<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1997.
REGISTRATION NO. 333-18605
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 7372 86-0779928
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1839 WEST DRAKE, SUITE B
TEMPE, ARIZONA 85283
(602) 491-0500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
TIMOTHY M. BRANNAN
CHAIRMAN OF THE BOARD AND PRESIDENT
1839 WEST DRAKE, SUITE B
TEMPE, ARIZONA 85283
(602) 491-0500
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
JAMES L. ADLER, JR., ESQ. SHELDON MISHER, ESQ.
BRADLEY S. PAULSON, ESQ. STEVEN A. FISHMAN, ESQ.
SQUIRE, SANDERS & DEMPSEY L.L.P. BACHNER, TALLY, POLEVOY
TWO RENAISSANCE SQUARE & MISHER LLP
40 NORTH CENTRAL AVENUE, SUITE 2700 380 MADISON AVENUE, 18TH FLOOR
PHOENIX, ARIZONA 85004 NEW YORK, NEW YORK 10017
TELEPHONE: (602) 528-4000 TELEPHONE: (212) 687-7000
FAX: (602) 253-8129 FAX: (212) 682-5729
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable from time to time after the date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [X]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) up to 1,380,000
units, including units to cover over-allotments, if any, (collectively, the
"Units"), each Unit consisting of one share of Common Stock, $.001 par value
("Common Stock"), of Piranha Interactive Publishing, Inc., a Nevada corporation
(the "Company"), one redeemable Class A Warrant ("Class A Warrant") and one
redeemable Class B Warrant ("Class B Warrant"), for sale by the Company in an
underwritten public offering, (ii) an additional 750,000 Class A Warrants, for
resale by the holders thereof (the "Selling Securityholders' Warrants") in an
offering that is not underwritten, and (iii) 750,000 shares of Common Stock and
750,000 Class B Warrants underlying the Selling Securityholders' Class A
Warrants and 750,000 shares of Common Stock issuable upon exercise of the
Selling Securityholders' Class B Warrants. The securities set forth in clause
(i) hereinabove are being registered for sale by the Company; the securities set
forth in clauses (ii) and (iii) hereinabove are being registered for resale by
the Selling Securityholders. The Selling Securityholders' Warrants are issuable
upon the closing of the Offering to the Selling Securityholders upon the
automatic conversion of 750,000 warrants (the "Bridge Warrants") acquired by
them in the Company's private placement in November and December 1996 (the
"Bridge Financing") into 750,000 Class A Warrants. The Selling Securityholders'
Warrants are expected to become freely tradeable one year from the date of the
Prospectus included in this Registration Statement; additionally the Selling
Securityholders have agreed not to exercise their Selling Securityholders'
Warrants for a period of one year from the date of the Prospectus included in
this Registration Statement. So long as any Selling Securityholders' Warrants
are outstanding, the Company will undertake to maintain the Alternate Prospectus
for the current use by the Selling Securityholders upon disposition of the
Selling Securityholders' Warrants or the securities issuable upon exercise of
the Warrants. Third parties who purchase Warrants from such Selling
Securityholders in the public market shall, however, be entitled to exercise
them immediately and immediately sell the securities issuable upon exercise of
the Warrants in the public market.
Following the Prospectus for the underwritten offering are pages of the
Prospectus relating solely to the Selling Securityholders' Warrants and the
securities underlying the Selling Securityholders' Warrants: Alternate front and
back cover pages and sections entitled "Selling Securityholders and Plan of
Distribution" and "Concurrent Offering" to be used in lieu of the sections
entitled "Concurrent Offering" and "Underwriting". All other sections of the
Prospectus for the underwritten offering are to be used in the Prospectus
relating to the Selling Securityholders' Warrants and the securities issuable
upon exercise of the Selling Securityholders' Warrants.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 18, 1997
PROSPECTUS 1,200,000 UNITS
PIRANHA LOGO
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
All of the Units being offered hereby (the "Offering") are being sold by
Piranha Interactive Publishing, Inc., a Nevada corporation (together with its
predecessor, the "Company"). Each unit ("Unit") offered by the Company consists
of one share of Common Stock, $.001 par value ("Common Stock"), one redeemable
Class A Warrant ("Class A Warrant") and one redeemable Class B Warrant ("Class B
Warrant"). The components of the Units will be separately transferable
immediately upon issuance. Each Class A Warrant entitles the holder to purchase
for $6.50 one share of Common Stock and one Class B Warrant, subject to
adjustment, at any time until the fifth anniversary of the date of this
Prospectus. Each Class B Warrant entitles the holder to purchase one share of
Common Stock at an exercise price of $8.75, subject to adjustment, at any time
until the fifth anniversary of the date of this Prospectus. Commencing one year
from the date hereof, the Class A Warrants and Class B Warrants (collectively,
the "Warrants") are subject to redemption by the Company at a redemption price
of $.05 per Warrant on 30 days' written notice, provided the average closing bid
price of the Common Stock for any 30 consecutive trading days ending within 15
days of the notice of redemption exceeds $9.10 and $12.25 per share,
respectively (subject to adjustment in each case). See "Description of
Securities".
Prior to this Offering, there has been no public market for the Units,
Common Stock or the Warrants and there can be no assurance that such a market
will develop. The Company has applied for quotation of the Common Stock, Units,
Class A Warrants and Class B Warrants on the Nasdaq SmallCap Market ("Nasdaq")
under the symbols "PRAN", "PRANU", "PRANW" and "PRANX", respectively. It is
anticipated that the initial public offering price will be $5.00 per Unit. See
"Underwriting" for a discussion of factors considered in determining the initial
public offering price. FOR INFORMATION CONCERNING A SECURITIES AND EXCHANGE
COMMISSION INVESTIGATION RELATING TO THE UNDERWRITER, SEE "RISK FACTORS" AND
"UNDERWRITING".
Upon completion of this Offering (assuming no exercise of the Underwriter's
over-allotment option), the Officers and Directors of the Company as a group
will hold approximately 50% of the Company's outstanding voting stock, all of
which voting stock is controlled by Timothy M. Brannan, President and Chairman
of the Company, as Voting Trustee under a Voting Trust Agreement and as proxy
pursuant to an Irrevocable Proxy Agreement. See "Principal Stockholders".
The Registration Statement of which this Prospectus is a part also covers
the offering for resale by certain securityholders (the "Selling
Securityholders") of 750,000 Class A Warrants (the "Selling Securityholders'
Warrants"), the shares of Common Stock and Class B Warrants underlying the
Selling Securityholders' Class A Warrants, and the shares of Common Stock
issuable upon exercise of such Class B Warrants. The Selling Securityholders'
Warrants and the securities underlying such Warrants are sometimes collectively
referred to as the "Selling Securityholders' Securities". The Company will not
receive any proceeds from the sale of the Selling Securityholders' Securities.
See "Concurrent Offering". The Selling Securityholders' Warrants are issuable
upon the closing of the Offering to certain Selling Securityholders upon the
automatic conversion of 750,000 Warrants ("Bridge Warrants") acquired by them in
the Company's private placement in November and December 1996 (the "Bridge
Financing") into 750,000 Class A Warrants. The Selling Securityholders have
agreed not to sell any of the Selling Securityholders' Warrants for at least one
year after the date of this Prospectus. Sales of the Selling Securityholders'
Warrants or the underlying securities, or the potential of such sales, may have
an adverse effect on the market price of the securities offered hereby. See
"Capitalization -- Bridge Financing".
------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION" BEGINNING ON PAGE 7 OF
THIS PROSPECTUS. THESE SECURITIES SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE COMMISSION OR ANY
SUCH AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==============================================================================================================
PROCEEDS TO
PRICE TO PUBLIC UNDERWRITING COMPANY(2)
DISCOUNTS AND
COMMISSIONS(1)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Per Unit....................................... $5.00 $.50 $4.50
- --------------------------------------------------------------------------------------------------------------
Total(3)....................................... $6,000,000.00 $600,000.00 $5,400,000.00
==============================================================================================================
</TABLE>
(1) Does not include additional compensation to be received by the Underwriter
in the form of (a) a non-accountable expense allowance payable by the
Company to the Underwriter equal to 3% ($180,000) of the aggregate initial
public offering price of the Units ($207,000 if the overallotment option is
exercised in full) and (b) an option to the Underwriter (the "Unit Purchase
Option") to purchase up to 120,000 Units for $6.00 per Unit (120% of the
initial public offering price) during the three-year period commencing two
years after the date of this Prospectus . The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting".
(2) Before deducting expenses of the Offering payable by the Company estimated
at $575,000 ($602,000 if the over-allotment option is exercised in full),
including the Underwriter's non-accountable expense allowance.
(3) The Company has granted the Underwriter a 45-day option to purchase up to
180,000 additional Units on the same terms and conditions as set forth above
solely to cover over-allotments, if any. If the over-allotment option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $6,900,000, $690,000 and
$6,210,000, respectively. See "Underwriting".
------------------
The Units are offered by the Underwriter on a "firm commitment" basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter, and subject to the right of the Underwriter to withdraw, cancel or
modify such offer without notice and to reject orders in whole or in part and to
certain other conditions. It is expected that delivery of the certificates
representing the Units will be made at the offices of D.H. Blair Investment
Banking Corp., 44 Wall Street, New York, New York 10005, on or about
, 1997.
D.H. BLAIR INVESTMENT BANKING CORP.
The date of this Prospectus is , 1997.
<PAGE> 4
[COMPANY'S LOGO]
Piranha publishes interactive multimedia software providing education,
entertainment, reference and personal productivity titles for the home personal
computer market.
[Photos of six products offered by the Company, clockwise from upper left:
Majestic(TM); Syn-Factor(TM); Travel CD Piranha Pack(TM); Alice's Adventures in
Wonderland; Piranha Pack -- Something for Everyone(TM); and The Academic
Edge(TM)Piranha Pack(TM).]
The Company intends to distribute to its shareholders annual reports
containing financial statements audited by its independent public accountants
and will make available copies of quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, THE
COMMON STOCK AND/OR THE WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE AND, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
Piranha Interactive Publishing(R), Majestic(TM), Alien Encounter(TM),
Syn-Factor(TM), Treasured Tales(TM), Travel CD Piranha Pack(TM), The Academic
Edge(TM), Piranha Pack -- Something For Everyone(TM), Piranha Pack(TM),
Preschool Mother Goose(TM) and the Piranha logo are trademarks of the Company.
This Prospectus also includes trademarks and trade names of entities other than
the Company.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus does not give effect to the exercise of: (i) the Underwriter's
over-allotment option; (ii) the Warrants; or (iii) the Unit Purchase Option.
Except as specifically otherwise set forth elsewhere in this Prospectus, all
share information contained herein gives retroactive effect to the
reincorporation of the Company in the State of Nevada (previously organized and
existing as an Arizona corporation) and a recapitalization effected in November
1996 (the "Recapitalization") consisting of (i) an increase in the Company's
authorized shares of Common Stock to 20,000,000 shares; (ii) the provision for
5,000,000 shares of Preferred Stock, with the designations, powers and
preferences to be determined by the Board of Directors from time to time; and
(iii) the conversion upon such reincorporation and Recapitalization of all of
the issued and outstanding shares of Common Stock, no par value, of the Arizona
corporation into 1,200,000 shares of the Nevada corporation's Common Stock,
$.001 par value, on an approximately 242-for-one basis. When used in this
Prospectus, unless otherwise specified, the term "Common Stock" shall refer to
the $.001 par value Common Stock of the surviving Nevada corporation. See
"Capitalization" and "Description of Securities".
THE COMPANY
Piranha Interactive Publishing, Inc. (the "Company") publishes interactive
multimedia software products providing education and entertainment as well as
reference and personal productivity titles for the home personal computer ("PC")
market. The Company generally licenses software programs being developed by
independent third party developers. The Company then directs and assists the
developers in finishing the programs according to its specifications, imprints
and duplicates the programs in a media format, packages them in a proprietary
manner, and markets and distributes the finished products under the Piranha name
as well as proprietary titles whenever possible. Since the release of its first
title in August 1995, the Company has licensed and marketed six titles under its
own label including (i) three "Piranha Packs," each of which offers 10 or 11
individual subject titles relating to a central theme and (ii) three standalone,
individually packaged titles. In addition, the Company has marketed 13 titles
under affiliate relationships with two third party publishers pursuant to
revenue-sharing agreements. To date, the Company has published all of its titles
in computer compact disc read-only memory ("CD-ROM") format. In the future, the
Company may distribute its products in other media, such as on-line information
services, television-based formats, telephone and cable networks and direct
broadcast satellite, if market acceptance of such formats becomes widespread.
The Company intends to focus its product offerings on "edutainment" titles,
which combine entertainment and educational content, games, reference and
personal productivity titles, and other content titles which it determines to
have market potential. The Company has published and plans to publish titles in
various categories, including entertainment (e.g. Majestic: Alien Encounter, a
deep space adventure game), early childhood education (e.g. Treasured Tales
Presents Alice's Adventures in Wonderland, a children's interactive storybook),
reference (e.g. Academic Edge, a 10 CD educational theme pack), and personal
productivity
(e.g. Travel CD Piranha Pack, an 11 CD travel and recreational theme pack). When
practicable, the Company publishes titles which are episodic in design, thereby
facilitating the production of sequential products and the generation of
increased customer loyalty. For example, Syn-Factor, the sequel to the Company's
game, Majestic: Alien Encounter, was just released in February of 1997. The
Company is also scheduled to release Preschool Mother Goose, an early childhood
educational product, during the first quarter of 1997.
The Company's strategy is generally to license its software programs from
independent, third party software developers. The Company believes this strategy
enables it to avoid expending significant financial resources over a lengthy
period of time towards the research and development of a product that may never
achieve significant market acceptance, a substantial burden facing in-house
software development companies. As competition for products from independent
developers intensifies, however, the Company may be required to commit
significant financial resources to third party developers in order to obtain
desirable programs. By drawing upon independent developers, the Company is able
to capitalize upon the variety of creative products
3
<PAGE> 6
currently being developed by a growing number of independent software
developers, an increase made possible in part by the availability of industry
standard authoring tools which assist software programmers with the technical
development of the titles. Pursuant to license agreements with these developers,
the Company pays a royalty based upon sales of the product and in most instances
an up-front advance and/or guaranteed minimum royalty payment. The Company has
also designed one title, Preschool Mother Goose, with the assistance of
consultants which it then subcontracted to independent software programmers for
development. The Company may follow the same procedure with additional future
titles.
The Company's growth strategy consists of (i) targeting the growing
home-based, consumer PC market, (ii) building the brand recognition of "Piranha"
title offerings, (iii) expanding and enhancing its portfolio of interactive
multimedia software products by generally licensing software programs from third
party developers who are in the process of developing such products, (iv)
expanding the placement of Piranha products with retailers and distributors, and
(v) seeking out appropriate strategic relationships, including the acquisition
of other software publishers.
The Company presently sells its products to retailers, distributors and
original equipment manufacturers ("OEM"s) through its own direct sales and
marketing efforts. The Company's marketing activities include channel marketing
in partnership with its retailers and distributors; direct advertising in PC
periodicals; Internet website demos and advertising; trade shows; and
pre-release marketing. Since its inception in November 1994, the Company has
entered into distribution agreements with several large national software
distributors, as well as a number of other smaller and specialty distributors.
The Company currently places its products with a number of the largest software
retailers (in terms of software sales volume) in the United States.
The Company's management team has worked closely together for the past
three to five years and all have prior software publishing experience. The
Company was incorporated in Arizona on November 14, 1994 and reincorporated in
Nevada on November 22, 1996. Its corporate headquarters are located at 1839 West
Drake, Suite B, Tempe, Arizona 85283, and its telephone number is (602)
491-0500. The Company's website address is http://www.piranhainteractive.com.
------------------------
This Prospectus contains "forward-looking statements," including statements
regarding, among other items, the Company's growth strategy, future products,
sales, ability to license future software programs and market products and
anticipated trends in the Company's business. Actual results could differ
materially from these forward-looking statements as a result of a number of
factors, including, but not limited to, the Company's early stage of
development, the need for additional financing, intense competition in various
aspects of its business, the seasonal nature of its business, its dependence on
third party authors and key personnel, and other factors described under "Risk
Factors" and elsewhere herein.
4
<PAGE> 7
THE OFFERING
Securities Offered by the
Company.................. 1,200,000 Units, each Unit consisting of one share
of Common Stock, one Class A Warrant and one
Class B Warrant of the Company. Each Class A
Warrant is exercisable at any time during the
five years following the date of this Prospectus
to purchase one share of Class A Common Stock and
one Class B Warrant for $6.50, subject to
adjustment. Each Class B Warrant is exercisable
at any time during the five years following the
date of this Prospectus to purchase one share of
Common Stock for $8.75, subject to adjustment.
The Warrants are subject to redemption by the
Company at $.05 per Warrant upon 30 days prior
written notice at any time commencing one year
from the date of this Prospectus in certain
circumstances. The Common Stock, Class A and
Class B Warrants will be separately tradeable
immediately upon issuance. See "Description of
Securities".
Securities Offered
Concurrently
by Selling
Securityholders.......... 750,000 Class A Warrants; 750,000 Class B Warrants
issuable upon exercise of these Class A Warrants,
and 1,500,000 shares of Common Stock issuable
upon exercise of these Class A Warrants and Class
B Warrants. See "Concurrent Offering".
Common Stock Outstanding
Before Offering(1)....... 1,200,000 shares(2)
Common Stock Outstanding
After Offering(1)........ 2,400,000 shares(2)(3)
Use of Proceeds............ The Company intends to use the proceeds for
repayment of an aggregate of $1,500,000 principal
amount of notes issued pursuant to the Bridge
Financing (the "Bridge Notes"), plus accrued
interest; acquisition of software programs; sales
and marketing costs, including salaries for
additional personnel; and working capital. See
"Use of Proceeds".
Risk Factors............... The securities offered hereby involve a high degree
of risk and will result in immediate substantial
dilution to public investors. An investment in
the Units offered hereby should be made only
after a careful consideration of the various
risks which may affect the Company and its
operations. See "Risk Factors" and "Dilution".
Proposed Nasdaq Symbols.... Common
Stock -- PRAN
Units -- PRANU
Class A
Warrants -- PRANW
Class B
Warrants -- PRANX
- ---------------
(1) For a description of the voting and other rights of the Common Stock, see
"Description of Securities -- Common Stock".
(2) Does not include 50,000 shares of Common Stock which are issuable upon
exercise of options to be outstanding at the closing of the Offering at an
exercise price of $5.00 and 150,000 shares of Common Stock reserved for
issuance upon future grants of options to be issued under the Company's 1996
Stock Option Plan. See "Management -- 1996 Stock Option Plan".
(3) Does not include shares of Common Stock issuable upon exercise of (i) the
Unit Purchase Option and the Class A and Class B Warrants underlying the
Unit Purchase Option; (ii) the Class A Warrants and Class B Warrants forming
part of the Units offered hereby; (iii) the 750,000 Class A Warrants issued
to holders of the Bridge Warrants; and (iv) the 750,000 additional Class B
Warrants issuable upon exercise of the Class A Warrants referred to under
(iii) hereinabove. See "Capitalization -- Bridge Financing", "Concurrent
Offering", and "Underwriting".
5
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
----------------- ------------
<S> <C> <C>
Net Sales........................................................ $ 1,342,034 $ 424,810
Costs and Expenses............................................... 1,153,891 1,337,148
Net income (loss)................................................ 188,143 (912,338)
Pro forma net income (loss)(1)................................... 109,123 (834,874)
Pro forma net income (loss) per common share:.................... $ 0.21 $ (1.89)
Shares used in computing pro forma net income (loss) per common
share:......................................................... 510,907 440,809
</TABLE>
- ---------------
(1) From inception, until November 15, 1996, the Company elected to be treated
as a Subchapter S corporation for federal income tax purposes. As such, all
tax liability flowed through to the individual shareholders. The pro forma
financial data presented herein is as if the Company had been a C
corporation for federal income tax purposes from inception at an assumed tax
rate of 42%.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
DECEMBER 31, 1995 ACTUAL AS ADJUSTED(1)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current assets............................ $ 491,086 $ 493,506 $ 4,171,903
Working capital (deficit)................. 173,926 (1,214,783) 3,909,323
Total assets.............................. 521,166 1,053,870 4,178,202
Total liabilities......................... 353,704 1,755,892 310,183
Stockholders' equity (deficit)............ 167,462 (702,022) 3,868,019
</TABLE>
- ---------------
(1) Adjusted to give effect to the sale of the 1,200,000 Units offered hereby at
an assumed initial public offering price of $5.00 per Unit less underwriter
discounts, commissions and estimated expenses of the Offering and the
repayment of the Bridge Notes. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Result of Operations".
6
<PAGE> 9
RISK FACTORS
An investment in the securities offered hereby involves a high degree of
risk and should only be made by investors who can afford the loss of their
entire investment. Prospective investors, prior to making an investment
decision, should give careful consideration, in addition to the other
information contained in this Prospectus, to the following risk factors. This
Prospectus contains "forward-looking statements," including statements
regarding, among other items, the Company's growth strategy, future products,
sales, ability to license future software programs and market products and
anticipated trends in the Company's business. Actual results could differ
materially from these forward-looking statements as a result of a number of
factors, including, but not limited to, the Company's early stage of
development, the need for additional financing, intense competition in various
aspects of its business, the seasonal nature of its business, its dependence on
third party authors and key personnel, and other factors described in the Risk
Factors sections set forth below and elsewhere herein.
EARLY STAGE COMPANY; ACCUMULATED DEFICIT; WORKING CAPITAL AND CAPITAL
DEFICITS; LIMITED OPERATING HISTORY. The Company commenced operations in
November 1994 and began shipping its products in August 1995. Although the
Company was profitable during the fourth quarter of 1995, since that time it has
incurred losses. The Company's profitability in 1995 was enhanced due to the
fact that the Company had not then incurred expenses to develop necessary
infrastructure nor incurred any significant overhead. The Company's founders did
not begin drawing a salary until October 1995. Accordingly, past results are not
indicative of future performance. The Company's ability to expand its operations
is dependent upon a number of factors such as the availability of appropriate
programs to the Company, the Company's marketing efforts, trends in personal
computer sales and usage, changes in available technology, changes in the
competitive environment of personal computer software and general economic
conditions. Many of these factors are outside the Company's control and changes
in these factors or the emergence of new competitive or other factors cannot be
accurately predicted.
To become profitable, the Company will need to substantially expand its
product offerings. In the past, the Company's revenues have been concentrated in
only a few products, with three products resulting in 90% of annual net sales
for 1995 and two products resulting in 78% of annual net sales for 1996.
However, the Company believes this concentration to be largely a result of the
limited number of products offered to date, and the Company intends to market a
broader variety and number of titles in the future consistent with its business
strategy. In the past, the Company's ability to release new products as well as
its ability to ship existing products in a timely manner and in sufficient
quantities to meet customer demand have been hampered by its inability to
generate sufficient cash flows from operations and its inability to raise
capital from external sources. The Company's financial statements for the period
ended December 31, 1996 reflect deficits for total capital and working capital
as well as an accumulated deficit in retained earnings. Furthermore, the Company
does not have experience marketing a significant number of products, and there
can be no assurance that it will be able to do so successfully. There can be no
assurance that revenues will increase significantly in the future or that the
Company will achieve ongoing profitable operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN. The Company has
received a report from its independent auditors that includes an explanatory
paragraph regarding uncertainty as to the ability of the Company to continue as
a going concern. Among the factors raising substantial doubt as to the Company's
ability to continue as a going concern is the Company's difficulty in generating
sufficient cash flows from operations, and its subsequent working capital
deficiency. The Company has incurred operating losses and may continue to do so
in the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Financial Statements -- Report of Independent
Auditors."
NEED FOR ADDITIONAL FINANCING. The Company has significant cash
requirements in connection with its business. In addition to its working capital
requirements, the Company must fund the production and marketing of its products
prior to the time the products are available for sale. Additionally, the Company
in most cases pays upfront advances and/or guaranteed royalties to third party
authors, which expenditures are expected to significantly increase as the
Company expands its product lines. See "Risk Factors -- Dependence
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<PAGE> 10
on Third Party Authors." The Company's potential receipt of revenues from
product sales are subject to substantial contingencies, and there can be no
assurances concerning the timing and amount of future revenues from product
sales. Additionally, the Company generally does not receive payment from its
retail and distribution customers until a period after products are sold to
end-users. Historically, the Company has received such payments from between 90
to 120 days after shipment of its products. This slow revenue receipt cycle
which has occurred in the past, and is expected to continue in the future, has
resulted in the Company having inadequate working capital to maintain its
distribution pipelines, fund publication of new products or otherwise fund its
ongoing operations. Further, the Company's sales are seasonal and, accordingly,
during a significant portion of its fiscal year the Company's revenues have
been, and may in the future be, insufficient to fund its operating expenses. The
Company will attempt to obtain credit, such as a revolving loan facility, to
alleviate the effects of its cash flow cycles, but there can be no assurance
that the Company will obtain such credit on satisfactory terms or at all.
The Company expects that the net proceeds of this Offering will enable it
to meet its liquidity and capital requirements for approximately 12 months
following completion of the Offering, although the Company's capital
requirements are subject to numerous contingencies associated with early-stage
companies. The Company may be required to seek additional financing in the event
of delays, cost overruns or unanticipated expenses associated with a company in
an early stage of development, or in the event the Company does not realize
anticipated revenues. In addition, the Company may require additional financing
in the future to further expand its product offerings or to make strategic
acquisitions. There can be no assurance that such additional financing will be
available, or that, if available, such financing will be obtainable on terms
favorable to the Company or its stockholders. The Company has no commitment for
any such financing and in the event such necessary financing is not obtained,
the Company's operations will be materially adversely affected and the Company
will have to cease or substantially reduce operations. Any additional equity
financings may be dilutive to stockholders, and debt financings, if available,
may involve restrictive covenants. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS. A significant portion of
the Company's operating expenses are relatively fixed, and planned expenditures
are based in part on sales forecasts. If net sales do not meet the Company's
expectations, the Company's business, operating results and financial condition
could be materially adversely affected. Further, the edutainment and games
software business is highly seasonal. Net revenues are typically significantly
higher during the fourth calendar quarter, due primarily to the increased demand
for such software during the year-end holiday buying season. As the Company's
profitability significantly depends on sales made in the fourth quarter, the
Company's operations could be materially adversely affected by an economic
downturn in any fourth quarter. Additionally, if product introductions planned
for the peak holiday season are delayed, the Company's operating results could
be materially adversely affected. Net revenues in other quarters are generally
lower and vary significantly as a result of new product introductions and other
factors. There can be no assurance that the Company will achieve consistent
profitability on a quarterly or annual basis. As a result of its working capital
deficiency during the second, third and fourth quarters of 1996, the Company's
net sales during 1996 were materially hampered by its inability to ship
quantities of products to satisfy customer demand and to launch new products.
The Company has experienced, and expects to continue to experience,
significant fluctuations in quarterly operating results due to a variety of
factors, including the size and rate of growth of the consumer multimedia
software market, market acceptance of the Company's products and those of its
competitors, development and promotional expenses relating to the introduction
of new products or new versions of existing products, projected and actual
changes in computing platforms, the timing and success of product introductions,
product returns, changes in pricing policies by the Company and its competitors,
the accuracy of retailers' forecasts of consumer demand, the timing of orders
from major customers, order cancellations and delays in shipment. In response to
competitive pressures, the Company may take certain pricing or marketing actions
that could materially adversely affect the Company's business, operating results
and financial condition. Products are generally shipped as orders are received,
and accordingly the Company operates with little backlog. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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DEPENDENCE ON THIRD PARTY AUTHORS. The Company does not generally develop
or own the source code to its products, but licenses software programs from
third party developers. Although the Company believes that the lack of in-house
program developers generally represents a cost advantage, currently the Company
is entirely dependent on third party authors for the development of new software
products. Additionally, as competition for products of third party authors
increases, the Company may be required to pay significant sums to its third
party developers in order to acquire desirable products. Such expenditures may,
for some products, offset any cost advantage the Company may have over
competitors who rely upon in-house developers. The Company typically receives
many new programs each month for evaluation from independent software
developers; however, there can be no assurance that the Company will continue to
obtain a supply of quality software programs from independent authors. In order
to generate a profit, the Company will need a substantial number of new
products, and competition among software publishers for licenses with
independent authors is intensifying. In the future, the Company may be required
to provide significantly higher advance payments, guaranteed minimum royalties
and/or greater royalty percentages to independent authors in order to compete
for licenses of their products. If the Company is unable to license or acquire
new products which are responsive to consumer preferences in a timely manner in
order to offset decreasing revenue from products reaching the end of their life
cycle, the Company's results of operations will be adversely affected. See
"Business -- Products."
The Company's success will be dependent upon, among other factors, its
ability to identify and license products that will achieve significant market
penetration and yield profitable margins. To the extent the Company licenses and
markets products that do not gain market acceptance, its operating results will
be adversely affected. In addition, such product failures could adversely impact
the Company's reputation in the industry and impact its ability to secure access
to retail shelf space and distribution channels and to attract new developers.
INTENSE COMPETITION. The consumer software industry is intensely
competitive and subject to rapid change. The Company believes that the principal
competitive factors affecting the markets for its titles include content,
quality, brand recognition, the Company's reputation, price, marketing,
distribution, access to retail shelf space and critical reviews. These factors
could be affected by the Company's ability to license products developed by
third party authors which gain market acceptance and enhance the Company's
reputation with distributors, retailers and consumers. In addition, consumer
demand for particular software products may be adversely affected by the
increasing number of competitive products from which to choose, making it
difficult to predict the Company's future success in publishing packaged
software products for the retail market. Rapid changes in technology, product
obsolescence and advances in computer hardware require the Company to develop or
acquire new products and to enhance its existing products on a timely basis. The
Company's marketplace has recently experienced a higher emphasis on on-line and
Internet related services and content tailored for these new media. To the
extent that demand increases for on-line products and content, the demand for
the Company's existing products and future performance may change.
The consumer multimedia software market is highly fragmented with products
offered by many vendors. The Company's products compete directly with those of
large and established software companies, such as GT Interactive, Broderbund,
and The Learning Company, as well as a large number of small independent
publishers similar to the Company. Most of these competitors have greater
financial, technical, marketing, sales and customer support resources, as well
as greater name recognition and access to customers than the Company. Due to the
low technical and economic barriers to entry into the multimedia software
market, the Company anticipates facing additional competition from an increasing
number of small, privately-held competitors. The Company will compete with such
companies not only for retail shelf space and sales, but also for obtaining
licenses for software programs being developed by third parties. In addition,
many large companies with sophisticated product marketing and technical
abilities and financial resources that do not presently compete with the Company
may enter the multimedia software market. For example, entertainment companies
have begun to produce and directly market their own titles, featuring their
proprietary characters, to the consumer software market. To the extent that
competitors, as a result of their purchasing capacity, have greater access to
financial and other resources or achieve a performance, price or distribution
advantage, the Company's business and results of operations could be adversely
affected. Furthermore, the Company
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<PAGE> 12
anticipates that there will be consolidation of the consumer multimedia market
around a smaller number of vendors who may be better positioned and have greater
resources with which to compete than the Company. The Company will also face
increased competition as it seeks to deliver multimedia content through other
new media, such as the World Wide Web, the Internet and on-line proprietary
services. There is no assurance that the Company will have the resources
required to respond to market or technological changes or to compete
successfully in the future. See "Business -- Competition."
COMPETITION FOR RETAIL SHELF SPACE AND PROMOTIONAL SUPPORT. The
competition for shelf space in retail stores is intense. To the extent that the
number of consumer software products and computer platforms increases, this
competition for shelf space may further intensify. At present, the Company's
products constitute a small percentage of a retailer's sales volume, and there
can be no assurance that retailers will provide the Company's products with
adequate levels of shelf space and promotional support. Increased competition
could result in loss of shelf space for, and reduction in sell-through of, the
Company's products at retail stores, as well as significant price competition,
any of which could adversely affect the Company's business, operating results
and financial condition.
The retail multimedia software market has experienced rapid change in
recent years, including consolidations and financial difficulties. These changes
have resulted in a greater degree of unpredictability as to retailer customer
accounts as well as increased competition for retail shelf space. To the extent
any retailers upon which the Company is dependent were to suffer financial
difficulties, the Company's operations could be materially adversely affected.
Due to increased competition for limited retail shelf space and promotional
resources, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts and product return
policies, as well as cooperative market development funds. Retailers often
require software publishers to pay fees in exchange for preferred shelf space.
The amounts paid to retailers by software publishers and distributors for
preferred shelf space are generally determined on a case by case basis and there
is, as of yet, no industry standard for determining such fees, although larger
publishers and distributors will likely have a competitive advantage in this
regard to the extent they have greater financial resources and negotiating
leverage. See "Business -- Competition."
COMPETITION FOR DISTRIBUTION CHANNELS; DISTRIBUTION RISKS. Sales to a
limited number of distributors have and will continue to constitute a
substantial portion of the Company's revenues. The Company's agreements with its
distributors generally are terminable by either party, with or without cause and
contain no minimum purchase obligations. During the year ended December 31,
1996, sales to three distributors accounted for approximately 21%, 18% and 11%,
respectively, of the Company's net sales. If the Company were to lose all or a
significant portion of the revenue attributable to its principal distributors,
or its principal distributors were to lose sales of the Company's products to
their principal accounts, the loss could have a material adverse effect on the
Company's operating results. In addition, the retail sales of the Company's
products are heavily concentrated among a few retailers. During the year ended
December 31, 1996, sales to two retailers accounted for approximately 20% and 7%
respectively, of the Company's net sales. Competition for access to
distributors, as well as for retail shelf space, is intense.
The type and number of distribution channels is increasing to include
non-traditional software retailers such as book, music, video, magazine, toy,
gift, convenience, drug and grocery store chains. Additionally, as technology
changes, the type and number of distribution channels will further change and
new types of competitors, such as cable or telephone companies, and new
distribution channels are likely to emerge. These new methods may include
delivery of software using on-line services or the Internet, which will
necessitate certain changes in the Company's business and operations, including
without limitation, addressing operational challenges such as improving download
time for pictures, images and programs, ensuring proper regulation of content
quality and developing sophisticated security for transmitting payments. Rapid
growth in the use of and interest in the Internet and the World Wide Web is a
recent phenomenon. The Company cannot accurately predict the impact on-line
media will have on the retail computer software industry. Should on-line
distribution channels increase, the Company will be required to modify its
existing technology bases in order for its products to be compatible and thereby
remain competitive. It is critical to the success of the Company that, as these
changes occur, it maintain access to such channels of software distribution in
its market segments.
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Even within traditional channels of distribution for consumer software
products there has been rapid change among distributors, including
consolidations and financial difficulties. These factors affecting distribution
channels could negatively affect the Company's business and results of
operations. With increasing concentration in the traditional channels of
distribution, the Company's customers have increased leverage in negotiating
favorable terms of sale, including price discounts and product return policies.
In addition, a number of the Company's larger competitors have attempted, with
some success, to enter into exclusive software distribution arrangements with
certain retail outlets. If the occurrence of these exclusive arrangements
increases and the Company is not able to offer a competing product line or
arrangement, the Company's operating results may be negatively impacted. See
"Business -- Competition."
LICENSING ARRANGEMENTS. The Company's rights to license most of its
software products included in the multiple CD-ROM Piranha Packs are
non-exclusive and, generally, of short duration. When licensing standalone,
individually packaged titles, the Company attempts to obtain exclusive licenses
for a longer term (to date, ranging from three years to five years). The
Company's exclusive license arrangements, however, may become non-exclusive or
terminate if the Company does not satisfy certain performance criteria, such as
selling a minimum amount of units or paying a minimum amount of royalties. There
is no assurance the Company will be able to continue to obtain new products from
developers or to maintain or expand its market share in the event that a
competitor offers the same or similar software products. In circumstances where
the Company has non-exclusive rights, the Company's competitive advantage, if
any, will be limited to its ability to obtain and market in a timely manner
software which is responsive to consumer preferences.
The Company has prepaid in the past, and anticipates that it will prepay in
the future, royalties to third party developers. In addition, the Company
anticipates that the amounts of prepaid royalties which it will pay in the
future are likely to significantly exceed amounts previously paid. There can be
no assurance that the sales of products associated with such royalties will be
sufficient to cover the amount of such prepayment or any guaranteed minimum
royalties. Companies with greater financial resources than the Company may be
able to make higher offers or guarantees to developers of commercially desirable
multimedia software products than the Company is able to make. As competition
for products of independent developers intensifies, the Company may not be able
to obtain the products that it desires, or may be required to reduce its profit
margins and pay significantly greater royalties, signing bonuses and/or advances
against royalties in order to license desired software programs. See
"Business -- Intellectual Property Licenses and Distribution Agreements."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. Commencing one year
from the date hereof, the Warrants may be redeemed by the Company at a
redemption price of $.05 per Warrant upon 30 days' notice provided the average
closing bid price (as defined therein) of the Common Stock for any 30
consecutive trading days ending within 15 days of the notice of redemption
exceeds $9.10, in the case of the Class A Warrants, or $12.25, in the case of
the Class B Warrants (subject to adjustment in each case). Redemption of the
Warrants could force the holders to exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for the holders to do so, to sell
the Warrants at the then current market price when they might otherwise wish to
hold the Warrants, or to accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities -- Redeemable Warrants".
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The operations
of the Company depend to a significant extent upon the efforts of Timothy M.
Brannan, Chairman of the Board and President, who is substantially responsible
for planning and guiding the Company's direction. In addition, the Company's
success depends upon the contributions of Keith P. Higginson, Chief Financial
Officer, J. Wade Stallings, II, Vice President and General Counsel, Douglas M.
Brannan, Vice President of Sales, and Wyndi D. Ballard, Vice President of
Marketing and Public Relations, each of whose responsibilities for the Company's
operations and strategic planning are very substantial. The loss of any of these
key employees would adversely affect the Company's business. The Company has
obtained $2,000,000 key man life insurance policies on each of the lives of
Messrs. Timothy M. Brannan, Higginson, Stallings and Douglas M. Brannan. See
"Management".
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The Company currently has only ten full-time employees, and will need to
recruit, hire and train additional personnel in order to fulfill its business
objectives. Because of the multifaceted and intensely competitive nature of the
multimedia industry, key personnel often require a unique combination of
creative and technical talents, as well as industry reputation. Such personnel
are in short supply, and the competition for their services is intense. The
process of identifying and recruiting key creative, technical and management
personnel with the requisite combination of skills and other attributes
necessary to execute the Company's strategy is expected to be lengthy. The
Company has entered into three-year employment contracts with each of Messrs.
Timothy M. Brannan, Higginson, Stallings, and Douglas M. Brannan and Ms.
Ballard; however, all other employees are currently subject to at-will
employment agreements, which are generally terminable at any time. The loss of
the services of any key personnel or the Company's failure to attract additional
qualified employees could have a material adverse effect on the Company's
business and results of operations.
PRODUCT DELAYS AND LIFECYCLES. The Company expends substantial resources
in connection with the initial launch of a new product, which activities
anticipate a particular retail availability date. Any failure to release a new
product as scheduled could result in the inability to recoup such expenditures
and loss of marketing opportunities, retailer fees and consumer interest.
Consumer preference for multimedia software products is difficult to predict,
and only a small percentage of such products enjoy sustained market acceptance.
The Company's success depends upon its ability to publish new, commercially
successful products and to replace revenues from products at the later stages of
their life cycles. There can be no assurance that new products introduced by the
Company will achieve any significant market acceptance or that if such
acceptance occurs, it will be sustained for any significant period. If the
Company does not anticipate and respond to changing demand for its products in a
timely manner, the Company's business, operating results and financial condition
will be materially adversely affected.
