between the Registrant and
C. Norman Campbell regarding the transfer of certain
intellectual property by C. Norman Campbell to the
Registrant(2)...................................................
10.46 Purchase Order dated July 29, 1996 between Registrant and LG
Electronics with respect to LCD displays(2).....................
10.47 Form of Securities Purchase Agreement, including form of
Promissory Note and Warrant, utilized in 1996 Private
Placement(2)....................................................
11.1 Statement re Calculation of Net Loss Per Share(2)...............
21.1 Subsidiaries of the Registrant(2)...............................
23.1 Consent of Allen, Matkins, Leck, Gamble & Mallory LLP (included
in the opinion filed as Exhibit 5.1)............................
23.2 Consent of Ernst & Young LLP, Independent Auditors..............
24.1 Power of Attorney(2)............................................
27 Financial Data Schedule(2)......................................
</TABLE>
- --------
(2) Previously filed.
<PAGE>
EXHIBIT 4.1
UNDERWRITER'S WARRANT AGREEMENT
THIS UNDERWRITER'S WARRANT AGREEMENT (the "Agreement"), dated as of
October __, 1996 is made and entered into by and between JAVELIN SYSTEMS, INC.,
a Delaware corporation (the "Company"), and MERIDIAN CAPITAL GROUP, INC. (the
"Warrantholder").
The Company agrees to issue and sell, and the Warrantholder agrees to
purchase, for a purchase price of $.0001 per warrant, warrants, as hereinafter
described (the "Warrants"), to purchase up to an aggregate of 85,000 shares,
subject to adjustment pursuant to the terms hereof (the "Shares") of the
Company's Common Stock, $.01 par value (the "Common Stock"), in connection with
a public offering (the "Public Offering") by the Company of up to 850,000 shares
of Common Stock pursuant to an underwriting agreement (the "Underwriting
Agreement"), dated as of October 25, 1996 between the Company and the
Warrantholder. The Warrants will be issued and sold hereunder at the rate of
one Warrant to purchase one share of Common Stock for each 10 shares of Common
Stock sold pursuant to the Underwriting Agreement, up to a maximum aggregate of
85,000 Warrants, and shall be issued in the name of the Warrantholder. The
purchase and sale of the Warrants shall occur on the First Closing Date, as
defined in the Underwriting Agreement.
In consideration of the foregoing and for the purpose of defining the terms
and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and the Warrantholder, for value received, hereby agree
as follows:
Section 1. Transferability and Form of Warrants.
1.1 Registration. The Warrants shall be numbered and shall be registered
on the books of the Company when issued. The Company may deem and treat the
Warrantholder of record as the owner of the Warrants for the purpose of any
exercise thereof and any distribution to the holder thereof and for all other
purposes.
1.2 Transfer. The Warrants shall be transferable in whole or in part
only on the books of the Company maintained at its principal office in Tustin,
California, or wherever its principal office may then be located, upon delivery
thereof duly endorsed by the Warrantholder or by its duly authorized attorney or
representative, accompanied by proper evidence of succession, assignment or
authority to transfer, and if reasonably determined by counsel to the Company,
an opinion of counsel reasonably satisfactory to the Company that such transfer
is exempt from registration under the Securities Act of 1933, as amended (the
"Act"). Upon any registration of transfer, the Company shall execute and
deliver new Warrants to the person or persons entitled thereto, and the
surrendered Warrants shall be canceled by the Company.