The introduction of new products is subject to the inherent risks of
development and manufacturing delays. The Company has in the past and may in the
future experience delays in introducing its products. In the past, the Company's
working capital deficiency has prevented it from shipping its products in a
timely manner and in sufficient quantities to meet customer demand. A
significant delay in the introduction of, or the presence of a defect in, one or
more new products could have a material adverse effect on the ultimate success
of such products and on the Company's business, operating results and financial
condition, particularly in view of the seasonality of the Company's business.
Delays in a product introduction near the end of the Company's third quarter may
materially adversely affect operating results for the entire year, as initial
shipments of a product may be delayed and result in an inability of the Company
to capitalize upon the historical trend of the fourth quarter holiday season
being the most significant, in terms of sales volume, each year. Any such delays
could cause the Company to miss this important selling season or other
opportunities and result in a corresponding negative impact on revenues and
results of operations. See "Business -- Products."
PRICE PROTECTIONS AND PRODUCT RETURNS. Industry practice and competitive
pressures generally require the Company to accept returns from distributors and
retailers of the Company's unsold products, including defective, shelfworn and
damaged products, or to reduce the price of previously shipped products to
enable retailers to sell slow moving inventories. The Company's agreements with
its distributors and retailers generally require that sales to a contracting
distributor or retailer be made at a price no greater than that at which product
is sold to any other like distributor or retailer, respectively, and provide
price protection for on-hand inventory in the form of credits to the contracting
distributor or retailer if the Company sells or discounts a particular product
to another distributor or retailer at a price that is lower than the price at
which that product was sold to the contracting distributor or retailer,
respectively. In addition, the Company's agreements with its retailers and
distributors require it to accept returns of products that are not sold. If all
or a significant portion of products are not purchased by consumers, and
distributors and retailers demand that the Company accept returns of the unsold
products, the Company's business, operating results and financial condition
could be materially adversely affected.
At the time of product shipment, the Company establishes reserves,
including reserves which estimate the potential for future returns based on
seasonal terms of sale and distributor and retailer inventories of the Company's
products, as well as other factors. The Company recognizes revenue from the sale
of its products upon delivery except for sales made to certain distributors
where the right of ownership does not pass at delivery. Product returns or price
protection concessions that exceed the Company's reserves could materially
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<PAGE> 15
adversely affect the Company's business, operating results and financial
condition and could increase the magnitude of quarterly fluctuations in the
Company's operating and financial results. Furthermore, if the Company's
assessment of the creditworthiness of its customers receiving product on credit
proves incorrect, the Company could be required to significantly increase the
reserves previously established. There can be no assurance that such future
write-offs will not occur or that amounts written off will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
SIGNIFICANT PRICE REDUCTIONS IN PERSONAL COMPUTER SOFTWARE. Recently,
several major publishers of multimedia software have significantly reduced the
prices of their products with the goal of gaining greater market share.
Competition in Microsoft's Windows application segment from major software
publishers is intensifying, and "competitive upgrade" price discounting among
the major firms is eroding the traditional pricing structures that had
previously existed in the software industry. The Company expects to encounter
increasing price competition in the future. Competitive pressures could result
not only in sustained price reductions, but also in a decline in sales volume.
Such declines could result in a decrease in the revenues from, and gross margins
on, sales of such products in the future and could result in lower cash flow or
operating margins.
RAPID TECHNOLOGICAL DEVELOPMENT AND SOFTWARE MARKET CHANGES. The market
for interactive multimedia software titles continues to evolve and is dependent
upon a number of variables, including consumer preferences, shipments of new
multimedia PCs, the installed base of multimedia PCs and the number of other
developers and publishers creating interactive multimedia software titles to
satisfy market demand. In addition, consumer preferences for particular software
products and titles are subject to rapid change and are highly reactive to
changes in computer technology. Changes in technology and consumer preferences
may render software being marketed by the Company obsolete. In particular, a
continually expanding consumer demand for content-rich multimedia products has
resulted in short life spans for software products. There can be no assurance
that the Company will be able to acquire innovative new products reflecting
technological change and consumer preferences, or that it will do so in a timely
manner. The inability of the Company to publish multimedia software products for
hardware technology with wide consumer acceptance and with high consumer appeal
could result in a material adverse affect on the Company's business, results of
operations and financial condition.
CHANGING PRODUCT PLATFORMS AND FORMATS. The Company's software products
are intended to be used on personal computer hardware systems built by third
party manufacturers. The operating systems of machines currently being
manufactured are characterized by several competing and incompatible formats or
"platforms", and new platforms will likely be introduced in the future.
Currently, Microsoft Corporation is the dominant supplier of computer operating
systems and frequently coordinates its operating system marketing efforts with
those for its applications software. In the future, interactive multimedia
titles may be accessible through such platforms as telephone, cable network and
direct broadcast satellite delivery. The Company's success is dependent upon,
among other things, its ability to anticipate future changes in platforms and
their acceptance by the market and to develop compatible software for such
platforms, of which there is no assurance. If the Company invests in software
products for a platform that does not achieve significant market penetration,
the Company's planned revenues from those products will be adversely affected
and it may not recover its development investment. If the Company does not
choose to develop or is unable to develop, due to resource constraints or other
factors, software products for a platform that achieves significant market
success in a timely manner, the Company's revenues may also be adversely
affected. Although the Company is optimistic that it can obtain, where
necessary, licenses to use these platforms, no assurances can be given that such
licenses can be obtained or that they can be obtained on commercially reasonable
terms. The inability of the Company to obtain a license to use a particular
platform or platforms could have a material adverse effect on the Company's
business.
To date, all of the Company's products have been produced, and all of its
product development efforts are directed at creating new products, on CD-ROM
format. Although the Company believes that it would be able to develop software
compatible with new formats in a timely manner, a leveling off or decline in
sales of CD-ROMs could have a material adverse effect on the Company's results
of operations. In addition, although the Company believes that most elements of
its operations and business strategy are applicable to and may be
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utilized in the creation of multimedia software products for additional
platforms, there can be no assurance that the Company will be able to adapt its
products and operations to emerging hardware platforms or to successfully create
multimedia software titles for such platforms.
DEPENDENCE ON PC SALES. Personal computer software sales are highly
dependent upon sales of personal computers. During recent years, segments of the
PC industry have experienced significant economic downturns characterized by
decreased product demand and price erosion. Although the Company does not
believe such factors have materially affected the Company in the past, there can
be no assurance that the Company will not be materially adversely affected if
such situation continues or worsens or by future events in the industry.
MANUFACTURING RISK. The production of the Company's products consists of
pressing CD-ROM disks, assembling purchased product components, printing product
packaging and user manuals and packaging finished products, all of which are
performed for the Company by third party vendors in accordance with the
Company's specifications and forecasts. Currently, the Company uses primarily
one vendor for each of these services. While these services are available from
multiple vendors and at multiple sites, there can be no assurance that an
interruption in the manufacture of the Company's products could be remedied
without undue delay and without materially and adversely affecting the Company's
results of operations. The Company does not have contractual agreements with any
of its third party vendors, which may result in an inability to secure adequate
services in a timely manner. In particular, due to the seasonal nature of the
software CD-ROM industry, it is critical that the Company secure adequate
production resources to timely produce and deliver its products for fourth
quarter sales. See "Business -- Manufacturing."
PROTECTION OF PROPRIETARY RIGHTS; RISK OF INFRINGEMENT CLAIMS. The Company
regards its software products as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, as well as employee
and third party nondisclosure agreements and other methods to protect its
proprietary rights. The Company generally licenses its externally developed
products rather than transferring title and, as is the industry practice, relies
upon "shrink-wrapped," rather than signed, license agreements with end-users.
The enforceability of such licenses has not been conclusively determined. As is
also the standard practice in the industry, none of the Company's CD-ROM
products include any mechanism to prevent or inhibit unauthorized copying. The
Company is not aware of any unauthorized copying, reverse engineering or other
unauthorized distribution of its proprietary information, but if such
unauthorized copying were to occur, the Company's business, operating results
and financial condition could be materially adversely affected. Further, the
laws of foreign jurisdictions may not protect the Company's proprietary rights
to the same extent as the laws of the United States. Policing unauthorized use
of a broadly disseminated product such as PC software is very difficult.
Software piracy has been, and can be expected to be, a persistent problem for
participants in the shrink-wrap software industry, including the Company. See
"Business -- Protection of Proprietary Rights."
As the number of multimedia software products in the industry increases and
the functionality of these products further overlaps, software publishers and
developers may increasingly become subject to infringement claims. There can be
no assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products. Although the
Company makes reasonable efforts to ensure that its products do not violate the
intellectual property rights of others, there can be no assurance that claims of
infringement will not be made against the Company. In certain circumstances,
litigation may be necessary to enforce and protect the Company's proprietary
rights. Any such litigation, with or without merit, could be costly and divert
management's attention, which could have an adverse effect on the Company's
business, operating results or financial condition. Adverse determinations in
litigation relating to any of the Company's products could result in the loss of
the Company's proprietary rights, subject the Company to liabilities, require
the Company to seek licenses from third parties or prevent the Company from
selling that product.
PRODUCT LIABILITY EXPOSURE. Sale of the Company's software products
involves the inherent risk of product liability claims against the Company. The
Company currently maintains product liability insurance coverage, however,
product liability insurance is expensive, subject to various coverage
exclusions, and may not be obtainable by the Company in the future on terms
acceptable to the Company. Moreover, the amount
14
<PAGE> 17
and scope of any coverage may be inadequate to protect the Company in the event
that a product liability claim is successfully asserted against the Company.
CONTROL BY PRESENT STOCKHOLDERS; VOTING TRUST AND IRREVOCABLE PROXY
AGREEMENT. The Company's present stockholders will own 1,200,000 shares of
Common Stock, representing 50% of the total combined voting power of all of the
Common Stock to be outstanding immediately after the Offering. In addition, the
present stockholders of the Company have entered into a voting trust agreement
and irrevocable proxy agreement. Pursuant to the voting trust agreement and
irrevocable proxy agreement, Timothy M. Brannan, the Company's Chairman and
President, is granted the authority to vote all of the shares subject to the
voting trust and the proxy on all matters on which the Company's stockholders
are entitled to vote. Mr. Brannan, accordingly, will likely be able to elect all
of the Company's directors and thereby control the policies of the Company. See
"Principal Stockholders".
POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO THE
INVESTIGATION OF THE UNDERWRITER AND D.H. BLAIR & CO., INC. BY THE SECURITIES
AND EXCHANGE COMMISSION. The Securities and Exchange Commission (the
"Commission") is conducting an investigation concerning various business
activities of the Underwriter and D. H. Blair & Co., Inc. ("Blair & Co."), a
selling group member which will distribute substantially all of the Units
offered hereby. The investigation appears to be broad in scope, involving
numerous aspects of the Underwriter's and Blair & Co.'s compliance with the
Federal securities laws and compliance with the Federal securities laws by
issuers whose securities were underwritten by the Underwriter or Blair & Co., or
in which the Underwriter or Blair & Co. made over-the-counter markets, persons
associated with the Underwriter or Blair & Co., such issuers and other persons.
The Company has been advised by the Underwriter that the investigation has been
ongoing since at least 1989 and that it is cooperating with the investigation.
The Underwriter cannot predict whether this investigation will ever result in
any type of formal enforcement action against the Underwriter or Blair & Co.,
or, if so, whether any such action might have an adverse effect on the
Underwriter or the securities offered hereby. The Company has been advised that
Blair & Co. intends to make a market in the securities following this Offering.
An unfavorable resolution of the Commission's investigation could have the
effect of limiting such firm's ability to make a market in the Company's
securities, which could adversely affect the liquidity or price of such
securities. See "Underwriting".
POSSIBLE RESTRICTIONS ON MARKET-MAKING ACTIVITIES IN COMPANY'S
SECURITIES. The Underwriter has advised the Company that Blair & Co. intends to
make a market in the Company's securities. Regulation M, which was recently
adopted to replace Rule 10b-6, under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), may prohibit Blair & Co. from engaging in any
market-making activities with regard to the Company's securities for the period
of up to five business days (or such other applicable period as Regulation M may
provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may have
to receive a fee for the exercise of Warrants following such solicitation. As a
result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. In
addition, under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Selling Securityholders' Warrants may
not simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable restricted period prior to the
commencement of such distribution. Accordingly, in the event the Underwriter or
Blair & Co. is engaged in a distribution of the Selling Securityholders'
Warrants, neither of such firms will be able to make a market in the Company's
securities during the applicable restrictive period. Any temporary cessation of
such market-making activities could have an adverse effect on the market price
of the Company's securities. See "Underwriting".
USE OF PROCEEDS FOR PAST DEBT. A significant portion of the proceeds from
this Offering will be used to repay past indebtedness. The Company expects to
use approximately $1,535,000 of the net proceeds from this Offering to redeem
the Bridge Notes. See "Use of Proceeds" and "Capitalization -- Bridge
Financing".
15
<PAGE> 18
BROAD DISCRETION OVER USE OF PROCEEDS. Approximately $1,790,000 (or 37%)
of the proceeds are allocated to working capital. Management will have broad
discretion as to the use of such proceeds. See "Use of Proceeds".
FUTURE SALES OF COMMON STOCK; ESCROWED SHARES. Upon completion of this
Offering, the Company will have 2,400,000 shares of Common Stock outstanding,
excluding shares issuable upon the exercise of warrants and options. The
1,200,000 shares of Common Stock presently outstanding, including the 825,000
Escrow Shares, are subject to the volume, manner of sale and public information
requirements of Rule 144 (described below) promulgated under the Securities Act
of 1933, as amended (the "Securities Act"), unless registered under the
Securities Act. The 825,000 Escrow Shares will be released only if the Company
achieves certain levels of income or the bid price for shares of its Common
Stock exceed certain thresholds. See "Principal Stockholders -- Escrow
Arrangements." and "Underwriting".
Future sales, and the potential for sales of significant amounts, of Common
Stock in the public market after this Offering could have an adverse effect on
the then prevailing market price of the Common Stock.
All of the shares of Common Stock currently outstanding are "restricted
securities" as that term is defined under Rule 144 promulgated under the
Securities Act and under certain circumstances may be sold without registration
pursuant to such rule. The Company's Officers and Directors and holders of all
of the shares of Common Stock and options to purchase Common Stock outstanding
prior to this Offering have agreed with the Underwriter not to offer, sell or
otherwise dispose of any of their shares of Common Stock or other securities
issued by the Company for a period of 13 months after the date of this
Prospectus without the prior written consent of the Underwriter. Upon expiration
of such 13-month period, substantially all of the shares of Common Stock will be
eligible for resale under Rule 144. The Company is unable to predict the effect
that sales made under Rule 144, or otherwise, may have on the then prevailing,
market price of the Company's securities although any future sales of
substantial amounts of securities pursuant to Rule 144 could adversely affect
prevailing market prices. See "Principal Stockholders," "Description of
Securities -- Shares Eligible For Future Sale" and "Underwriting".
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Units offered hereby
will incur immediate substantial dilution of approximately $2.54 (or 51%) in the
per share net tangible book value of their Common Stock (attributing no value to
the Warrants included in the Units). The current stockholders of the Company
acquired their securities at an average price per share of less than $.01.
Therefore, purchasers of the Units offered hereby will bear a proportionately
greater risk of loss than the Company's current stockholders. See "Dilution".
CHARGES ARISING FROM PRIVATE PLACEMENT. The Company incurred approximately
$281,000 of debt issuance costs and debt discount associated with the Bridge
Financing completed in November and December 1996. A substantial portion of such
fees will be charged to income upon the repayment of the Bridge Notes from the
proceeds of this Offering and booked for the quarter ending March 31, 1997. This
charge to income will adversely affect the Company's financial results for that
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
CHARGES AND POTENTIAL CHARGES TO EARNINGS. The Commission has taken the
position with respect to escrow arrangements such as that entered into by the
Company and its stockholders that in the event any shares are released from
escrow to the holders who are officers, directors, employees or consultants of
the Company, a compensation expense will be recorded for financial reporting
purposes. Accordingly, in the event of the release of the Escrow Shares, the
Company will recognize during the period in which the earnings thresholds are
probable of being met or such Common Stock bid price levels achieved, a
substantial noncash charge (not deductible for income tax purposes) to
operations equal to the then fair market value of such shares, which would have
the effect of significantly increasing the Company's loss or reducing or
eliminating earnings, if any, at such time. The recognition of such compensation
expense may have a depressive effect on the market price of the Company's
securities. Notwithstanding the foregoing discussion, there can be no assurance
that the Company will attain the targets which would enable the Escrow Shares to
be released from escrow. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Potential Charges to Income."
16
<PAGE> 19
DIVIDENDS UNLIKELY. The Company does not intend to declare or pay cash
dividends on its Common Stock in the foreseeable future. The Company expects
that it will retain all available earnings, if any, to finance and expand its
business. See "Dividend Policy".
ABSENCE OF PRIOR PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING AND
EXERCISE PRICES. Prior to this Offering, there has been no public market for
any of the Company's securities and there is no assurance that any such market
will develop, or, if one does develop, that it will be sustained. The initial
public offering price for the Units and the exercise prices of the Warrants have
been determined by negotiation between the Company and the Underwriter and are
not necessarily related to the Company's asset value, net worth or other
established criteria of value.
STOCK MARKET VOLATILITY. General market price declines or market
volatility in the future could adversely affect the price of the Common Stock
and the Warrants. In certain cases, volatility in the price of a given security
can result from the short-term trading strategies of certain market segments.
Such volatility can distort market value and can be particularly severe in the
case of smaller capitalization stocks and immediately before or after an
important corporate event such as a public offering. In recent years, the stock
markets in general, and the securities of technology companies in particular,
have experienced extreme price fluctuations in response to such occurrences as
quarterly variations in operating results, changes in earnings estimates by
analysts, announcements concerning new products, strategic relationships or
technological innovations by individual software publishers and developers,
general conditions in the software computer and entertainment industries and
other events or facts. This pattern of extreme volatility in the stock market,
which in many cases was unrelated to the operating performance of, or
announcements concerning, the issuers of the affected stock may adversely affect
the market price of the Common Stock.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Upon completion of the
Offering, the Company will have outstanding (i) 1,200,000 Class A Warrants to
purchase an aggregate of 1,200,000 shares of Common Stock and 1,200,000 Class B
Warrants; (ii) 1,200,000 Class B Warrants to purchase 1,200,000 shares of Common
Stock; (iii) the Selling Securityholders' Class A Warrants to purchase an
aggregate of 750,000 shares of Common Stock and 750,000 Class B Warrants; (iv)
the Unit Purchase Option to purchase an aggregate of 120,000 Units; and (v)
options to purchase an aggregate of 50,000 shares of Common Stock. The Company
has an additional 150,000 shares of Common Stock reserved for issuance under its
1996 Stock Option Plan. For the respective terms of such Warrants, options and
the Unit Purchase Option, the holders thereof are given an opportunity to profit
from a rise in the market price of the Company's Common Stock with a resulting
dilution in the interests of the other stockholders. Further, the terms on which
the Company may obtain additional financing during that period may be adversely
affected by the existence of such options and warrants. The holders of the
Warrants may exercise them at a time when the Company might be able to obtain
additional capital through a new offering of securities on terms more favorable
than those provided therein. In addition, holders of the Unit Purchase Option
have registration rights with respect to such option and the underlying
securities. Exercise of the registration rights may involve substantial expense
to the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Description of Securities" and "Underwriting".
NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES UNDERLYING THE
WARRANTS; NEED FOR CURRENT PROSPECTUS. The Class A Warrants and Class B
Warrants constituting part of the Units offered hereby are detachable
immediately from the Units and may be traded separately. Although the Units will
not knowingly be sold to purchasers in jurisdictions in which the Units are not
registered or otherwise qualified for sale, purchasers may buy Units or the
components thereof in the aftermarket in, or may move to, jurisdictions in which
the shares underlying the Class A Warrants or the Class B Warrants issuable upon
exercise of the Warrants are not so registered or qualified during the period
that the Warrants are exercisable. In this event, the Company would be unable to
issue shares and/or Class B Warrants to those persons desiring to exercise their
Warrants unless and until the underlying securities could be qualified in such
jurisdiction. In addition, investors in this Offering will not be able to
exercise their Warrants, unless at the time of exercise the Company has a
current prospectus covering the shares of Common Stock underlying the Warrants.
No assurances can be given that the Company will be able to effect any required
registration or qualification or maintain a current prospectus. See "Description
of Securities -- Redeemable Warrants".
17
<PAGE> 20
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS. The Company's Board of Directors has the authority to issue up to
5,000,000 shares of preferred stock, $.001 par value ("Preferred Stock"), in one
or more series and to determine the price, rights, preferences and privileges of
the shares of each such series without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company, thereby
delaying, deferring or preventing a change of control of the company. In
addition, certain provisions in the Company's Articles of Incorporation and
By-laws creating a staggered-term board and relating to supermajority
stockholder approval of certain business combinations by the Company,
restrictions on calling special meetings of stockholders, restrictions on
removal of directors and restrictions on amendments to the By-laws may
discourage or make more difficult any attempt by a person or group of persons to
obtain control of the Company. See "Description of Securities -- Certain
Statutory and Charter Provisions."
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS. The Company's Articles
of Incorporation require the Company to indemnify each of its Officers and
Directors against liabilities and reasonable expenses incurred in any action or
proceeding, including stockholders' derivative actions, by reason of such person
being or having been an Officer or Director of the Company, or of any other
corporation for which he or she serves as such at the request of the Company, to
the fullest extent permitted by Nevada law. The Company's Articles of
Incorporation also limit the liabilities of the Directors and Officers of the
Company for monetary damages for breach of fiduciary duty as a Director or
Officer to the maximum extent permitted by Nevada law. Although such limitation
of liability does not affect the availability of equitable remedies such as
injunctive relief or rescission, the presence of these provisions in the
Articles of Incorporation could prevent the recovery of monetary damages against
Directors and Officers of the Company. See "Management -- Indemnification and
Limitation of Liability".
RISK OF LOW-PRICED STOCK; PENNY STOCK REGULATIONS. If the Company's
securities were delisted from Nasdaq (See "Risk Factors -- Nasdaq Listing and
Maintenance Requirements; Risk of Delisting"), they could become subject to Rule
15g-9 under the Exchange Act, which imposes additional sales practice
requirements on broker-dealers which sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, such rule may adversely affect the ability of broker-dealers
to sell the Company's securities and may adversely affect the ability of
purchasers in this Offering to sell any of the securities acquired hereby in the
secondary market.
The Commission adopted regulations which generally define a "penny stock"
to be any non-Nasdaq equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6)of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the commission finds that such a restriction would be in
the public interest.
18
<PAGE> 21
If the Company's securities were subject to the existing or proposed rules
on penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
NASDAQ LISTING AND MAINTENANCE REQUIREMENTS; RISK OF DELISTING. The
Company proposes to list the Units, Common Stock and Warrants on the Nasdaq
SmallCap Market. See "Cover Page". Under the rules for continued listing in the
Nasdaq system, a company is required to maintain at least $2,000,000 in total
assets, two market-makers, a public float of at least $200,000 and a minimum bid
price of $1.00 per share or, if the share price criterion cannot be met,
$2,000,000 in capital and surplus and a public float of $1,000,000. In addition,
Nasdaq has proposed more stringent maintenance criteria for continued listing,
which, among other things, would require that a company have at least $2,000,000
in "net tangible assets" ("net tangible assets" equals total assets less total
liabilities and goodwill) or at least $35,000,000 in total market value or at
least $500,000 in net income in two out of its last three fiscal years, as well
as at least 500,000 shares in the public float, at least $1,000,000 in market
value of the public float, a bid price of not less than $1.00 per share, and
more stringent corporate governance standards. Adoption of any or all of the
proposals could make it more difficult for the Company to maintain compliance
with the listing criteria, assuming the Company is accepted for listing on the
SmallCap Market. Upon notice of a deficiency in one or more of the maintenance
requirements, the Company would be given 90 days (30 days in the case of the
number of market-makers) to comply with the maintenance standards. Failure of
the Company to meet the maintenance requirements of Nasdaq could result in the
Company's securities being delisted from Nasdaq, with the result that the
Company's securities would trade on the OTC Bulletin Board or in the "pink
sheets" maintained by the National Quotation Bureau Incorporated. As a
consequence of such delisting, an investor could find it more difficult to
dispose of or to obtain accurate quotations as to the market value of the
Company's securities. Among other consequences, delisting from Nasdaq may cause
a decline in the stock price, the loss of news coverage about the Company and
difficulty in obtaining future financing.
19
<PAGE> 22
USE OF PROCEEDS
The Company estimates that the net proceeds from the sale of the 1,200,000
Units offered hereby will be approximately $4,825,000 ($5,608,000 if the
Underwriter's over-allotment option is exercised in full), assuming an initial
public offering price of $5.00 per Unit and after deducting underwriting
discounts and commissions and estimated expenses of this offering. The Company
intends to apply the net proceeds of this, as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPLICATIONS AMOUNT PERCENTAGE
------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Repayment of Bridge Notes and related interest(1)............ $1,535,000 32%
Acquisition of Software Programs............................. 1,000,000 21
Marketing and Sales(2)....................................... 500,000 10
Working Capital(3)........................................... 1,790,000 37
---------- ---
Total................................................... $4,825,000 100%
========== ===
</TABLE>
- ---------------
(1) The Bridge Notes accrue interest at 10% per annum and are payable upon the
earlier of one year after the date of issuance, or the completion of the
public offering contemplated herein. The proceeds of the Bridge Notes are
being used for repayment of a $200,000 loan (and accrued interest thereon)
made by the Underwriter to the Company in November 1996, payment of accrued
officer and employee salaries of $76,000, loans by Officers to the Company
of $100,000, loans by others to the Company of $25,000 and working capital
purposes including general and administrative expenses. See
"Capitalization -- Bridge Financing" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
(2) Represents funds to be used to implement the Company's marketing and sales
program, including the hiring of additional personnel, exhibition at trade
shows and production of brochures and sales literature. See
"Business -- Marketing and Sales".
(3) As a result of the Company's relatively long payment cycles, the Company
generally applies a significant portion of its working capital toward
financing its accounts receivable and maintaining sufficient quantities of
inventory on hand. The Company intends to use the portion of the net
proceeds from this Offering allocated to working capital purposes in a
manner consistent with its past practices.
If the Underwriter's over-allotment option is exercised, the amount for
which it is exercised will increase the amount of proceeds allocated to sales
and marketing and working capital.
Until applied as set forth above, all proceeds will be invested in
short-term investment grade instruments or bank certificates of deposit. Income
received from investments or from any Warrant exercise will be added to working
capital and used to fund operations. Investment of the net proceeds in
short-term securities rather than operations could adversely affect the
Company's overall return on its capital.
Although the Company presently has no plans, agreements or understandings
to enter into any potential business combination, it does intend to actively
seek and investigate such opportunities as they become available. The Company
would likely finance any such transaction with cash, the issuance of equity or
debt securities, incurrence of indebtedness or any combination of the foregoing.
To the extent that any such transaction would be paid for by the Company in
cash, the Company could decide to use a portion of the net proceeds from this
Offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and
"Business -- Business Strategy."
The foregoing represents the Company's present intentions and best estimate
with respect to the allocation of the proceeds of this Offering based upon its
present plans and business conditions. The Company expects that the net proceeds
of this Offering will enable it to meet its liquidity and capital requirements
for approximately 12 months following completion of the Offering, although the
Company's capital requirements are subject to numerous contingencies associated
with early-stage companies. The Company may be required to seek additional
financing in the event of delays, cost overruns or unanticipated expenses
associated with a company in an early stage of development, or in the event the
Company does not realize anticipated revenues.
20
<PAGE> 23
In addition, the Company may require additional financing in the future to
further expand its product offerings or to make strategic acquisitions. There is
no assurance that unforeseen events or changed business conditions will not
result in the application of the proceeds of this Offering in a manner other
than as described in this Prospectus. This estimate is based on certain
assumptions, which are subject to change. Future events, including changes in
the Company's business plans, results and economic, competitive or industry
conditions, may make shifts in the allocation of funds necessary or desirable.
See "Risk Factors -- Need for Additional Financing," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
DIVIDEND POLICY
The Company does not intend to declare or pay cash dividends on its Common
Stock (or any other securities) in the foreseeable future. The Company intends
to retain all available earnings to finance and expand its business.
21
<PAGE> 24
DILUTION
The following discussion and tables allocate no value to the Warrants
issued as part of the Units.
The net tangible book value of the Company as of December 31, 1996 was
$(702,022) or $(1.87) per share of Common Stock. Net tangible book value per
share is determined by dividing the number of shares of Common Stock outstanding
(excluding 825,000 shares held in escrow) into the tangible net worth of the
Company (tangible assets less total liabilities). Without taking into account
any changes in such net tangible book value subsequent to December 31, 1996,
other than to give effect to the sale of 1,200,000 Units by the Company at an
assumed initial public offering price of $5.00 per Unit (after deducting the
estimated underwriting discount and estimated offering expenses payable by the
Company), the pro forma net tangible book value at December 31, 1996, would have
been $3,868,019, or $2.46 per common share. This represents an immediate
increase in net tangible book value of $4.33 per common share to existing
shareholders and an immediate dilution of $2.54 per common share to persons
purchasing Units in this Offering ("New Investors"). The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Unit.............. $5.00
Net tangible book value per common share at
December 31, 1996...................................... $(1.87)
Increase in net tangible book value per common share
attributable to the New Investors in the Units......... $ 4.33
------
Pro forma net tangible book value per common share
after offering......................................... $2.46
-----
Dilution per common share to New Investors(1)(2)............ $2.54
=====
</TABLE>
- ---------------
(1) If the Underwriter exercises the over-allotment option in full, the per
share dilution to investors in the Units would be $2.35.
(2) If the 825,000 shares held in escrow were treated as outstanding, the per
share dilution to New Investors would be $3.39.
The following table sets forth on a pro forma basis at December 31, 1996,
the differences between existing shareholders and the New Investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share (assuming
an initial public Offering price of $5.00 per Unit):
<TABLE>
<CAPTION>
SHARES PURCHASED
------------------------------------------ TOTAL CONSIDERATION
NON-ESCROW ESCROW TOTAL -------------------- AVERAGE PRICE
SHARES SHARES SHARES PERCENT AMOUNT PERCENT PER SHARE
---------- ------- --------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Existing shareholders..... 375,000 825,000 1,200,000 50% $4,959 0.1% $ 0.004
New Investors............. 1,200,000 0 1,200,000 50% $6,000,000 99.9% $ 5.00
--------- ------- --------- --- ---------- ---
Total................ 1,575,000 825,000 2,400,000 100% $6,004,959 100%
========= ======= ========= === ========== ===
</TABLE>
The foregoing table assumes no exercise of the over-allotment option. If
such option is exercised in full, the New Investors will have paid $6,900,000
for 1,380,000 shares of Common Stock, representing approximately 100% of the
total consideration for approximately 54% of the total number of shares of
Common Stock outstanding (including escrow shares). The foregoing table also
assumes no exercise of the Underwriter's Unit Purchase Option or any other
options or warrants of the Company and further assumes that all existing
shareholders purchased the Common Stock held by them from the Company at the
price at which such shares were originally sold by the Company. As of the
closing of the Offering, there will be options outstanding to purchase an
aggregate of 50,000 additional shares of Common Stock, which have an exercise
price equal to the initial public offering price of the Units offered hereby.
See "Management -- 1996 Stock Option Plan".
22
<PAGE> 25
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of December 31, 1996, (i) giving effect to the approximately 242-for-1 stock
split as part of the reincorporation of the Company as a Nevada corporation on
November 22, 1996, and to reflect the sale of $1,500,000 of Bridge Units in
November and December 1996 and the application of the proceeds therefrom to
repay short-term debt, and the change effected in par value and the number of
shares authorized, and (ii) as adjusted to give effect to the issuance and sale
of the 1,200,000 Units offered hereby at an initial offering price of $5.00 per
Unit and the repayment of the Bridge Notes out of the net proceeds therefrom as
set forth in "Use of Proceeds". This table should be read in conjunction with
the Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
AS
ACTUAL ADJUSTED
---------- ----------
<S> <C> <C>
Notes payable -- officers........................................... $ 36,426 $ 36,426
Bridge Notes(1)..................................................... 1,431,928 0
Preferred Stock, $.001 par value, 5,000,000 shares authorized, none
issued............................................................ 0 0
Common Stock; $.001 par value; 20,000,000 shares authorized;
1,200,000 shares issued and outstanding; 2,400,000 shares issued
and outstanding as adjusted(2).................................... 1,200 2,400
Additional paid in capital.......................................... (565,703) 4,258,097
Additional paid in capital -- warrants.............................. 75,000 75,000
Stockholders' equity (deficit)...................................... (702,022) 3,868,019
---------- ----------
Total capitalization...................................... $ 766,332 $3,904,445
========== ==========
</TABLE>
- ---------------
(1) The amount set forth for Bridge Notes represents the price of the Units
issued in the Bridge Financing less the value ascribed to the Bridge
Warrants ($75,000). Bridge Notes accrue interest at the rate of 10% per
annum and are payable upon the earlier of November 27, 1997 or completion of
this Offering. See "Use of Proceeds" and "-- Bridge Financing".
(2) Does not include: (i) 180,000 shares of Common Stock included in Units which
may be sold pursuant to the Underwriter's over-allotment option and 360,000
shares of Common Stock issuable upon exercise of the Class A and Class B
Warrants included in and underlying such Units; (ii) 3,600,000 shares of
Common Stock reserved for issuance upon exercise of the Class A and Class B
Warrants included in the Units offered hereby; and (iii) 120,000 shares of
Common Stock issuable upon exercise of the Unit Purchase Option and/or
240,000 shares of Common Stock issuable upon exercise of the Class A and
Class B Warrants included in or underlying such option; and (iv) 200,000
shares reserved for issuance under the Company's 1996 Stock Option Plan, of
which options to purchase 50,000 shares will be outstanding at the closing
of the Offering. See "Principal Stockholders", "Description of Securities",
and "Underwriting".
BRIDGE FINANCING
In November and December 1996, the Company completed the Bridge Financing
consisting of an aggregate of $1,500,000 principal amount of Bridge Notes and
750,000 Bridge Warrants from which it received net proceeds of approximately
$1,294,000 (after deduction of the Placement Agent's commissions and expenses of
such financing). The Bridge Notes are payable, together with interest at the
rate of 10% per annum, on the earlier of November 27, 1997 or the closing of
this Offering. See "Use of Proceeds". The Bridge Warrants entitle the holders
thereof to purchase one share of Common Stock for $3.00, but will be exchanged
automatically on the closing of this Offering for 750,000 Selling
Securityholders' Warrants, each of which will be identical to the Class A
Warrants included in the Units offered hereby (including the $6.50
23
<PAGE> 26
exercise price). The Selling Securityholders' Securities have been registered
for resale in the Registration Statement of which this Prospectus forms a part,
but are subject to the agreement of the Selling Securityholders not to exercise
such Selling Securityholders' Warrants for a period of one year from the date of
this Prospectus and not to sell such Securityholders' Warrants for a period of
one year from the date of this Prospectus. See "Concurrent Offering".
SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December
31, 1996 and 1995 have been derived from the financial statements of the
Company, which together with the notes thereto and the related report of Coopers
& Lybrand L.L.P., are included elsewhere in this Prospectus. Operating results
for the year ended December 31, 1996 are not necessarily indicative of the
results that may be expected for future periods. The selected financial data set
forth below should be read in conjunction with the financial statements of the
Company and related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales........................................................ $1,342,034 $ 424,810
Costs and Expenses............................................... 1,153,891 1,337,148
Net income (loss)................................................ 188,143 (912,338)
Pro forma net income (loss)(1)................................... 109,123 (834,874)
Pro forma net income (loss) per common share:.................... $ 0.21 $ (1.89)
Shares used in computing pro forma net income (loss) per common
share:......................................................... 510,907 440,809
</TABLE>
- ---------------
(1) From inception, until November 15, 1996, the Company elected to be treated
as a Subchapter S corporation for federal income tax purposes. As such, all
tax liability flowed through to the individual shareholders. The pro forma
financial data presented herein is as if the Company had been a C
corporation for federal income tax purposes from inception at an assumed tax
rate of 42%.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets............................................. $ 491,086 $ 493,506
Working capital (deficit).................................. 173,926 (1,214,783)
Total assets............................................... 521,166 1,053,870
Total liabilities.......................................... 353,704 1,755,892
Stockholders' equity (deficit)............................. 167,462 (702,022)
</TABLE>
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<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the financial
statements and notes thereto set forth elsewhere in this Prospectus.
GENERAL
The Company was incorporated in November 1994 to publish interactive
multimedia software products for the home PC market. The Company generally
licenses software programs being developed by independent third party developers
in return for which the independent developers generally receive an advance
royalty payment and a future royalty stream based on a percentage of the net
sales of the product. The Company then generally produces, packages and markets
the completed software products under its own name. In addition, the Company has
in the past and may in the future enter into affiliate relationships with other
publishers or developers ("Affiliates") pursuant to which the Company markets
titles owned by an Affiliate under a revenue sharing arrangement.
From inception until August 1995, the Company's activities included
assembling its management team, developing infrastructure and obtaining titles
for publication. The Company recognized its first sales revenues in August 1995.
As a result of its start up activity, the Company recorded revenues during only
the final five months of 1995, and it recorded no revenues during the period
from November 14, 1994 (inception) through December 31, 1994. In addition,
during 1994 and the first nine months of 1995, the Company had not incurred the
expenses necessary to develop infrastructure nor incurred any significant
overhead. In addition, the founders of the Company did not draw or accrue
salaries. Accordingly, general and administrative expenses during those periods
were unusually low. Further, the home education and entertainment software
market is highly seasonal, with demand typically higher during the year-end
buying season. As a result of its working capital deficiency during the second,
third and fourth quarters of 1996, the Company's net sales during 1996 were
materially hampered by its inability to ship quantities of products to satisfy
customer demand and to launch new products. Consequently, the Company believes
that the comparisons below in "Results of Operations" are neither meaningful nor
representative of future results. In addition, the Company's product mix and
distribution channels have changed significantly from past periods.
The Company's initial strategy was to bring rapidly to market multiple
products with high visibility in order to establish credibility in the retail
channel. To implement that strategy, the Company relied primarily on licensing
finished products for inclusion in multipack bundles and entering into Affiliate
relationships for the non-exclusive rights to market products from other
companies. As a result of this strategy, the Company sold over 70,000 units of
budget category titles in the last five months of 1995. The Company, however,
recognized minimal profit on these low margin, budget category titles, and in
some cases actually lost money on certain titles. In addition, the Company
experienced greater than expected customer price reductions and product returns
on many of these products.
After establishing an initial portfolio of products in the retail channel,
the Company began to shift its strategy to publishing premium products with
higher gross profit margins. In addition, the Company also began to expand its
retail distribution base. As of December 31, 1995, one large national chain
accounted for approximately 96% of all of the Company's sales. During 1996,
however, the Company began to establish relationships with several distributors
and more retail accounts. During the year ended December 31, 1996, sales to the
Company's primary 1995 account declined as a percentage of net sales to 20%. In
addition, sales to distributors accounted for 54% of the Company's net sales
during the year ended December 31, 1996, and sales to an original equipment
manufacturer ("OEM") represented 11% of net sales during such period.
As is typical in the interactive multimedia software industry, the Company
depends on the introduction of new titles or sequels to existing titles to
replace declining revenues from older titles. In order to generate revenues in
the future, it will be necessary for the Company to obtain rights to new titles
that are developed for the appropriate platforms, are introduced in a timely
manner and are able to achieve market acceptance for a significant period of
time. Consequently, the Company will need to expend financial and other
resources to obtain and market new products.
25
<PAGE> 28
The Company's quarterly operating results have in the past and are likely
in the future to vary significantly depending on factors such as the timing of
new hardware and software products, the degree of market acceptance of such
products and the introduction of titles competitive with those of the Company.
In addition, the home education and entertainment software business is highly
seasonal. Typically, revenues are highest during the third and fourth calendar
quarters (which includes the holiday buying season), decline in the first
calendar quarter and are lowest in the second calendar quarter. This seasonal
pattern is due primarily to the increased demand for home education and
entertainment software titles during the year-end holiday buying season. In
addition, as demand for fulfillment houses is also greatest in the third and
fourth quarters due to publishers building inventory for holiday sales, an
unanticipated delay in the manufacture of products, particularly during the
fourth quarter, could result in a material adverse effect on the Company's
financial condition and results of operations. Although the Company believes
alternative sources are available, currently the Company utilizes single vendors
for several of its manufacturing functions. The Company expects its future
revenues and operating results will reflect these seasonal factors.
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1996 and 1995
Net Sales. Net sales decreased $917,224, or 68%, during the year ended
December 31, 1996 as compared to 1995, despite the fact that 1995 included sales
for only five months, August through December. Net sales for 1996 were adversely
affected by the Company's working capital deficiency in the latter part of the
second quarter, all of the third quarter, and the initial part of the fourth
quarter. This deficiency prevented the Company from shipping existing products
in a timely manner and in sufficient quantities to meet customer demand and from
acquiring and launching new products. In addition, net sales in 1995 included
volume sales of low margin, budget titles. Net sales from products sold pursuant
to affiliate relationships decreased significantly during fiscal 1996 as
compared to the prior year. This reduction was primarily a result of the
Company's business strategy of marketing these particular products for a limited
period in order to establish credibility in the retail channel and generate
initial revenues. The Company presently does not intend to focus on marketing
products sold pursuant to affiliate relationships, although it may sell such
products from time to time. See "Business."
The Company was dependent on six distributors and four retailers for
approximately 86% of its net sales during 1996. Allowances for product returns
are determined by estimates on a product-by-product basis. Allowances were
approximately $17,000 and $47,000 for the years ended December 31, 1996 and
1995, respectively.
The following table summarizes the composition of the Company's net sales
by product categories for the years indicated.
<TABLE>
<CAPTION>
1995 1996
------------------ ----------------
$ % $ %
---------- --- -------- ---
<S> <C> <C> <C> <C>
Products from Affiliate relationships.... $ 571,505 43% $ 8,020 2%
Theme Packs.............................. 433,122 32% 247,085 59%
Games.................................... 334,219 25% 146,352 34%
Educational.............................. 3,188 * 22,007 5%
Other.................................... 1,346 *
-------- --- -------- ---
$1,342,034 100% $424,810 100%
======== === ======== ===
</TABLE>
- ---------------
* Less than 1%.
Gross Profits. The Company's gross profit decreased from $441,067, or 33%
of net sales, during the year ended December 31, 1995 to $105,872, or 25% of net
sales, during 1996. Cost of goods sold declined from $900,967 during the year
ended December 31, 1995 to $318,938 during the corresponding 1996 period. The
decrease in gross profit margins in 1996 is primarily attributable to the
decrease in sales price in 1996 on products which were released the prior year,
the few number of new titles released in 1996, and an increase in
26
<PAGE> 29
1996 in the reserve for obsolete and slow-moving inventory of approximately
$40,000. The Company anticipates that gross profit margins may improve in the
future due to increased emphasis on sales of higher margin products and
decreased sales of budget products and theme multipacks, although there can be
no assurance in this regard. In addition, the Company intends to continue to
focus on entertainment and educational titles, which tend to have higher profit
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $983,000 during the year
ended December 31, 1996, compared with approximately $247,000 during 1995. The
increase was attributable to the fact that the Company was in a start-up phase
during the 1995 period, and the founders of the Company did not accrue or draw
salaries during that period. In addition, the Company had marginal rent expense
during the year ended December 31, 1995. Salaries and payroll taxes increased
from approximately $84,000 during 1995 to approximately $397,000 in 1996. In
addition, sales, advertising and marketing costs increased from approximately
$66,000 during 1995 to approximately $259,000 during 1996. This increase was
largely attributable to the Company's expansion of its distribution channels
into new retailers and distributors, as well as the launch of new products.
During the 1996, the Company also substantially increased its reserves for bad
debts. Due primarily to the recent bankruptcy filing of a large national
software retailer, the Company increased its reserves for bad debts from $9,195
at December 31, 1995 to $45,000 at December 31, 1996. In addition, greater
general and administrative costs were incurred in 1996 due to the Company's
relocation to larger offices. The Company anticipates that future selling,
general and administrative expenses will increase in the aggregate as the
Company adds personnel, launches new products and expands its marketing efforts
and distribution channels. Management expects, however, that such expenses will
decrease as a percentage of net sales as the Company's revenues from product
sales increase.
Due to the above, the Company had a net loss for the year ended December
31, 1996 of $(834,874) or $(1.89) per share, compared to net income of $109,123
or $.21 per share for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation in 1994, the Company has financed its operations
primarily through the equity investments of its founders and credit extended by
its vendors. In recent periods, the Company's expenditures have exceeded its
revenues. As a result of the Company's difficulty in generating sufficient cash
flows from operations, the Company has received a report from its independent
auditors that includes an explanatory paragraph regarding uncertainty as to the
ability of the Company to continue as a going concern. The Company's operating
activities used cash for operations of $944,710 during the year ended December
31, 1996, while revenues for the same period were $424,810. The Company
experiences long customer payment cycles for its products, which is typical in
the CD-ROM industry. In addition, the Company's cash flow from operations can be
affected significantly by greater than expected product returns and pricing
reductions. The Company's allowance for estimated returns is established by
taking into consideration historical return rates, sell-through information and
data regarding the mix of products in the distribution channel. Returns are
typically highest in the first two quarters of the calendar year, as
distributors and retailers adjust their inventory product mix following the
year-end holiday buying season.
In November and December 1996, the Company completed the Bridge Financing
of $1,500,000 principal amount of Bridge Notes and 750,00 Bridge Warrants (which
will automatically convert into Class A Warrants upon completion of this
Offering). See "Capitalization -- Bridge Financing" and "Concurrent Offering."
The net proceeds of the Bridge Financing were approximately $1,294,000 after
deducting the Placement Agent's 10% commission and a 3% non-accountable expense
allowance aggregating $195,000 and other expenses of the Bridge Financing. The
net proceeds of the Bridge Financing are being used to repay indebtedness,
including accrued salaries and employee-advanced business expenses, and trade
payables and for working capital purposes, including general and administrative
expenses and the production and marketing of products. The Company has allocated
a portion of the net proceeds of this Offering to repay the principal and
accrued interest on the Bridge Notes. See "Use of Proceeds."
27
<PAGE> 30
The Company currently has no credit facility with a bank or other financial
institution. The Company will attempt to obtain a credit facility to address
short-term cash flow needs resulting from its slow payment cycles. There can be
no assurance that any such financing will be available if needed, or, if
available will be on terms acceptable to the Company. See "Risk Factors -- Need
for Additional Financing."
The Company is obligated under a long-term lease for its corporate offices
through the year 1999, with minimum annual lease payments of $45,234 in 1997,
$46,421 in 1998 and $43,551 in 1999. Effective November 1, 1996, the Company
entered into three-year employment agreements with five of its executive
officers. The Company expects to make aggregate cash payments and incur
aggregate salary expense as a result of such agreements in the amounts of
approximately $320,000, $320,000 and $266,667 for fiscal years 1997, 1998 and
1999, respectively, subject to increases after 1997 as determined by the Board
of Directors. See "Management -- Employment Agreement" and "-- Certain
Transactions." The Company had no other material capital commitments at December
31, 1996.
The Company anticipates that its expenses will increase as it attempts to
expand its business by acquiring new products and increasing sales and marketing
efforts and other operations. The Company expects to continue to incur losses
until such time as it is able to sell a sufficient volume of products at prices
that provide adequate gross profit to cover operating costs. The Company's
working capital requirements will depend upon numerous factors, including
payment cycles for its shipped products, credit arrangements with suppliers, the
scale-up of its sales and marketing resources, acquisition of new products and
the terms upon which such products are acquired, competitive factors including
costs associated with obtaining adequate levels of retail shelf space, and
marketing activities. The Company expects that the net proceeds of this Offering
will enable it to meet its liquidity and capital requirements for approximately
12 months following completion of the Offering, although the Company's capital
requirements are subject to numerous contingencies associated with early-stage
companies. The Company's capital requirements after such period will depend upon
the extent to which its product sales are able to generate sufficient revenue to
sustain its operations. The Company may be required to seek additional financing
or alter its business plan in the event of product delays, cost overruns or
unanticipated expenses.
Although the Company presently has no plans, agreements or understandings
to enter into any potential business combination, it does intend to actively
seek and investigate such opportunities as they become available. The Company
would likely finance any such acquisition with cash, the issuance of equity or
debt securities, incurrence of indebtedness or any combination of the foregoing.
To the extent that any such acquisition would be paid for by the Company in
cash, the Company could decide to use a portion of the net proceeds from this
Offering, use funds from its ongoing operations, seek financing from a
commercial lender or some combination of the foregoing. To date, the Company has
been unable to obtain commercial financing. In addition, any commercial
financing obtained is likely to impose certain financial and other restrictive
covenants upon the Company and result in increased interest expense. Further,
any issuance of additional equity or debt securities to the sellers in any such
acquisitions could result in further dilution to the existing investors,
including those who purchase the Company's securities in this Offering. See
"Risk Factors -- Need for Additional Financing" and "Business -- Business
Strategy."
POTENTIAL CHARGES TO INCOME
The Company expects to incur a charge to income of approximately $211,000
upon repayment of the Bridge Notes, representing the unamortized portion of the
debt discount, interest and deferred financing costs of the Bridge Financing.
The charge to income will be recorded in the first quarter of 1997.
Key employees officers, Directors and certain stockholders of the Company
have agreed to place 825,000 shares of Common Stock in escrow (the "Escrow
Shares"), to be released only upon the Company attaining certain minimum
earnings thresholds or the market price of the Company's Common Stock meeting
certain minimum levels. In the event of the release of Escrow Shares, the
Company will recognize during the period in which the earnings thresholds are
probable of being met or such Common Stock bid price levels achieved, a
substantial noncash charge (not deductible for income tax purposes) to
operations equal to the then fair market value of such shares. By way of
example, if (i) all of the Escrow Shares were released and (ii) on the date of
such release, all of the holders of such shares were employed by the Company and
the market price of
28
<PAGE> 31
the Common Stock was $16.50, the Company would be required to recognize
compensation expense of approximately $13,612,500 with a corresponding increase
to additional paid-in capital. However, there can be no assurance that either
the market price of the Common Stock or the Company's earnings will meet the
minimum thresholds necessary to release any of the Escrow Shares. See "Risk
Factors -- Future Sales of Common Stock; Escrowed Shares" and "Principal
Stockholders -- Escrow Arrangements."
INFLATION
Management does not believe that inflation has had a material effect on the
Company's sales during the past two fiscal years. However, to the extent a
significant increase in the inflation rate adversely impacted the rate of
consumer purchases of PCs and CD-ROM software, the Company's results of
operations would be adversely affected.
NET OPERATING LOSSES IN SUBCHAPTER S CORPORATION -- CONVERSION TO C CORPORATION
FOR TAX PURPOSES
Prior to November 15, 1996, the Company had elected to be taxed under
Subchapter S of the Internal Revenue Code and corresponding provisions of
Arizona tax laws. As a result of the election, federal and state income taxes on
the net income of the Company were payable personally by the shareholders.
Accordingly, the statements of operations for all prior years do not include a
provision for federal and state income taxes. As of November 16, 1996, the
Company became subject to federal and state income taxes as a result of its
conversion from a Subchapter S corporation to a C corporation.
OUTLOOK
The Company's future operating results and many of the forward looking
statements contained in this document are dependent upon a number of factors,
including economic factors affecting sales in the software market, the Company's
dependence on key personnel, and the Company's ability to acquire and publish
new software titles, add additional distribution channels and customers, address
the impact of the World Wide Web and the Internet on its markets, enter
successfully into new markets, react to changing technology and effectively
manage resources, as well as other factors. See "Risk Factors." The retail
multimedia software market has experienced rapid change in recent years,
including consolidations and financial difficulties. These changes have resulted
in a greater degree of unpredictability as to retailer customer accounts as well
as increased competition for retail shelf space. To the extent any retailers
upon which the Company is dependent were to suffer financial difficulties, the
Company's operations could be materially adversely affected. As a result, the
Company may experience higher product returns and lower product sales. The
impact that market trends and the Company's actions may have on its operations
cannot be accurately measured at this time. A key challenge to the Company's
continued growth is to sell increased volumes of CD-ROMs at competitive prices
and sufficient profit margins. There is a significant amount of competition in
the home-based PC market and the Company's success is substantially dependent
upon continued demand for existing PC products, its ability to market in a
timely manner new products and its ability to meet the pricing and functionality
requirements of the consumer.
29
<PAGE> 32
BUSINESS
This Prospectus contains "forward-looking statements," including statements
regarding, among other items, the Company's growth strategy, future products,
sales, ability to license future software programs and market products and
anticipated trends in the Company's business. Actual results could differ
materially from these forward-looking statements as a result of a number of
factors, including, but not limited to, the Company's early stage of
development, the need for additional financing, intense competition in various
aspects of its business, the seasonal nature of its business, its dependence on
third party authors and key personnel, and other factors described under "Risk
Factors" and elsewhere herein.
The Company publishes interactive multimedia software products providing
education and entertainment as well as reference and personal productivity
titles for the home personal computer ("PC") market. The Company generally
licenses software programs being developed by independent third party
developers. The Company then directs and assists the developers in finishing the
programs according to its specifications, imprints and duplicates the programs
in a media format, packages them in a proprietary manner, and markets and
distributes the finished products under the Piranha name as well as proprietary
titles whenever possible. Since the release of its first title in August 1995,
the Company has licensed and marketed six titles under its own label including
(i) three "Piranha Packs," each of which offers 10 or 11 individual subject
titles relating to a central theme and (ii) three standalone, individually
packaged titles. In addition, the Company has marketed 13 titles under affiliate
relationships with two third party publishers pursuant to revenue-sharing
agreements. To date, the Company has published all of its titles in CD-ROM
format. In the future, the Company may distribute its products in other media,
such as on-line information services, television-based formats, telephone and
cable networks and direct broadcast satellite, if market acceptance of such
formats becomes widespread.
The Company intends to focus its product offerings on "edutainment" titles,
which combine entertainment and educational content, games, reference and
personal productivity titles, and other content titles which it determines to
have market potential. The Company has published and plans to publish titles in
various categories, including entertainment (e.g. Majestic: Alien Encounter, a
deep space adventure game), early childhood education (e.g. Treasure Tales
Presents Alice's Adventures in Wonderland, a children's interactive storybook),
reference (e.g. Academic Edge, a 10 CD educational theme pack), and personal
productivity (e.g. Travel CD Piranha Pack, an 11 CD travel and recreational
theme pack). When practicable, the Company publishes titles which are episodic
in design, thereby facilitating the production of sequential products and the
generation of increased customer loyalty. For example, Syn-Factor, the sequel to
the Company's game, Majestic: Alien Encounter, was just released in February
1997. The Company is also scheduled to release Preschool Mother Goose, an early
childhood educational product, during the first quarter of 1997.
The Company's strategy is generally to license its software programs from
independent, third party software developers. The Company believes this strategy
enables it to avoid expending significant financial resources over a lengthy
period of time towards the research and development of a product that may never
achieve significant market acceptance, a substantial burden facing in-house
software development companies. As competition for products from independent
developers intensifies, however, the Company may be required to commit
significant financial resources to third party developers in order to obtain
desirable programs. By drawing upon independent developers the Company is able
to capitalize upon the variety of creative products currently being developed by
a growing number of software developers, an increase made possible in part by
the availability of industry standard authoring tools which assist software
programmers with the technical development of the titles. Pursuant to license
agreements with these developers, the Company pays a royalty based upon sales of
the product and in most instances an up-front advance and/or guaranteed minimum
royalty payment. The Company has also designed one title, Preschool Mother
Goose, with the assistance of consultants, which it then subcontracted to
independent software programmers for development. The Company may follow the
same procedure with additional future titles.
The Company's growth strategy consists of (i) targeting the growing
home-based, consumer PC market, (ii) building the brand recognition of "Piranha"
title offerings, (iii) expanding and enhancing its portfolio of
30
<PAGE> 33
interactive multimedia software products by generally licensing software
programs from third party developers who are in the process of developing such
products, (iv) expanding the placement of Piranha products with retailers and
distributors, and (v) seeking out appropriate strategic relationships, including
the acquisition of other software publishers.
The Company presently sells its products to retailers and distributors
through its own direct sales and marketing efforts. The Company's marketing
activities include channel marketing in partnership with its retailers and
distributors; direct advertising in PC periodicals; Internet website demos and
advertising; trade shows; and pre-release marketing. Since its inception in
November 1994, the Company has entered into distribution agreements with several
large national software distributors, as well as a number of other smaller and
specialty distributors. The Company currently places its products with a number
of the largest software retailers (in terms of software sales volume) in the
United States.
The Company's management team has worked closely together for the past
three to five years and all have prior software publishing experience. The
Company was incorporated in Arizona on November 14, 1994 and reincorporated in
Nevada on November 22, 1996. Its corporate headquarters are located at 1839 West
Drake, Suite B, Tempe, Arizona 85283, and its telephone number is (602)
491-0500. The Company's website address is http://www.piranhainteractive.com.
INDUSTRY OVERVIEW
As a result of technological advances, increased functionality, and
declining prices for entry level systems, the PC has become a mass market
consumer electronics product. Industry analysts estimate that the worldwide
installed base of PCs at the end of 1995 had grown to approximately 225 million
units. The demand for multimedia PC software is expected to be largely driven by
the rapid increase in home-based PC use. It is estimated that the installed base
of multimedia home-based PCs will grow from approximately 45 million in 1995 to
approximately 77 million by the year 2000. Additionally, the increased use of
PCs in schools, increased quality of production, decreasing cost of PCs and
multimedia software and the demographic increase in teen consumers (who tend to
be heavily concentrated in entertainment software) all suggest significant
future growth in the consumer multimedia software market. Home education and
entertainment software products are currently the fastest growing categories of
retail software sales.
In recent years, tremendous advances in computer hardware and software, as
well as the decreasing cost of such products, have resulted in a rapid expansion
of the number of users in home environments prepared to consume new multimedia
products. As a result, total sales of multimedia software in the U.S. have been
projected to increase from approximately $1.2 billion in 1995 to approximately
$1.7 billion in 1996 and $2.3 billion in 1997. However, in recent years, the
retail multimedia software industry has experienced a consolidating trend as
regional and smaller retailers are acquired by retailers with greater resources
and access to capital. As a result, competition among retailers has increased
and total sales of multimedia products have increasingly become concentrated in
fewer retailers. Most of the multimedia products have been delivered on CD-ROMs.
In addition, other systems have evolved for delivery of multimedia products
including the Internet, other proprietary on-line services and television-based
systems. The Company believes that there will be an increasing convergence
between CD-ROM and on-line distribution of multimedia content, with on-line
information sources increasingly used in connection with CD-ROMs to update and
supplement the CD-ROM experience. To the extent that these new delivery systems
achieve significant market acceptance, management believes it will be able to
capitalize on this increasing demand for high quality interactive multimedia.
BUSINESS STRATEGY
As a result of management's experience in the software industry, the
Company believes it has the foundation to become a successful provider of high
quality multimedia software products for the consumer PC market. The Company
intends to focus on the following strategic objectives.
Target Growing Consumer PC Market. The Company is positioning its product
portfolio to take advantage of the fast-growing consumer PC market. The
Company's existing content-rich products -- entertainment, early childhood
education, reference and personal productivity -- are intended for home-based
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PC users from adults to teenagers to pre-schoolers. The Company endeavors to
anticipate this market's demand for particular software in order to provide
products that meet such demand. The Company also seeks to offer unique software
products that will generate demand within this market as well as the education
market.
Publish a Portfolio of Multimedia Software Titles. The Company's objective
is to publish an inventory of diverse software titles. As the installed base of
multimedia PCs grows, consumers increasingly demand a greater variety of content
rich, high quality software products. In response to this demand, independent
software developers are generating a greater number and variety of products.
The Company's strategy is generally to license software programs from
independent developers. The Company intends to capitalize upon this growing pool
of software developed by independent developers by identifying products which
the Company believes have an ability to achieve significant market penetration.
The Company uses a three-step selection process to identify such products. This
process entails a preliminary technical review, sales and marketing analysis,
and legal and financial review. By licensing software programs from third party
developers, the Company generally reduces its front-end financial commitment and
its risk of loss if the product is not ultimately successful. As competition for
products of independent developers intensifies, however, the Company may be
required to make significant front-end financial commitments in order to obtain
desirable products.
Develop Name Recognition for Piranha and its Products. Management believes
that a recognized and respected brand name will enhance initial interest in and
acceptance of new product offerings. In this regard, the Company selected its
name and logo and develops a packaging and advertising concept designed to
generate customer interest and create a Piranha brand image. At the same time,
the Company seeks to build customer loyalty by providing high quality software
products that satisfy customers. In order to create brand name recognition, the
Company initially introduced software products in the lower price ranges in
order to maximize its volume of products sold and secure retail shelf space.
Soon thereafter, the Company began to offer theme-oriented Piranha Packs, each
containing multiple CD-ROM titles, in order to enhance the perceived value and
increase customer recognition of Piranha products. Although budget software and
Piranha Packs will still be considered in appropriate circumstances, the Company
now intends to focus primarily on publishing premium products with higher gross
margins. The Company will continue to seek titles that enhance its name
recognition.
Place Piranha Products with Major Retailers and Distributors. The
Company's strategy is to expand the number of retailers and distributors
carrying its products. Management believes that its prior industry experience
has resulted in a certain degree of credibility for the Company and its products
with retailers and distributors. According to Computer Retail Week, in 1995
approximately 30 retailers accounted for over 90% of total U.S. retail software
sales. To date, the Company has placed products with many of these retail
chains. In addition, software distribution is dominated by several large
distributors. The Company currently has distribution agreements with a few of
these distributors. The Company intends to expand its retailer and distributor
relationships by maintaining and improving its existing accounts and developing
additional national, regional and specialty retail and distribution accounts.
Its strategy is to maintain these relationships and add additional distributor
relationships.
Seek Strategic Partnerships and Acquisition Opportunities. The Company
intends to expand its operations and product line by establishing strategic
partnerships and acquiring other software publishers or developers when
appropriate. Piranha has entered into marketing relationships with two national
companies in connection with certain products lines. The Company's Academic Edge
product has been supplied to Apple Computers, Inc. ("Apple") for use by Apple in
conjunction with a nationwide promotion of Apple's hardware through Sears retail
outlets. Academic Edge is one of the products offered in the promotional
material distributed by Apple. Through the promotion, schools are permitted to
redeem free copies of the product from Apple. In addition, the Company was
granted a license from United Airlines to include United's proprietary travel
software package, United Connection, in the Travel CD Piranha Pack. The Company
may also license some of its products near the end of their retail lifecycles to
OEM. In addition, the Company believes there are many companies with one or two
attractive products but a limited number of total products or marketing
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resources, which may be attractive candidates for acquisition. The Company
intends to pursue these opportunities to enhance its product portfolio, but
there can be no assurance that any acquisition will be consummated. The Company
does not currently have any plans, agreements or understandings, binding or
non-binding, to enter into any potential business combination. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
PRODUCTS
Current Products. The Company has released and currently markets six
multimedia software titles under its name, three of which are thematic Piranha
Packs of 10 or 11 CD-ROM titles, and also has an executed license agreement for
a title expected to be launched during the first quarter of 1997. Syn-Factor,
the Company's most recent title, was initially shipped in mid-February 1997, but
is not yet generally available to consumers. The Company is continually
evaluating other titles submitted to it by independent developers as part of its
ongoing product selection process. All of the Company's products to date have
been released in CD-ROM format. The following table sets forth the titles
released, or to be released, by the Company in each of its three current product
families:
<TABLE>
<CAPTION>
PRODUCTS RELEASE DATE
- --------------------------------------------------------------------------- -----------------
<S> <C>
THEME PACKS
Piranha Pack -- Something for Everyone. The Company's first multipack August 1995
includes 10 CD-ROM titles offering a variety of title categories: games,
business and home management, utilities, edutainment, pastimes and
exercise. The Company does not intend to produce any further units of
this product.
Academic Edge Piranha Pack. The 10 CD Academic Edge Piranha Pack includes November 1995
nine curriculum-based titles for subjects such as Biology, Literature,
World History, Art History and more, as well as quizzes to test
comprehension. Also featured are Webster's New Collegiate Dictionary and
the American Concise Encyclopedia.
Travel CD Piranha Pack. This 11 CD Theme Pack is comprised of software July 1996
suited for the business and vacation traveler. It includes United
Connection, which allows flight scheduling and reservations with over 500
airlines, 30,000 hotels and 50 car rental companies worldwide. Other
titles include Street Wizard mapping and routing software, National
Parks, Vacation Dreamer, Sports Fishing, Ballooning and Soaring,
Adventures, White Water Rafting, Great Restaurants, Wineries and
Breweries and Explore America.
EARLY CHILDHOOD EDUCATION
Treasured Tales Presents Alice's Adventures in Wonderland. This program is November 1995
an adaptation of Lewis Carroll's classic tale Alice in Wonderland and is
intended for young children. The program is an interactive storybook
created specifically for Windows 95 containing hundreds of animations and
a classical music score. The Company's license for this product has
terminated, but the Company is entitled to sell its existing inventory.
Preschool Mother Goose. This multimedia program leads children through six Scheduled for
animated learning activities accompanied by narrated direction. Preschool 1st Quarter 1997
Mother Goose is designed to teach children the fundamentals of counting,
reading, music appreciation, foreign language and other cognitive skills.
The program includes parent and teacher icons that allow adults to extend
the learning lessons.
</TABLE>
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<TABLE>
<CAPTION>
PRODUCTS RELEASE DATE
- --------------------------------------------------------------------------- -----------------
<S> <C>
ENTERTAINMENT
Majestic: Alien Encounter. This multimedia program is a deep space November 1995
adventure game. The S. S. Majestic, a luxury space cruiser which
inexplicably disappeared on her maiden voyage, has suddenly reappeared in
the Pleiades Nebula. The user's mission is to enter the craft, determine
the fate of her crew and solve the mystery of her ill fated voyage.
Syn-Factor. This multimedia sequel to the game Majestic contains a new February 1997
musical score, expanded gaming theater and improved 3-D graphics. The
user's adventure begins as a crew member aboard a spaceship which has
just been the target of a brutal attack by unknown forces. The ensuing
investigation pits the user against the galaxy's largest corporation.
</TABLE>
In addition, the Company has marketed 13 titles in partnership with third
party Affiliates, pursuant to revenue sharing arrangements. The Company has no
proprietary rights in the products marketed under such arrangements and receives
a lesser percentage of gross revenues on such products than it does on products
proprietary to the Company.
Product Development. The Company's strategy is to license software
programs from independent software developers. The Company believes that this
strategy minimizes the financial risks associated with in-house research and
development activities and capitalizes upon the large pool of creative, high
quality products currently produced by independent developers. While several
publishers have spent millions of dollars on the research and development of a
single new title, a number of the best selling entertainment software titles in
the United States during recent years were developed by small, independent
developers and were licensed to software publishers. The Company uses a variety
of forums to identify high quality, completed or substantially completed
software programs produced by independent developers which generally lack the
sales, marketing and distribution resources offered by the Company and necessary
to introduce their products into the retail marketplace.
The Company has also designed one title, Preschool Mother Goose , with the
assistance of consultants which it then subcontracted to independent software
programmers for development. The Company may follow the same procedure with
additional future titles. The Company has agreed to pay minimal advance
royalties and future royalties based on product sales to the independent
developers who designed Preschool Mother Goose. Although all of the Company's
current products were developed by independent developers, the Company may fund
in-house development at some time in the future if management deems it
advisable.
The Company's product development activities are conducted with constant
attention given to the sales, marketing and technical support aspects of
publishing a successful title. The Company seeks to identify and attract new
developers through a variety of methods, including regular postings on the
Internet and on-line developer forums, existing developer relationships,
attendance at popular trade shows and conferences, referrals from retailers,
industry reputation and contacts, and developers' agencies. The Company also
launched its own on-line Developers' Forum in August 1996 which can be found at
the Company's website. See also "-- Sales and Marketing".
Once the Company has identified a potential title for publication, the
title is submitted to a three-step selection process. First, the Company
conducts a preliminary technical review to (i) assess the title's technical
operating stability, (ii) determine whether the title's technology and design
meet or exceed the then current industry standards and (iii) assess the
developer's technical proficiency. Next, the Company performs a sales and
marketing review to assess (i) the potential market share for the product, (ii)
the degree of consumer demand for, and media interest in, the product and (iii)
the potential interest of the Company's retailers and distributors in the
product. Finally, the Company reviews the legal and financial issues associated
with publishing the potential title to determine (i) the cost to bring the
product to market, (ii) the absence of any perceived risk of intellectual
property infringement and (iii) acceptable license agreement terms.
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Before and after a title is published, the Company employs various quality
assurance methods to measure consumer reaction to the product and the
effectiveness of the various marketing programs utilized by the Company and its
retailers and distributors. Focus groups, independent quality assurance teams,
demonstrations and end-user questionnaires are among the methods which the
Company uses in its quality assurance activities. The Company seeks to use the
information received from consumers of its products to remain abreast of and
satisfy consumer expectations for technical stability, performance, content and
market image of its products.
Recent advances in software authoring systems have removed many of the
technical barriers previously associated with software development. These
advances and the rapidly increasing base of installed multimedia hardware have
resulted in an expanding pool of technically sound, content rich software
programs. As a result, the current trend in development has shifted competition
away from purely technical skills to creative ones. This newly emerging pool of
independent developers generally lacks the sales, marketing and distribution
resources offered by publishers such as the Company.
The Company seeks to increase revenues, market predictability and product
lifecycles and limit the effects of seasonality by offering a mix of three types
of titles: evergreen titles, hits, and sequels. Evergreen titles, such as the
Travel CD Piranha Pack, are intended to produce stable sales over a relatively
long period of time. In addition, they may be revised and updated to extend
their profitable lifecycles. Hit titles, such as Majestic: Alien Encounter, are
developed in response to market trends and are promoted through aggressive
product positioning and rigorous development and quality control management.
Finally, sequels such as Syn-Factor are titles intended to capitalize on the
success of earlier titles by exploiting a consumer base loyal to such titles.
Sequels tend to have a higher degree of market predictability. In the past, the
Company's revenues have been concentrated in only a few products, with three
products resulting in 90% of annual net sales for 1995 and two products
resulting in 78% of annual net sales for 1996. However, the Company believes
this concentration to be largely a result of the limited number of products
offered to date, and the Company intends to market a broader variety and number
of titles in the future consistent with its business strategy.
SALES AND MARKETING
Customers. The Company sells its products to distributors and directly to
certain retailers. Currently, the retail merchandisers of the Company's products
include computer "superstores", national and regional retail stores, mass
merchandisers, corporate resellers, direct mail accounts, consumer electronic
stores, warehouse clubs and office supply stores. The Company also distributes
its products through several of the largest national distributors which have
access to desirable retail accounts. By making its products available through a
number of large distributors, the Company believes it is able to fill retailers'
orders more quickly and increase the name recognition of the Company and its
products.
For the year ended December 31, 1996, 54% of the Company's net sales were
to distributors, 32% of net sales were direct to retailers and 11% of net sales
were to an OEM. Three distributors accounted for approximately 21%, 18% and 11%,
respectively, of the Company's net sales during fiscal year 1996. Two retailers
accounted for approximately 20% and 7%, respectively, and one OEM accounted for
11%, of the Company's net sales during such period. International sales
accounted for only 3% of the Company's net sales during the year. During the
fiscal year ended December 31, 1995, one retailer accounted for substantially
all of the Company's net sales.
Sales Activities. The Company's sales activities are focused upon
fostering familiarity among the buyers for the various retail chains with the
Company and its products, whether they purchase Piranha products directly from
the Company or through a distributor, building upon the philosophy that retail
stores will put more effort behind and give better placement to products they
are familiar with. In addition, management believes that the key to developing
successful relationships with retail merchants of its products is the ability to
develop an understanding of each retailer's customers, including, what they buy,
how they make their purchases and which marketing programs are most successful
in promoting a particular type of software title. The retail software market is
intensely competitive in terms of shelf space and promotional support. Although
the Company believes that it will continue to secure adequate shelf space and
promotional support from
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retailers of its products, the competition for such access is intense and there
can be no assurance that the Company will be successful in this regard.
As the number of home-based PCs increases and the use of multimedia
software becomes more widespread, the number and variety of software retailers
have rapidly increased. Examples of new software retailers include bookstores,
grocery, music and convenience stores and even specialty shops. The Company has
already begun to access these new retail sales channels and has placed its
products in record stores and book stores. In addition to these emerging retail
sales channels, the Company markets its products to alternative markets, such as
international sales, original equipment manufacturers and educational markets.
In addition to its retail customers, the Company sells its products to
distributors who resell such products to various retailers. The Company believes
that access to these distributors permits the Company to more rapidly fill
customer orders and increases the name recognition of Piranha and its products.
To date, the Company has entered into distribution agreements with a few of the
largest national distributors.
Marketing Activities. The Company's marketing activities are organized
around direct advertising, product packaging and public relations and media. The
Company strives to create a highly visible and appealing brand image through its
corporate name and logo, its customer service number, its World Wide Web site
and the design and packaging of its products. The Company pays close attention
to the brand image created through its product packaging and seeks to develop an
appropriate packaging concept and design that will be attractive to its
customers and end-users. The Company's packaging is designed not only to get the
product on the shelf, but also to entice the customer to purchase the product.
In order to generate consumer awareness, the Company advertises in various
trade and general circulation publications. Additionally, the Company often
participates in cooperative marketing efforts with its distributors and
retailers. Retailer marketing programs include in-store premium shelf placement,
flyers, in-store promotions, advertisements and customer service employee
training. In addition, each distributor promotes its products with marketing
programs, including trade publications and catalogs targeted at retail buyers
and in-house education seminars designed to permit vendors such as the Company
an opportunity to increase the distributors' sales force's familiarity with
their products.
The Company intends to aggressively market its new product releases. In
connection with the launch of new products, the Company seeks to generate
initial retailer and distributor interest by sending a "teaser" prior to the
completion of the new product. The "teaser" is a marketing pre-mailer designed
to draw attention to a product, which also contains brief information regarding
the actual product and its functions.
Once the product is completed, the Company focuses on sending advance
copies of the product to the media and retail and distribution buyers for
review. Management believes that maintaining a relationship with the media is
crucial in receiving the recognition and product reviews needed to support new
product releases and continuing product sales. A number of publications,
including The New York Times and industry magazines, have previously responded
to the Company's products with reviews.
The Company seeks to anticipate consumer demands by establishing channels
of communication between itself and consumers through registration cards, trade
shows and user groups and to find additional avenues for increasing the
visibility for its products and its name. Capitalizing on the rapid increase in
consumer use of the Internet, the Company has developed its own website, which
it uses in connection with its sales and marketing and product development
activities. The website is designed for instant communication, feedback and
product delivery to users. The website includes a Products Forum with full-page
graphical product descriptions and downloadable, interactive game demos; a Sales
Forum where customers can locate and contact resellers; and a Distributor's
Forum with product descriptions and part numbers with direct ordering
capability.
INTELLECTUAL PROPERTY LICENSES AND DISTRIBUTION AGREEMENTS
Software Licenses. Each of the Company's software products is authored by
a third party developer which creates each program's "source code", a unique set
of program instructions which are translated into machine language and executed
by an end-user's computer. Once created, each program's source code is
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proprietary in nature and is generally the property of the developer, unless
there is an agreement in place to the contrary. The Company does not own the
source code to the software contained in the Piranha Packs published to date,
but has published the products with proprietary packaging and titles. As a
result, the products contained in the Piranha Packs may be sold by the
developers to other publishers, permitting the Company's competition to publish
similar products. The Company's licenses for the software contained in its
multiple CD-ROM Piranha Packs are generally non-exclusive and generally of short
duration (to date ranging from one to two years). Two of the three Piranha Packs
published to date have been in Windows only format and one has been published in
dual platform formats, Windows and Macintosh. Piranha Pack licenses to date have
not contained any rights of first refusal for any future products produced by
the developers. The permitted sales territory for two of the Company's Piranha
Packs is world-wide, while the territory for the third is limited to North
America. All three Piranha Packs published to date are English language only.
Technical support for the software programs in the three Piranha Packs published
to date is the responsibility of the respective third party licensors.
The Company's licenses for the software contained in its standalone,
individually packaged titles are generally exclusive licenses for longer terms
(to date ranging from three years to five years). However, generally the
Company's exclusive license arrangements may become non-exclusive or terminate
if the Company does not satisfy certain performance criteria, such as selling a
minimum amount of units or paying a minimum amount of royalties. In September
1996, the Company's exclusive license for the title Treasured Tales Presents
Alice's Adventures in Wonderland terminated when product sales failed to satisfy
the required minimum threshold. Some of the Company's licenses have become, or
will become, non-exclusive with the passage of specified time periods. The
Company does not own the source code to the software contained in the licensed,
standalone titles published to date, but the license agreements provide that the
Company exclusively owns the proprietary packaging and titles that it develops
for such software programs. One of the individual titles published to date has
been in Windows only format and two have been published in dual platform
formats, Windows and Macintosh. One licensed individual title which has yet to
be published by the Company is intended for use on dual platforms, Windows and
Macintosh. The Company has a right of first refusal to the sequel of only one of
its individual titles licensed to date.
The Company has paid advances against royalties for only one individual
title licensed to date but anticipates that it will likely pay advances against
royalties for many future individual titles in order to obtain desirable content
and technology. Such advances may be significantly greater in amount than those
previously paid by the Company in order to obtain products. The permitted sales
territory for the three individual titles published to date, and for the
additional individual title which the Company plans to launch in the first
quarter of 1997, is world-wide. The Company has the right to publish three of
the individual titles in languages other than English, but the Company currently
has no plans for such publication. The Company is required to supply technical
support to the end users for all three published individual titles and for the
additional title planned for launch in the first quarter of 1997. The Company
anticipates that it will be required to supply technical support for all such
future titles as well.
Distribution Agreements. The Company's distribution agreements generally
permit the distributor to sell the Company's products on a non-exclusive basis
for a limited term. Distributors are not generally required to purchase any
minimum amount of products from the Company, and are entitled to make purchases
at prices at least as favorable as those at which the Company sells comparable
products to other distributors. In addition, most of these agreements permit the
distributor to return unsold products and require the Company to indemnify the
distributor against certain intellectual property and product design related
liabilities. Generally, the distribution agreements require the distributors to
pay the Company for products purchased within a specified period of time,
however, two distribution agreements with significant distributors permit such
distributors to delay payment until product is sold by the distributor to retail
customers. Consequently, the Company incurs longer delays in cash receipts for
products distributed through these channels. The Company's distribution
agreements also permit distributors to apply credits against invoices for
certain advertising and marketing efforts associated with the Company's
products.