1.3 Limitations on Transfer of the Warrants. The Warrants shall not
be sold, transferred, assigned or hypothecated by the Warrantholder, until
October __, 1997, except that the Warrants may be transferred, in whole or in
part, to (i) one or more persons, each of whom on the date of transfer is an
officer or partner of the Warrantholder; (ii) a successor to the Warrantholder
<PAGE>
in merger or consolidation; (iii) a purchaser of all or substantially all of the
Warrantholder's assets; or (iv) any person receiving the Warrants from one or
more of the persons listed in this subsection 1.3 at such person's or persons'
death pursuant to a will or trust or the laws of intestate succession. After one
year, a transfer of a Warrant may occur if the Warrant is exercised immediately
upon transfer, if the Warrant is not exercised immediately upon such transfer,
the Warrant shall lapse. The Warrants may be divided or combined, upon request
to the Company by the Warrantholder, into a certificate or certificates
representing the right to purchase the same aggregate number of Shares. Unless
the context indicates otherwise, the term "Warrantholder" shall include any
transferee or transferees of the Warrants pursuant to this subsection 1.3, and
the term "Warrants" shall include any and all warrants outstanding pursuant to
this Agreement, including those evidenced by a certificate or certificates
issued upon division, exchange, substitution or transfer pursuant to this
Agreement. The Warrantholder agrees that prior to making any disposition of the
Warrants or the Shares, other than to persons or entities identified in clauses
(i) through (iv), inclusive, of this Section 1.3, the Warrantholder shall give
written notice to the Company describing briefly the manner in which any such
proposed disposition is to be made; and no such disposition shall be made if the
Company has notified the Warrantholder that in the opinion of counsel,
reasonably satisfactory to the Warrantholder, a registration statement or other
notification or post-effective amendment thereto (hereinafter collectively a
"Registration Statement") under the Act is required with respect to such
disposition and no such Registration Statement has been filed by the Company,
with, and declared effective, if necessary, by, the Securities and Exchange
Commission (the "Commission").
1.4 Form of Warrants. The text of the Warrants and the form of
election to purchase Shares shall be substantially as sct forth in Exhibit A
attached hereto. The number of Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants shall be executed on behalf of the Company by its
President or by a Vice President. A Warrant bearing the signature of an
individual who was at the time of signature the proper officer of the Company
shall bind the Company, notwithstanding that such individual shall have ceased
to hold such office prior to the delivery of such Warrant or did not hold such
office on the date of this Agreement.
The Warrants shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.
1.5 Legend on Shares. Each Warrant certificate and certificate of
Shares initially issued upon exercise of the Warrants shall bear the following
legend, unless, at the time of exercise, such Shares are subject to a currently
effective registration statement under the Act:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE
SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT PURSUANT TO A
REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION AND IN COMPLIANCE WITH THE
AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to
<PAGE>
a registration statement under the Act, of the securities represented thereby)
shall also bear the above legend unless, in the opinion of the Company's
counsel, the securities represented thereby need no longer be subject to such
restrictions. In addition, if the Shares deliverable upon exercise of any
Warrants are not subject to a currently effective Registration Statement under
the Act, the Warrantholder shall deliver to the Company such representations and
certifications as the Company, or the Company's counsel, shall reasonably
require in order to comply with applicable federal and state securities laws for
the issuance of such Shares.
Section 2. Exchange of Warrant Certificate. Any Warrant certificate may
be exchanged for another certificate or certificates entitling the Warrantholder
to purchase a like aggregate number of Shares as the certificate or certificates
surrendered then entitled the Warrantholder to purchase. Any Warrantholder
desiring to exchange a Warrant certificate shall make such request in writing
delivered to the Company, and shall surrender, properly endorsed, the
certificate evidencing the Warrant to be so exchanged. Thereupon, the Company
shall execute and deliver to the person or persons entitled thereto a new
Warrant certificate as so requested and the Warrants so surrendered for exchange
shall be canceled by the Company.
Section 3. Term of Warrants; Exercise of Warrants.
3.1 Subject to the terms of this Agreement, the Warrantholder shall have
the right, at any time during the period commencing at 9:00 a.m., Pacific Time,
on October __, 1997 and ending at 5:00 p.m., Pacific Time, on October __, 2001
(the "Termination Date"), to purchase from the Company up to the number of fully
paid and nonassessable Shares to which the Warrantholder may at the time be
entitled to purchase pursuant to this Agreement, upon surrender to the Company,
at its principal office, of the certificate evidencing the Warrants to be
exercised, together with the purchase form on the reverse thereof duly filled in
and signed, and upon payment to the Company of the Warrant Price (as defined in
and determined in accordance with the provisions of this Section 3 and Sections
7 and 8 hereof), for the number of Shares in respect of which such Warrants are
then exercised, but in no event for less than 100 Shares (unless less than an
aggregate of 100 Shares are then purchasable under all outstanding Warrants held
by a Warrantholder). Payment of the aggregate Warrant Price shall be made in
cash, by check, or as set forth in Section 3.3
3.2 The Warrants shall be exercisable, at the election of the
Warrantholder, either in full or from time to time in part. Any Warrants not
surrendered to the Company for exercise in accordance with this Section 3.1
prior to 5:00 p.m., Pacific Time, on the Termination Date shall be void.