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MANUFACTURING
All of the Company's titles are currently pressed, reproduced, and packaged
at third party fulfillment houses. The Company's printed materials are produced
by third party vendors that ship such materials directly to the fulfillment
house for product assembly and packaging. The Company places orders with such
vendors for production of completed products in amounts specified by the Company
based upon forecasted sales. Most products are shipped directly to distributors
and retailers by the fulfillment houses. An unanticipated delay in the
manufacture of products, particularly during the fourth quarter, could result in
a material adverse effect on the Company's financial condition and results of
operations. Demand for fulfillment houses is greatest in the third and fourth
quarters, as publishers build inventory for holiday sales. Although the Company
has been utilizing one particular fulfillment house, it is negotiating with
several others in order to attempt to reduce such problems.
Generally, the Company is obligated to pay its vendors within 30 days of
shipment, although the Company's customers' payment cycles are often much
longer, generally from between 90 to 120 days. Previously, this discrepancy in
payment cycles has resulted in inconsistent cash flows for the Company, which
condition may recur in the future. The Company does not have contractual
agreements with any of its outside vendors, including its fulfillment house. As
a result, the outside vendors are not committed to provide services or products
to the Company when the Company may require such services or products, and the
Company may not be able to seek indemnification from its vendors for potential
product liability or other manufacturing defects.
COMPETITION
Software Industry. The consumer software industry is intensely competitive
and subject to rapid change. The Company believes that the principal competitive
factors affecting the markets for its titles include content, quality, brand
recognition, price, marketing, distribution, access to shelf space and critical
reviews. In addition, consumer demand for particular software products may be
adversely affected by the increasing number of competitive products from which
to choose, making it difficult to predict the Company's future success in
publishing packaged software products for the retail market. Rapid changes in
technology, product obsolescence and advances in computer hardware require the
Company to develop or acquire new products and to enhance its existing products
on a timely basis. The Company's marketplace has recently experienced a higher
emphasis on on-line and Internet related services and content tailored for this
new delivery vehicle. To the extent that demand increases for on-line products
and content, the demand for the Company's existing product format may decline.
The consumer multimedia market is highly fragmented with products offered
by many vendors. The Company's products compete directly with those of large and
established software companies, such as GT Interactive, Broderbund, and The
Learning Company, as well as a large number of small independent publishers like
the Company. Most of these competitors have greater financial, technical,
marketing, sales and customer support resources, as well as greater name
recognition and access to customers than the Company. Due to the low technical
and economic barriers to entry into the multimedia software market, the Company
anticipates facing additional competition from an increasing number of small,
privately-held competitors. In addition, many large companies with sophisticated
product marketing and technical abilities and financial resources that do not
presently compete with the Company may enter the multimedia software market. For
example, content-rich companies such as Mattel, The Walt Disney Company, and
Viacom have begun to produce and directly market their own titles to the
consumer software market. To the extent that competitors, as a result of their
purchasing capacity, have greater access to financial and other resources or
achieve a performance, price or distribution advantage, the Company's business
and results of operations could be adversely affected. Furthermore, the Company
anticipates that there will be consolidation of the consumer multimedia market
around a smaller number of vendors who may be better positioned and have greater
resources to compete than the Company. The Company will also face increased
competition as it seeks to deliver multimedia content through other new media,
such as the World Wide Web, the Internet and on-line proprietary services.
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There is no assurance that the Company will have the resources required to
respond to market or technological changes or to compete successfully in the
future.
Retail Shelf Space. The competition for shelf space in retail stores is
intense. To the extent that the number of consumer software products and
computer platforms increases, this competition for shelf space may further
intensify. At present, the Company's products constitute a small percentage of a
retailer's sales volume, and there can be no assurance that retailers will
provide the Company's products with adequate levels of shelf space and
promotional support. Increased competition could result in loss of shelf space
for, and reduction in sell-through of, the Company's products at retail stores,
as well as significant price competition, any of which could adversely affect
the Company's business, operating results and financial condition.
Due to increased competition for limited retail shelf space and promotional
resources, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts and product return
policies, as well as cooperative market development funds. Retailers often
require software publishers to pay fees in exchange for preferred shelf space.
The amounts paid to retailers by software publishers and distributors for
preferred shelf space are generally determined on a case by case basis and there
is, as of yet, no industry standard for determining such fees, although larger
publishers and distributors will likely have a competitive advantage in this
regard to the extent they have greater financial resources and negotiating
leverage.
Distribution Channels. Competition for access to distributors, as well as
for retail shelf space and inclusion in OEM sales programs is intense. In
addition, the type and number of distribution channels is increasing to include
non-traditional software retailers such as book, music, video, magazine, toy,
gift, convenience, drug and grocery store chains. Additionally, as technology
changes, the type and number of distribution channels will further change and
new types of competitors, such as cable or telephone companies, and new
distribution channels are likely to emerge. These new distribution channels may
include delivery of software using on-line services or the Internet, which will
necessitate certain changes in the Company's business and operations, including
without limitation, addressing operational challenges such as improving download
time for pictures, images and programs, ensuring proper regulation of content
quality and developing sophisticated security for transmitting payments. Even
within traditional channels of distribution for consumer software products there
has been rapid change among distributors, including consolidations and financial
difficulties. These factors affecting distribution channels are likely to
increase competition and negatively affect the Company's business and results of
operations. With increasing concentration in the traditional channels of
distribution, the Company's customers have increased leverage in negotiating
favorable terms of sale, including price discounts and product return policies.
In addition, a number of the Company's larger competitors have attempted, with
some success, to enter into exclusive software distribution arrangements with
certain retail outlets. If the occurrence of these exclusive arrangements
increases and the Company is not able to offer a competitive product line or
arrangement, the Company's operating results may be negatively impacted.
PROTECTION OF PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, as well as employee
and third party nondisclosure agreements and other methods to protect its
proprietary rights. The Company generally licenses its externally developed
products rather than transferring title and, as is the industry practice, relies
upon "shrink-wrapped," rather than signed, license agreements with end-users.
The enforceability of such licenses has not been conclusively determined. As is
also the standard practice in the industry, none of the Company's CD-ROM
products include any mechanism to prevent or inhibit unauthorized copying. The
Company is not aware of any unauthorized copying, reverse engineering or other
unauthorized distribution of its proprietary information, but if such
unauthorized copying were to occur, the Company's business, operating results
and financial condition could be materially adversely affected. Further, the
laws of foreign jurisdictions may not protect the Company's proprietary rights
to the same extent as the laws of the United States. Policing unauthorized use
of a broadly disseminated product such as PC software is very difficult.
Software piracy has been, and can be expected to be, a persistent problem for
participants in the software industry, including the Company.
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As the number of multimedia software products in the industry increases and
the functionality of these products further overlaps, software publishers and
developers may increasingly become subject to infringement claims. There can be
no assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products. Although the
Company makes reasonable efforts to ensure that its products do not violate the
intellectual property rights of others, there can be no assurance that claims of
infringement will not be made against the Company. In certain circumstances,
litigation may be necessary to enforce and protect the Company's proprietary
rights. Any such litigation, with or without merit, could be costly and divert
management's attention, which could have an adverse effect on the Company's
business, operating results or financial condition. Adverse determinations in
litigation relating to any of the Company's products could result in the loss of
the Company's proprietary rights, subject the Company to liabilities, require
the Company to seek licenses from third parties or prevent the Company from
selling that product.
The Company has a federally registered trademark for the "Piranha
Interactive Publishing" name. In addition, the Company currently has a Federal
trademark application pending for its logo. The Company has not filed any other
Federal trademark applications, although it may do so in the future. The Company
is not currently aware of any objections to its pending Federal trademark
application but there can be no assurance that such trademark will be awarded.
The Company believes that its products do not infringe upon the proprietary
rights of third parties. The Company seeks whenever possible to obtain
warranties and indemnification from its third party software developers to
protect the Company from claims of infringement by third parties of their
property rights. However, there can be no assurance that such warranties,
indemnifications and disclaimers will protect the Company from liability arising
from such claims or from any resulting material adverse effects to its business.
EMPLOYEES
The Company currently has ten full-time employees and expects to hire at
least four additional full-time employees in the next six months. None of the
Company's employees are represented by labor unions. The Company believes that
its relations with its employees are good.
PROPERTY
The Company subleases its principal offices in Tempe, Arizona, which are
used to house all of its operations, including marketing, sales and all
administrative operations. The 4,750 square foot facility is subleased pursuant
to an agreement under which the Company is obligated to make minimum annual
rental payments of $45,234 in 1997, $46,421 in 1998 and $43,551 in 1999. The
sublease has a four-year term which expires in November 1999. The Company
believes that its facilities are adequate for its current and foreseeable
operations over the next 12 months.
LEGAL PROCEEDINGS
The Company is not a party to any pending or threatened legal proceedings
that it believes will have a material impact on the Company's business.
40
<PAGE> 43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors, Director-Nominees and Executive Officers of the Company, and
their respective ages and positions with the Company, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------------------
<S> <C> <C>
Timothy M. Brannan................. 39 President, Chief Executive Officer and Chairman
of the Board of Directors
Keith P. Higginson................. 32 Vice President, Chief Financial Officer and
Director
J. Wade Stallings, II.............. 36 Vice President, General Counsel and Director
Douglas M. Brannan................. 31 Vice President, Sales
Wyndi D. Ballard................... 27 Vice President, Marketing and Public Relations
George W. Gregg.................... 29 Vice President, Product Planning and
Development
Ian D. Berman...................... 41 Director-Nominee
Michael D. Flink................... 36 Director-Nominee
</TABLE>
DIRECTORS AND OFFICERS
TIMOTHY M. BRANNAN. Mr. Brannan has served as President, Chief Executive
Officer and Chairman of the Board of the Company since its inception in November
1994. Mr. Brannan served as Executive Vice President for Software Marketing
Corporation ("SMC"), a privately held software publisher, from November 1991
until October 1994. Mr. Brannan served as Executive Vice President for Automap,
Inc. ("Automap"), also a privately held publisher of interactive software, from
November 1991 until June 1993. Mr. Brannan attended Arizona State University
where he studied Business and Marketing.
KEITH P. HIGGINSON. Mr. Higginson has served as Vice President, Chief
Financial Officer and a Director of the Company since its inception in November
1994. From January 1993 until October 1994, Mr. Higginson served as Controller
for SMC. From January 1993 until June 1993, Mr. Higginson also served as
Controller of Automap. Mr. Higginson was self-employed as an accountant from
March through December 1992. From August 1991 until February 1992, Mr. Higginson
was employed as Controller for TimeMax Corporation, a provider of corporate
training and time management materials. Mr. Higginson received a Bachelor's
Degree in Accounting from San Diego State University.
J. WADE STALLINGS, II. Mr. Stallings has served as Vice President, General
Counsel and a Director of the Company since its inception in November 1994. From
February through October 1994, Mr. Stallings served as Vice President and
General Counsel to SMC. Prior thereto, Mr. Stallings was the Coordinator of the
Office of Properties for the Baha'i World Center, an international non-profit
organization from February 1990 until February 1994. Mr. Stallings received a
Bachelor's Degree in Management from the University of Alabama and a Juris
Doctor Degree from Washington and Lee University School of Law.
DOUGLAS M. BRANNAN. Mr. Brannan has served as Vice President, Sales for
the Company since October 1995. Prior thereto, Mr. Brannan served as Director,
Western Sales for Softkey International (recently renamed The Learning Company),
a publicly traded software company, from September 1994 until October 1995. From
January 1992 until September 1994, Mr. Brannan was Vice President, Sales, for
SMC. In addition, from January 1992 until June 1993, Mr. Brannan was Director of
Sales for Automap. Mr. Brannan received a Bachelor's Degree in Health Science
from San Diego State University.
WYNDI D. BALLARD. Ms. Ballard has served as Vice President, Marketing &
Public Relations for the Company since April 1995. From November 1994 to April
1995, Ms. Ballard served as Director of Public Relations for SC&T International,
a publicly traded corporation developing and marketing sound enhancement
products for the personal computer and video game markets. From June 1991 until
October 1994, Ms. Ballard served as Director of Public Relations and Director of
Marketing for SMC. In addition, from June 1991 to June 1993, Ms. Ballard served
as Director of Public Relations and Marketing for Automap. Ms. Ballard attended
University of Wyoming and Phoenix College where she studied Business and
Marketing.
41
<PAGE> 44
GEORGE W. GREGG. Mr. Gregg has been employed as the Company's Vice
President, Product Planning and Development, since June 1995. From November 1992
through May 1995, Mr. Gregg served as Project Director, Lead Software Developer
and Operations Manager for Mythos Software Corporation, a software developer
which Mr. Gregg also co-founded. In addition, Mr. Gregg worked with several
members of the Company's management while serving as an independent software
design consultant to SMC during the Fall of 1992. Mr. Gregg was employed as a
Research Associate for the Department of Chemistry at the University of Georgia
during the Spring of 1992. Mr. Gregg received a Bachelor's Degree in Chemistry
from Arizona State University and a Master's Degree in Chemistry from the
University of Southern California.
IAN D. BERMAN. Mr. Berman has agreed to become a director of the Company
effective upon the closing of the Offering. In 1991, Mr. Berman co-founded Frost
& Berman Incorporated, an investment banking and financial advisory consulting
firm. Since that time, Mr. Berman has served as Managing Director for the firm,
which focuses exclusively on the entertainment and education software industry.
From 1985 to 1991, Mr. Berman served as a Senior Manager with the Capital
Markets Group for Touche Ross. From 1983 to 1985, Mr. Berman served as a Senior
Analyst with Salomon Brothers, Inc. Mr. Berman is a Certified Public Accountant
and received a Bachelor of Commerce Degree in Accounting and a Master's Degree
in Finance from the University of Witwatersrand University (Johannesburg).
MICHAEL D. FLINK. Mr. Flink has agreed to become a Director of the Company
effective upon the closing of the Offering. Since October 1995, Mr. Flink has
served as the Senior Vice President, Merchandising & Advertising for
Communication EXPO, a communication products superstore. From January 1994 until
September 1995, Mr. Flink served as Vice president of Computer City, a division
of Tandy Corporation, where he was responsible for all merchandising,
advertising and strategic planning functions for the computer and software
retailer. From 1992 through December 1993, Mr. Flink served as Consumer Brand
and Product Management Consultant to IBM. From 1990 through 1992, Mr. Flink
served as President and Chief Operating Officer of R&R Electronics and
Appliance, a regional chain of consumer electronics and appliance superstores.
From 1978 through 1990, Mr. Flink served in various management capacities with
Tandy Corporation's Radio Shack division. Mr. Flink received a Bachelor of Arts
in Communication from North Carolina State University.
Messrs. Douglas M. Brannan and Timothy M. Brannan are brothers. No other
directors or officers are related by blood or marriage.
CLASSIFIED BOARD
Pursuant to the Company's Articles of Incorporation and Bylaws, the Board
of Directors is divided into three classes, as nearly equal in number as is
feasible. Each class serves for a term of three years, and election of the
classes is staggered so that one class is elected each year. The Director
serving in Class III, which class term expires in 1999, is Timothy M. Brannan.
The Director serving in Class II, which class term expires in 1998, is Keith P.
Higginson and the Director serving in Class I, which class term expires in 1997,
is J. Wade Stallings, II. Upon the effective date of the Registration Statement,
of which this Prospectus forms a part, the number of Directors on the Board will
be increased to five and Michael D. Flink and Ian D. Berman, two non-employee
directors, will be appointed as Directors to serve in Classes II and I,
respectively. At the Company's 1997 Annual Meeting of Stockholders, stockholders
will vote to elect Class I of the Board.
BOARD COMMITTEES
The Board of Directors has authorized a Compensation Committee that will
commence upon the effective date of the Registration Statement of which this
Prospectus forms a part. The Compensation Committee will be comprised of Timothy
M. Brannan, Michael D. Flink and Ian D. Berman. The Compensation Committee will
review and recommend to the Board of Directors the compensation and benefits of
all officers of the Company and also administer the Company's stock plans,
pursuant to which stock options are granted to Officers, Directors, key
employees and consultants. The Board of Directors has authorized an Audit
Committee to commence upon the effective date of the Registration Statement of
which this Prospectus forms a part. The Audit Committee will be comprised of
Michael D. Flink and Ian D.
42
<PAGE> 45
Berman. The Audit Committee will review, with the Company's independent
accountants, the annual financial statements of the Company, and also review the
effectiveness of the Company's financial and accounting functions and
organization and make recommendations to the Board of Directors in that regard.
DIRECTORS' COMPENSATION
Directors are not currently compensated for their services in that capacity
or for serving on committees but are reimbursed for their reasonable expenses
incurred in connection with serving as Directors. Non-employee Directors serving
on the Company's Board currently receive an initial grant of options to purchase
10,000 shares of Common Stock at the time they commence service to the Company
and may receive additional future options at the discretion of the Board. See
"-- 1996 Stock Option Plan".
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Articles of Incorporation and Bylaws require the Company to
indemnify each of its Officers and Directors against liabilities and reasonable
expenses incurred in any action or proceeding, including stockholders'
derivative actions, by reason of such person being or having been an Officer or
Director of the Company, or of any other corporation for which he or she serves
as such at the request of the Company, to the fullest extent permitted by Nevada
law. Pursuant to Nevada law, the Company has adopted provisions in its Articles
of Incorporation and Bylaws that eliminate, to the fullest extent available
under Nevada law, the personal liability of its Directors and Officers of the
Company or its stockholders for monetary damages incurred as a result of the
breach of their duty of care. These provisions neither limit the availability of
equitable remedies nor eliminate Directors' or Officers' liability for engaging
in intentional misconduct or fraud, knowingly violating a law or unlawfully
paying a distribution.
The Company has been advised that it is the position of the Commission that
insofar as the foregoing provision may be invoked to disclaim liability for
damages arising under the Securities Act, such provision is against public
policy as expressed in the Securities Act and is therefore unenforceable.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for the services rendered during the fiscal year ended December 31, 1996
to the Company's Chief Executive Officer (the "Named Executive Officer"). No
executive officer of the Company earned in excess of $100,000 during that
period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
------------------
NAME AND POSITION SALARY BONUS
-------------------------------------------------------- ------- ------
<S> <C> <C>
Timothy M. Brannan...................................... $50,250 $1,083
Chairman, President
</TABLE>
- ---------------
(1) The Company was not formed until November 14, 1994 and no salaries were paid
until October 1995. Effective November 1, 1996, Mr. Brannan became subject
to an employment agreement pursuant to which he is compensated thereafter at
an annual base rate of $75,000.
During the Company's fiscal year ended December 31, 1996, Mr. Brannan did
not receive any other annual compensation, long-term compensation or other
compensation.
EMPLOYMENT AGREEMENTS
Effective November 1, 1996, the Company entered into three-year employment
agreements with its senior executive officers, Timothy M. Brannan, Keith P.
Higginson, J. Wade Stallings, II, Douglas M. Brannan and Wyndi D. Ballard. The
agreements provide for base salaries of $75,000, $65,000, $65,000,
43
<PAGE> 46
$65,000 and $50,000 for Mr. Timothy M. Brannan, Mr. Higginson, Mr. Stallings,
Mr. Douglas M. Brannan and Ms. Ballard, respectively, subject to review at least
annually by the Board of Directors. The executives may receive bonuses at the
discretion of the Board. The Company may unilaterally terminate the agreements
for "Cause," which includes (i) conviction of a felony, or (ii) failure to
diligently cure a specified deficiency in the executive's performance within 30
days.
In the event the Company terminates the executive's employment during the
term of the agreement without Cause, or in the event the executive terminates
the agreement for "Good Reason" (as defined in the agreements), which includes
certain changes in the executive's duties or a change in control of the Company,
the Company shall pay to the executives (i) his/her salary through the
termination date plus any accrued but unpaid bonuses and (ii) with respect to
executives other than Timothy M. Brannan, a severance payment equal to the
executive's current annual salary and an amount equal to the average of all
bonuses paid to the executive in the three years immediately preceding
termination, which the Company has the option to pay over one year. With respect
to Timothy M. Brannan, the severance payment would be equal to two times his
current annual salary and an amount equal to the average of all bonuses paid to
him in the three years immediately preceding termination, which the Company has
the option to pay over two years. In addition, the Company must maintain until
the first to occur of (i) the executive's attainment of substitute employment or
(ii) two years from the date of termination with respect to Timothy M. Brannan
and one year from the date of termination with respect to the other executives,
the executive's benefits under the Company's benefit plans to which the
executive and his/her eligible beneficiaries were entitled immediately prior to
the date of termination. If the executive requests, the Company must also assign
to the executive any assignable insurance policy on the life of the executive
owned by the Company and at the end of the period of coverage. If the executive
is terminated for Cause or if the executive terminates his/her employment other
than for Good Reason, the Company's only obligation is to pay the executive
his/her base salary and accrued vacation pay through the date of termination. If
any of the executives are terminated without Cause or resign for Good Reason
following a change in control of the Company, the executive is entitled to two
years' severance compensation including benefits until obtaining alternate
employment.
If the executive is incapacitated due to physical or mental illness during
the term of his/her employment, the agreements provide that the Company shall
pay to the executive a lump sum equal to the executive's current base salary and
the average of all bonuses paid to the executive in the three years preceding
the date of termination due to illness. If the executive dies during his/her
employment, his/her salary through the date of his/her death, any accrued but
unpaid bonuses and any benefits payable pursuant to the Company's survivor's
benefits insurance and other applicable programs and plans then in effect are
payable to his/her estate.
If the executive's employment is terminated, the Company has agreed to
indemnify the executive for claims and expenses associated with certain personal
guarantees, if any, made by the executive. The Company also has agreed to use
its best efforts to secure the release of such personal guarantees following the
Offering. In addition, the Company has agreed to indemnify the executive against
all costs incurred in enforcing his/her rights under the agreement following a
change in control of the Company. See "Certain Transactions."
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "1996 Plan") authorizes the Board
to grant options to Directors, officers, employees and consultants of the
Company to purchase shares of Common Stock. An aggregate of 200,000 shares of
Common Stock are reserved for issuance upon exercise of options granted or to be
granted under the 1996 Plan. Directors, officers, employees and consultants
(including independent contractors and software developers) of the Company who,
in the opinion of the Board of Directors, are responsible for the continued
growth and development and the financial success of the Company are eligible to
be granted options by the Board under the 1996 Plan. Options may be nonqualified
options, incentive stock options, or any combination of the foregoing. In
general, options granted under the 1996 Plan are not transferable and expire ten
years after the date of grant. The per share exercise price of any incentive
stock option granted under the 1996 Plan may not be less than the fair market
value of the Common Stock on the date of grant. Incentive stock options granted
to persons who have voting control over 10% or more of the
44
<PAGE> 47
company's capital stock are granted at 110% of the fair market value of the
underlying shares on the date of grant and expire five years after the date of
grant. No option may be granted after December 13, 2006.
The 1996 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration. No option granted under the 1996 Plan
is transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable during the lifetime of the optionee
only by the optionee. As of the closing date of the Offering, options to
purchase an aggregate of 50,000 shares of Common Stock at an exercise price of
$5.00 per share will be outstanding under the 1996 Plan. The Company has agreed
with the Underwriter that it will not, without the prior written consent of the
Underwriter, grant any options to employees that are exercisable at a price
below the public offering price set forth on the Cover or the fair market value
on the date of grant, for a period of 18 months from the date of this
Prospectus.
Possible Need for Additional Plan Securities or Plans. It may become
necessary to grant options for more shares of Common Stock than are available
under the 1996 Plan in order to attract additional members to its Board of
Directors or Officers, consultants or employees. In such events, additional
shares may be required to be added to the Company's 1996 Plan or new plans may
be adopted with shares reserved for exercise thereunder, either of which events
may have a dilutive effect to shareholders.
CERTAIN TRANSACTIONS
On November 15, 1994, in connection with the founding of the Company, the
Company issued 1,436 shares of Common Stock to Timothy M. Brannan, 1,000 shares
of Common Stock to J. Wade Stallings, II and 1,000 shares of Common Stock to
Keith P. Higginson. On January 1, 1995, the Company issued 564 shares of Common
Stock to Douglas M. Brannan, 564 shares of Common Stock to Wyndi D. Ballard and
282 shares of Common Stock to George Gregg. The per share consideration received
by the Company in each of the aforementioned transactions was $1.00. In November
1996, pursuant to the Company's recapitalization and reincorporation in the
State of Nevada, all of the outstanding shares of Common Stock of the Company,
including the aforementioned shares, were split on an approximately 242-for-1
basis.
On December 4, 1996, the Company paid Timothy M. Brannan, the Company's
President, $67,805 as reimbursement for certain business expenses incurred by
Mr. Brannan.
Effective November 1, 1996, the Company entered into three year employment
agreements with Messrs. Timothy M. Brannan, Keith P. Higginson, J. Wade
Stallings, II and Douglas M. Brannan, each an executive officer of the Company.
These agreements provide for a base salary of $75,000, $65,000, $65,000 and
$65,000, respectively, to be paid by the Company to such employees. See
"Management -- Employment Agreements."
In January 1997, the Company engaged Frost & Berman Incorporated, an
investment banking and financial advisory consulting firm of which Ian Berman, a
Director-Nominee, is Managing Director. Pursuant to this arrangement, Frost &
Berman has agreed to provide financial consulting services to the Company on a
month-to-month basis for a monthly fee of approximately $830.
The Company believes that none of the foregoing transactions were entered
into on terms no less favorable to the Company than may have been available from
a third party. All future transactions between the Company and its officers,
Directors and 5% stockholders will be on terms no less favorable to the Company
than could be obtained from independent third parties and will be approved by a
majority of the disinterested Directors and a majority of the entire Board of
Directors.
45
<PAGE> 48
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of January 31, 1997, certain information
concerning the beneficial ownership of the Company's Common Stock, by (i) each
stockholder known by the Company to own beneficially 5% or more of the
outstanding Common Stock of the Company, (ii) each Director, (iii) each
Director-Nominee, (iv) the Named Executive Officer and (v) all executive
officers, Director-Nominees and Directors of the Company as a group, and their
percentage ownership before and after this Offering and voting power after this
Offering. See "Description of Securities" for a discussion of the voting and
other rights of holders of the Company's capital stock.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------
NUMBER OF % BEFORE % AFTER
NAME(1) SHARES(2) OFFERING OFFERING
------------------------------------------------------ ---------- -------- --------
<S> <C> <C> <C>
Timothy M. Brannan.................................... 330,463 27.54 13.77
Keith P. Higginson(3)................................. 230,127 19.18 9.59
J. Wade Stallings, II................................. 230,127 19.18 9.59
Douglas M. Brannan.................................... 129,791 10.82 5.41
Wyndi D. Ballard...................................... 129,791 10.82 5.41
Ian D. Berman......................................... 0 0 0(4)
Michael D. Flink...................................... 0 0 0(4)
All Directors, Directors-Nominees and executive
officers as a group (8 persons)(4).................. 1,115,194 92.95 46.47
</TABLE>
- ---------------
(1) Except as otherwise noted, each of the parties listed above has sole voting
and investment power over the securities listed. The address for all
officers and Directors of the Company is 1839 West Drake, Suite B, Tempe,
Arizona 85283.
(2) Includes Escrow Shares as follows: Timothy M. Brannan, 227,193 shares; Keith
P. Higginson, individually, 79,106 shares and as trustee, 79,106 shares; J.
Wade Stallings, II, 158,212 shares; Douglas M. Brannan, 89,231 shares; Wyndi
D. Ballard, 89,231 shares; and George W. Gregg, 44,615 shares.
See "-- Escrow Arrangements".
(3) Includes 35,957 shares of which Mr. Higginson is the record and beneficial
owner and 35,958 shares held by a trust of which Mr. Higginson is trustee
and has sole voting power, but in which he disclaims any beneficial
interest.
(4) Excludes options to purchase up to 10,000 shares of Common Stock to be
granted to each of Messrs. Berman and Flink in connection with their
respective appointments to the Board of Directors effective upon the closing
of this Offering.
VOTING TRUST AGREEMENT AND IRREVOCABLE PROXY AGREEMENT
Nine stockholders of the Company owning an aggregate of 1,200,000 shares of
Common Stock, which will represent 50% of the total voting power immediately
after the Offering (47% if the over-allotment option is exercised in full),
entered into a Voting Trust Agreement and an Irrevocable Proxy Agreement ("Proxy
Agreement"), in November 1996. Of the 1,200,000 shares, 825,000 shares (which
825,000 shares have been placed in Escrow, see "-- Escrow Arrangements", below),
are subject to a Voting Trust Agreement and 375,000 shares are subject to the
Proxy Agreement. All 1,200,000 shares also are subject to the 13-month Lock-Up
Agreement. See "Underwriting".
Timothy M. Brannan, the President and Chairman of the Company, is
designated as both the trustee of the Voting Trust Agreement and the proxy
holder under the Proxy Agreement, and is empowered to vote all shares subject to
the Voting Trust Agreement and the Proxy Agreement with respect to any matter
subject to a vote by the Company's stockholders. Such matters include voting in
favor of the election of himself as a Director and an officer of the Company and
in favor of ratification or approval of acts of himself as a Director and an
officer in the conduct of business affairs of the Company, and other acts
relating to the Company, including, but not limited to, dissolution,
liquidation, a merger or consolidation of the Company or the sale of
46
<PAGE> 49
all, or substantially all, of its assets. Consequently, after the Offering, by
virtue of the Voting Trust Agreement and Proxy Agreement, Mr. Brannan will
effectively control 50% of the total voting power (47% if the over-allotment
option is exercised in full) of the Company.
The agreement of the stockholders to deposit their shares in the Voting
Trust and to grant their proxy under the Proxy Agreement is irrevocable for 13
months following the date of this Prospectus. Thereafter, parties to the Proxy
Agreement may withdraw their respective shares on ten days prior written notice
to the Trustee if they sell them to third parties. Parties to the Voting Trust
Agreement may also withdraw their shares on ten days prior notice if such shares
are not then subject to the Escrow Agreement. The Voting Trust Agreement and the
Proxy Agreement both terminate upon the earliest of five years, the date on
which Mr. Brannan ceases to be an employee of the Company or resigns as Trustee
or Proxy Holder, as applicable, or dies, or upon termination of the Voting Trust
Agreement or the Proxy Agreement by the unanimous written agreement of the
holders of the shares (other than Timothy M. Brannan) subject to the Voting
Trust Agreement or the Proxy Agreement, as applicable.
ESCROW ARRANGEMENTS
In connection with this Offering, present holders of the Company's Common
Stock placed into escrow, on a pro rata basis, an aggregate of 825,000 shares
pursuant to an Escrow Agreement, before this Offering (the "Escrow Agreement").
Such stockholders will continue to vote the Escrow Shares, all of which, except
those held by Timothy M. Brannan, are subject to the Voting Trust described
above of which Mr. Brannan is the trustee. The Escrow Shares are not further
assignable or transferrable.
Escrow Shares will be released from the escrow and placed in the Voting
Trust if the Voting Trust is in existence and, if not, to the stockholders as
follows:
1. 300,000 shares held in escrow shall be released therefrom if:
(a) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited and
determined by the Company's independent public accountants) (the
"Minimum Pretax Income") equals at least $2,000,000 before or
during the fiscal year ending on December 31, 1998; or
(b) the Minimum Pretax Income equals at least $3,000,000 during the
fiscal year ending on December 31, 1999; or
(c) the Minimum Pretax Income equals at least $4,000,000 during the
fiscal year ending December 31, 2000; or
(d) commencing at the Effective Date and ending 18 months after the
Effective Date, the Bid Price of the Company's Common Stock shall
average in excess of $11.50 per share (subject to adjustment in
the event of any stock splits, reverse stock splits or other
similar events) for 30 consecutive business days; or
(e) commencing 18 months after the Effective Date and ending 36 months
after the Effective Date, the Bid Price shall average in excess of
$15.00 per share (subject to adjustment in the event of any stock
splits, reverse stock splits or other similar events) for 30
consecutive business days; or
(f) the Company is acquired by or merged with or into another entity
during either of the periods referred to above and as a result
thereof the holders of shares of Common Stock not then subject to
escrow (after giving consideration to the release from escrow of
such 300,000 shares and subject to adjustment in the event of any
stock splits, reverse stock splits or other similar events)
receive per share consideration equal or greater than (i) $11.50
per share during the 18-month period commencing on the Effective
Date; or (ii) $15.00 per share during the 18-month period
commencing 18 months from the Effective Date.
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<PAGE> 50
2. The remaining 525,000 shares held in escrow shall be released therefrom
if:
(a) the Minimum Pretax Income equals at least $3,300,000 prior to or
during the fiscal year ending on December 31, 1998; or
(b) the Minimum Pretax Income equals at least $4,400,000 during the
fiscal year ending on December 31, 1999; or
(c) the Minimum Pretax Income equals at least $5,500,000 during the
fiscal year ending on December 31, 2000; or
(d) commencing at the Effective Date and ending 18 months after the
Effective Date, the Bid Price of the Company's Common Stock shall
average in excess of $12.50 per share (subject to adjustment in
the event of any stock splits, reverse stock splits or other
similar events) for 20 consecutive business days; or
(e) commencing 18 months from the Effective Date and ending 36 months
after the Effective Date, the Bid Price shall average in excess of
$16.50 per share (subject to adjustment in the event of any stock
splits, reverse stock splits or other similar events) for 20
consecutive business days; or
(f) the Company is acquired by or merged with or into another entity
during either of the periods referred to above and as a result
thereof the holder of shares of Common Stock not then subject to
escrow (after giving consideration to the release from escrow of
such 525,000 shares (and the 300,000 shares set forth above, if
not previously released) and subject to adjustment in the event of
any stock splits, reverse stock splits or other similar events)
receive per share consideration equal or greater than (i) $12.50
per share during the 18-month period commencing on the Effective
Date; or (ii) $16.50 per share during the 18-month period
commencing 18 months from the Effective Date.
The Minimum Pretax Income amounts set forth in 1 and 2 above, assume the
release of all of the Escrow Shares and the conversion into Common Stock of any
outstanding securities which are convertible into Common Stock solely upon
surrender of such convertible securities without the payment of any additional
consideration, but shall be increased proportionally to reflect the issuance of
any other additional shares, including any shares that may be issued upon the
exercise of the Class A Warrants, the Class B Warrants or any other options or
warrants presently outstanding or hereafter granted by the Company. The Minimum
Pretax Income shall be calculated exclusive of any extraordinary earnings,
including, but not limited to, any charge to income resulting from the release
of the Escrow Shares. On March 31, 2001, all shares still held in escrow will be
forfeited, which shares will then be placed in the Company's treasury for
cancellation thereof as a contribution to capital.
Distributions, in the event the Company is acquired or merged with or into
another entity, will be made as follows:
(a) if the merger or acquisition proceeds are sufficient to pay the
non-escrowed Common Stock prior to such event up to the applicable
Bid Price amount per share price set forth in paragraphs 1(f) or
2(f) above, then such number of shares of escrowed Common Stock
shall be released from escrow, pro rata, to enable the holders
thereof to participate in the balance remaining up to the
applicable Bid Price per share.
(b) if the merger or acquisition proceeds are sufficient to pay the
then non-escrowed and the then escrowed Common Stock, the full
amount set forth in paragraphs 1(f) or 2(f) above, then
distributions will be made pro rata on all Common Stock
outstanding, whether or not subject to escrow.
Any money, securities, rights, or property distributed in respect of the
Escrow Shares, including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Shares. Shares in escrow as to which the applicable earnings levels set forth
above have not been met by March 31, 2001, as well
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as any dividends or other distributions made with respect thereto, will be
contributed to the capital of the Company and canceled. The Company expects that
the release of the Escrow Shares held by officers, Directors, employees, and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a substantial charge to reportable earnings, which would equal the
fair market value of such shares on the date of release. Such charge could
substantially eliminate the Company's net income for financial reporting
purposes for the period(s) during which such shares are, or become probable of
being, released from escrow. Although the amount of compensation expense
recognized by the Company will not affect the Company's total stockholder's
equity, it may have a negative effect on the market price of the Company's
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 12 to the Company's Financial Statements.
The earnings levels set forth above were determined by negotiation between
the Company and the Underwriter and should not be construed to imply or predict
any future earnings by the Company or any increase in the market price of its
securities.
CONCURRENT OFFERING
The Registration Statement of which this Prospectus forms a part also
includes a Prospectus with respect to an offering by the Selling Securityholders
of 750,000 Class A Warrants, 750,000 Class B Warrants issuable upon exercise of
the Class A Warrants and an aggregate of 1,500,000 shares of Common Stock
underlying such Class A and Class B Warrants. The Selling Securityholders' Class
A Warrants are being issued to the Selling Securityholders as of the effective
date of the Offering upon the automatic conversion of all of the Company's
outstanding Bridge Warrants. These Class A Warrants are identical to the Class A
Warrants included in the Units offered hereby. All of the Selling
Securityholders' Class A Warrants, the Common Stock and Class B Warrants
issuable upon exercise of such Class A Warrants and the Common Stock issuable
upon exercise of the Class B Warrants will be registered, at the Company's
expense, under the Securities Act and are expected to become tradeable on or
about the effective date of the Offering, subject to a contractual restriction
with the Selling Securityholders that such Class A Warrants and underlying
securities may not be transferred for a period of one year after the effective
date of the Offering. Such Selling Securityholders have also agreed not to
exercise their Selling Securityholders' Warrants for a period of one year
following the effective date of the Registration Statement of which this
Prospectus forms a part. After the one year period following the effective date
of the Registration Statement of which this Prospectus forms a part, such
Selling Securityholders may exercise and sell the Common Stock issuable upon
exercise of the Selling Securityholders' Warrants without restriction if a
current prospectus relating to such Common Stock is in effect and the shares of
Common Stock are qualified for sale under applicable state securities laws. The
Company will not receive any proceeds from the sale of the Selling
Securityholders' Warrants or the underlying securities. Sales of Selling
Securityholders' Warrants or the securities underlying such Class A Warrants or
even the potential of such sales could have an adverse effect on the market
prices of the Units, the Common Stock and the Warrants.
There are no material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years. The Company has been informed by the
Underwriter that there are no agreements between the Underwriter and any Selling
Securityholder regarding the distribution of the Selling Securityholders'
Warrants or their underlying securities.
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions or a combination of such methods of sale. Sales
may be made at fixed prices which may be changed, at market prices or in
negotiated transactions, a combination of such methods of sale or otherwise.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities, from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of
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discounts, concessions or commissions from the Selling Securityholders and/or
the purchasers from whom such broker-dealer may act as agents or to whom they
may sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Securityholders' Warrants may not
simultaneously engage in market-making activities with respect to any securities
of the Company during the applicable restricted period prior to the commencement
of such distribution. Accordingly, in the event the Underwriter or Blair & Co.
is engaged in a distribution of the Selling Securityholders' Warrants, neither
of such firms will be able to make a market in the Company's securities during
the applicable restrictive period. However, neither the Underwriter nor Blair &
Co. has agreed to nor is either of them obligated to act as broker-dealer in the
sale of the Selling Securityholders' Warrants and the Selling Securityholders
may be required, and in the event Blair & Co. is a market-maker, will likely be
required, to sell such securities through another broker-dealer. In addition,
each Selling Securityholder desiring to sell Warrants will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Regulation M, which was adopted to
replace Rules 10b-6 and 10b-7, which provisions may limit the timing of the
purchases and sales of shares of the Company's securities by such Selling
Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to
constitute underwriting discounts and commissions under the Securities Act.
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DESCRIPTION OF SECURITIES
GENERAL
In November 1996, the Board of Directors and the stockholders of the
Company approved the reincorporation of the Company from an Arizona corporation
into a Nevada corporation, by means of a merger of the Arizona corporation into
a Nevada corporation, which merger and the reincorporation became effective as
of November 22, 1996. In connection with the merger (i) all then outstanding
shares of Common Stock of the Arizona corporation were exchanged for shares of
Common Stock of the Nevada corporation on an approximately 242-for-1 basis, (ii)
the authorized Common Stock was increased and a class of Preferred Stock was
created, and (iii) the shares of the Company's former Common Stock, no par
value, were changed into Common Stock, $.001 par value. The Company's authorized
capital stock now consists of (i) 20,000,000 shares of Common Stock, $.001 par
value per share, and (ii) 5,000,000 shares of "blank check" Preferred Stock,
$.001 par value. Immediately prior to this Offering, there were outstanding
1,200,000 shares of Common Stock (held by nine holders) and no outstanding
shares of Preferred Stock. The Company reincorporated in Nevada primarily in
order to take advantage of Nevada's modern and flexible corporation laws. In
addition, the recent increase in the number of corporations domiciled in the
State of Nevada has had the effect of increasing that state's body of law
relating to corporations, which the Company believes is likely to result in a
greater degree of predictability concerning the outcome of legal matters which
may affect the Company from time to time.
The foregoing and following summary descriptions of capital stock of the
Company is qualified in its entirety by reference to the Company's Articles of
Incorporation, as amended (the "Articles of Incorporation"), and Bylaws (the
"Bylaws"), a copy of each of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
UNITS
Each Unit consists of one share of Common Stock, one redeemable Class A
Warrant and one redeemable Class B Warrant. Each Class A Warrant entitles the
holder thereof to purchase one share of Common Stock and one additional Class B
Warrant. Each Class B Warrant entitles the holder thereof to purchase one share
of Common Stock. The Common Stock and Warrants comprising the Units are
separately transferable immediately upon issuance.
COMMON STOCK
Holders of Common Stock have the right to cast one vote for each share held
of record on all matters submitted to a vote of holders of Common Stock,
including the election of directors.
Holders of Common Stock are entitled to receive dividends pro rata based on
the number of shares held, when, as and if declared by the Board of Directors,
from funds legally available therefor, subject to the rights of holders of any
outstanding preferred stock. In the event of the liquidation, dissolution or
winding up of the affairs of the Company, all assets and funds of the Company
remaining after the payment of all debts and other liabilities, subject to the
rights of the holders of any outstanding preferred stock, shall be distributed,
pro rata, among the holders of the Common Stock. Holders of Common Stock are not
entitled to preemptive, subscription, cumulative voting or conversion rights,
and there are no redemption or sinking fund provisions applicable to the Common
Stock. All outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby will be when issued, fully paid and nonassessable.
See "Principal Stockholders -- Voting Trust Agreement and Irrevocable Proxy
Agreement" and "-- Escrow Arrangements" regarding a Voting Trust and Irrevocable
Proxy Agreement relating to 1,200,000 shares of Common Stock and escrow
arrangements relating to 825,000 of such shares.
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REDEEMABLE WARRANTS
Class A Warrants. Each Class A Warrant entitles the registered holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $6.50 at any time until 5:00 P.M., New York City time, on the fifth
anniversary of the date of this Prospectus. Commencing one year from the date of
this Prospectus, the Class A Warrants are redeemable by the Company on 30 days'
written notice at a redemption price of $.05 per Class A Warrant if the "closing
price" of the Company's Common Stock for any 30 consecutive trading days ending
within 15 days of the notice of redemption averages in excess of $9.10 per
share. "Closing price" shall mean the closing bid price if listed in the
over-the-counter market on Nasdaq or otherwise or the closing sale price if
listed on The Nasdaq National Market or a national securities exchange. All
Class A Warrants must be redeemed if any are redeemed.
Class B Warrants. Each Class B Warrant entitles the registered holder to
purchase one share of Common Stock at an exercise price of $8.75 at any time
until 5:00 P.M. New York City time, on the fifth anniversary date of this
Prospectus. Commencing one year from the date of this Prospectus, the Class B
Warrants are redeemable by the Company on 30 days' written notice at a
redemption price of $.05 per Class B Warrant, if the closing price of the
Company's Common Stock for any 30 consecutive trading days ending within 15 days
of the notice of redemption averages in excess of $12.25 per share. All Class B
Warrants must be redeemed if any are redeemed.
General. The Class A Warrants and Class B Warrants will be issued pursuant
to a warrant agreement (the "Warrant Agreement") among the Company, the
Underwriter and American Stock Transfer & Trust Company, New York, New York, as
Warrant Agent, and will be evidenced by warrant certificates in registered form.
The Warrants provide for adjustment of the exercise price and for a change in
the number of shares issuable upon exercise thereof to protect holders against
dilution in the event of a stock dividend, stock split, combination or
reclassification of the Common Stock or upon issuance of shares of Common Stock
at prices lower than the market price then in effect other than issuances upon
exercise of options granted to officers, employees, Directors and consultants to
the Company under the Company's stock option plans, other outstanding warrants
on the date of this Prospectus or with respect to the Unit Purchase Option.
The exercise prices of the Warrants were determined by negotiation between
the Company and the Underwriter and should not be construed to be predictive of
or to imply that any price increases in the Company's securities will occur.
A Warrant may be exercised upon surrender of the Warrant certificate on or
prior to its expiration date (or earlier redemption date) at the offices of
American Stock Transfer & Trust Company, New York, New York, as Warrant Agent,
with the form of "Election to Purchase" on the reverse side of the Warrant
certificate completed and executed as indicated, accompanied by payment of the
full exercise price (by certified or bank check payable to the order of the
Company) for the number of securities with respect to which the Warrant is being
exercised. Securities issued upon exercise of Warrants and payment in accordance
with the terms of the Warrants will be fully paid and nonassessable.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrantholders, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.
PREFERRED STOCK
The Articles of Incorporation of the Company authorize the issuance of up
to 5,000,000 shares of Preferred Stock, none of which are currently outstanding.
The Board of Directors, within the limitations and restrictions contained in the
Articles of Incorporation and without further action by the Company's
stockholders, has the authority to issue shares of Preferred Stock from time to
time in one or more series and to fix the number of shares and the relative
rights, conversion rights, voting rights, and terms of redemption, liquidation
preferences and any other preferences, special rights and qualifications of any
such series. Any issuance of Preferred Stock could, under certain circumstances,
have the effect of delaying, deferring or
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preventing a change in control of the Company and may adversely affect the
rights of holders of Common Stock. The Company has no present plans to issue any
shares of Preferred Stock.
CERTAIN STATUTORY AND CHARTER PROVISIONS
The Company's Articles of Incorporation and By-laws contain a number of
provisions relating to corporate governance and the rights of stockholders.
These provisions: (i) establish a classified Board of Directors; (ii) permit the
removal of Directors only for cause and only by vote of stockholders owning two-
thirds of the voting power of the Company; (iii) impose conditions on the
ability of stockholders to nominate persons for the position of Director; (iv)
prohibit stockholders from calling special meetings; and (v) require the consent
of the Board of Directors or the "disinterested" members thereof and/or the
affirmative vote of two-thirds of the Company's voting stock, excluding stock
owned by interested stockholders, to effect certain business combinations with
interested stockholders. An interested stockholder for purposes of this
provision means a person who, together with affiliates or associates,
beneficially owns, or beneficially owned within the preceding two-year period,
10% or more of the Company's combined voting power. For purposes of these
provisions, at January 31, 1996, five of the Company's stockholders were deemed
to be interested stockholders. The provisions included in the Company's Articles
of Incorporation and certain provisions in the By-laws may not be amended or
repealed without the affirmative vote of two-thirds of the Company's voting
stock, excluding, with respect to the business combination provision, stock
owned by interested stockholders. See "Management -- Indemnification and
Limitation of Liability" for a discussion of certain indemnification provisions
included in the Articles of Incorporation and By-laws.
The Company believes that these provisions promote the stability and
continuity of the Board of Directors of the Company and assure that stockholders
will receive adequate notice of and an opportunity to consider actions by
stockholders that could materially affect the Company. However, these provisions
could have the effect of deterring unsolicited takeovers or delaying or
preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then-current market prices. In addition, these provisions may limit
the ability of stockholders to approve transactions that they may deem to be in
their best interest.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York will serve as
Transfer Agent for the Common Stock and Warrant Agent for the Warrants.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding an
aggregate of 2,580,000 shares of Common Stock (assuming exercise in full of the
Underwriter's over-allotment option). Of all such shares, the 1,380,000 shares
of Common Stock included in the Units sold in this Offering (assuming exercise
in full of the Underwriter's over-allotment option) will be freely transferable
without restriction under the Securities Act except for any shares purchased by
any person who is or thereby becomes an "affiliate" of the Company, which shares
will be subject to the resale limitations contained in Rule 144 promulgated
under the Securities Act. All of the other shares of Common Stock outstanding
prior to this Offering are "restricted securities" as that term is defined under
Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), who has beneficially owned restricted securities
for at least two years, may sell within any three-month period a number of
restricted shares which does not exceed the greater of 1% of the then
outstanding shares of such class of securities or the average weekly trading
volume during the four calendar weeks prior to such sale. Sales under Rule 144
are also subject to certain requirements as to the manner of sale, notice and
the availability of current public information about the Company. Rule 144 also
permits, under certain circumstances, the sale of shares by a person who is not
an affiliate of the Company, with respect to restricted securities that satisfy
a three-year holding period, without regard to the volume or other resale
limitations. For shares issued in consideration of an unsecured or nonrecourse
promissory note, the holding period does not commence until the note is paid in
full. The above is a brief summary of Rule 144 and is not intended to be a
complete description of Rule 144.
All of the current stockholders, including all of the principal
stockholders, officers and Directors of the Company (including Timothy M.
Brannan as Voting Trustee and Proxy for 1,200,000 shares) holding in the
aggregate approximately 1,200,000 shares of Common Stock, have agreed not to
sell, assign or transfer or otherwise dispose publicly of any of their shares
for a period of 13 months from the date of this Prospectus without the prior
written consent of the Underwriter. Following the expiration of such period, all
1,200,000 of such shares of Common Stock will be freely transferrable subject to
the requirements of Rule 144; provided, however, that 825,000 of such shares
will remain subject to the provisions of the Escrow Agreement. See "Principal
Stockholders -- Escrow Agreements". Prior to this Offering, there has been no
market for any securities of the Company and the Company is unable to predict
the effect that sales under Rule 144, pursuant to a registered public offering
or otherwise, may have on the then prevailing market price of the Common Stock,
but such sales may have a substantial negative effect on such market price.
As of the closing date of this Offering, options to purchase a total of
50,000 shares of Common Stock will be outstanding under the Company's Stock
Option Plan. An aggregate of an additional 150,000 shares are available for
future option grants under the Plan. See "Management -- 1996 Stock Option Plan".
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UNDERWRITING
D. H. Blair Investment Banking Corp., the Underwriter, has agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase the
1,200,000 Units offered hereby from the Company on a "firm commitment" basis, if
any are purchased. It is expected that Blair & Co. will distribute as a selling
group member substantially all of the Units offered hereby. It is also expected
that Blair & Co. will make a market in the Company's securities. Blair & Co. is
owned by a corporation which is substantially owned by family members of J.
Morton Davis. Mr. Davis is the sole stockholder and director of an entity which
is the parent and sole stockholder of the Underwriter.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus and that it may allow to selected dealers who are members of the
National Association of Securities Dealers, Inc. concessions, not in excess of
$. per Unit, of which not more than $. per Unit may be reallowed to certain
other dealers. After this Offering, the public offering price, concessions and
reallowances may be changed by the Underwriter.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 3% of the aggregate offering price of the Units offered
hereby (including any Units purchased pursuant to the over-allotment option), of
which $40,000 has been paid.
The Company has granted an option to the Underwriter, exercisable for 45
days from the date of this Prospectus, to purchase up to 180,000 additional
Units at the public offering price set forth on the cover page of this
Prospectus, less the underwriting discounts and commissions, solely to cover
over-allotments, if any, made in connection with the sale of the Units offered
hereby.
The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 120,000 Units,
substantially identical to the Units being offered hereby. The Unit Purchase
Option will be exercisable during the three-year period commencing two years
from the date of this Prospectus at an exercise price equal to $6.00 per Unit,
subject to adjustment in certain events to protect against dilution, and are not
transferable for a period of two years from the date of this Prospectus except
to officers of the Underwriter or to members of the selling group, including
Blair & Co. or its officers. The exercise price and all other terms of any
Common Stock, Class A Warrants or Class B Warrants issuable to the Underwriter
upon exercise of the Unit Purchase Option will be substantially identical to
those sold in this Offering except that the Warrants issued to the Underwriter
are not subject to redemption by the Company. The Company has agreed to register
during the five-year period commencing one year from the date of the closing of
the underwriting of 1,200,000 Units pursuant to this Prospectus, on two separate
occasions upon request of the Underwriter, the securities issuable upon exercise
of the Unit Purchase Option under the Securities Act, the initial such
registration to be at the Company's expense and the second at the expense of the
holders. The Company has also granted certain "piggy-back" registration rights
to holders of the Unit Purchase Option.
The Company has agreed to indemnify the Underwriter against certain
liabilities in connection with this Offering, including liabilities under the
Securities Act.
During the five-year period from November 27, 1996, in the event the
Underwriter originates a financing or a merger, acquisition or transaction to
which the Company is a party, the Underwriter will be entitled to receive a
finder's fee in consideration for origination of such transaction. The fee is
based on a percentage of the consideration paid in the transaction ranging from
7% of the first $1,000,000 to 2 1/2% of any consideration in excess of
$9,000,000.
In connection with the Bridge Financing in November and December 1996, the
Underwriter served as placement agent and received an aggregate of $195,000 from
the Company as commission and non-accountable expense allowance.
In November 1996, the Underwriter loaned the Company $200,000, which bore
interest at the rate of 10% per annum. The loan was repaid out of the proceeds
of the Bridge Financing.
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The Company has agreed not to solicit Warrant exercises other than through
the Underwriter unless the Underwriter declines or is unable to make such
solicitation. Except for any Warrants held by the Underwriter at the time of
exercise, commencing one year form the date of this Prospectus, upon any
exercise of the Warrants, the Company will pay the Underwriter a fee (the
"Warrant Fee") of 5% of the aggregate exercise price if (i) the market price of
the Company's Common Stock on the date the Warrants are exercised is greater
than the then exercise price of the Warrants; (ii) the exercise of the Warrants
was solicited by a member of the National Association of Securities Dealers,
Inc. designated in writing by the Warrantholder as having solicited the
exercise; (iii) the Warrants are not held in a discretionary account; (iv)
disclosure of compensation arrangements is made both at the time of the offering
and at the time of exercise of the Warrants; and (v) the solicitation of
exercise of the Warrants was not in violation of Regulation M promulgated under
the Exchange Act. The Underwriter may reallow a portion of such fee to members
of the National Association of Securities Dealers, Inc. The costs of the
Underwriter's solicitation of exercise or redemption of the Warrants will be
borne by the Company.
Regulation M, which was recently adopted to replace Rule 10b-6, of the
Exchange Act may prohibit Blair & Co. from engaging in any market making
activities with regard to the Company's securities for the period of up to five
business days (or such other applicable period as Regulation M may provide)
prior to any solicitation by the Underwriter of the exercise of Warrants until
the later of the termination of such solicitation activity or the termination
(by waiver or otherwise) of any right that the Underwriter may have to receive a
fee for the exercise of Warrants following such solicitation. As a result, Blair
& Co. may be unable to provide a market for the Company's securities during
certain periods while the Warrants are exercisable.
The Company has agreed to nominate a designee of the Underwriter to the
Company's Board of Directors for a period of five years from the date hereof.
Any such Director will receive the same compensation, if any, which is paid to
Directors who are not employees of the Company and shall be reimbursed all
reasonable expenses in connection with attending all meetings of the Board or
any committees thereof. The Underwriter has not yet designated its nominee, and
such nominee is not expected to be an officer, Director or affiliate of the
Underwriter.
All of the Company's current stockholders, officers and directors have
agreed not to sell, assign, transfer or otherwise dispose publicly any of their
shares of Common Stock for a period of 13 months after the date of this
Prospectus without the prior written consent of the Underwriter.
The Underwriter has informed the Company that the Securities and Exchange
Commission is conducting an investigation concerning various business activities
of the Underwriter and Blair & Co., a selling group member which will distribute
substantially all of the Units offered hereby. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's and Blair &
Co.'s compliance with the Federal securities laws and compliance with the
Federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and that
it is cooperating with the investigation. The Underwriter cannot predict whether
this investigation will ever result in any type of formal enforcement action
against the Underwriter or Blair & Co., or, if so, whether any such action might
have an adverse effect on the Underwriter or the securities offered hereby. The
Company has been advised that Blair & Co. will make a market in the securities
following this Offering. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to make a
market in the Company's securities, which could affect the liquidity or price of
such securities.
Prior to this Offering, there has been no public market for the Company's
securities. Accordingly, the offering prices of the Units offered hereby and the
terms of the Warrants have been determined by negotiation between the Company
and the Underwriter and are not necessarily related to the Company's asset
value, net worth or other established criteria of value. Among the factors
considered in determining such prices and terms, in addition to prevailing
market conditions, include the history of and the prospects for the industry in
which the Company competes, the present state of the Company's development and
its future prospects, an assessment of the Company's management and the
Company's capital structure.
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The Underwriter has informed the Company that it does not expect sales to
discretionary accounts to exceed 5% of the total number of the Units offered
hereby.
LEGAL MATTERS
Certain legal matters with respect to the Company and the validity of the
securities offered hereby will be passed upon for the Company by Squire, Sanders
& Dempsey L.L.P., Phoenix, Arizona. Certain legal matters will be passed upon
for the Underwriter by Bachner, Tally, Polevoy & Misher, LLP, New York, New
York.
EXPERTS
The balance sheet as of December 31, 1995 and 1996 and the statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1995 and 1996, included in this Prospectus have been included
herein in reliance on the report, which includes an explanatory paragraph
concerning the substantial doubt about the Company's ability to continue as a
going concern, of Coopers & Lybrand L.L.P., independent accountants, given on
the authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the Units, Warrants and Common
Stock offered hereby. This Prospectus constitutes a part of the Registration
Statement and does not contain all of the information set forth therein and in
the exhibits thereto, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Units, Warrants and Common Stock offered hereby,
reference is hereby make to such Registration Statement and exhibits. Statements
contained in this Prospectus as to the contents of any document are not
necessarily complete and in each instance are qualified in their entirety by
reference to the copy of the appropriate documents filed with the Commission.
The Registration Statement and the reports and other information to be
filed by the Company following the Offering in accordance with the Exchange Act
can be inspected and copied at the principal office of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, New
York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60601. Copies of such materials may be obtained from the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the
Commission. In addition, the Commission maintains a website (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission.
57
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Financial Statements:
Balance Sheets as of December 31, 1995 and 1996..................................... F-3
Statements of Operations for the years ended December 31, 1995 and 1996............. F-4
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995
and 1996......................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1995 and 1996............. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Piranha Interactive Publishing, Inc.
We have audited the accompanying balance sheets of Piranha Interactive
Publishing, Inc. (the "Company") as of December 31, 1995 and 1996, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the years ended December 31, 1995 and 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Piranha Interactive
Publishing, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has experienced difficulty in generating
sufficient cash flows from operations which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regards to this
matter are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Phoenix, Arizona
January 27, 1997
F-2
<PAGE> 62
PIRANHA INTERACTIVE PUBLISHING, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $202,216 $ 246,732
Accounts receivable, net of allowance for returns of $46,541 and
$17,221 and doubtful accounts of $9,195 and $45,000,
respectively.................................................. 137,663 4,420
Inventories...................................................... 143,119 137,807
Prepaid expenses................................................. 8,088 104,547
-------- ----------
Total current assets..................................... 491,086 493,506
Property and equipment, net........................................ 25,563 71,274
Other assets....................................................... 4,517 489,090
-------- ----------
Total assets............................................. $521,166 $1,053,870
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $248,052 $ 68,964
Accrued liabilities.............................................. 5,000 207,397
Accounts payable -- officers..................................... 64,108
Notes payable.................................................... 1,431,928
-------- ----------
Total current liabilities................................ 317,160 1,708,289
Notes payable -- officers.......................................... 33,000 36,426
Other liabilities.................................................. 3,544 11,177
-------- ----------
Total liabilities........................................ 353,704 1,755,892
-------- ----------
Commitments (Note 12)
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares authorized; no
shares issued and outstanding
Common stock, $.001 par value; 20,000,000 shares authorized;
1,336,479 and 1,200,000 shares issued and outstanding,
respectively.................................................. 1,336 1,200
Additional paid-in capital....................................... 4,187 (490,703)
Retained earnings (deficit)...................................... 161,939 (212,519)
-------- ----------
Total stockholders' equity (deficit)..................... 167,462 (702,022)
-------- ----------
Total liabilities and stockholders' equity (deficit)..... $521,166 $1,053,870
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 63
PIRANHA INTERACTIVE PUBLISHING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Net sales.......................................................... $1,342,034 $ 424,810
Cost of goods sold................................................. 900,967 318,938
---------- ---------
Gross profit..................................................... 441,067 105,872
Selling, general and administrative expenses....................... 247,458 982,827
---------- ---------
Income (loss) from operations.................................... 193,609 (876,955)
Interest expense................................................... 5,466 35,383
---------- ---------
Net income (loss)................................................ $ 188,143 $ (912,338)
========== =========
Pro forma net income (loss) data (unaudited):
Income (loss) before income taxes................................ $ 188,143 $ (912,338)
Pro forma income tax benefit (expense)........................... (79,020) 77,464
---------- ---------
Pro forma net income (loss)...................................... $ 109,123 $ (834,874)
========== =========
Pro forma net income (loss) per common share:...................... $ 0.21 $ (1.89)
Shares used in computing pro forma net income (loss) per common
share:........................................................... 510,907 440,809
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 64
PIRANHA INTERACTIVE PUBLISHING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994......... 967,937 $ 968 $ 3,032 $ (3,704) $ 296
Issuance of common stock........... 368,542 368 1,155 1,523
Distributions to stockholders...... (22,500) (22,500)
Net income......................... 188,143 188,143
--------- ------ --------- --------- ---------
Balance, December 31, 1995......... 1,336,479 1,336 4,187 161,939 167,462
Distributions to stockholders...... (45,000) (45,000)
Repurchase common stock............ (136,479) (136) (428) (5,182) (5,746)
Reclassification of S Corporation
accumulated deficit.............. (588,062) 588,062
Issuance of warrants............... 75,000 75,000
Issuance of stock options.......... 18,600 18,600
Net loss........................... (912,338) (912,338)
--------- ------ --------- --------- ---------
Balance, December 31, 1996......... 1,200,000 $1,200 $ (490,703) $(212,519) $(702,022)
========= ====== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 65
PIRANHA INTERACTIVE PUBLISHING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ 188,143 $ (912,338)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................. 6,256 41,187
Interest on notes payable -- officers......................... 3,000 3,426
Allowance for bad debts and sales returns..................... 55,736 6,485
Reserve for obsolescence...................................... 39,494
Issuance of stock options for services........................ 18,600
Net changes in operating assets and liabilities:
Accounts receivable......................................... (193,399) 126,758
Related party receivables................................... 4,000
Inventories................................................. (143,119) (34,182)
Prepaid expenses............................................ (8,088) (96,459)
Accounts payable............................................ 248,052 (179,088)
Accrued liabilities......................................... 5,000 33,774
Other liabilities........................................... 3,544 7,633
--------- ---------
Net cash provided by (used in) operating activities...... 169,125 (944,710)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment............................... (32,196) (60,686)
Sale of property plant and equipment............................. 600
Increase in other assets......................................... (3,662) (320)
--------- ---------
Net cash used in investing activities.................... (35,258) (61,006)
--------- ---------
Cash flows from financing activities:
Proceeds from accounts and notes payable -- officers............. 89,326 63,309
Proceeds from notes payable...................................... 1,724,979
Deferred offering costs.......................................... (128,964)
Repayment of accounts and notes payable -- officers.............. (127,417)
Repayments of notes payable...................................... (224,979)
Payment of debt issuance costs................................... (205,950)
Issuance of common stock......................................... 1,523
Repurchase of common stock....................................... (5,746)
Distributions to stockholders.................................... (22,500) (45,000)
--------- ---------
Net cash provided by financing activities................ 68,349 1,050,232
--------- ---------
Net increase in cash and cash equivalents.......................... 202,216 44,516
Cash and cash equivalents, beginning of year....................... 202,216
--------- ---------
Cash and cash equivalents, end of year............................. $ 202,216 $ 246,732
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 66
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Piranha Interactive Publishing, Inc. (the "Company") was incorporated in
Arizona on November 14, 1994. The Company publishes interactive multimedia
software products providing education and entertainment as well as reference and
personal productivity titles for the home personal computer market. The Company
produces its products by generally licensing software programs being developed
by independent third party developers, imprinting them in media format,
duplicating, packaging, marketing and distributing them.
On November 22, 1996, the Board of Directors and the stockholders of the
Company approved the reincorporation of the Company from an Arizona corporation
into a Nevada corporation, by means of a merger of the Arizona corporation into
a Nevada corporation, which merger and the reincorporation became effective as
of November 22, 1996. In connection with the merger (i) all outstanding shares
of common stock of the Arizona corporation were exchanged for shares of common
stock of the Nevada corporation on an approximately 242-to-1 basis, (ii) the
authorized common stock was increased and a class of preferred stock was
created, and (iii) the shares of the Company's former common stock, no par
value, were changed into common stock, $.001 par value. The Company's authorized
capital stock now consists of (i) 20,000,000 shares of common stock, $.001 par
value per share, and (ii) 5,000,000 shares of preferred stock, $.001 par value.
All references to the number of common shares outstanding and to per share
information in the financial statements have been adjusted to reflect the
conversion on a retroactive basis.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has experienced difficulty in
generating sufficient cash flows from operations. Management is seeking
additional financing to meet working capital needs for operations. In addition,
the Company plans to increase revenues through new products while controlling
costs. Since there is no assurance that management will complete their plans,
there is substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time of
acquisition to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. Inventories consist primarily of finished goods,
packaging, supplies and manuals.
F-7
<PAGE> 67
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Debt Issuance Costs
The costs incurred in connection with the notes payable have been
capitalized and are included in other assets. The capitalized costs are being
amortized using the effective interest method over the term of the notes
payable.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on
depreciable assets by the straight-line method over estimated useful lives while
leasehold improvements are amortized by the straight-line method over the
shorter of estimated useful lives or the remaining lease terms.
When items are retired or disposed of, the cost and accumulated
depreciation or amortization are removed from the accounts and any gain or loss
is included in the statements of operations.
Organizational Costs
Costs incurred in organizing the Company have been capitalized and are
included in other assets. Organizational costs are being amortized over five
years using the straight-line method.
Deferred Offering Costs
Costs incurred, related to the Company's proposed public offering (Note
11), have been capitalized and are included in other assets. Upon successful
completion of the public offering, these costs will be offset against the
proceeds received or if not successful will be expensed.
Revenue Recognition
The Company sells its products to original equipment manufacturers,
distributors, and retailers. Revenues are recognized upon delivery except for
sales made to certain distributors where the right of ownership does not pass at
delivery. In those instances, revenue recognition is deferred until resale by
the distributor. The Company's agreements with distributors and retailers allow
for stock rotation. Reserves are provided for stock rotation and returns based
on industry and past experience. These reserves are established at the time of
shipment and reduce gross sales to arrive at net sales as presented in the
accompanying statement of operations. These reserves are reflected as an
allowance for returns. It is the policy of the Company's customers to offset any
returns as reductions against payments on accounts receivable.
On occasion, the Company purchases finished products from other software
publishers for resale to the Company's customers. These purchases are made under
the terms of revenue sharing arrangements. These transactions are accounted for
as the purchase and resale of inventory.
Royalties
The Company, at times, is required to pay royalties to independent software
developers. Up-front advances of a portion of these royalties may also be
required. These prepayments are capitalized and included in prepaid expenses.
The prepayments are amortized to cost of goods sold based on net sales. If and
when it is determined sales of a product associated with a prepayment are not
going to be sufficient to cover the prepayment, the prepaid royalties are
expensed.
Co-op Advertising
Co-op advertising represents credits granted by the Company to its
customers to advertise the Company's products in circulars, catalogs or other
advertisements sponsored by the customer or for special shelf
F-8
<PAGE> 68
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
placement or other types of in-store promotion. Any such advertising is
specifically approved by the Company and the associated costs are expensed as
incurred.
Stock-based Compensation
The Company has elected to measure compensation expense related to employee
stock purchase options using Accounting Principles Board Opinion No. 25, and has
provided the necessary pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting, defined by Financial
Accounting Standard No. 123, had been applied.
Income Taxes
Prior to November 15, 1996, the Company elected to be treated as a
Subchapter S Corporation for federal income tax purposes. As such, all tax
liability flowed through to the individual shareholders. Effective November 15,
1996, the Company became a C Corporation and began using the liability method
for income taxes. Deferred income taxes reflect the impact of temporary
differences between the amount of assets and liabilities recognized for
financial reporting purposes and such amounts recognized for tax purposes.
Deferred tax balances are adjusted to reflect tax rates, based on current tax
laws, that will be in effect in the years in which the temporary differences are
expected to reverse.
3. CONCENTRATION OF RISK:
Financial instruments subject to credit risk consist primarily of cash,
cash equivalents, and accounts receivable. At times, the Company's cash
deposited in financial institutions may be in excess of federally insured
limits. In the normal course of business, the Company extends unsecured credit
to its customers. Additionally, the Company has certain sales concentrations. As
of and for the year ended December 31, 1996, the following concentrations
existed:
Accounts Receivable
Three customers comprised approximately 50%, 28% and 17%, respectively, of
the accounts receivable balance as of December 31, 1996. One customer comprised
approximately 69% of the accounts receivable balance as of December 31, 1995.
Customer Sales
Five customers comprised approximately 21%, 20%, 18%, 11% and 11%,
respectively, of net sales for the year ended December 31, 1996. One customer
comprised approximately 96% of net sales for the year ended December 31, 1995.
Sales By Product
Major product lines, as a percentage of net sales, for the years ended
December 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Product A...................................................... 43% 2%
Product B...................................................... 25% 35%
Product C...................................................... 22% 3%
Product D...................................................... 10% 43%
Product E...................................................... 13%
</TABLE>
F-9
<PAGE> 69
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Manufacturing and Distribution
All of the Company's titles are currently pressed, reproduced, and packaged
at third party fulfillment houses. The Company's printed materials are produced
by third party vendors that ship such materials directly to the fulfillment
house for product assembly and packaging. The Company places orders with such
vendors for production of completed products in amounts specified by the Company
based upon forecasted sales. All products are shipped directly to distributors
and retailers by the fulfillment houses. As demand for fulfillment houses is
greatest in the third and fourth quarters due to publishers building inventory
for holiday sales, an unanticipated delay in the manufacture of products,
particularly during the fourth quarter, could result in a material adverse
effect on the Company's financial condition and results of operations. Currently
the Company has been utilizing one fulfillment house.
The retail multimedia software market has experienced rapid change in
recent years, including consolidations and financial difficulties. To the extent
any retailers upon which the Company is dependent were to suffer financial
difficulties, the Company's operations could be materially adversely affected.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The carrying amounts of
cash equivalents, accounts receivable, accounts payable, and notes payable
approximate fair value at December 31, 1995 and 1996 as a result of the short
maturity of these instruments. The carrying value of the notes payable to
officers approximates fair value at December 31, 1995 and 1996 based on the
estimated interest rates for similar types of borrowing arrangements.
5. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Packaging supplies and manuals..................... $ 40,927 $ 30,909
Finished goods..................................... 102,192 146,392
-------- --------
143,119 177,301
Less reserve for obsolescence...................... 39,494
-------- --------
$143,119 $137,807
======== ========
</TABLE>
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Office furniture................................... $ 8,834 $ 8,834
Office equipment................................... 5,969 27,481
Computer equipment................................. 16,793 20,463
Leasehold improvements............................. 35,504
------- --------
31,596 92,282
Less accumulated depreciation...................... (6,033) (21,008)
------- --------
$ 25,563 $ 71,274
======= ========
</TABLE>
F-10
<PAGE> 70
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Notes payable, interest at 10%, net of unamortized
debt discount of $68,072, due on the earlier of
November 27, 1997 or the close of the proposed
initial public offering.......................... $ $1,431,928
Notes payable -- officers, interest at 10%, due
August 1, 1999................................... 33,000 36,426
------- ----------
33,000 1,468,354
Less current portion............................... 1,431,928
------- ----------
$ 33,000 $ 36,426
======= ==========
</TABLE>
The outstanding balance of notes payable -- officers includes accrued
interest of $3,000 and $6,426 at December 31, 1995 and 1996, respectively.
8. RELATED PARTY TRANSACTIONS:
At December 31, 1995, the Company owed $64,108 to several officers of the
Company for Company expenses funded by these officers.
The Company rented office space from an officer of the Company during 1995.
Rental expense was approximately $6,000.
On July 1, 1996, the Company entered into a one-year consulting agreement
with a stockholder who is otherwise unaffiliated with the Company. As
compensation for the stockholder's future services in pursuing and arranging
potential business combinations, the Company has agreed to pay an amount not to
exceed 2.5 percent of the total consideration involved in such a combination to
the stockholder minus any retainer advanced to the stockholder. The agreement
also calls for a $50,000 non-refundable retainer to be paid in monthly
installments over the term of the agreement and a commitment to grant an option
to purchase 12,000 shares of common stock following the adoption of a stock
option plan. The agreement is renewable for one-year terms by mutual consent of
the parties. On December 4, 1996, the Company paid the outstanding balance of
the retainer in full and is recognizing expense ratably over the term of the
agreement.
9. ADVERTISING:
Total advertising expense, including co-op advertising, was $2,975 and
$148,590 and for the years ended December 31, 1995 and 1996, respectively.
F-11
<PAGE> 71
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred tax assets:
Current:
Net operating loss carryforwards............... $ 40,886
Allowance for bad debts and sales returns...... 26,133
Accrued expenses............................... 9,912
Inventories.................................... 16,587
--------
93,518
--------
Deferred tax liabilities:
Non-current:
Depreciation................................... 2,515
--------
Net deferred tax assets............................. 91,003
Valuation allowance................................. (91,003)
--------
$ 0
========
</TABLE>
The reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1996
-----
<S> <C>
Federal income tax rate............................... 34.0%
Effect of net operating loss carryforward and
valuation allowance................................. (34.0)%
-----
Effective income tax rate............................. 0.0%
=====
</TABLE>
11. EQUITY:
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, with a par value of $.001, in one or more series and to fix the powers,
designations, preferences, and rights of each series. No series have been issued
to date.
Stock Option Plan
During December 1996, the Board of Directors of the Company established the
1996 Stock Option Plan ("1996 Plan") which authorizes them to grant options to
directors, employees and consultants of the Company to purchase shares of common
stock. An aggregate of 200,000 shares of common stock are reserved for issuance
upon exercise of options granted under the 1996 Plan. In general, options
granted under the 1996 Plan are not transferable, expire ten years after date of
grant and the exercise price may not be less than fair market value of common
stock on grant date and no options may be granted with an exercise price less
than the initial public offering price.
On December 13, 1996, the Company issued an option under the 1996 Plan to
purchase 12,000 shares of common stock to a stockholder of the Company (see Note
8) at an exercise price of $5.00 per share. The option becomes fully vested on
September 1, 1997, and may be exercised at any time prior to August 31, 2002.
The compensation cost recognized in income for this option for the year ended
December 31, 1996 was
F-12
<PAGE> 72
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$18,600 based on the fair value of the option. This fair value was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: no dividends are expected to be declared; expected
volatility of 75 percent, risk-free interest rate of 6 percent; options are not
expected to be exercised for 4.5 years; and the estimated fair value of the
underlying stock based on the historical stock prices of similar public entities
following a comparable period in their lives, of $3.00 per share. As of December
31, 1996, no options have been exercised or forfeited.
Warrants
The Company issued 750,000 warrants in connection with the $1,500,000 of
notes payable. The warrants entitle the holders to purchase one share of common
stock for $3.00; however, these warrants will be exchanged automatically for
750,000 Selling Securityholders' Warrants upon the close of the proposed public
offering, each of which will be identical to the Class A warrants (including the
exercise price of $6.50) included in the Offering Units. These warrants were
valued at $75,000 and recorded as notes payable discount, which is being
amortized over the term of the notes payable using the effective interest
method.
Proposed Initial Public Offering
The Company signed a letter of intent with an underwriter for a proposed
initial public offering (the "Offering") of 1,200,000 units ("Offering Units"),
consisting of one share of common stock, one Class A warrant and one Class B
warrant. Each Class A warrant is exercisable at any time during the five years
following the date of the Offering to purchase one share of common stock and one
Class B warrant for $6.50, subject to adjustment. Each Class B warrant is
exercisable at any time during the five years following the date of the Offering
to purchase one share of common stock for $8.75, subject to adjustment. The
Company may redeem such warrants at $.05 per warrant if the Company's stock
price meets certain price levels.
In connection with the public offering, the present holders of the
Company's common stock have been required to place 825,000 shares of common
stock in an escrow account to be released only upon the Company attaining
certain minimum earnings thresholds or the market price of the Company's common
stock meeting certain minimum levels. In the event the requirements for the
release of the escrow shares are attained, the Company will be required to
recognize compensation expense based on the share price at the date of release.
On March 31, 2001, all shares still held in escrow will be forfeited, which
shares will then be placed in the Company's treasury for cancellation thereof as
a contribution to capital.
12. COMMITMENTS:
Equity
The Company has agreed to sell to the underwriter, for nominal
consideration, the option to purchase up to 120,000 Units ("Unit Purchase
Option"), substantially identical to the Offering Units. The Unit Purchase
Option will be exercisable during the three-year period commencing two years
from the date of the Offering at an exercise price equal of $6.00 per Unit,
subject to adjustment. The Unit Purchase Option is not transferable for a period
of two years from the date of the Offering except to officers of the underwriter
or to members of the selling group. The exercise price and all other terms of
any common stock, Class A warrants or Class B warrants issuable to the
underwriter upon exercise of the Unit Purchase Option will be substantially
identical to those sold in the offering except that the warrants issued to the
underwriter are not subject to redemption by the Company.
During the five-year period starting November 27, 1996, in the event the
underwriter originates a financing or a merger, acquisition or transaction to
which the Company is a party, the underwriter will be entitled to receive a
finder's fee in consideration for origination of such transaction. The fee is
based on a percentage of the consideration paid in the transaction.
F-13
<PAGE> 73
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Royalties
The Company has entered into several different license and distribution
agreements (the "Agreements") with independent software developers. The
Agreements generally provide that in return for the Company's exclusive right to
produce, market and sell certain software products, the developers of these
products are entitled to royalties based on a percentage of the product's net
sales. If certain performance criteria are not met, such as selling a minimum
amount of units or paying a minimum amount of royalties, the Company may lose
its right for exclusivity or the agreement may terminate. The Agreements expire
through October 2000. Royalty expense for the years ended December 31, 1995 and
1996 was $72,547 and $90,307, respectively, and was included in the cost of
goods sold. Also, the Company was required to make certain up-front advances
related to royalties. The unamortized up-front advances, included in prepaid
expenses, were $8,008 and $62,169 at December 31, 1995 and 1996, respectively.
Leases
The Company is obligated under a long-term operating lease for its
corporate offices through the year 1999. Annual rent commitments under this
operating lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
----------------------------------------------------------
<S> <C>
1997................................................... $ 45,234
1998................................................... 46,421
1999................................................... 43,551
--------
$135,206
========
</TABLE>
Rent expense amounted to $3,804 and $45,738 for the years ended December
31, 1995 and 1996, respectively.