3.2 The Warrants shall be deemed to have been exercised immediately prior
to the close of business on the date of their surrender for exercise as provided
above, and the person entitled to receive the Shares issuable upon such exercise
shall be treated for all purposes as the holder of record of such shares as of
the close of business on such date. As promptly as practicable on or after such
date and in any event within ten (10) days thereafter, the Company at its
expense shall issue and deliver to the person or persons entitled to receive the
same a certificate or certificates for the number of full Shares issuable upon
such exercise together with cash, as provided in Section 9 hereof, in respect of
any fractional Shares otherwise issuable upon such surrender; provided that if
<PAGE>
the Shares deliverable upon exercise of any Warrants are not subject to a
currently effective Registration Statement under the Act, the Warrantholder has
delivered such representations and certifications as the Company, or the
Company's counsel, may reasonably require pursuant to Section 1.5 hereof. In
the event that the Warrants are exercised in part, the Company at its expense
will execute and deliver new Warrants of like tenor exercisable for the number
of Shares for which the Warrants may then be exercised.
3.3 In lieu of exercising the Warrants, the Warrantholder may elect to
receive Shares equal to the value of the Warrants (or the portion thereof being
canceled) by the surrender of the Warrants at the principal office of the
Company together with notice of such election in which event the Company shall
issue to the Warrantholder a number of shares of Common Stock computed using the
following formula:
Y (A - B)
---------
X= A
Where
X - The number of Shares to be issued to Warrantholder.
Y - The number of Shares purchasable under the Warrant, or if only a
portion of the Warrant is being exercised, the portion of the Warrant being
canceled on such date.
A - The Current Market Price of one share of the Company's Common Stock
(as defined in Section 9).
B - Warrant Price (as adjusted to the date of such calculations).
Section 4. Payment of Taxes. The Company will pay all documentary stamp
taxes, if any, attributable to the initial issuance of the Warrants or the
Shares; provided, however, that the Company shall not be required to pay any tax
which may be payable with respect to any secondary transfer of the Warrants or
the Shares.
Section 5. Mutilated or Missing Warrants. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence satisfactory to the Company of such loss, theft or
destruction of such Warrant.
Section 6. Reservation of Shares. There has been reserved, and the
Company shall at all times keep reserved so long as the Warrants remain
outstanding, out of its authorized Common Stock, such number of shares of Common
Stock as shall be subject to purchase under the Warrants.
<PAGE>
Section 7. Warrant Price. The price per Share at which Shares shall
be purchasable upon the exercise of the Warrants (the "Warrant Price") shall be
$6.25 subject to further adjustment pursuant to Section 8 hereof.
Section 8. Adjustments. The number and kind of securities purchasable
upon the exercise of the Warrants and the Warrant Price shall be subject to
adjustment from time to time upon the happening of certain events, as follows:
8.1 Mergers, Consolidations or Sale of Assets. If at any time there
shall be a capital reorganization (other than a combination or subdivision of
Common Stock otherwise provided for herein), or a merger or consolidation of the
Company with or into another corporation, or the sale of the Company's
properties and assets as, or substantially as, an entirety to any other person,
then, as a part of such reorganization, merger, consolidation or sale, lawful
provision shall be made so that the Warrantholder shall thereafter be entitled
to receive upon exercise of the Warrants and payment of the Warrant Price, the
number of shares of stock or other securities or property of the Company or the
successor corporation resulting from such reorganization, merger, consolidation
or sale, to which a holder of the Shares deliverable upon exercise of the
Warrants would have been entitled under the provisions of the agreement in such
reorganization, merger, consolidation or sale if the Warrants had been exercised
immediately before consummation of such reorganization, merger, consolidation or
sale. In any such case, appropriate adjustment (as determined in good faith by
the Company's Board of Directors) shall be made in the application of the
provisions of the Warrants with respect to the rights and interests of the
Warrantholder after the reorganization, merger, consolidation or sale to the end
that the provisions of the Warrants (including adjustment of the Warrant Price
then in effect and the number of Shares) shall be applicable after that event,
as near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of the Warrants.
8.2 Splits, Subdivisions and Dividends. In the event the Company should
at any time or from time to time fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of the holders of Common Stock entitled to receive a dividend or
other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as the "Common Stock Equivalents") without payment of any
consideration by such holder for the additional shares of Common Stock or Common
Stock Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such distribution, split or subdivision if no record date is fixed), the per
share Warrant Price shall be appropriately decreased and the number of Shares
shall be appropriately increased in proportion to such increase of outstanding
shares.