13. UNAUDITED PRO FORMA DATA:
The following pro forma data has been presented on the statements of
operations:
a. Income tax benefit (expense) has been presented as if the Company
was a C corporation. The income tax benefit (expense) was calculated
assuming an effective tax rate of 42%.
The pro forma tax benefit (expense) consists of:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Current benefit (expense):
Federal.................................. $(63,969) $ 62,746
State.................................... (15,051) 14,718
-------- -------
$(79,020) $ 77,464
======== =======
</TABLE>
Total pro forma provision for income taxes differs from the "expected"
pro forma tax expense of 34% principally due to state income taxes for all
periods and only partial benefit from the net operating loss for the year
ended December 31, 1996. A valuation allowance is required on the pro forma
deferred tax asset resulting from the net operating loss for the year ended
December 31, 1996 due to the uncertainty surrounding the realization of
such asset.
b. Net income (loss) per share is computed using the weighted average
number of common shares outstanding during each period after giving
retroactive effect to the recapitalization (see Note 1). As the
F-14
<PAGE> 74
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
conditions for release of the escrow shares (see Note 11) have not been met
nor will they be met upon the mere passage of time, the escrow shares have
been considered contingently issuable and, accordingly, have been excluded
from the weighted average number of common shares outstanding used for the
calculation of the primary net income (loss) per share. The escrow shares
are considered common stock equivalents in determining fully diluted net
income per share; however, in 1995 after giving effect to the higher level
of earnings required under the escrow agreement, the escrow shares have
been excluded from the computation as their effect would be antidilutive.
All common stock equivalents are excluded from the computation of net loss
per share as their effect would be antidilutive.
14. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Cash paid for:
Interest.............................................. $ 20,643
Schedule of non-cash investing and financing activities:
Issuance of stock options for services................ $ 18,600
Warrants issued in connection with notes payable...... $ 75,000
</TABLE>
F-15
<PAGE> 75
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS WITH RESPECT TO THE
OFFERING MADE HEREBY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL ANY
OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR
IN THE BUSINESS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 7
Use of Proceeds............................ 20
Dividend Policy............................ 21
Dilution................................... 22
Capitalization............................. 23
Selected Financial Data.................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 25
Business................................... 30
Management................................. 41
Certain Transactions....................... 45
Principal Stockholders..................... 46
Concurrent Offering........................ 49
Description of Securities.................. 51
Shares Eligible for Future Sale............ 54
Underwriting............................... 55
Legal Matters.............................. 57
Experts.................................... 57
Available Information...................... 57
Financial Statements....................... F-1
</TABLE>
------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE UNITS, 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.
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
PIRANHA LOGO
1,200,000 UNITS
------------------------
PROSPECTUS
------------------------
D.H. BLAIR INVESTMENT
BANKING CORP.
, 1997
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 76
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
[ALTERNATE PROSPECTUS COVER]
SUBJECT TO COMPLETION -- DATED FEBRUARY 18, 1997
PROSPECTUS
[PIRANHA LOGO]
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
750,000 REDEEMABLE CLASS A WARRANTS TO PURCHASE
750,000 SHARES OF COMMON STOCK
AND 750,000 REDEEMABLE CLASS B WARRANTS TO PURCHASE
750,000 SHARES OF COMMON STOCK
This Prospectus relates to 750,000 redeemable Class A Warrants (the "Class
A Warrants") of Piranha Interactive Publishing, Inc., a Nevada corporation (the
"Company"), issued to investors upon conversion of 750,000 such warrants issued
to such investors (the "Selling Securityholders") in a private placement by the
Company in November and December 1996 (the "Private Placement"), together with
the 750,000 redeemable Class B Warrants (the "Class B Warrants") issuable upon
exercise of the Class A Warrants, and 1,500,000 shares of Common Stock, $.001
par value, of the Company (the "Common Stock") underlying the Class A Warrants
and Class B Warrants. See "Selling Securityholders". Each Class A Warrant
entitles the holder to purchase, at an exercise price of $6.50, subject to
adjustment, one Class B Warrant and one share of Common Stock. Each Class B
Warrant entitles the holder to purchase, at an exercise price of $8.75, subject
to adjustment, one share of Common Stock. The Class A Warrants and the Class B
Warrants (collectively, the "Warrants") are exercisable at any time after
issuance through the fifth anniversary of the date of this Prospectus. The
Warrants are subject to redemption by the Company for $.05 per Warrant, upon 30
days' written notice, if the average closing bid price of the Common Stock
exceeds $9.10 per share with respect to the Class A Warrants and $12.25 per
share with respect to the Class B Warrants (subject to adjustment in each case)
for 30 consecutive business days ending within 15 days of the date the Warrants
are called for redemption. See "Description of Securities".
The securities offered by this Prospectus may be sold from time to time by
the Selling Securityholders, or by their transferees. All of the Class A
Warrants are expected to become freely tradeable commencing one year from the
date of this Prospectus, and the securities underlying such Class A Warrants are
expected to become freely tradeable commencing one year from the date of this
Prospectus. See "Concurrent Offering". The distribution of the securities
offered hereby may be effected in one or more transactions that may take place
on the over-the-counter market, including ordinary brokers' transactions,
privately negotiated transactions or through sales to one or more dealers for
resale of such securities as principals, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders.
The Selling Securityholders and intermediaries through whom such securities
are sold may be deemed "underwriters" within the meaning of the Securities Act
of 1933, as amended (the "Act"), with respect to the securities offered, and any
profits realized or commissions received may be deemed underwriting
compensation. The Company has agreed to indemnify the Selling Securityholders
against certain liabilities, including liabilities under the Act.
The Company will not receive any of the proceeds from the sale of
securities by the Selling Securityholders.
On December 23, 1996, the Company filed a Registration Statement under the
Act with respect to a public offering by the Company (the "Offering")
underwritten by D.H. Blair Investment Banking Corp. (the "Underwriter") of
1,200,000 Units, each Unit consisting of one share of Common Stock, one Class A
Warrant and one Class B Warrant, with the Securities and Exchange Commission
(the "Commission"). The Company received approximately $4,825,000 net proceeds
from the offering (assuming no exercise of the Underwriter's over-allotment
option) after payment of underwriting discounts and commissions and estimated
expenses of the offering. In the event the Warrants are fully exercised, the
Company will receive gross proceeds of $34,800,000 (assuming no exercise of the
Underwriter's over-allotment option or the Unit Purchase Option).
------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
IMMEDIATE DILUTION. SEE "RISK FACTORS" AND "DILUTION" BEGINNING ON PAGE 7 OF
THIS PROSPECTUS. THESE SECURITIES SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
<PAGE> 77
[ALTERNATE PROSPECTUS PAGE]
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
An aggregate of up to 750,000 Class A Warrants, 750,000 shares of Common
Stock, 750,000 Class B Warrants issuable upon exercise of the Class A Warrants
and 750,000 shares of Common Stock issuable upon exercise of the Class B
Warrants may be offered by certain securityholders who received their Class A
Warrants in connection with the Private Placement. See "Capitalization -- Bridge
Financing".
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering securities for resale
to the public. The Company will not receive any of the proceeds from the sale of
these securities. Except as described below, there are no material relationships
between any of the Selling Securityholders and the Company, nor have any such
material relationships existed within the past three years.
<TABLE>
<CAPTION>
NUMBER OF CLASS A WARRANTS
BENEFICIALLY OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD(1)
---------------------------------------------------------- ------------------------------
<S> <C>
Robert P. Adler........................................... 18,750
Brynde Berkowitz.......................................... 18,750
Richard & Beverly Berry, JTWROS........................... 12,500
Benjamin Bollag........................................... 31,250
Michael Bollag Charitable Remainder....................... 25,000
Unitrust
Jacob & Channah Borenstein, JTWROS........................ 25,000
Cohen Family Trust dtd 10/3/80............................ 18,750
Raymond D. Drapkin........................................ 25,000
Rose Eisen................................................ 37,500
Marvin Fischman........................................... 6,250
Yale M. Fishman........................................... 12,500
Robert Foise.............................................. 50,000
Joseph & Zipporah Friedman, JTWROS........................ 6,250
Paul Friedman............................................. 6,250
Barbara Grae.............................................. 12,500
Seth & Beth Grae, JTWROS.................................. 6,250
Melvin Katten............................................. 12,500
Jay Kestenbaum............................................ 25,000
Solomon Kurz.............................................. 12,500
Ben Lehrer................................................ 12,500
Lea & Alfred Mendelsohn, JTWROS........................... 6,250
Albert Milstein........................................... 25,000
Harey N. & Susan G. Mininberg, JTWROS..................... 25,000
Ruth Peyser............................................... 12,500
Marc Roberts.............................................. 12,500
The Rubin Family Foundation, Inc.......................... 18,750
Andrew Schonzeit.......................................... 12,500
E. Donald Shapiro......................................... 12,500
Dvora & Tali Skoczylas, JTWROS............................ 12,500
Miriam Stern.............................................. 12,500
Gary J. Strauss........................................... 18,750
Joel Wolff................................................ 18,750
Wolfson Equities.......................................... 50,000
</TABLE>
A-2
<PAGE> 78
[ALTERNATE PROSPECTUS PAGE]
<TABLE>
<CAPTION>
NUMBER OF CLASS A WARRANTS
BENEFICIALLY OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD (1)
---------------------------------------------------------- ------------------------------
<S> <C>
David & Bonnie Anfang, JTWROS............................. 6,250
David James Brown......................................... 50,000
Thomas Dupree, Jr......................................... 25,000
Israel & Joyce Goldberg, JTWROS........................... 6,250
Gloria Maura.............................................. 12,500
Roy & Marlena Schaeffer, JTWROS........................... 12,500
E. Donald Shapiro......................................... 12,500
E&M RP Trust.............................................. 12,500
----------
Total................................................... 750,000
</TABLE>
- ---------------
(1) Does not include shares of Common Stock and Class B Warrants issuable upon
exercise of the Class A Warrants and the shares of Common Stock issuable
upon exercise of the Class B Warrants. The Selling Securityholders have
agreed not to exercise the Class A Warrants being registered hereby for a
period of one year from the date hereof.
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to brokerdealers who may purchase securities as
principals and thereafter sell the securities from time to time in the
over-the-counter market, in negotiated transactions or a combination of such
methods of sale. Such broker-dealers, if any, may receive compensation in the
form of discounts, concessions or commissions from the Selling Securityholders
and/or the purchasers for whom such broker-dealers act as agents or to whom they
may sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
Under applicable rules and regulations under the Securities Exchange Act of
1934 ("Exchange Act"), any person engaged in the distribution of the Selling
Securityholders' Warrants may not simultaneously engage in market making
activities with respect to any securities of the Company for a period of up to
five business days prior to the commencement of such distribution. Accordingly,
in the event the Underwriter of the Company's offering or D.H. Blair & Co. Inc.
("Blair & Co.") is engaged in a distribution of the Selling Securityholders'
Warrants, neither of such firms will be able to make a market in the Company's
securities during the applicable restrictive period. However, neither the
Underwriter nor Blair & Co. have agreed to nor are either of them obliged to act
as broker/dealer in the sale of the Selling Securityholders' Warrants and the
Selling Securityholders may be required, and in the event Blair is a
marketmaker, will likely be required, to sell such securities through another
broker/dealer. In addition, each Selling Securityholder desiring to sell
Warrants will be subject to the applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation, Regulation
M, which provisions may limit the timing of the purchases and sales of shares of
the Company's securities by such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
A-3
<PAGE> 79
[ALTERNATE PROSPECTUS PAGE]
PLAN OF DISTRIBUTION
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions or a combination of such methods of sale. Sales
may be made at fixed prices which may be changed, at market prices prevailing at
the time of sale, or at negotiated prices.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase securities as
principals and thereafter sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions, or commissions from the Selling Securityholders and/or the
purchasers for whom such broker-dealers act as agents or to whom they may sell
as principals or otherwise (which compensation as to a particular broker-dealer
may exceed customary commissions).
Each Selling Securityholder has agreed (i) not to sell, transfer, or
otherwise dispose of the Selling Securityholders' Warrants and (ii) not to
exercise the Selling Securityholders' Warrants for a period of one year after
the closing of this Offering. Purchasers of the Selling Securityholders'
Warrants will not be subject to such restrictions.
Under applicable rules and regulations under the Securities Exchange Act of
1934 ("Exchange Act"), any person engaged in the distribution of the Selling
Securityholders' Warrants may not simultaneously engage in market-making
activities with respect to any securities of the Company for a period of up to
five business days prior to the commencement of such distribution. Accordingly,
in the event the Underwriter of the Company's offering or D.H. Blair & Co. Inc.
("Blair & Co.") is engaged in a distribution of the Selling Securityholders'
Warrants, neither of such firms will be able to make a market in the Company's
securities during the applicable restrictive period. However, neither the
Underwriter nor Blair & Co. have agreed to nor are either of them obliged to act
as broker/dealer in the sale of the Selling Securityholders' Warrants and the
Selling Securityholders may be required, and in the event Blair & Co. is a
market-maker, will likely be required, to sell such securities through another
broker/dealer. In addition, each Selling Securityholder desiring to sell
Warrants will be subject to the applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M, which provisions may limit the timing of the purchases and sales of shares of
the Company's securities by such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
A-4
<PAGE> 80
[ALTERNATE PROSPECTUS PAGE]
CONCURRENT OFFERING
On December 23, 1996, the Company filed a Registration Statement under the
Securities Act with respect to an underwritten offering of 1,200,000 Units by
the Company, each Unit consisting of one share of Common Stock, one Class A
Warrant and one Class B Warrant.
A-5
<PAGE> 81
[ALTERNATE PROSPECTUS BACK COVER]
- ---------------------------------------------------------
- ---------------------------------------------------------
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 AND REPRESENTATIONS MUST NOT BE RELIED UPON HAS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SECURITYHOLDERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR ANY OFFER TO BUY ANY SECURITY OTHER THAN
THE WARRANTS AND SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE WARRANTS
AND SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED TO DO SO, 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............................. 7
Use of Proceeds.......................... 20
Dividend Policy.......................... 21
Dilution................................. 22
Capitalization........................... 23
Selected Financial Data.................. 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 25
Business................................. 30
Management............................... 41
Certain Transactions..................... 45
Principal Stockholders................... 46
Selling Securityholders and Plan of
Distribution...........................
Concurrent Offering...................... 49
Description of Securities................ 51
Shares Eligible For Future Sale.......... 54
Legal Matters............................ 57
Experts.................................. 57
Available Information.................... 57
Financial Statements..................... F-1
</TABLE>
=========================================================
=========================================================
PIRANHA LOGO
PIRANHA INTERACTIVE
PUBLISHING, INC.(R)
750,000 REDEEMABLE
CLASS A WARRANTS
750,000 REDEEMABLE
CLASS B WARRANTS
1,500,000 SHARES OF
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1997
=========================================================
<PAGE> 82
PART II TO FORM SB-2
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 12 of the Company's Articles of Incorporation and Article X of the
Company's Bylaws limit, to the fullest extent permitted by the Nevada General
Corporation law, as amended ("NGCL"), Directors' personal liability to the
Company or its stockholders for monetary damages or breach of fiduciary duty.
Section 78.751 of the NGCL enables a corporation to eliminate or limit personal
liability of members of its board of directors for violations of their fiduciary
duties. However, Nevada law does not permit the elimination of a director's
liability for engaging in any transaction from which the director derived an
improper personal benefit or for unlawfully paying a distribution. The statute
has no effect on the availability of equitable remedies, such as an injunction
or rescission, for breach of fiduciary duty.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses of the
Company in connection with the Offering other than underwriting discounts.
<TABLE>
<S> <C>
SEC Registration Fee.................................................... $ 16,719
NASD Filing Fee......................................................... 6,018
Nasdaq Listing Fee...................................................... 15,000
Legal Fees and Expenses*................................................ 110,000
Accounting Fees and Expenses*........................................... 45,000
Representative's Non-accountable Expense Allowance**.................... 180,000
Printing and Engraving Expenses*........................................ 80,000
Blue Sky Fees and Expenses*............................................. 30,000
Miscellaneous*.......................................................... 92,263
--------
Total.............................................................. $575,000
========
</TABLE>
- ---------------
* Estimated.
** $207,000 if Over-allotment option is exercised in full.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the period commencing November 14, 1994, the Company sold or issued
the securities listed below without registration under the Securities Act of
1933, as amended.
On November 15, 1994, the Company issued (i) 347,489 shares of Common Stock
to Timothy M. Brannan for aggregate consideration of $1,436, (ii) 241,984 shares
of Common Stock to J. Wade Stallings II for aggregate consideration of $1,000,
(iii) 241,984 shares of Common Stock to Keith P. Higginson for aggregate
consideration of $1,000 and (iv) 136,479 shares of Common Stock to Douglas M.
Brannan for aggregate consideration of $564.
On January 1, 1995, the Company issued (i) 136,479 shares of Common Stock
to Wyndi D. Ballard for aggregate consideration of $564, (ii) 136,479 shares of
Common Stock to Richard J. Leitner for aggregate consideration of $564, (iii)
68,240 shares of Common Stock to George W. Gregg for aggregate consideration of
$282 and (iv) 27,344 shares of Common Stock to Karen A. Timmons for aggregate
consideration of $113.
On December 13, 1996, the Company granted an option to purchase 12,000
shares of Common Stock to Milton Cohen, pursuant to a Consulting Agreement dated
July 1, 1996. The per shares exercise price of the options is $5.00.
On November 27, and December 5, 1996, the Company issued an aggregate of 30
Units, each Unit consisting of a Note for $50,000 and warrants, convertible on
closing of this Offering into Class A Warrants, to
II-1
<PAGE> 83
purchase 25,000 shares of Class A Common Stock and one Class B Warrant
exercisable to purchase one share of Class A Common Stock. The aggregate
consideration received by the Company for the Units was $1,500,000, less
placement fees and Placement Agent expenses. All of the Units were sold to
accredited investors, all of whom are the Selling Securityholders identified in
the Alternate Prospectus contained in this Registration Statement.
Unless otherwise noted herein, the issuances of securities in the
transactions described above were deemed to be exempt from registration under
the Act either pursuant to the exemption from registration contained in Section
4(2) thereof, or under the provisions of Regulation D or Rule 701 promulgated
under the Act. Restrictions have been imposed on the resale of such securities,
including the placement of legends thereon noting such restrictions, and written
disclosure of such restrictions were made prior to issuance of the securities.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------ ------------------------------------------------------------ -------------------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement
3.1 -- Articles of Incorporation of Registrant +
3.2 -- Bylaws of Registrant +
4.1 -- Form of Certificate for Common Stock
4.2 -- Form of Class A Warrant
4.3 -- Form of Class B Warrant
4.4 -- Form of Bridge Note +
4.5 -- Unit Purchase Option
4.6 -- Form of Bridge Warrant +
4.7 -- Voting Trust Agreement dated November 13, 1996, among +
certain stockholders of the Registrant
4.8 -- Irrevocable Proxy Agreement dated November 13, 1996, among +
certain stockholders of the Registrant
4.9 -- Form of Warrant Agreement
5.1 -- Opinion and Consent of Squire, Sanders & Dempsey L.L.P.
10.1 -- Form of Employment Agreement between Registrant and +
Executive Officers
10.2 -- 1996 Stock Option Plan +
10.3 -- Software Distribution Agreement between Tech Data and +*
Registrant, dated September 23, 1996
10.4 -- Computer Software Distribution Agreement between Navarre +*
Corporation and Registrant, dated January 8, 1996
10.5 -- Ingram Micro Start-up Agreement between Ingram Micro Inc. +*
and Registrant, dated March 11, 1996
10.6 -- Vendor Agreement between Registrant and American Software +*
and Hardware Distributors, Inc., dated April 23, 1996
10.7 -- License Agreement between Registrant and Istvan Pely dated +*
October 20, 1995, as amended dated April 12, 1996
10.8 -- Software Manufacturing and Distribution Agreement between +*
Registrant and Zane Publishing, Inc., dated August 30, 1995,
as amended dated March 29, 1996, as further amended November
22, 1996
</TABLE>
II-2
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------ ------------------------------------------------------------ -------------------
<C> <C> <S> <C>
10.9 -- License Agreement between Registrant and Cambrix Publishing, +*
Inc., dated May 21, 1996
10.10 -- Lease Agreement between Registrant and Phoenix Newspapers, +
Inc., dated December 15, 1995
10.11 -- Merger and Acquisition Agreement between Registrant and D.H. +
Blair Investment Banking Corp., dated November 27, 1996
11.1 -- Computation of Per Share Earnings
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Squire, Sanders & Dempsey L.L.P. Included in Exhibit
5.1
24.1 -- Powers of Attorney +
27.1 -- Financial Data Schedule
99.1 -- Consent of Ian D. Berman +
99.2 -- Consent of Michael D. Flink +
</TABLE>
- ---------------
* This document has been filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment. An excised
version of the documents is being filed as an exhibit hereto.
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
ITEM 28. UNDERTAKINGS.
1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission ("SEC") such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act, and will be governed by the final
adjudication of such issue.
2. The undersigned small business issuer will: (i) for determining any
liability under the Act, treat the information omitted from the form of
prospectus filed as a part of this Registration Statement in reliance upon Rule
430A and contained in a form or prospectus filed by the small business issuer
under Rule 424(b)(1), or (4) or 497(h) under the Act as part of this
Registration Statement as of the time the SEC declared it effective and (ii) for
determining any liability under the Act, treat each post-effective amendment
that contains a form of prospectus as a new registration statement, and that
offering of the securities at that time as the initial bona fide offering of
those securities.
3. The undersigned small business issuer 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 Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement. Notwithstanding
II-3
<PAGE> 85
the foregoing, any increase or decrease in volume of securities
offered (if the total dollar volume of securities offered would
not exceed that which was registered) and any deviations from
the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in
the volume and price represent no more that a 20% change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the 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.
4. The undersigned small business issuer will provide to the underwriter at
the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-4
<PAGE> 86
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 of filing on Form SB-2 and authorized this amendment No. 1
to its registration statement to be signed on its behalf by the undersigned, in
the City of Phoenix and State of Arizona on February 13, 1997.
PIRANHA INTERACTIVE PUBLISHING, INC.,
a Nevada corporation
By: /s/ Timothy M. Brannan
-------------------------------------
Timothy M. Brannan
Chairman of the Board and President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------- ----------------------------- -------------------
<S> <C> <C>
/s/ Timothy M. Brannan Chairman of the Board and February 13, 1997
- ------------------------------------------- President (Principal
Timothy M. Brannan Executive Officer)
/s/ Keith P. Higginson Vice President, Chief February 13, 1997
- ------------------------------------------- Financial Officer and
Keith P. Higginson Director (Principal Financial
and Accounting Officer)
/s/ J. Wade Stallings, II Vice President and Director February 13, 1997
- -------------------------------------------
J. Wade Stallings, II
</TABLE>
II-5
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------ ------------------------------------------------------------ -------------------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement
3.1 -- Articles of Incorporation of Registrant +
3.2 -- Bylaws of Registrant +
4.1 -- Form of Certificate for Common Stock
4.2 -- Form of Class A Warrant
4.3 -- Form of Class B Warrant
4.4 -- Form of Bridge Note +
4.5 -- Unit Purchase Option
4.6 -- Form of Bridge Warrant +
4.7 -- Voting Trust Agreement dated November 13, 1996, among +
certain stockholders of the Registrant
4.8 -- Irrevocable Proxy Agreement dated November 13, 1996, among +
certain stockholders of the Registrant
4.9 -- Form of Warrant Agreement
5.1 -- Opinion and Consent of Squire, Sanders & Dempsey L.L.P.
10.1 -- Form of Employment Agreement between Registrant and +
Executive Officers
10.2 -- 1996 Stock Option Plan +
10.3 -- Software Distribution Agreement between Tech Data and *+
Registrant, dated September 23, 1996
10.4 -- Computer Software Distribution Agreement between Navarre *+
Corporation and Registrant, dated January 8, 1996
10.5 -- Ingram Micro Start-up Agreement between Ingram Micro Inc. *+
and Registrant, dated March 11, 1996
10.6 -- Vendor Agreement between Registrant and American Software *+
and Hardware Distributors, Inc., dated April 23, 1996
10.7 -- License Agreement between Registrant and Istvan Pely dated *+
October 20, 1995, as amended dated April 12, 1996
10.8 -- Software Manufacturing and Distribution Agreement between *+
Registrant and Zane Publishing, Inc., dated August 30, 1995,
as amended dated March 29, 1996, as further amended November
22, 1996
10.9 -- License Agreement between Registrant and Cambrix Publishing, *+
Inc., dated May 21, 1996
10.10 -- Lease Agreement between Registrant and Phoenix Newspapers, +
Inc., dated December 15, 1995
10.11 -- Merger and Acquisition Agreement between Registrant and D.H. +
Blair Investment Banking Corp., dated November 27, 1996
11.1 -- Computation of Per Share Earnings
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Squire, Sanders & Dempsey L.L.P. Included in Exhibit
5.1
</TABLE>
II-6
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------ ------------------------------------------------------------ -------------------
<C> <C> <S> <C>
24.1 -- Powers of Attorney +
27.1 -- Financial Data Schedule
99.1 -- Consent of Ian D. Berman +
99.2 -- Consent of Michael D. Flink +
</TABLE>
- ---------------
* This document has been filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment. An excised
version of the documents is being filed as an exhibit hereto.
+ Previously filed.
II-7
<PAGE> 1
Exhibit 1.1
1,200,000 Units
(each Unit consisting of (i) one share of Common
Stock, par value $.001 per share; (ii) one redeemable
Class A warrant to purchase
one share of Common Stock and one redeemable Class B warrant
and (iii) one redeemable Class B warrant)
PIRANHA INTERACTIVE PUBLISHING, INC.
UNDERWRITING AGREEMENT
D.H. Blair Investment Banking Corp. ___________, 1997
44 Wall Street
New York, New York 10005
PIRANHA INTERACTIVE PUBLISHING, INC., a Nevada corporation
(the "Company"), proposes to issue and sell to D.H. Blair Investment Banking
Corp. (the "Underwriter") subject to the terms and conditions of this
Underwriting Agreement (the "Agreement"), an aggregate of 1,200,000 Units, each
unit being hereinafter referred to as a "Unit" and consisting of (i) one shares
of Common Stock, par value $.001 per share, ("Shares"), (ii) one redeemable
Class A warrant ("Class A Warrant") to purchase one share of Common Stock and
one redeemable Class B warrant ("Class B Warrant") at a price of $6.50 from ,
1997 to _______, 2002 and (iii) one Class B Warrant exercisable to purchase one
share of Common Stock for $8.75 from _______, 1997 to _______, 2002. The Class A
Warrants and Class B Warrants are collectively referred to as the "Warrants".
The Warrants are subject to redemption, in certain instances commencing one year
from the date of this Agreement. In addition, the Company proposes to grant to
the Underwriter, the option referred to in Section 2(b) to purchase all or any
part of an aggregate of 180,000 additional Units. Unless the context otherwise
indicates, the term "Units" shall include the 180,000 additional Units referred
to above.
The aggregate of 1,200,000 Units to be sold by the Company,
together with all or any part of the 180,000 Units which the Underwriter has the
option to purchase, and the Shares and the Warrants comprising such Units, are
herein called the "Units." The Common Stock of the Company to be outstanding
after giving effect to the sale of the Shares is herein called the "Common
Stock." The Shares and Warrants included in the Units (including the Units which
the Underwriter has the option to purchase) are herein collectively called the
"Securities."
You have advised the Company that you desire to purchase the
Units. The Company confirms the agreements made by it with respect to the
purchase of the Units by you as follows:
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriter that:
<PAGE> 2
(a) A registration statement (File No. 333-18605) on Form SB-2
relating to the public offering of the Units, including a form of prospectus
subject to completion, copies of which have heretofore been delivered to you,
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission under the Act
and one or more amendments to such registration statement may have been so
filed. After the execution of this Agreement, the Company will file with the
Commission either (i) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act,
either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Units that shall identify the Preliminary
Prospectus (as hereinafter defined) that it supplements containing such
information as is required or permitted by Rules 434, 430A and 424(b) under the
Act or (B) if the Company does not rely on Rule 434 under the Act a prospectus
in the form most recently included in an amendment to such registration
statement (or, if no such amendment shall have been filed, in such registration
statement), with such changes or insertions as are required by Rule 430A under
the Act or permitted by Rule 424(b) under the Act and in the case of either
clause (i)(A) or (i)(B) of this sentence, as has been provided to and approved
by the Underwriter prior to the execution of this Agreement, or (ii) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Underwriter prior to the execution of this
Agreement.
As used in this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and including
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means (A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Units that is first filed pursuant to Rule 424(b)(7) under
the Act, together with the Preliminary Prospectus identified therein that such
Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act or (C) if the Company does not rely on Rule 434 under the Act and
if no prospectus is required to be filed pursuant to said Rule 424(b), such term
means the prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be; and the term "Term Sheet" means
any term sheet that satisfies the requirements of Rule 434 under the Act. Any
reference to the "date" of a Prospectus that includes a Term Sheet shall mean
the date of such Term Sheet.
-2-
<PAGE> 3
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. At the time the Registration
Statement becomes effective and at all times subsequent thereto up to and on the
Closing Date (as hereinafter defined) or the Option Closing Date, as the case
may be, (i) the Registration Statement and Prospectus will in all respects
conform to the requirements of the Act and the Rules and Regulations; and (ii)
neither the Registration Statement nor the Prospectus will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make statements therein not misleading; provided,
however, that the Company makes no representations, warranties or agreements as
to information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of the Underwriter specifically for use
in the preparation thereof. It is understood that the statements set forth in
the Prospectus on page 2 with respect to stabilization, under the heading
"Underwriting" and the identity of counsel to the Underwriter under the heading
"Legal Matters" constitute the only information furnished in writing by or on
behalf of the several Underwriter for inclusion in the Registration Statement
and Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, with full power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus and is
duly qualified to do business as a foreign corporation and is in good standing
in all other jurisdictions in which the nature of its business or the character
or location of its properties requires such qualification, except where failure
to so qualify will not materially affect the Company's business, properties or
financial condition.
(d) The authorized, issued and outstanding capital stock of
the Company as of December 31, 1996 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued and are
fully paid and non-assessable; except as set forth in the Prospectus, no
options, warrants, or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company have been granted or entered into by the
Company; and the capital stock conforms to all statements relating thereto
contained in the Registration Statement and Prospectus.
(e) The Units and the Shares are duly authorized, and when
issued and delivered pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. Neither the filing of the Registration
Statement nor the offering or sale of the Units as contemplated in this
Agreement gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common Stock,
except as described in the Registration Statement.
The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid
-3-
<PAGE> 4
and legally binding obligations of the Company enforceable in accordance with
their terms and entitled to the benefits provided by the warrant agreement
pursuant to which such Warrants are to be issued (the "Warrant Agreement"),
which will be substantially in the form filed as an exhibit to the Registration
Statement. The shares of Common Stock issuable upon exercise of the Warrants
have been reserved for issuance upon the exercise of the Warrants and when
issued in accordance with the terms of the Warrants and Warrant Agreement, will
be duly and validly authorized, validly issued, fully paid and non-assessable
and free of preemptive rights and no personal liability will attach to the
ownership thereof. The Warrant Agreement has been duly authorized and, when
executed and delivered pursuant to this Agreement, will have been duly executed
and delivered and will constitute the valid and legally binding obligation of
the Company enforceable in accordance with its terms. The Warrants and the
Warrant Agreement conform to the respective descriptions thereof in the
Registration Statement and Prospectus.
The Shares and the Warrants contained in the Unit Purchase Option have
been duly authorized and, when duly issued and delivered, such Warrants will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms and entitled to the benefits provided by the Unit
Purchase Option. The Shares included in the Unit Purchase Option (and the shares
of Common Stock issuable upon exercise of such Warrants) when issued and sold,
will be duly authorized, validly issued, fully paid and non-assessable and free
of preemptive rights and no personal liability will attach to the ownership
thereof.
(f) This Agreement, the Unit Purchase Option, the M/A
Agreement, the Consulting Agreement and the Escrow Agreement have been duly and
validly authorized, executed and delivered by the Company. The Company has full
power and lawful authority to authorize, issue and sell the Units to be sold by
it hereunder on the terms and conditions set forth herein, and no consent,
approval, authorization or other order of any governmental authority is required
in connection with such authorization, execution and delivery or with the
authorization, issue and sale of the Units or the Unit Purchase Option, except
such as may be required under the Act or state securities laws.
(g) Except as described in the Prospectus, the Company is not
in violation, breach or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a breach or violation of, any of
the terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any of the
property or assets of the Company pursuant to the terms of any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
any of the property or assets of the Company is subject, nor will such action
result in any violation of the provisions of the articles of incorporation or
the by-laws of the Company, as amended, or any statute or any order, rule or
regulation applicable to the Company of any court or of any regulatory authority
or other governmental body having jurisdiction over the Company.
-4-
<PAGE> 5
(h) Subject to the qualifications stated in the Prospectus,
the Company has good and marketable title to all properties and assets described
in the Prospectus as owned by it, free and clear of all liens, charges,
encumbrances or restrictions, except such as are not materially significant or
important in relation to its business; all of the material leases and subleases
under which the Company is the lessor or sublessor of properties or assets or
under which the Company holds properties or assets as lessee or sublessee as
described in the Prospectus are in full force and effect, and, except as
described in the Prospectus, the Company is not in default in any material
respect with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company as lessor, sublessor, lessee or sublessee under any of the leases or
subleases mentioned above, or affecting or questioning the right of the Company
to continued possession of the leased or subleased premises or assets under any
such lease or sublease except as described or referred to in the Prospectus; and
the Company owns or leases all such properties described in the Prospectus as
are necessary to its operations as now conducted and, except as otherwise stated
in the Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Coopers & Lybrand LLP, independent auditors, who have
given their reports on certain financial statements filed and to be filed with
the Commission as a part of the Registration Statement, which are incorporated
in the Prospectus, are with respect to the Company, independent public
accountants as required by the Act and the Rules and Regulations.
(j) The financial statements, and Schedules together with
related notes, set forth in the Prospectus (or if the Prospectus is not in
existence, the most recent Preliminary Prospectus) or the Registration Statement
present fairly the financial position and results of operations and changes in
cash flow position of the Company on the basis stated in the Registration
Statement, at the respective dates and for the respective periods to which they
apply. Said statements and Schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a basis
which is consistent during the periods involved. The information set forth under
the captions "Dilution", "Capitalization", and "Selected Financial Data" in the
Prospectus fairly present, on the basis stated in the Prospectus, the
information included therein.
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), the Company has not
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which is material to the business of the Company, and there
has not been any change in the capital stock of, or any incurrence of short-term
or long-term debt by, the Company or any issuance of options, warrants or other
rights to purchase the capital stock of the Company or any adverse change or any
development involving, so far as the Company can now reasonably foresee a
prospective adverse change in the condition (financial or other), net worth,
results of operations, business, key personnel or properties of it which would
be material to the business or financial condition of the Company and the
Company has not become a party
-5-
<PAGE> 6
to, and neither the business nor the property of the Company has become the
subject of, any material litigation whether or not in the ordinary course of
business.
(l) Except as set forth in the Prospectus, there is not now
pending or, to the knowledge of the Company, threatened, any action, suit or
proceeding to which the Company is a party before or by any court or
governmental agency or body, which might result in any material adverse change
in the condition (financial or other), business prospects, net worth, or
properties of the Company, nor are there any actions, suits or proceedings
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race; and no labor disputes involving the employees of the
Company exist or are imminent which might be expected to adversely affect the
conduct of the business, property or operations or the financial condition or
results of operations of the Company.
(m) Except as disclosed in the Prospectus, the Company has
filed all necessary federal, state and foreign income and franchise tax returns
and has paid all taxes shown as due thereon; and there is no tax deficiency
which has been or to the knowledge of the Company might be asserted against the
Company.
(n) The Company has sufficient licenses, permits and other
governmental authorizations currently required for the conduct of its business
or the ownership of its properties as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, service marks,
trade-names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of such business and had not received any
notice of conflict with the asserted rights of others in respect thereof. To the
best knowledge of the Company, none of the activities or business of the Company
are in violation of, or cause the Company to violate, any law, rule, regulation
or order of the United States, any state, county or locality, or of any agency
or body of the United States or of any state, county or locality, the violation
of which would have a material adverse impact upon the condition (financial or
otherwise), business, property, prospective results of operations, or net worth
of the Company.
(o) The Company has not, directly or indirectly, at any time
(i) made any contributions to any candidate for political office, or failed to
disclose fully any such contribution in violation of law or (ii) made any
payment to any state, federal or foreign governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or
other taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Units to the Underwriter hereunder
will have been fully paid or provided for by the Company and all laws imposing
such taxes will have been fully complied with.
-6-
<PAGE> 7
(q) All contracts and other documents of the Company which
are, under the Rules and Regulations, required to be filed as exhibits to the
Registration Statement have been so filed.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Units hereby.
(s) The Company has no subsidiaries.
(t) The Company has not entered into any agreement pursuant to
which any person is entitled either directly or indirectly to compensation from
the Company for services as a finder in connection with the proposed public
offering.
(u) Except as previously disclosed in writing by the Company
to the Underwriter, no officer, director or stockholder of the Company has any
affiliation or association with any member of the National Association of
Securities Dealers Inc. ("NASD").
(v) The Company is not, and upon receipt of the proceeds from
the sale of the Units will not be, an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(w) The Company has not distributed and will not distribute
prior to the First Closing Date any offering material in connection with the
offering and sale of the Units other than the Preliminary Prospectus,
Prospectus, the Registration Statement or the other materials permitted by the
Act, if any.
(x) The conditions for use of Form SB-2, as set forth in the
General Instructions thereto, have been satisfied.
(y) There are no business relationships or related-party
transactions of the nature described in Item 404 of Regulation S-B2 involving
the Company, the Subsidiaries and any person described in such Item that are
required to be disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and that have not been so
disclosed.
2. Purchase, Delivery and Sale of the Units.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties, and agreements herein
contained, the Company agrees to issue and sell to the Underwriter, and the
Underwriter agrees to buy from the Company
-7-
<PAGE> 8
at $5.00 per Unit, at the place and time hereinafter specified of 1,200,000
Units (the "First Units").
Delivery of the First Units against payment therefor shall take place
at the offices of D.H. Blair Investment Banking Corp., 44 Wall Street, New York,
N.Y. (or at such other place as may be designated by agreement between you and
the Company) at 10:00 a.m., New York time, on _________, 1997, or at such later
time and date as you may designate, such time and date of payment and delivery
for the First Units being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option to the Underwriter (or, at
its option, to the Representative, individually) to purchase all or any part of
an aggregate of an additional 180,000 Units at the same price per Unit as the
Underwriter shall pay for the First Units being sold pursuant to the provisions
of subsection (a) of this Section 2 (such additional Units being referred to
herein as the "Option Units"). This option may be exercised within 45 days after
the effective date of the Registration Statement upon notice by the Underwriter
to the Company advising as to the amount of Option Units as to which the option
is being exercised, the names and denominations in which the certificates for
such Option Units are to be registered and the time and date when such
certificates are to be delivered. Such time and date shall be determined by the
Underwriter but shall not be earlier than four nor later than ten full business
days after the exercise of said option, nor in any event prior to the First
Closing Date, and such time and date is referred to herein as the "Option
Closing Date." Delivery of the Option Units against payment therefor shall take
place at the offices of D.H. Blair Investment Banking Corp., 44 Wall Street, New
York, N.Y. The Option granted hereunder may be exercised only to cover
overallotments in the sale by the Underwriter of First Units referred to in
subsection (a) above. In the event the Company declares or pays a dividend or
distribution on its Common Stock, whether in the form of cash, shares of Common
Stock or any other consideration, prior to the Option Closing Date, such
dividend or distribution shall also be paid on the Option Units on the Option
Closing Date.