8.3 Combination or Reverse Split of Shares. If the number of shares of
Common Stock outstanding at any time after the date hereof is decreased by a
combination of, or a reverse split affecting, the outstanding shares of Common
Stock, the Warrant Price shall be appropriately increased and the number of
Shares shall be appropriately decreased in proportion to such decrease
<PAGE>
in outstanding shares.
8.4 No Adjustment. No adjustment in the number of Shares purchasable
pursuant to the Warrants shall be required unless such adjustment would require
an increase or decrease of at least one percent in the number of Shares then
purchasable upon the exercise of the Warrants or, if the Warrants are not then
exercisable, the number of Shares purchasable upon the exercise of the Warrants
on the first date thereafter that the Warrants become exercisable; provided,
however, that any adjustments which by reason of this subsection 8.4 are not
required to be made immediately shall be carried forward and taken into account
in any subsequent adjustment.
8.5 Notice of Adjustment. Whenever the number of Shares purchasable upon
the exercise of the Warrants is adjusted as herein provided, the Company shall
cause to be promptly mailed to the Warrantholder by first class mail, postage
prepaid, notice of such adjustment and a certificate of the chief financial
officer of the Company setting forth the number of Shares purchasable upon the
exercise of the Warrants and the Warrant Price after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
Section 9. Fractional Interests; Current Market Price. The Company shall
not be required to issue fractional Shares on the exercise of the Warrants. If
any fraction of a Share would, except for the provisions of this Section 9, be
issuable on the exercise of the Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the then Current Market Price
multiplied by such fraction. For purposes of this Agreement, the term, "Current
Market Price" shall mean the average of the per share closing bid prices of the
Company's Common Stock quoted in the Over-the-Counter Market summary or the
average of the per share closing prices quoted on the Nasdaq National Market or
on any exchange on which the Common Stock is listed, whichever is applicable, as
published in the Western Edition of the Wall Street Journal (or, if not so
-------------------
reported, as otherwise reported by the Nasdaq System) for five (5) trading days
prior to the date notice of exercise is given to the Company. If trading in the
Common Stock is not reported by the Nasdaq system, the bid price referred to
above shall be the average of the lowest bid price for five (5) trading days as
reported in the "pink sheets" published by the National Quotation Bureau,
Incorporated. If the Common Stock is quoted on the Nasdaq National Market or
listed on any exchange, the closing price referred to above shall be the last
reported sales price or, in case no such reported sale takes place on such day,
the average of the reported closing bid and asked prices.
Section 10. No Rights as Stockholder; Notices to Warrantholders.
Nothing contained in this Agreement or in the Warrants shall be construed as
conferring upon the Warrantholder or its respective transferees any rights as a
stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect of any meeting of
stockholders for the election of directors of the Company or any other matter.
If, however, at any time prior to the expiration of the Warrants and prior to
their exercise, any one or more of the following events shall occur:
(a) any action which would require an adjustment pursuant to Section 8;
or
<PAGE>
(b) a dissolution, liquidation or winding up of the Company (other than
in connection with a consolidation, merger or sale of its property, assets and
business as an entirety or substantially as an entirety) shall be proposed:
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 14 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
stockholders entitled to vote on such proposed dissolution, liquidation or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. The failure to mail or receive such
notice or any defect therein shall not affect the validity of any action taken
with respect thereto.
Section 11. Registration Rights.
11.1 Company Registration. If the Company shall determine to register
any of its securities either for its own account or the account of security
holders of the Company on a registration statement on form S-1, S-2, S-3, SB-1
or SB-2, the Company will (i) promptly give to each Warrantholder and each
holder of Shares, at their respective addresses as they appear on the records of
the Company, written notice thereof and (ii) use its best efforts to include in
such registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in a written request made by any Warrantholder or holder of Shares within thirty
(30) days after delivery of the written notice from the Company. Such written
request may specify some or all of a Warrantholder's Shares. The Company shall
be obligated to include such Shares in the registration only for the seven year
period ending October __, 2003.
11.2 Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Warrantholder or holder of Shares as a part of the
written notice given. In such event the right of any Warrantholder or holder of
Shares to registration pursuant to Section 11.1 shall be conditioned upon such
Warrantholder's or holder of Shares participation in such underwriting and the
inclusion of such Warrantholder's (or holder of Shares) Shares in the
underwriting to the extent provided herein.
11.3 Request for Registration. In addition to any registration
statement filed pursuant to Section 11.1 above, during the four-year period
beginning on October __, 1997 and ending on October __, 2001, the Company will,
as promptly as practicable (but in any event within 60 days), after written
request (the "Request") by the Warrantholder, or by a person or persons holding
(or having the right to acquire by virtue of holding the Warrants) at least 50%
of the Shares which have been (or may be) issued upon exercise of the Warrants,
prepare and file at its own expense a registration statement with the Commission
and appropriate Blue Sky authorities sufficient to permit the public offering of
the Shares and will use its best efforts at its own expense through its
officers, directors, auditors and counsel, in all matters necessary or
advisable, to cause such registration statement to become effective as promptly
as practicable and to maintain such effectiveness so as to permit resale of the
Shares covered by the Request until the earlier of the time that all such Shares
have been sold or the expiration of ninety (90) days from the effective date of
<PAGE>
the Registration Statement (the "Minimum Period"). The Company shall be
obligated to file and have declared effective a total of only one registration
statement pursuant to a Request hereunder.
11.4 Expenses. All fees, disbursements and out-of-pocket expenses in
connection with the filing of any registration statement under this Section 11
(or obtaining the opinion of counsel and any no-action position of the
Commission with respect to sales under Rule 144) and in complying with
applicable securities and Blue Sky laws shall be borne by the Company including
reasonable fees of one counsel for the Warrantholder or holder of Shares. The
Company at its expense will supply any Warrantholder and any holder of Shares
with copies of such registration statement and the prospectus included therein
and other related documents, and any opinions and no-action letters in such
quantities as may be reasonably requested by the Warrantholder or holder of
Shares.
11.5 The Company agrees that until all Shares have been sold under a
registration statement or pursuant to Rule 144 under the Act, it will keep
current in filing all materials required to be filed with the Commission in
order to permit the holders of such securities to sell the same under Rule 144.
Section 12. Indemnification.
12.1 In the event of the filing of any registration statement with
respect to the Shares pursuant to Section 11 hereof, the Company will indemnify
the Warrantholder, its officers, directors and partners, legal counsel and
accountants and each person controlling such Warrantholder within the meaning of
Section 15 of the Act, with respect to which registration, qualification or
compliance has been effected pursuant to Section 11 hereof, against all
expenses, claims, losses, damages and liabilities (or actions, proceedings or
settlements in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any prospectus,
offering circular or other document (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by the Company of the
Act or any rule or regulation thereunder applicable to the Company and relating
to action or inaction required of the Company in connection with any such
registration, qualification or compliance, and will reimburse such
Warrantholder, its officers, directors, partners, legal counsel and accountants
and each person controlling such Warrantholder, for any legal and any other
expenses reasonably incurred in connection with investigating and defending or
settling any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission based upon written information furnished to the Company by
the Warrantholder and stated to be specifically for use therein.
12.2 The Warrantholder will, if Shares held by it are included in the
securities as to which such registration, qualification or compliance is being
effected, indemnify the Company, each of its directors, officers, partners,
legal counsel and accountants against all claims, losses, damages and
liabilities (or actions, proceedings or settlements in respect thereof)
arising out of or based on any untrue statement (or
<PAGE>
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, its directors, officers, partners, legal counsel and accountants,
for any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by the Warrantholder; provided, however, that the obligations of the
Warrantholder hereunder shall not apply to amounts paid in settlement of any
such claims, losses, damages or liabilities (or actions in respect thereof) if
such settlement is effected without the consent of the Warrantholder (which
consent shall not be unreasonably withheld).
12.3 Each party entitled to indemnification under this Section 12 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 12, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
Section 13. Contribution. If the indemnification provided for in Section
12 is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any loss, liability, claim, damage or expense
referred to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party on the one hand and of the Indemnified Party on the other
in connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
<PAGE>
Section 14. Notices. Any notice pursuant to this Agreement by the
Company or by a Warrantholder or a holder of Shares shall be in writing and
shall be deemed to have been duly given on the date of delivery or refusal
indicated on the return receipt if delivered or mailed by certified mail,
return receipt requested:
(a) If to the Warrantholder or a holder of Shares addressed to
Meridian Capital Group, Inc., 4675 MacArthur Court, Suite 1250, Newport Beach,
California 92660, Attention: Mr. Steve Spencer.