(c) The Company will make the certificates for the securities
comprising the Units to be purchased by the Underwriter hereunder available to
you for checking at least two full business days prior to the First Closing Date
or the Option Closing Date (which are collectively referred to herein as the
"Closing Dates"). The certificates shall be in such names and denominations as
you may request, at least two full business days prior to the Closing Dates.
Time shall be of the essence and delivery at the time and place specified in
this Agreement is a further condition to the obligations of each Underwriter.
Definitive certificates in negotiable form for the Units to be
purchased by the Underwriter hereunder will be delivered by the Company to you
against payment of the purchase price by you, by certified or bank cashier's
checks or, at the Underwriter's option, by wire transfer in New York Clearing
House funds, payable to the order of the Company.
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<PAGE> 9
In addition, in the event the Underwriter exercises the option
to purchase from the Company all or any portion of the Option Units pursuant to
the provisions of subsection (b) above, payment for such Units shall be made to
or upon the order of the Company by certified or bank cashier's checks payable
in New York Clearing House funds at the offices of D.H. Blair Investment Banking
Corp., at the time and date of delivery of such Units as required by the
provisions of subsection (b) above, against receipt of the certificates for such
Units by the Underwriter registered in such names and in such denominations as
the Representative may request.
It is understood that the Underwriter proposes to offer the
Units to be purchased hereunder to the public upon the terms and conditions set
forth in the Registration Statement, after the Registration Statement becomes
effective.
3. Covenants of the Company. The Company covenants and agrees
with the Underwriter that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective as promptly as possible. If required,
the Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. Upon notification from the Commission that the Registration Statement has
become effective, the Company will so advise you and will not at any time,
whether before or after the effective date, file the Prospectus, Term Sheet or
any amendment to the Registration Statement or supplement to the Prospectus of
which you shall not previously have been advised and furnished with a copy or to
which you or your counsel shall have objected in writing or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to the
later of (A) the completion by the Underwriter of the distribution of the Units
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement shall have become or been declared effective)
and (B) 25 days after the date on which the Registration Statement shall have
become or been declared effective, the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus which, in your opinion, may be necessary or
advisable in connection with the distribution of the Units.
As soon as the Company is advised thereof, the Company will
advise you, and confirm the advice in writing, of the receipt of any comments of
the Commission, of the effectiveness of any post-effective amendment to the
Registration Statement, of the filing of any supplement to the Prospectus or any
amended Prospectus, of any request made by the Commission for amendment of the
Registration Statement or for supplementing of the Prospectus or for additional
information with respect thereto, of the issuance by the Commission or any state
or regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Units for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its
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<PAGE> 10
best efforts to prevent the issuance of any such order, and, if issued, to
obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company authorizes
the Underwriter and dealers to use the Prospectus in connection with the sale of
the Units for such period as in the opinion of counsel to the Underwriter the
use thereof is required to comply with the applicable provisions of the Act and
the Rules and Regulations. In case of the happening, at any time within such
period as a Prospectus is required under the Act to be delivered in connection
with sales by an underwriter or dealer of any event of which the Company has
knowledge and which materially affects the Company or the securities of the
Company, or which in the opinion of counsel for the Company or counsel for the
Underwriter should be set forth in an amendment of the Registration Statement or
a supplement to the Prospectus in order to make the statements therein not then
misleading, in light of the circumstances existing at the time the Prospectus is
required to be delivered to a purchaser of the Units or in case it shall be
necessary to amend or supplement the Prospectus to comply with law or with the
Rules and Regulations, the Company will notify you promptly and forthwith
prepare and furnish to you copies of such amended Prospectus or of such
supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or supplemented,
will not contain any untrue statement of a material fact or omit to state any
material facts necessary in order to make the statements in the Prospectus, in
the light of the circumstances under which they are made, not misleading. The
preparation and furnishing of any such amendment or supplement to the
Registration Statement or amended Prospectus or supplement to be attached to the
Prospectus shall be without expense to the Underwriter, except that in case the
Underwriter is required, in connection with the sale of the Units to deliver a
Prospectus nine months or more after the effective date of the Registration
Statement, the Company will upon request of and at the expense of the
Underwriter, amend or supplement the Registration Statement and Prospectus and
furnish the Underwriter with reasonable quantities of prospectuses complying
with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934 and the rules and
regulations thereunder in connection with the offering and issuance of the
Units.
(b) The Company will use its best efforts to qualify to
register the Units for sale under the securities or "blue sky" laws of such
jurisdictions as the Underwriter may designate and will make such applications
and furnish such information as may be required for that purpose and to comply
with such laws, provided the Company shall not be required to qualify as a
foreign corporation or a dealer in securities or to execute a general consent of
service of process in any jurisdiction in any action other than one arising out
of the offering or sale of the Units. The Company will, from time to time,
prepare and file such statements and reports as are or may be required to
continue such qualification in effect for so long a period as the Underwriter
may reasonably request.
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<PAGE> 11
(c) If the sale of the Units provided for herein is not
consummated for any reason caused by the Company, the Company shall pay all
costs and expenses incident to the performance of the Company's obligations
hereunder, including but not limited to, all of the expenses itemized in Section
8, including the accountable out-of-pocket expenses of the Underwriter.
(d) The Company will use its best efforts to (i) cause a
registration statement under the Securities Exchange Act of 1934 to be declared
effective concurrently with the completion of this offering and will notify the
Underwriter in writing immediately upon the effectiveness of such registration
statement, and (ii) if requested by the Underwriter, to obtain a listing on the
Pacific Stock Exchange and to obtain and keep current a listing in the Standard
& Poors or Moody's Industrial OTC Manual.
(e) For so long as the Company is a reporting company under
either Section 12(g) or 15(d) of the Securities Exchange Act of 1934, the
Company, at its expense, will furnish to its stockholders an annual report
(including financial statements audited by independent public accountants), in
reasonable detail and at its expense, will furnish to you during the period
ending five (5) years from the date hereof, (i) as soon as practicable after the
end of each fiscal year, a balance sheet of the Company and any of its
subsidiaries as at the end of such fiscal year, together with statements of
income, surplus and cash flow of the Company and any subsidiaries for such
fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal quarters of each
fiscal year, consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iv) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission or any securities exchange or
automated quotation system on which any class of securities of the Company is
listed; and (v) such other information as you may from time to time reasonably
request.
(f) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e) above will
be on a consolidated basis to the extent the accounts of the Company and its
subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
(g) The Company will deliver to the Underwriter at or before
the First Closing Date two signed copies of the Registration Statement including
all financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the Underwriter such number of conformed copies of
the Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the Underwriter may reasonably
request. The Company will deliver to or upon the order of the Underwriter, from
time to time until the effective date of the Registration Statement, as many
copies of any Preliminary Prospectus filed with the Commission prior to the
effective date of the Registration Statement as the Underwriter may reasonably
request. The Company will deliver to the
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<PAGE> 12
Underwriter on the effective date of the Registration Statement and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriter may from time to time reasonably
request. The Company, not later than (i) 5:00 p.m., New York City time, on the
date of determination of the public offering price, if such determination
occurred at or prior to 12:00 noon, New York City time, on such date or (ii)
6:00 p.m., New York City time, on the business day following the date of
determination of the public offering price, if such determination occurred after
12:00 noon, New York City time, on such date, will deliver to the Underwriter,
without charge, as many copies of the Prospectus and any amendment or supplement
thereto as the Underwriter may reasonably request for purposes of confirming
orders that are expected to settle on the First Closing Date.
(h) The Company will make generally available to its security
holders and to the registered holders of its Warrants and deliver to you as soon
as it is practicable to do so but in no event later than 90 days after the end
of twelve months after its current fiscal quarter, an earnings statement (which
need not be audited) covering a period of at least twelve consecutive months
beginning after the effective date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of
the Units for the purposes set forth under "Use of Proceeds" in the Prospectus,
and will file such reports with the Commission with respect to the sale of the
Units and the application of the proceeds therefrom as may be required pursuant
to Rule 463 under the Act.
(j) The Company will, promptly upon your request, prepare and
file with the Commission any amendments or supplements to the Registration
Statement, Preliminary Prospectus or Prospectus and take any other action, which
in the reasonable opinion of Bachner, Tally, Polevoy & Misher LLP, counsel to
the Underwriter, may be reasonably necessary or advisable in connection with the
distribution of the Units, and will use its best efforts to cause the same to
become effective as promptly as possible.
(k) The Company will reserve and keep available that maximum
number of its authorized but unissued securities which are issuable upon
exercise of the Unit Purchase Option outstanding from time to time.
(l) For a period of 13 months from the First Closing Date, no
present stockholders of the Company (except for stockholders who at the date
hereof hold an aggregate of not more than 2% of the Company's common Stock), and
no officer or director of the Company, will directly or indirectly, offer, sell
(including any short sale), grant any option for the sale of, acquire any option
to dispose of, or otherwise dispose of any shares of Common Stock without the
prior written consent of the Underwriter. In order to enforce this covenant, the
Company shall obtain lock-up letters in form satisfactory to the Underwriter and
impose stop-transfer instructions with respect to the shares owned by such
officer, director or stockholder until the end of such period.
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<PAGE> 13
(m) Prior to completion of this offering, the Company will
make all filings required, including registration under the Securities Exchange
Act of 1934, to obtain the listing of the Units, Common Stock, and Warrants on
the Nasdaq Small Cap Market (or a listing on such other market or exchange as
the Underwriter consent to), and will effect and maintain such listing for at
least five years from the date of this Agreement.
(n) The Company and each of the Principal Stockholders
represents that it or he has not taken and agree that it or he will not take,
directly or indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Units, Shares or the Warrants or to facilitate
the sale or resale of the Securities.
(o) On the Closing Date and simultaneously with the delivery
of the Units, the Company shall execute and deliver to you the Unit Purchase
Option. The Unit Purchase Option will be substantially in the form of the
Representative's Unit Purchase Option filed as an Exhibit to the Registration
Statement.
(p) During the 18 month period commencing on the date of this
Agreement, the Company will not, without the prior written consent of the
Underwriter, grant options to purchase shares of Common Stock at an exercise
price less than the greater of (i) the initial public offering price of the
Units (without allocating any value to the Warrants); (ii) the fair market value
of the Common Stock on the date of grant or issue any shares of Common Stock to
its employees, officers, directors or consultants, at less than the greater of
such prices. During the three year period from the First Closing Date, the
Company will not, without the prior written consent of the Underwriter, offer or
sell any of its securities pursuant to Regulation S under the Act; (iii) grant
registration rights to any person which are exercisable sooner than 13 months
from the First Closing Date; or (iv) issue any securities which have per share
voting rights greater than the voting rights of the Shares (or take any
corporate action which would have this effect).
(q) Timothy M. Brannan shall be President and Keith Higginson
shall be the Chief Financial Officer of the Company on the Closing Dates. The
Company has obtained key person life insurance on the lives of each of Messrs.
Timothy M. Brannan, Keith Higginson, Wade Stallings and Douglas Brannan in an
amount of not less than $2 million and will use its best efforts to maintain
such insurance during the period commencing with the First Closing and ending on
the three year anniversary of such date or the term of employment of such
individuals, whichever is later. In the event such term of employment is less
than three years, the Company will obtain a comparable policy on the life of the
such individual's successor for the balance of the three year period. For a
period of thirteen months from the First Closing Date, the compensation of the
executive officers of the Company shall not be increased from the compensation
levels disclosed in the Prospectus.
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<PAGE> 14
(r) On the Closing Date and simultaneously with the delivery
of the Units the Company shall execute and deliver to you an agreement with you
regarding mergers, acquisitions, joint ventures and certain other forms of
transactions, in the form previously delivered to the Company by you (the "M/A
Agreement").
(s) So long as any Warrants are outstanding, the Company shall
use its best efforts to cause post-effective amendments to the Registration
Statement to become effective in compliance with the Act and without any lapse
of time between the effectiveness of any such post-effective amendments and
cause a copy of each Prospectus, as then amended, to be delivered to each holder
of record of a Warrant and to furnish to the Underwriter and dealer as many
copies of each such Prospectus as the Underwriter or dealer may reasonably
request. The Company shall not call for redemption any of the Warrants unless a
registration statement covering the securities underlying the Warrants has been
declared effective by the Commission and remains current at least until the date
fixed for redemption. In addition, for so long as any Warrant is outstanding,
the Company will promptly notify the Underwriter of any material change in the
business, financial condition or prospects of the Company.
(t) Upon the exercise of any Warrant or Warrants after
___________, 199 , the Company will pay D.H. Blair Investment Banking Corp. a
fee of 5% of the aggregate exercise price of the Warrants, a portion of which
may be reallowed to the dealer who solicited in writing the exercise (which may
also be the Underwriter) if (i) the market price of the Company's Common Stock
is greater than the exercise price of the Warrants on the date of exercise; (ii)
the exercise of the Warrant was solicited by a member of the National
Association of Securities Dealers, Inc., (iii) the Warrant is not held in a
discretionary account; (iv) the disclosure of compensation arrangements has been
made in documents provided to customers, both as part of the original offering
and at the time of exercise, and (v) the solicitation of the Warrant was not in
violation of Rule 10b-6 promulgated under the Securities Exchange Act of 1934,
as amended. The Company agrees not to solicit the exercise of any Warrants other
than through D.H. Blair Investment Banking Corp. and will not authorize any
other dealer to engage in such solicitation without the prior written consent of
D.H. Blair Investment Banking Corp., unless D.H. Blair Investment Banking Corp.
refuses or is unable to solicit such exercise.
(u) For a period of five (5) years from the Effective Date the
Company (i) at its expense, shall cause its regularly engaged independent
certified public accountants to review (but not audit) the Company's financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
10-Q quarterly report and the mailing of quarterly financial information to
stockholders and (ii) shall not change its accounting firm without the prior
written consent of the Chairman or the President of the Underwriter.
(v) As promptly as practicable after the Closing Date, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute at least four of such volumes to the
individuals designated by the Representative or counsel to the Underwriter.
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<PAGE> 15
(w) For a period of five years from the First Closing Date (i)
the Underwriter shall have the right, but not the obligation, to designate one
director of the Board of Directors of the Company and (ii) the Company shall
engage a public relations firm acceptable to the Underwriter.
(x) The Company shall, for a period of six years after date of
this Agreement, submit which reports to the Secretary of the Treasury and to
stockholders, as the Secretary may require, pursuant to Section 1202 of the
Internal Revenue Code, as amended, or regulations promulgated thereunder, in
order for the Company to qualify as a "small business" so that stockholders may
realize special tax treatment with respect to their investment in the Company.
(y) With respect to the Selling Securityholders, the Company
will send all post-effective amendments or prospectus supplements disclosing
actual price and selling terms to the NASD concurrently with the filing thereof
with the Commission. The Company will notify the Underwriter and the NASD if the
Company becomes aware that any 5% or greater stockholder of the Company becomes
an affiliated or associated person of an NASD member participating in the
distribution of this offering.
(z) On the First Closing Date, the right of first refusal
granted to the Underwriter pursuant to the Agency Agreement between the Company
and the Underwriter dated November 13, 1996 shall terminate.
4. Conditions of the Underwriter's Obligation. The obligations of
the Underwriter to purchase and pay for the Units which they have respectively
agreed to purchase hereunder, are subject to the accuracy (as of the date
hereof, and as of the Closing Dates) of and compliance with the representations
and warranties of the Company herein, to the performance by the Company of its
obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 A.M., New
York time, on the date on which the amendment to the registration
statement originally filed with respect to the Units or to the
Registration Statement, as the case may be, containing information
regarding the initial public offering price of the Units has been filed
with the Commission, or such later time and date as shall have been
agreed to by the Underwriter; if required, the Prospectus or any Term
Sheet that constitutes a part thereof and any amendment or supplement
thereto shall have been filed with the Commission in the manner and
within the time period required by Rule 434 and 424(b) under the Act;
on or prior to the Closing Dates no stop order suspending the
effectiveness of the Registration Statement shall have been issued and
no proceedings for that or a similar purpose shall have been instituted
or shall be pending or, to your knowledge or to the knowledge of the
Company, shall be contemplated by the Commission; any request on the
part of the Commission for additional information shall have been
complied with to the
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<PAGE> 16
reasonable satisfaction of Bachner, Tally, Polevoy & Misher LLP,
counsel to the Underwriter;
(b) At the First Closing Date, you shall have received the
opinion, together with copies of such opinion for each of the other
several Underwriter, dated as of the First Closing Date, of Squire,
Sanders & Dempsey L.L.P., counsel for the Company, in form and
substance satisfactory to counsel for the Underwriter, to the effect
that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Nevada, with full corporate power and authority
to own its properties and conduct its business as described in
the Registration Statement and Prospectus and is duly
qualified or licensed to do business as a foreign corporation
and is in good standing in Arizona and in each other
jurisdiction in which the ownership or leasing of its
properties or conduct of its business requires such
qualification;
(ii) to the best knowledge of such counsel, (a) the Company
has obtained, or is in the process of obtaining, all licenses,
permits and other governmental authorizations necessary to the
conduct of its business as described in the Prospectus, (b)
such licenses, permits and other governmental authorizations
obtained are in full force and effect, and (c) the Company is
in all material respects complying therewith;
(iii) the authorized capitalization of the Company as of
December 31, 1996 is as set forth under "Capitalization" in
the Prospectus; all shares of the Company's outstanding stock
requiring authorization for issuance by the Company's board of
directors have been duly authorized, validly issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus; the outstanding shares of Common
Stock of the Company have not been issued in violation of the
preemptive rights of any shareholder and the shareholders of
the Company do not have any preemptive rights or other rights
to subscribe for or to purchase, nor are there any
restrictions upon the voting or transfer of any of the Stock,
except with respect to the shares that are subject to the
irrevocable Proxy Agreement and the Voting Trust described in
the Prospectus; the Common Stock, the Warrants, the Unit
Purchase Option and the Warrant Agreement conform to the
respective descriptions thereof contained in the Prospectus;
the Shares have been, and the shares of Common Stock to be
issued upon exercise of the Warrants and the Unit Purchase
Option, upon issuance in accordance with the terms of such
Warrants, the Warrant Agreement and Unit Purchase Option have
been duly authorized and, when issued and delivered, will be
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<PAGE> 17
duly and validly issued, fully paid, non-assessable, free of
preemptive rights and no personal liability will attach to the
ownership thereof; all prior sales by the Company of the
Company's securities have been made in compliance with or
under an exemption from registration under the Act and
applicable state securities laws and no shareholders of the
Company have any rescission rights with respect to Company
securities; a sufficient number of shares of Common Stock has
been reserved for issuance upon exercise of the Warrants and
Unit Purchase Option and to the best of such counsel's
knowledge, neither the filing of the Registration Statement
nor the offering or sale of the Units as contemplated by this
Agreement gives rise to any registration rights or other
rights, other than those which have been waived or satisfied
for or relating to the registration of any shares of Common
Stock;
(iv) this Agreement, the Unit Purchase Option, the Warrant
Agreement and the M/A Agreement have been duly and validly
authorized, executed and delivered by the Company and,
assuming due execution by each other party hereto or thereto,
each constitutes a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its
respective terms (except as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application
of equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited
by applicable law;
(v) the certificates evidencing the shares of Common Stock
are in valid and proper legal form; the Warrants will be
exercisable for shares of Common Stock of the Company in
accordance with the terms of the Warrants and at the prices
therein provided for; at all times during the term of the
Warrants the shares of Common Stock of the Company issuable
upon exercise of the Warrants have been duly authorized and
reserved for issuance upon such exercise and such shares, when
issued upon such exercise in accordance with the terms of the
Warrants and at the price provided for, will be duly and
validly issued, fully paid and non-assessable;
(vi) such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company is a party which
could materially adversely affect the business, property,
financial condition or operations of the Company; or which
question the validity of the Securities, this Agreement, the
Warrant Agreement, the Unit Purchase Option or the M/A
Agreement, or of any action taken or to be taken by the
Company pursuant to this Agreement, the Warrant Agreement, the
Unit
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<PAGE> 18
Purchase Option or the M/A Agreement, and no such proceedings
are known to such counsel to be contemplated against the
Company; there are no governmental proceedings or regulations
required to be described or referred to in the Registration
Statement which are not so described or referred to;
(vii) the Company is not in violation of or default under,
nor will the execution and delivery of this Agreement, the
Unit Purchase Option, the Warrant Agreement or the M/A
Agreement and the incurrence of the obligations herein and
therein set forth and the consummation of the transactions
herein or therein contemplated, result in a breach or
violation of, or constitute a default under the certificate or
articles of incorporation or by-laws, in the performance or
observance of any material obligations, agreement, covenant or
condition contained in any bond, debenture, note or other
evidence of indebtedness or in any contract, indenture,
mortgage, loan agreement, lease, joint venture or other
agreement or instrument to which the Company is a party or by
which it or any of its properties may be bound or in violation
of any material order, rule, regulation, writ, injunction, or
decree of any government, governmental instrumentality or
court, domestic or foreign;
(viii) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for that purpose
have been instituted or are pending before, or threatened by,
the Commission; the Registration Statement and the Prospectus
(except for the financial statements and other financial data
contained therein, or omitted therefrom, as to which such
counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act
and the Rules and Regulations;
(ix) such counsel has participated in the preparation of
the Registration Statement and the Prospectus and nothing has
come to the attention of such counsel to cause such counsel to
have reason to believe that the Registration Statement or any
amendment thereto at the time it became effective or as of the
Closing Dates contained any untrue statement of a material
fact required to be stated therein or omitted to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading or that the
Prospectus or any supplement thereto contains any untrue
statement of a material fact or omits to state a material fact
necessary in order to make statements therein, in light of the
circumstances under which they were made, not misleading
(except, in the case of both the Registration Statement and
any amendment thereto and the Prospectus and any supplement
thereto, for the financial statements,
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<PAGE> 19
notes thereto and other financial information and schedules
contained therein, as to which such counsel need express no
opinion);
(x) all descriptions in the Registration Statement and
the Prospectus, and any amendment or supplement thereto, of
contracts and other documents are accurate and fairly present
the information required to be shown, and such counsel is
familiar with all contracts and other documents referred to in
the Registration Statement and the Prospectus and any such
amendment or supplement or filed as exhibits to the
Registration Statement, and such counsel does not know of any
contracts or documents of a character required to be
summarized or described therein or to be filed as exhibits
thereto which are not so summarized, described or filed;
(xi) no authorization, approval, consent, or license of
any governmental or regulatory authority or agency is
necessary in connection with the authorization, issuance,
transfer, sale or delivery of the Units by the Company, in
connection with the execution, delivery and performance of
this Agreement by the Company or in connection with the taking
of any action contemplated herein, or the issuance of the Unit
Purchase Option or the Securities underlying the Unit Purchase
Option, other than registrations or qualifications of the
Units under applicable state or foreign securities or Blue Sky
laws and registration under the Act;
(xii) the statements in the Registration Statement under
the captions "Business", "Use of Proceeds", "Management", and
"Description of Securities" have been reviewed by such counsel
and insofar as they refer to descriptions of agreements,
statements of law, descriptions of statutes, licenses, rules
or regulations or legal conclusions, are correct in all
material respects;
(xiii) the Units, the Common Stock and the Warrants have
been duly authorized for quotation on the Nasdaq Small Cap
Market and
(xiv) to such counsel's knowledge, there are no business
relationships or related-party transactions of the nature
described in Item 404 of Regulation S-B2 involving the
Company, any Subsidiary and any person described in such Item
that are required to be disclosed in the Prospectus and which
have not been so disclosed.
(c) All corporate proceedings and other legal matters relating
to this Agreement, the Registration Statement, the Prospectus and other related
matters shall be satisfactory to or approved by Bachner, Tally, Polevoy & Misher
LLP, counsel to the Underwriter, and you shall have received from such counsel a
signed opinion, dated as of the
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<PAGE> 20
First Closing Date, with respect to the validity of the issuance of the Units,
the form of the Registration Statement and Prospectus (other than the financial
statements and other financial data contained therein), the execution of this
Agreement and other related matters as you may reasonably require. The Company
shall have furnished to counsel for the Underwriter such documents as they may
reasonably request for the purpose of enabling them to render such opinion.
(d) You shall have received a letter prior to the effective
date of the Registration Statement and again on and as of the First Closing Date
from Coopers & Lybrand LLP, independent public accountants for the Company,
substantially in the form approved by you, and including estimates of the
Company's revenues and results of operations for the period ending at the end of
the month immediately preceding the effective date and results of the comparable
period during the prior fiscal year.
(e) At the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
with the same effect as if made on and as of the Closing Dates and the Company
shall have performed all of its obligations hereunder and satisfied all the
conditions on its part to be satisfied at or prior to such Closing Date; (ii)
the Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations, and shall in all material
respects conform to the requirements thereof, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; (iii) there shall have been, since the respective dates as of
which information is given, no material adverse change, or any development
involving a prospective material adverse change, in the business, properties,
condition (financial or otherwise), results of operations, capital stock,
long-term or short-term debt or general affairs of the Company from that set
forth in the Registration Statement and the Prospectus, except changes which the
Registration Statement and Prospectus indicate might occur after the effective
date of the Registration Statement, and the Company shall not have incurred any
material liabilities or entered into any agreement not in the ordinary course of
business other than as referred to in the Registration Statement and Prospectus;
and (iv) except as set forth in the Prospectus, no action, suit or proceeding at
law or in equity shall be pending or threatened against the Company which would
be required to be set forth in the Registration Statement, and no proceedings
shall be pending or threatened against the Company before or by any commission,
board or administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would materially and adversely affect
the business, property, condition (financial or otherwise), results of
operations or general affairs of the Company, and (v) you shall have received,
at the First Closing Date, a certificate signed by each of the Chairman of the
Board or the President and the principal financial or accounting officer of the
Company, dated as of the First Closing Date, evidencing compliance with the
provisions of this subsection (e).
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<PAGE> 21
(f) Upon exercise of the option provided for in Section 2(b)
hereof, the obligations of the Underwriter to purchase and pay for the Option
Units referred to therein will be subject (as of the date hereof and as of the
Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at
the Option Closing Date, and no stop order suspending the
effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been instituted or
shall be pending, or, to your knowledge or the knowledge of
the Company, shall be contemplated by the Commission, and any
reasonable request on the part of the Commission for
additional information shall have been complied with to the
satisfaction of Bachner, Tally, Polevoy & Misher LLP, counsel
to the Underwriter.
(ii) At the Option Closing Date there shall have been
delivered to you the signed opinion of Squire, Sanders &
Dempsey L.L.P., counsel for the Company, dated as of the
Option Closing Date, in form and substance satisfactory to
Bachner, Tally, Polevoy & Misher LLP, counsel to the
Underwriter, which opinion shall be substantially the same in
scope and substance as the opinion furnished to you at the
First Closing Date pursuant to Section 4(b) hereof, except
that such opinion, where appropriate, shall cover the Option
Units.
(iii) At the Option Closing Date there shall have been
delivered to you a certificate of the Chairman of the Board or
the President and the principal financial or accounting
officer of the Company, dated the Option Closing Date, in form
and substance satisfactory to Bachner, Tally, Polevoy & Misher
LLP, counsel to the Underwriter, substantially the same in
scope and substance as the certificate furnished to you at the
First Closing Date pursuant to Section 4(e) hereof.
(iv) At the Option Closing Date there shall have been
delivered to you a letter in form and substance satisfactory
to you from Coopers & Lybrand LLP, dated the Option Closing
Date and addressed to the Underwriter confirming the
information in their letter referred to in Section 4(d) hereof
and stating that nothing has come to their attention during
the period from the ending date of their review referred to in
said letter to a date not more than five business days prior
to the Option Closing Date, which would require any change in
said letter if it were required to be dated the Option Closing
Date.
(v) All proceedings taken at or prior to the Option
Closing Date in connection with the sale and issuance of the
Option Units shall be satisfactory in form and substance to
you, and you and Bachner, Tally,
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<PAGE> 22
Polevoy & Misher LLP, counsel to the Underwriter, shall have
been furnished with all such documents, certificates, and
opinions as you may request in connection with this
transaction in order to evidence the accuracy and completeness
of any of the representations, warranties or statements of the
Company or its compliance with any of the covenants or
conditions contained herein.
(g) No action shall have been taken by the Commission or the
NASD the effect of which would make it improper, at any time prior to the
Closing Date, for members of the NASD to execute transactions (as principal or
agent) in the Units, Common Stock or the Warrants and no proceedings for the
taking of such action shall have been instituted or shall be pending, or, to the
knowledge of the Underwriter or the Company, shall be contemplated by the
Commission or the NASD. The Company represents that at the date hereof it has no
knowledge that any such action is in fact contemplated by the Commission or the
NASD. The Company shall have advised the Underwriter of any NASD affiliation of
any of its officers, directors, stockholders or their affiliates.
(h) If any of the conditions herein provided for in this
Section shall not have been fulfilled as of the date indicated, this Agreement
and all obligations of the Underwriter under this Agreement may be cancelled at,
or at any time prior to, each Closing Date by the Underwriter. Any such
cancellation shall be without liability of the Underwriter to the Company.
5. Conditions of the Obligations of the Company. The obligation
of the Company to sell and deliver the Units is subject to the condition that at
the Closing Dates, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued under the Act or any proceedings
therefor initiated or threatened by the Commission.
If the condition to the obligations of the Company provided for in this
Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Units on exercise of the
option provided for in Section 2(b) hereof shall be affected.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which the Underwriter or such controlling person may become subject,
under the Act or otherwise, and will reimburse, as incurred, the Underwriter and
such controlling persons for any legal or other expenses reasonably incurred in
connection with investigating, defending against or appearing as a third party
witness in connection with any losses, claims, damages or liabilities, insofar
as such losses, claims, damages or liabilities (or actions in respect
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<PAGE> 23
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
(B) any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by the
Company filed in any state or other jurisdiction in order to qualify any or all
of the Units under the securities laws thereof (any such application, document
or information being hereinafter called a "Blue Sky Application"), or arise out
of or are based upon the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment
or supplement thereto, or in any Blue Sky Application, a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) The Underwriter will indemnify and hold harmless the
Company, each of its directors, each nominee (if any) for director named in the
Prospectus, each of its officers who have signed the Registration Statement, and
each person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
director, nominee, officer or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto (i) in reliance upon and in conformity with written
information furnished to the Company by you specifically for use in the
preparation thereof and (ii) relates to the transactions effected by the
Underwriter in connection with the offer and sale of the Units contemplated
hereby. This indemnity agreement will be in addition to any liability which the
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify in writing the
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<PAGE> 24
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under this Section. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense thereof,
subject to the provisions herein stated, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that if the indemnified party is the Underwriter or a person who controls the
Underwriter within the meaning of the Act, the fees and expenses of such counsel
shall be at the expense of the indemnifying party if (i) the employment of such
counsel has been specifically authorized in writing by the indemnifying party or
(ii) the named parties to any such action (including any impleaded parties)
include both the Underwriter or such controlling person and the indemnifying
party and in the judgment of the Underwriter, it is advisable for the
Underwriter or controlling persons to be represented by separate counsel (in
which case the indemnifying party shall not have the right to assume the defense
of such action on behalf of the Underwriter or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for the Underwriter and such controlling persons,
which firm shall be designated in writing by you). No settlement of any action
against an indemnified party shall be made without the consent of the
indemnifying party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnifying party.
7. Contribution.
In order to provide for just and equitable contribution under the Act
in any case in which (i) the Underwriter makes claim for indemnification
pursuant to Section 6 hereof but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of the Underwriter,
then the Company and each person who controls the Company, in the aggregate, and
the Underwriter shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either case (after
contribution from others) in
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<PAGE> 25
such proportions that the Underwriter is responsible in the aggregate for that
portion of such losses, claims, damages or liabilities represented by the
percentage that the underwriting discount per Unit appearing on the cover page
of the Prospectus bears to the public offering price appearing thereon, and the
Company shall be responsible for the remaining portion, provided, however, that
(a) if such allocation is not permitted by applicable law then the relative
fault of the Company and the Underwriter and controlling persons, in the
aggregate, in connection with the statements or omissions which resulted in such
damages and other relevant equitable considerations shall also be considered.
The relative fault shall be determined by reference to, among other things,
whether in the case of an untrue statement of a material fact or the omission to
state a material fact, such statement or omission relates to information
supplied by the Company, or the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriter agree that it
would not be just and equitable if the respective obligations of the Company and
the Underwriter to contribute pursuant to this Section 7 were to be determined
by pro rata or per capita allocation of the aggregate damages (even if the
Underwriter in the aggregate were treated as one entity for such purpose) or by
any other method of allocation that does not take account of the equitable
considerations referred to in the first sentence of this Section 7 and (b) that
the contribution of the Underwriter shall not be in excess of its proportionate
share of such losses, claims, damages or liabilities for which it is
responsible. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. As used in this
paragraph, the word "Company" includes any officer, director, or person who
controls the Company within the meaning of Section 15 of the Act. If the full
amount of the contribution specified in this paragraph is not permitted by law,
then the Underwriter and each person who controls the Underwriter shall be
entitled to contribution from the Company, its officers, directors and
controlling persons to the full extent permitted by law. The foregoing
contribution agreement shall in no way affect the contribution liabilities of
any persons having liability under Section 11 of the Act other than the Company
and the Underwriter. No contribution shall be requested with regard to the
settlement of any matter from any party who did not consent to the settlement;
provided, however, that such consent shall not be unreasonably withheld in light
of all factors of importance to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the
sale of the Units to the Underwriter is consummated, the Company will pay all
costs and expenses incident to the performance of this Agreement by the Company
including, but not limited to, the fees and expenses of counsel to the Company
and of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or
supplemented, or the Term Sheet, the fee of the NASD in connection with the
filing required by the NASD relating to the offering of the Units contemplated
hereby; all expenses, including reasonable fees (not to exceed $25,000) and
disbursements of counsel to the Underwriter, in connection with the
qualification of the
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<PAGE> 26
Units under the state securities or blue sky laws which the Underwriter shall
designate; the cost of printing and furnishing to the Underwriter copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, Selling Agreement, Underwriter's Questionnaire, Underwriter's Power
of Attorney and the Blue Sky Memorandum, any fees relating to the listing of the
Units, Common Stock and Warrants on the Nasdaq Small Cap Market or any other
securities exchange, the cost of printing the certificates representing the
securities comprising the Units, the fees of the transfer agent and warrant
agent the cost of publication of at least three "tombstones" of the offering (at
least one of which shall be in national business newspaper and one of which
shall be in a major New York newspaper) and the cost of preparing at least four
hard cover "bound volumes" relating to the offering, in accordance with the
Underwriter's request. The Company shall pay any and all taxes (including any
transfer, franchise, capital stock or other tax imposed by any jurisdiction) on
sales to the Underwriter hereunder. The Company will also pay all costs and
expenses incident to the furnishing of any amended Prospectus or of any
supplement to be attached to the Prospectus as called for in Section 3(a) of
this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at
the First Closing Date pay to the Underwriter, a non-accountable expense
allowance of $180,000 of which $40,000 has been paid. In the event the
overallotment option is exercised, the Company shall pay to D.H. Blair
Investment Banking Corp. at the Option Closing Date an additional amount equal
to 3% of the gross proceeds received upon exercise of the overallotment option.
In the event the transactions contemplated hereby are not consummated by reason
of any action by the Underwriter (except if such prevention is based upon a
breach by the Company of any covenant, representation or warranty contained
herein or because any other condition to the Underwriter's obligations hereunder
required to be fulfilled by the Company is not fulfilled) the Company shall be
liable for the accountable out-of-pocket expenses of the Underwriter, including
legal fees up to a maximum of $25,000. In the event the transactions
contemplated hereby are not consummated by reason of any action of the Company
or because of a breach by the Company of any covenant, representation or
warranty herein, the Company shall be liable for the accountable out-of-pocket
expenses of the Underwriter, including legal fees, up to a maximum of $150,000.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from the Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless the Underwriter against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Underwriter or such other
Underwriter or person may become subject insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
the claim of any person (other than an employee of the party claiming indemnity)
or entity that he or it is entitled to a finder's fee in connection with the
proposed offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
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<PAGE> 27
9. Effective Date.
The Agreement shall become effective upon its execution except that you
may, at your option, delay its effectiveness until 11:00 A.M., New York time on
the first full business day following the effective date of the Registration
Statement, or at such earlier time after the effective date of the Registration
Statement as you in your discretion shall first commence the initial public
offering by the Underwriter of any of the Units. The time of the initial public
offering shall mean the time of release by you of the first newspaper
advertisement with respect to the Units, or the time when the Units are first
generally offered by you to dealers by letter or telegram, whichever shall first
occur. This Agreement may be terminated by you at any time before it becomes
effective as provided above, except that Sections 3(c), 6, 7, 8, 12, 13, 14, 15
and 16 shall remain in effect notwithstanding such termination.
10. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 12, 13,
14 and 15 hereof, may be terminated at any time prior to the First Closing Date,
and the option referred to in Section 2(b) hereof, if exercised, may be
cancelled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriter for the resale of the Units agreed to be purchased hereunder by
reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree; (ii)
trading in securities on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq SmallCap Market or the Nasdaq National Market having been
suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the date
hereof); (iv) a banking moratorium having been declared by federal or New York
state authorities; (v) an outbreak of international hostilities or other
national or international calamity or crisis or change in economic or political
conditions having occurred; (vi) a pending or threatened legal or governmental
proceeding or action relating generally to the Company's business, or a
notification having been received by the Company of the threat of any such
proceeding or action, which could materially adversely affect the Company; (vii)
except as contemplated by the Prospectus, the Company is merged or consolidated
into or acquired by another company or group or there exists a binding legal
commitment for the foregoing or any other material change of ownership or
control occurs; (viii) the passage by the Congress of the United States or by
any state legislative body or federal or state agency or other authority of any
act, rule or regulation, measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is reasonably believed likely by
the Underwriter to have a material impact on the business, financial condition
or financial statements of the Company or the market for the securities offered
pursuant to the Prospectus; (ix) any adverse change in the financial or
securities markets beyond normal market fluctuations having occurred since the
date of this Agreement, or (x) any material adverse change having occurred,
since the
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<PAGE> 28
respective dates of which information is given in the Registration Statement and
Prospectus, in the earnings, business prospects or general condition of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business.
(b) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 11 or in
Section 10, the Company shall be promptly notified by you, by telephone or
telegram, confirmed by letter.
11. Unit Purchase Option.
At or before the First Closing Date, the Company will sell to
D.H. Blair Investment Banking Corp., or its designees for a consideration of
$.0001 and upon the terms and conditions set forth in the form of Unit Purchase
Option annexed as an exhibit to the Registration Statement, a Unit Purchase
Option to purchase an aggregate of 120,000 Units. In the event of conflict in
the terms of this Agreement and the Unit Purchase Option, the language of the
Unit Purchase Option shall control.
12. Representations, Warranties and Agreements to Survive
Delivery.
The respective indemnities, agreements, representations,
warranties and other statements of the Company or its Principal Stockholders,
where appropriate, and the undertakings set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriter, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Units and the termination of this Agreement.