(b) If to the Company addressed to it at 2882C Walnut Avenue, Tustin,
California 92780, Attention: President.
Each party may from time to time change the address to which notices to it are
to be delivered or mailed hereunder by notice in accordance herewith to the
other party.
Section 15. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company, the Warrantholder, or the
holders of Shares shall bind and inure to the benefit of their respective
successors and assigns hereunder.
Section 16. Merger or Consolidation of the Company. The Company will not
merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of Section 8 are complied with.
Section 17. Applicable Law. This Agreement shall be deemed to be a
contract made under the laws of the State of California and for all purposes
shall be construed in accordance with the laws of said State.
Section 18. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrantholder and the holders of Shares any legal or equitable right, remedy or
claim under this Agreement. This Agreement shall be for the sole and exclusive
benefit of the Company, the Warrantholder and the holders of Shares.
Section 19. Amendments. This Agreement may be amended only by a written
instrument executed by duly authorized representatives of the Company and the
Warrantholder.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
JAVELIN SYSTEMS, INC.
By:
Name: Richard P. Stack
Title: President
<PAGE>
MERIDIAN CAPITAL GROUP, INC.
By:
Name: Jeffrey L. Gottfredson
Title: Chief Executive Officer
<PAGE>
Exhibit A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT
PURSUANT TO A REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION AND IN
COMPLIANCE WITH THE AGREEMENT PURSUANT
TO WHICH THEY WERE ISSUED
Warrant Certificate No. ______
UNDERWRITER'S WARRANT TO PURCHASE 85,000 SHARES
OF COMMON STOCK
VOID AFTER 5:00 P.M.
PACIFIC TIME ON OCTOBER __, 2001
JAVELIN SYSTEMS, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, Meridian Capital Group, Inc., the
registered holder hereof or assigns ("Warrantholder"), is entitled to purchase
from JAVELIN SYSTEMS, INC. (the "Company"), at any time during the period
commencing at 9:00 a.m., Pacific Time, on October __, 1997, and before 5:00
p.m., Pacific Time, October __, 2001 at the purchase price per share of $6.25
(the "Warrant Price"), the number of Shares of Common Stock of the Company set
forth above (the "Shares"). The number of Shares issuable upon exercise of each
Warrant evidenced hereby and the Warrant Price shall be subject to adjustment
from time to time as set forth in the Underwriter's Warrant Agreement referred
to below.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price at the principal office of the Company pursuant to
the terms of the Underwriter's Warrant Agreement.
The Warrant evidenced hereby represent the right to purchase an
aggregate of up to 85,000 Shares, subject to certain adjustments, and are issued
under and in accordance with a Underwriter's Warrant Agreement, dated as of
October __, 1996 (the "Underwriter's Warrant Agreement"), between the Company
and Meridian Capital Group, Inc. and are subject to the terms and provisions
contained in the Underwriter's Warrant Agreement, to all of which the
Warrantholder by acceptance hereof consents.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued
<PAGE>
to the Warrantholder a new Warrant Certificate in respect of the Shares of
Common Stock as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares of Common Stock as evidenced by
the Warrant or Warrants exchanged. No fractional Shares of Common Stock will be
issued upon the exercise of rights to purchase hereunder, but the Company shall
pay the cash value of any fraction upon the exercise of one or more Warrants.
These Warrants are transferable at the office of the Company in the manner and
subject to the limitations set forth in the Underwriter's Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a stockholder of the Company.
JAVELIN SYSTEMS, INC.
By: _____________________________
Dated: October __, 1996
<PAGE>
JAVELIN SYSTEMS, INC.
PURCHASE FORM
JAVELIN SYSTEMS, INC.
2882C Walnut Avenue
Tustin, California 92780
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ____________________ Shares of Common Stock (the "Shares") provided
for therein, and requests that certificates for the Shares be issued in the name
of:
----------------------------------------------------------------------
(Please Print or Type Name)
----------------------------------------------------------------------
(Address, including zip code)
----------------------------------------------------------------------
(Social Security No. or Tax I.D. No.)
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant Certificate for the balance of the Shares purchasable under
the Warrant Certificate be registered in the name of the undersigned
Warrantholder or his Assignee as below indicated and delivered to the address
stated below.
Name of Warrantholder
or Assignee:
-------------------------------------------------------------
(Please Print)
Address:
-----------------------------------------------------------------
Signature: Dated:
------------------------------------------- --------------
Note: The signature on this purchase must correspond with the name as it
appears upon the face of the within Warrant Certificate in every particular,
without alteration or enlargement or any change whatever.
Signature Guaranteed:
------------------------------------------
(Signature must be guaranteed by a bank or trust company having an
office or correspondent in the United States or by a member firm of a
registered securities exchange or the National Association of
Securities Dealers, Inc.)
<PAGE>
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
the assignee named below all of the rights of the undersigned represented by the
attached Warrant with respect to the number of Shares covered by the Warrant set
forth below:
(Name and Address of Assignee Must Be Printed or Typewritten)
<TABLE>
<CAPTION>
Social Security No. No. of
Name of Assignee or Tax I.D. No. Address Shares
<S> <C> <C> <C>
- ---------------- ------------------- -------------------- ------
--------------------
--------------------
</TABLE>
and does hereby irrevocably constitute and appoint
----------------------------
Attorney to transfer said Warrants on the books of the Company, with full power
of substitution in the premises.
Dated:
------------------------- ------------------------------
Signature of Registered Holder
Note: The signature on this assignment must correspond with the names as it
appears upon the face of the within Warrant Certificate in every
particular, without alteration or enlargement or any change whatever.
Signature Guaranteed:
--------------------------------------------------
(Signature must be guaranteed by a bank or trust company having an
office or correspondent in the United States or by a member firm of a
registered securities exchange or the National Association of Securities
Dealers, Inc.)
<PAGE>
SCHEDULE I
Initial Distribution of Warrants
--------------------------------
<TABLE>
<CAPTION>
Name Amount
---- ------
<S> <C>
Meridian Capital Group, Inc. 100%
Total 100%
</TABLE>
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF ALLEN, MATKINS, LECK, GAMBLE & MALLORY LLP]
October 25, 1996
Javelin Systems, Inc.
2882C Walnut Avenue
Tustin, CA 92780
Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2 filed by you (File No. 333-11217), Amendment No. 1 thereto filed by you,
and the form of Amendment No. 2 thereto to be filed by you, with the Securities
and Exchange Commission in connection with the registration under the Securities
Act of 1933, as amended, of up to 961,250 shares, including 111,250 shares
subject to the underwriters' over-allotment option (the "Company's Shares"), of
Common Stock, $.01 par value, of Javelin Systems, Inc., a Delaware corporation
(the "Company"), and up to 16,250 shares, all of which are subject to the
underwriters' over-allotment option (the "Selling Stockholders' Shares"), of
Common Stock, $.01 par value, of the Company which are presently outstanding and
held by certain of your existing stockholders. The Registration Statement as
amended by Amendment No. 1 and Amendment No. 2 is hereinafter referred to as the
"Registration Statement."
We are familiar with the proceedings taken by you, and with the
additional proceedings proposed to be taken by you, in connection with the
authorization and proposed issuance and sale of the Company's Shares. We are
also familiar with the proceedings taken by you in connection with the
authorization and issuance of the Selling Stockholders' Shares. Based upon the
foregoing, we are of the opinion that under Delaware law, subject to the
additional proceedings being duly taken and completed by you as now contemplated
by us as your counsel prior to the issuance of the Company's Shares, upon the
issuance and sale of the Company's Shares in the manner contemplated by the
Registration Statement, the Company's Shares will be legally issued, fully paid
and non-assessable securities of the Company. We are further of the opinion that
under Delaware law the Selling Stockholders' Shares are legally issued, fully
paid and non-assessable securities of the Company.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm in the Prospectus
incorporated therein under the caption "Legal Matters."
Very truly yours,
ALLEN, MATKINS, LECK, GAMBLE & MALLORY LLP,
a Limited Liability Partnership including
Professional Corporations
By: /s/ JEREMY D. GLASER
----------------------
Jeremy D. Glaser
JDG/dhm
<PAGE>
EXHIBIT 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated August 15, 1996,
except as to Note 8, as to which the date is August 29, 1996, in Amendment No. 2
to the Registration Statement (Form SB-2 No. 333-11217) and related Prospectus
of Javelin Systems, Inc. for the registration of 977,500 shares of its common
stock.
Orange County, California
October 25, 1996