13. Notice.
Any communications specifically required hereunder to be in
writing, if sent to the Underwriter, will be mailed, delivered and confirmed to
them at D.H. Blair Investment Banking Corp., 44 Wall Street, New York, New York
10005, with a copy sent to Bachner, Tally, Polevoy & Misher LLP, 380 Madison
Avenue, New York, New York 10017, or if sent to the Company, will be mailed,
delivered and confirmed to it at 1839 West Drake, Suite B, Tempe, Arizona 85283.
14. Parties in Interest.
The Agreement herein set forth is made solely for the benefit
of the Underwriter, the Company and, to the extent expressed, the Principal
Stockholders, any person controlling the Company or the Underwriter, and
directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not
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<PAGE> 29
include any purchaser, as such purchaser, from the Underwriter of the Units. All
of the obligations of the Underwriter hereunder are several and not joint.
15. Applicable Law.
This Agreement will be governed by, and construed in
accordance with, the laws of the State of New York applicable to agreements made
and to be entirely performed within New York.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the Underwriter in accordance with its
terms.
Very truly yours,
PIRANHA INTERACTIVE PUBLISHING, INC.
By: ____________________________________
Timothy M. Brannan
President
The foregoing Underwriting Agreement is hereby confirmed and
accepted as of the date first above written.
D.H. BLAIR INVESTMENT BANKING CORP.
By: ____________________________________
Authorized Officer
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<PAGE> 1
Exhibit 4.1
[CERTIFICATE]
COMMON STOCK COMMON STOCK
[PIRANHA LOGO]
INTERACTIVE PUBLISHING(R)
NUMBER SHARES
P_____ ______
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
SEE REVERSE FOR
CERTAIN DEFINITIONS
AND TRANSFER RESTRICTIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
THIS CERTIFIES THAT CUSIP 724251 10 3
SPECIMEN
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.001, OF
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
(hereinafter called the "Company") transferable on the books of the Company by
said owner in person or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Articles of Incorporation and all amendments thereto, copies of which are on
file at the office of the Transfer Agent, and the holder hereof by acceptance
of this certificate consents to and agrees to be bound by all of said
provisions. This certificate is not valid unless countersigned and registered
by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
[PIRANHA INTERACTIVE PUBLISHING INC. CORPORATE SEAL]
1996
NEVADA
Dated:
/s/ Timothy M. Brannan /s/ J. Wade Stallings, II
- ----------------------------------- -----------------------------
Timothy M. Brannan J. Wade Stallings, II
CHAIRMAN OF THE BOARD AND PRESIDENT VICE PRESIDENT AND SECRETARY
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE> 2
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
Notice to Holders of Common Stock
The Company shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Company or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights. Such requests shall be made to the Company's
Secretary at the principal office of the Company.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - __________Custodian_________
TEN ENT - as tenants by the entireties (Cust.) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
| |
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
______________________________________________________________________________
______________________________________________________________________________
________________________________________________________________________Shares
of the capital stock represented by the within Certificate and do hereby
irrevocably constitute and appoint
______________________________________________________________________Attorney
to transfer the said Shares on the books of the within-named Company with full
power of substitution in the premises.
Dated ____________________________ _____________________________________
_____________________________________
_____________________________________
NOTICE: The signature to the
assignment must correspond with the
name as written upon the face of the
Certificate, in every particular,
without any change whatever.
Signature(s) Guaranteed: _____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
[CERTIFICATE]
EXHIBIT 4.2
No. PWA [LOGO] REDEEMABLE
PIRANHA CLASS A WARRANTS
INTERACTIVE PUBLISHING(R)
VOID AFTER , 2002
REDEEMABLE CLASS A WARRANT
CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE CLASS B WARRANT CUSIP 724251 11 1
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of a number of
Class A Warrants specified above. Each Class A Warrant represented hereby
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Warrant Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.001 par value ("Common Stock"), and one Class B Warrant of Piranha Interactive
Publishing, Inc., a Nevada corporation (the "Company"), at any time between
________, 1997 and the Expiration Date (as hereinafter defined), upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of American
Stock Transfer & Trust Company as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $6.50 (the "Purchase Price") in lawful money
of the United States of America in cash or by official bank or certified check
made payable to the Company.
This Warrant Certificate and each Class A Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated ________,
1997 by and among the Company, the Warrant Agent and D.H. Blair Investment
Banking Corp.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock and Class
B Warrants subject to purchase upon the exercise of each Class A Warrant
represented hereby are subject to modification or adjustment.
Each Class A Warrant represented hereby is exercisable at the option of
the Registered Holder, but no fractional shares of Common Stock will be issued.
In the case of the exercise of less than all the Class A Warrants represented
hereby, the Company shall cancel this Warrant Certificate upon the surrender
hereof and shall execute and deliver a new Warrant Certificate or Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Class A Warrants.
The Term "Expiration Date" shall mean 5:00 P.M. (New York time) on
________, 2002, or such earlier date as the Class A Warrants shall be redeemed.
If such date shall in the State of New York be a holiday or a day on which
banks are authorized to close, then the Expiration Date shall mean 5:00 P.M.
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Class A Warrants represented hereby unless a
registration statement under the Securities Act of 1933, as amended, with
respect to such securities is effective. The Company has covenanted and agreed
that it will file a registration statement and will use its best efforts to
cause the same to become effective and to keep such registration statement
current while any of the Class A Warrants are outstanding. The Class A Warrants
represented hereby shall not be exercisable by a Registered Holder in any state
where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Class A Warrants, each of such new Warrant Certificates to
represent such number of Class A Warrants as shall be designed by such
Registered Holder at the time of such surrender. Upon due presentment and
payment of any applicable transfer fee in addition to any tax or other
governmental charge imposed in connection therewith, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Class A
Warrants will be issued to the transferee in exchange therefor, subject to the
limitations provided in the Warrant Agreement.
Prior to the exercise of any Class A Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
The Class A Warrants represented hereby may be redeemed at the option
of the Company, at a redemption price of $.05 per Class A Warrant at any time
after _________, 1997 provided the Market Price (as defined in the Warrant
Agreement) for the Common Stock shall exceed $9.10 per share for any 30
consecutive trading days ending within 15 days of the notice of redemption.
Notice of redemption shall be given not later than the thirtieth day before the
date fixed for redemption, all as provided in the Warrant Agreement. On and
after the date fixed for redemption, the Registered Holder shall have no rights
with respect to the Class A Warrants represented hereby except to receive the
$.05 per Class A Warrant upon surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Class A Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice of the contrary.
The Company has agreed to pay a fee of 5% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
the Class A Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
Dated:
PIRANHA INTERACTIVE PUBLISHING, INC.
<TABLE>
<S> <C> <C>
COUNTERSIGNED:
AMERICAN STOCK
TRANSFER & TRUST COMPANY By: /s/ Timothy M. Brannan By: /s/ J. Wade Stallings, II
AS WARRANT AGENT ---------------------- -------------------------
TIMOTHY M. BRANNAN J. WADE STALLINGS JR.
BY: CHAIRMAN OF THE VICE PRESIDENT
BOARD AND SECRETARY
AUTHORIZED SIGNATURE AND PRESIDENT
</TABLE>
[PIRANHA INTERACTIVE PUBLISHING, INC. CORPORATE SEAL]
[1996]
[NEVADA]
<PAGE> 2
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
TRANSFER FEE $______ PER CERTIFICATE ISSUED
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE WARRANTS
The undersigned Registered Holder hereby irrevocably elects to exercise
________ Class A Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Class A Warrants, and
requests that certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
(please print or type name and address)
and be delivered to
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
(please print or type name and address)
and if such number of Class A Warrants shall not be all the Class A Warrants
evidenced by this Warrant Certificate, that a new Class A Warrant Certificate
for the balance of such Warrants be registered in the name of, and delivered
to, the Registered Holder at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by D.H. Blair & Co.,
Inc. [ ]
2. The exercise of this Warrant was solicited by ___________________ [ ]
3. The exercise of this Warrant was not solicited [ ]
Dated: ___________________________ __________________________________
Name
__________________________________
Number and Street
__________________________________
City/Town/State/Zip
__________________________________
Social Security or Taxpayer
Identification Number
__________________________________
Signature Guaranteed
__________________________________
ASSIGNMENT
TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO ASSIGN WARRANTS
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
(please print or type name and address and include
Social Security or other identifying number)
________________________________________________________________________________
of the Class A Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and appoints
______________________________________________________________________ Attorney
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
Dated: ___________________________ ____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE FOREGOING ASSIGNMENT MUST CORRESPOND TO THE NAME AS
WRITTEN UPON THE FACE OF THIS SECURITY IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ANY CHANGE WHATSOEVER. SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCK BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM) PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 17AD-15.
<PAGE> 1
Exhibit 4.3
[CERTIFICATE]
NUMBER
PWB VOID AFTER ______, 2002
[LOGO]
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
REDEEMABLE CLASS B WARRANT REDEEMABLE CLASS B WARRANT
TO PURCHASE COMMON STOCK TO PURCHASE ONE SHARE
OF COMMON STOCK
CUSIP 724251 12 9
This Warrant Certificate certifies that, FOR VALUE RECEIVED
[BLANK AREA]
or registered assigns (the "Registered Holder") is the owner of a number of
Class B Warrants specified above. Each Class B Warrant represented hereby
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Warrant Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.001 par value ("Common Stock"), of Piranha Interactive Publishing, Inc., a
Nevada corporation (the "Company"), at any time between ___________, 1997 and
the Expiration Date (as hereinafter defined), upon the presentation and
surrender of this Warrant Certificate with the Subscription Form on the reverse
hereof duly executed, at the corporate office of American Stock Transfer &
Trust Company as Warrant Agent, or its successor (the "Warrant Agent"),
accompanied by payment of $8.75 (the "Purchase Price") in lawful money of the
United States of America in cash or by official bank or certified check made
payable to the Company.
This Warrant Certificate and each Class B Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
_____________, 1997 by and among the Company, the Warrant Agent and D.H. Blair
Investment Banking Corp.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject
to purchase upon the exercise of each Class B Warrant represented hereby are
subject to modification or adjustment.
Each Class B Warrant represented hereby is exercisable at the option of
the Registered Holder, but no fractional shares of Common Stock will be issued.
In the case of the exercise of less than all the Class B Warrants represented
hereby, the Company shall cancel this Warrant Certificate upon the surrender
hereof and shall execute and deliver a new Warrant Certificate or Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Class B Warrants.
REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS WARRANT
CERTIFICATE SET FORTH ON THE REVERSE HEREOF, SUCH FURTHER PROVISIONS SHALL FOR
ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE.
This Warrant Certificate shall not be valid unless manually
countersigned by the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
executed by its duly authorized officers, and the corporate seal hereunto
affixed.
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
AS WARRANT AGENT
BY: ____________________________________
AUTHORIZED SIGNATURE
[PIRANHA INTERACTIVE PUBLISHING, INC.
CORPORATE SEAL
1996
NEVADA]
PIRANHA INTERACTIVE PUBLISHING, INC.
By: By:
/s/ Timothy M. Brannan /s/ J. Wade Stallings
CHAIRMAN OF THE BOARD VICE PRESIDENT
AND PRESIDENT AND SECRETARY
<PAGE> 2
PIRANHA INTERACTIVE PUBLISHING, INC.(R)
The Term "Expiration Date" shall mean 5:00 P.M. (New York time) on
_______________, 2002, or such earlier date as the Class B Warrants shall be
redeemed. If such date shall in the State of New York be a holiday or a day on
which banks are authorized to close, then the Expiration Date shall mean
5:00 P.M. (New York time) the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Class B Warrants represented hereby unless a
registration statement under the Securities Act of 1933, as amended, with
respect to such securities is effective. The Company has covenanted and agreed
that it will file a registration statement and will use its best efforts to
cause the same to become effective and to keep such registration statement
current while any of the Class B Warrants are outstanding. The Class B Warrants
represented hereby shall not be exercisable by a Registered Holder in any state
where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Class B Warrants, each of such new Warrant Certificates to
represent such number of Class B Warrants as shall be designated by such
Registered Holder at the time of such surrender. Upon due presentment and
payment of any applicable transfer fee in addition to any tax or other
governmental charge imposed in connection therewith, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Class B
Warrants will be issued to the transferee in exchange therefor, subject to the
limitations provided in the Warrant Agreement.
Prior to the exercise of any Class B Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
The Class B Warrants represented hereby may be redeemed at the option
of the Company, at a redemption price of $.05 per Class B Warrant at any time
after __________________, 1997 provided the Market Price (as defined in the
Warrant Agreement) for the Common Stock shall exceed $12.25 per share for any
30 consecutive trading days ending within 15 days of the notice of redemption.
Notice of redemption shall be given not later than the thirtieth day before the
date fixed for redemption, all as provided in the Warrant Agreement. On and
after the date fixed for redemption, the Registered Holder shall have no rights
with respect to the Class B Warrants represented hereby except to receive the
$.05 per Class B Warrant upon surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Class B Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice of the contrary.
The Company has agreed to pay a fee of 5% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
the Class B Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
ELECTION TO EXERCISE
(To be executed upon exercise of the Warrant)
The undersigned hereby irrevocably elects to exercise _______ Class B
Warrants and to purchase _______ Shares of Common Stock and herewith tenders in
payment for such Shares of Common Stock $________ in lawful money of the United
States of America, in accordance with the terms hereof. The undersigned
requests that a certificate representing such Shares of Common Stock be
registered and delivered as follows:
---------------------------------------------------------
Name
---------------------------------------------------------
Address
---------------------------------------------------------
Delivery Address (if different)
If such number of Shares of Common Stock is less than the aggregate number of
Shares purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the balance of such Shares of Common Stock be
registered and delivered as follows:
---------------------------------------------------------
Name
---------------------------------------------------------
Address
---------------------------------------------------------
Delivery Address (if different)
- --------------------------------- --------------------------------------
Social Security or Other Taxpayer Signature
Identification Number of Holder
Note: The above signature must
correspond with the name as written
upon the face of this Warrant
Certificate in every particular,
without alteration or enlargement or
any change whatsoever. In addition,
the signature of the holder hereof
must be guaranteed.
The undersigned represents that the exercise of the Class B Warrants
evidenced hereby was solicited by a member of the National Association of
Securities Dealers, Inc. If not solicited by an NASD member, please write
"unsolicited" in the space below. Unless otherwise indicated by listing the
name of another NASD member firm, it will be assumed that the exercise was
solicited by D.H. Blair Investment Banking Corp. or D.H. Blair & Co., Inc.
--------------------------------------
(Name of NASD Member)
Dated:
---------------------------------- --------------------------------------
--------------------------------------
--------------------------------------
(Address)
--------------------------------------
(Taxpayer Identification Number)
--------------------------------------
Signature Guaranteed
--------------------------------------
ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate)
For Value Received, the undersigned registered holder hereby sells,
assigns and transfers unto
---------------------------------------------------------
Name of Assignee
---------------------------------------------------------
Address of Assignee
of the Class B Warrants represented by this Warrant Certificate, together with
all right, title and interest therein, and does irrevocably constitute and
appoint
attorney,
- ----------------------------------------------------------------------
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution.
- --------------------------------- --------------------------------------
Dated Signature
Note: The above signature must
correspond with the name as written
upon the face of this Warrant
Certificate in every particular,
without alteration or enlargement or
any change whatsoever. In addition,
the signature of the holder hereof
must be guaranteed.
- ---------------------------------
Social Security or Other Taxpayer
Identification Number of Holder
Signature(s) Guaranteed:
- -------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 4.5
Option to Purchase
________Units
PIRANHA INTERACTIVE PUBLISHING, INC.
Unit Purchase Option
Dated: _______, 1997
THIS CERTIFIES THAT D.H. Blair Investment Banking Corp.,
(herein sometimes called the "Holder") is entitled to purchase from Piranha
Interactive Publishing, Inc. a Nevada corporation (hereinafter called the
"Company"), at the prices and during the periods as hereinafter specified, up to
one hundred twenty thousand (120,000) Units ("Units"), each Unit consisting of
one share of the Company's Common Stock, $.001 par value, as now constituted
("Common Stock"), one Class A warrant ("Class A Warrants") and one Class B
warrant ("Class B Warrants"). Each Class A Warrant is exercisable to purchase
one share of Common Stock and one Class B Warrant at an exercise price of $6.50
from _________, 1997 to _________, 2002, and each Class B Warrant is exercisable
to purchase one share of Common Stock at an exercise price of $8.75 until
_________, 2002. The Class A Warrants and Class B Warrants are herein
collectively referred to as the "Warrants."
The Units have been registered under a Registration Statement
on Form SB-2, (File No. 333-18605) declared effective by the Securities and
Exchange Commission on _______, 1997 (the "Registration Statement". This Option,
together with options of like tenor, constituting in the aggregate options (the
"Options") to purchase 120,000 Units, subject to adjustment in accordance with
Section 8 of this Option (the "Option Units"), was originally issued pursuant to
an underwriting agreement between the Company and D.H. Blair Investment Banking
Corp., as underwriter (the "Underwriter") in connection with a public offering
(the "Offering") of 1,200,000 Units (the "Public Units") through the
Underwriter, in consideration of $_______ received for the Options.
Except as specifically otherwise provided herein, the Common
Stock and the Warrants issued pursuant to the option herein granted (the
"Option") shall bear the same terms and conditions as described under the
caption "Description of Securities" in the Registration Statement, and the
Warrants shall be governed by the terms of the Warrant Agreement dated as of
_______, 1997 executed in connection with such public offering (the "Warrant
Agreement"), and except that (i) the holder shall have registration rights under
the Securities Act of 1933, as amended (the "Act"), for the Option, the Common
Stock and the Warrants included in the Option Units, and the shares of Common
Stock underlying the Warrants, as more fully described in Section 6 of this
Option and (ii) the Warrants issuable upon exercise of the Option will be
subject to redemption by the Company pursuant to the Warrant Agreement at any
time after the Option has been exercised and the Warrants underlying the Option
Units are outstanding. Any such redemption shall be on the same terms and
conditions as the Warrants included in the
<PAGE> 2
Public Units (the "Public Warrants"). The Company will list the Common Stock
underlying this Option and, at the Holder's request the Warrants, on the Nasdaq
National Market, the Nasdaq Small Cap Market or such other exchange or market as
the Common Stock or Public Warrants may then be listed or quoted. In the event
of any extension of the expiration date or reduction of the exercise price of
the Public Warrants, the same changes to the Warrants included in the Option
Units shall be simultaneously effected.
1. The rights represented by this Option shall be exercised at
the prices, subject to adjustment in accordance with Section 8 of this Option
("the "Exercise Price"), and during the periods as follows:
(a) During the period from _______, 1997 to _______,
1999 inclusive, the Holder shall have no right to purchase
any Option Units hereunder, except that in the event of any
merger, consolidation or sale of all or substantially all
the capital stock or assets of the Company or in the case
of any statutory exchange of securities with another
corporation (including any exchange effected in connection
with a merger of another corporation into the Company)
subsequent to _______, the Holder shall have the right to
exercise this Option and the Warrants included herein at
such time and receive the kind and amount of shares of
stock and other securities and property (including cash)
which a holder of the number of shares of Common Stock
underlying this Option and the Warrants included in this
Option would have owned or been entitled to receive had
this Option been exercised immediately prior thereto.
(b) Between _______, 1999, and _______,2002 inclusive,
the Holder shall have the option to purchase Option Units
hereunder at a price of $_______ per Unit. For purposes of
the adjustments under Section 8 hereof, the Per Share
Exercise Price shall be deemed to be $_______, subject to
further adjustment as provided in such Section 8.
(c) After _________, 2002 the Holder shall have no
right to purchase any Units hereunder.
2. (a) The rights represented by this Option may be exercised
at any time within the period above specified, in whole or in part, by (i) the
surrender of this Option (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the Holder
at the address of the Holder appearing on the books of the Company); and (ii)
payment to the Company of the exercise price then in effect for the number of
Option Units specified in the above-mentioned purchase form together with
applicable stock transfer taxes, if any. This Option shall be deemed to have
been exercised, in whole or in part to the extent specified, immediately prior
to the close of business on the date this Option is surrendered and payment is
made in accordance with the foregoing provisions of this Section 2, and the
person or
-2-
<PAGE> 3
persons in whose name or names the certificates for shares of Common Stock and
Warrants shall be issuable upon such exercise shall become the holder or holders
of record of such Common Stock and Warrants at that time and date. The
certificates for the Common Stock and Warrants so purchased shall be delivered
to the Holder as soon as practicable but not later than ten (10) days after the
rights represented by this Option shall have been so exercised.
(b) At any time during the period above specified, during
which this Option may be exercised, the Holder may, at its option, exchange this
Option, in whole or in part (an "Option Exchange"), into the number of Option
Units determined in accordance with this Section (b), by surrendering this
Option at the principal office of the Company or at the office of its stock
transfer agent, accompanied by a notice stating such Holder's intent to effect
such exchange, the number of Option Units into which this Option is to be
exchanged and the date on which the Holder requests that such Option Exchange
occur (the "Notice of Exchange"). The Option Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
shares of Common Stock and Warrants issuable upon such Option Exchange and, if
applicable, a new Option of like tenor evidencing the balance of the Option
Units remaining subject to this Option, shall be issued as of the Exchange Date
and delivered to the Holder within seven (7) days following the Exchange Date.
In connection with any Option Exchange, this Option shall represent the right to
subscribe for and acquire the number of Option Units (rounded to the next
highest integer) equal to (x) the number of Option Units specified by the Holder
in its Notice of Exchange up to the maximum number of Option Units subject to
this option (the "Total Number") less (y) the number of Option Units equal to
the quotient obtained by dividing (A) the product of the Total Number and the
existing Exercise Price by (B) the Fair Market Value. "Fair Market Value" shall
mean first, if there is a trading market as indicated in Subsection (i) below
for the Units, such Fair Market Value of the Units and if there is no such
trading market in the Units, then Fair Market Value shall have the meaning
indicated in Subsections (ii) through (v) below for the aggregate value of all
shares of Common Stock and Warrants which comprise a Unit:
(i) If the Units are listed on a national securities exchange
or listed or admitted to unlisted trading privileges on such exchange
or listed for trading on the Nasdaq National Market or the Nasdaq Small
Cap Market, the Fair Market Value shall be the average of the last
reported sale prices or the average of the means of the last reported
bid and asked prices, respectively, of the Units on such exchange or
market for five (5) business days ending on the last business day prior
to the Exchange Date; or
(ii) If the Common Stock or Warrants are listed on a national
securities exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the Nasdaq National Market or the
Nasdaq Small Cap Market, the Fair Market Value shall be the average of
the last reported sale prices or the average of the means of the last
reported bid and asked prices, respectively, of Common
-3-
<PAGE> 4
Stock or Warrants, respectively, on such exchange or market for the
five (5) business days ending on the last business day prior to the
Exchange Date; or
(iii) If the Common Stock or Warrants are not so listed or
admitted to unlisted trading privileges, the Fair Market Value shall be
the average of the means of the last reported bid and asked prices of
the Common Stock or Warrants, respectively, for five (5) business days
ending on the last business day prior to the Exchange Date; or
(iv) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so
reported, the Fair Market Value shall be an amount, not less than book
value thereof as at the end of the most recent fiscal year of the
Company ending prior to the Exchange Date, determined in such
reasonable manner as may be prescribed by the Board of Directors of the
Company; or
(v) If the Warrants are not so listed or admitted to
unlisted trading privileges, and bid and asked prices are not so
reported for Warrants, then Fair Market Value for the Warrants shall be
an amount equal to the difference between (i) the Fair Market Value of
the shares of Common Stock and Warrants which may be received upon the
exercise of the Warrants, as determined herein, and (ii) the Warrant
Exercise Price.
3. Neither this Option nor the underlying securities shall be
transferred, sold, assigned, or hypothecated for a period of two years
commencing on the date of issuance of this Option except that they may be
transferred to successors of the Holder, and may be assigned in whole or in part
to any person who is an officer of the Holder, any member participating in the
selling group relating to the Offering or any officer of such selling group
member. Any such assignment shall be effected by the Holder (i) executing the
form of assignment at the end hereof and (ii) surrendering this Option for
cancellation at the office or agency of the Company referred to in Section 2
hereof, accompanied by a certificate (signed by an officer of the Holder if the
Holder is a corporation), stating that each transferee is a permitted transferee
under this Section 3 hereof; whereupon the Company shall issue, in the name or
names specified by the Holder (including the Holder) a new Option or Options of
like tenor and representing in the aggregate rights to purchase the same number
of Option Units as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Common
Stock which may be issued as part of the Option Units purchased hereunder and
the Common Stock which may be issued upon exercise of the Warrants will, upon
issuance, be duly and validly issued, fully paid and nonassessable and no
personal liability will attach to the holder thereof. The Company further
covenants and agrees that during the periods within which this Option may be
exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of its Common Stock to provide for the exercise of
this Option and that it will have
-4-
<PAGE> 5
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon exercise of the Warrants included in the Option Units.
5. This Option shall not entitle the Holder to any voting
rights or any other rights, or subject to the Holder to any liabilities, as a
stockholder of the Company.
6. (a) The Company shall advise the Holder or its transferee,
whether the Holder holds the Option or has exercised the Option and holds Option
Units or any of the securities underlying the Option Units, by written notice at
least four weeks prior to the filing of any post-effective amendment to the
Registration Statement or of any new registration statement or post-effective
amendment thereto under the Act covering any securities of the Company, for its
own account or for the account of others, and will for a period of five years
from the effective date of the Registration Statement, upon the request of the
Holder, include in any such post-effective amendment or registration statement,
such information as may be required to permit a public offering of the Option,
all or any of the Option Units, the Common Stock or Warrants included in the
Option Units or the Common Stock issuable upon the exercise of the Warrants (the
"Registrable Securities"); provided, however, the right of any Holder to include
its Registrable Securities in any such post effective amendment or registration
statement may be waived by the written consent of D.H. Blair Investment Banking
Corp., D.H. Blair & Co. Inc. or J. Morton Davis.
(b) If any Demand Holder ("Demand Holder" as defined below)
shall give notice to the Company at any time to the effect that such holder
desires to register under the Act this Option, the Option Units or any of the
underlying securities contained in the Option Units under such circumstances
that a public distribution (within the meaning of the Act) of any such
securities will be involved then the Company will promptly, but no later than 20
days after receipt of such notice, file a post-effective amendment to the
current Registration Statement or a new registration statement pursuant to the
Act or such other form as the holder requests pursuant to the Act, to the end
that the Option, the Option Units and/or any of the securities underlying the
Option Units may be publicly sold under the Act as promptly as practicable
thereafter and the Company will use its best efforts to cause such registration
to become and remain effective (including the taking of such steps as are
necessary to obtain the removal of any stop order); provided, that such holder
shall furnish the Company with appropriate information in connection therewith
as the Company may reasonably request in writing. The Demand Holder may, at its
option, request the filing of a post-effective amendment to the current
Registration Statement or a new registration statement under the Act on one
occasion during the four year period beginning one year from the effective date
of the Registration Statement. The Holder may, at its option request the
registration of the Option and/or any of the securities underlying the Option in
a registration statement made by the Company as contemplated by Section 6(a) or
in connection with a request made pursuant to this Section 6(b) prior to
acquisition of the Option Units issuable upon exercise of the Option and even
though the Holder has not given notice of exercise of the Option. The Demand
Holder may, at its option, request such post-effective amendment or new
registration statement during the described period with respect to the Option,
the Option Units as a unit, or separately as to the Common Stock and/or Warrants
included in the Option Units
-5-
<PAGE> 6
and/or the Common Stock issuable upon the exercise of the Warrants, and such
registration rights may be exercised by the Demand Holder prior to or subsequent
to the exercise of the Option.
Within ten days after receiving any such notice pursuant to
this Section 6(b), the Company shall give notice to the other holders of the
Options, advising that the Company is proceeding with such post-effective
amendment or registration statement and offering to include therein the
securities underlying the Options of the other holders, provided that they shall
furnish the Company with such appropriate information (relating to the
intentions of such holders) in connection therewith as the Company shall
reasonably request in writing. In the event the registration statement is not
filed within the period specified herein, and in the event the registration
statement is not declared effective under the Act prior to ___, 200_, then at
the holders' request, the Company shall purchase the Options from the holder for
a per option price equal to the difference between (i) the Fair Market Value of
the Common Stock on the date of notice multiplied by the number of shares of
Common Stock issuable upon exercise of the Option and the underlying Warrants
and (ii) the average per share purchase price of the Option and each share of
Common Stock underlying the Option. All costs and expenses of the first such
post-effective amendment or new registration statement under this paragraph 6(b)
shall be borne by the Company, except that the holders shall bear the fees of
their own counsel and any underwriting discounts or commissions applicable to
any of the securities sold by them.
The Company will maintain such registration statement or
post-effective amendment current under the Act for a period of at least six
months (and for up to an additional three months if requested by the Holder)
from the effective date thereof.
(c) The term "Demand Holder" as used in this Section 6
shall mean the holder of at least 50% of the Common Stock and the Warrants
underlying the Options (considered in the aggregate) and shall include any owner
or combination of owners of such securities, which ownership shall be calculated
by determining the number of shares of Common Stock held by such owner or owners
as well as the number of shares then issuable upon exercise of the Warrants.
(d) Whenever pursuant to Section 6 a registration statement
relating to any Registrable Securities is filed under the Act, amended or
supplemented, the Company shall (i) supply prospectuses and such other documents
as the Holder may request in order to facilitate the public sale or other
disposition of the Registrable Securities, (ii) use its best efforts to register
and qualify any of the Registrable Securities for sale in such states as such
Holder designates, (iii) furnish indemnification in the manner provided in
Section 7 hereof, (iv) notify each Holder of Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, contains
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and, at the request of any such Holder, prepare and furnish to such
Holder a reasonable number of copies of a supplement to or an amendment of
-6-
<PAGE> 7
such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not included an
untrue statement of a material fact or omit to state material fact required to
be stated therein or necessary to make the statements therein not misleading and
(v) do any and all other acts and things which may be necessary or desirable to
enable such Holders to consummate the public sale or other disposition of the
Registrable Securities, The Holder shall furnish appropriate information in
connection therewith and indemnification as set forth in Section 7.
(e) The Company shall not permit the inclusion of any
securities other than the Registrable Securities to be included in any
registration statement filed pursuant to Section 6(b) hereof without the prior
written consent of the Demand Holder.
(f) The Company shall furnish to each Holder participating
in the offering and to each underwriter, if any, a signed counterpart, addressed
to such Holder or underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (or, if such
registration includes an underwritten public offering, an opinion dated the date
of the closing under the underwriting agreement), and (ii) if such registration
includes an underwritten public offering, a "cold comfort" letter dated the
effective date of such registration statement and dated the date of the closing
under the underwriting agreement signed by the independent public accountants
who have issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(g) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonable
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to non-confidential books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
as any such Holder shall reasonably request.
7. (a) Whenever pursuant to Section 6 a registration statement
relating to the Registrable Securities is filed under the Act, amended or
supplemented, the Company will indemnify and hold harmless each holder of the
Registrable Securities covered by such registration statement, amendment or
supplement (such holder being hereinafter called the
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<PAGE> 8
"Distributing Holder"), and each person, if any, who controls (within the
meaning of the Act) the Distributing Holder, and each underwriter (within the
meaning of the Act) of such securities and each person, if any, who controls
(within the meaning of the Act) any such underwriter, against any losses,
claims, damages or liabilities, joint or several, to which the Distributing
Holder, any such controlling person or any such underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such registration statement or any preliminary prospectus or final
prospectus constituting a part thereof or any amendment or supplement thereto,
or arise out of or are based upon the 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 Distributing Holder and each such controlling
person and underwriter for any legal or other expenses reasonably incurred by
the Distributing Holder or such controlling person or underwriter in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in said registration statement, said preliminary
prospectus, said final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished by such Distributing
Holder specifically for use in the preparation thereof.
(b) If requested by the Company prior to the filing of any
registration statement covering the Registrable Securities, each Distributing
Holder will agree, severally but not jointly, to indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the Company
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue or alleged
untrue statement of any material fact contained in said registration statement,
said preliminary prospectus, said final prospectus, or said amendment or
supplement, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder specifically for use in the preparation
thereof; except that the maximum amount which may be recovered from the
Distributing Holder pursuant to this Section 7 or otherwise shall be limited to
the amount of net proceeds received by the Distributing Holder from the sale of
the Registrable Securities.
(c) Promptly after receipt by an indemnified party under
this Section 7 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 7.
-8-
<PAGE> 9
(d) In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
(8) In addition to the provisions of Section 1(a) of this
Option, the Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of the Options shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or
make a distribution on its outstanding shares of Common Stock
in shares of Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding shares
of Common Stock into a smaller number of shares, the Exercise
Price in effect at the time of the record date for such
dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted
so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall
be the number of shares of Common Stock outstanding after
giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be
made successively whenever any event listed above shall occur.
(b) Whenever the Exercise Price payable upon exercise of
each Option is adjusted pursuant to Subsection (a) above, (i)
the number of shares of Common Stock included in an Option
Unit shall simultaneously be adjusted by multiplying the
number of shares of Common Stock included in Option Unit
immediately prior to such adjustment by the Exercise Price in
effect immediately prior to such adjustment and dividing the
product so obtained by the Exercise Price, as adjusted and
(ii) the number of shares of Common Stock or other securities
issuable upon exercise of the Warrants included in the Option
Units and the exercise price of such Warrants shall be
adjusted in accordance with the applicable terms of the
Warrant Agreement.
(c) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease
of at least five cents ($0.05) in such price; provided,
however, that any adjustments which by reason of this
Subsection (c) are not required to be made shall be carried
forward and taken into
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<PAGE> 10
account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 8 shall be made
to the nearest cent or to the nearest one-hundredth of a
share, as the case may be. Anything in this Section 8 to the
contrary notwithstanding, the Company shall be entitled, but
shall not be required, to make such changes in the Exercise
Price, in addition to those required by this Section 8, as it
shall determine, in its sole discretion, to be advisable in
order that any dividend or distribution in shares of Common
Stock, or any subdivision, reclassification or combination of
Common Stock, hereafter made by the Company shall not result
in any Federal Income tax liability to the holders of Common
Stock or securities convertible into Common Stock (including
Warrants issuable upon exercise of this Option).
(d) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days
after any request for such an adjustment by the Holder, cause
a notice setting forth the adjusted Exercise Price and
adjusted number of Option Units issuable upon exercise of each
Option and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to
the Holders, at the address set forth herein, and shall cause
a certified copy thereof to be mailed to its transfer agent,
if any. The Company may retain a firm of independent certified
public accountants selected by the Board of Directors (who may
be the regular accountants employed by the Company) to make
any computation required by this Section 8, and a certificate
signed by such firm shall be conclusive evidence of the
correctness of such adjustment.
(e) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Holder
of this Option thereafter shall become entitled to receive any
shares of the Company, other than Common Stock, thereafter the
number of such other shares so receivable upon exercise of
this Option shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained
in Subsections (a) to (d), inclusive above.
(f) In case any event shall occur as to which the other
provisions of this Section 8 or Section 1(a) hereof are not
strictly applicable but as to which the failure to make any
adjustment would not fairly protect the purchase rights
represented by this Option in accordance with the essential
intent and principles hereof then, in each such case, the
Holders of Options representing the right to purchase a
majority of the Option Units may appoint a firm of independent
public accountants reasonably acceptable to the Company, which
shall give their opinion as to the adjustment, if any, on a
basis consistent with the essential intent and principles
established herein, necessary to preserve the purchase rights
represented by the Options. Upon receipt of such opinion, the
Company will promptly mail a copy thereof to the Holder of
this Option and shall make the
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<PAGE> 11
adjustments described therein. The fees and expenses of such
independent public accountants shall be borne by the Company.
9. This Agreement shall be governed by and in accordance with
the laws of the State of New York, without giving effect to the principles of
conflicts of law thereof.
IN WITNESS WHEREOF, the Company has caused this Option to be
signed by its duly authorized officers under its corporate seal, and this Option
to be dated ____________.
Piranha Interactive Publishing, Inc.
By: _____________________________
Timothy M. Brannan, President
(Corporate Seal)
Attest:
_____________________________________
J. Wade Stallings, II, Vice President
<PAGE> 12
PURCHASE FORM
(To be signed only upon exercise of option)
The undersigned, the holder of the foregoing Option, hereby
irrevocably elects to exercise the purchase rights represented by such Option
for, and to purchase thereunder, Units of Piranha Interactive Publishing, Inc.,
each Unit consisting of one share of $.001 Par Value Common Stock, one Class A
Warrant to purchase one share of Common Stock and one Class B Warrant, and one
Class B Warrant, and herewith makes payment of $_________ thereof.
Dated: _________, 19__. Instructions for Registration of Stock and Warrants
________________________________________
Print Name
________________________________________
Address
________________________________________
Signature
<PAGE> 13
OPTION EXCHANGE
The undersigned, pursuant to the provisions of the foregoing
Option, hereby elects to exchange its Option for _________ Units of Piranha
Interactive Publishing, Inc., consisting of one share of $.001 Par Value Common
Stock, one Class A Warrant to purchase one share of Common Stock and one Class B
Warrant, pursuant to the Option Exchange provisions of the Option.
Dated: _____________, 19__.
________________________________________
Print Name
________________________________________
Address
________________________________________
Signature
<PAGE> 14
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and
transfers unto the right to purchase Units represented by the foregoing Option
to the extent of Units , and appoints _____________ attorney to transfer such
rights on the books of _____________, with full power of substitution in the
premises.
Dated: _______________, 19__
[Underwriter]
By: _____________________________________
________________________________________
Address
In the presence of:
<PAGE> 1
Exhibit 4.9
WARRANT AGREEMENT
AGREEMENT, dated as of this ____th day of ___________, 1997,
by and among Piranha Interactive Publishing, Inc., a Nevada corporation
("Company"), American Stock Transfer & Trust Company, as Warrant Agent (the
"Warrant Agent"), and D.H. BLAIR INVESTMENT BANKING CORP., a New York
corporation ("Blair").
W I T N E S S E T H
WHEREAS, in connection with (i) a public offering of up to
1,380,000 units ("Units"), each unit consisting of one (1) share of the
Company's Common Stock, $.001 par value ("Common Stock"), one (1) redeemable
Class A Warrant ("Class A Warrants") and one (1) redeemable Class B Warrant
("Class B Warrants") pursuant to an underwriting agreement (the "Underwriting
Agreement") dated _______________, 1997 between the Company and Blair, (ii) the
issuance to the Underwriter or its designees of Unit Purchase Options to
purchase an aggregate of 120,000 additional Units, to be dated as of __________,
1997 (the "Unit Purchase Options"),and (iii) the conversion of 750,000 warrants
issued in a private placement by the Company on November 27, 1996 and December
5, 1996, into 750,000 Class A Warrants, the Company may issue up to 2,250,000
Class A Warrants and 1,500,000 Class B Warrants (the Class A Warrants and Class
B Warrants may be collectively referred to as "Warrants"); and
WHEREAS, each Class A Warrant initially entitles the
Registered Holder thereof to purchase one (1) share of Common Stock and one (1)
Class B Warrant, and accordingly, the Company may issue up to an additional
2,250,000 Class B Warrants; and
WHEREAS, each Class B Warrant initially entitles the
Registered Holder thereof to purchase one (1) share of Common Stock; and
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer exchange and redemption of the
Warrants, the issuance of certificates representing the Warrants, the exercise
of the Warrants, and the rights of the Registered Holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions. As used herein, the following terms
shall have the following meanings, unless the context shall otherwise require:
<PAGE> 2
(a) "Common Stock" shall mean stock of the Company of any
class, whether now or hereafter authorized, which has the right to participate
in the distribution of earnings and assets of the Company without limit as to
amount or percentage, which at the date hereof consists of twenty million
(20,000,000) shares of Common Stock, $.001 par value.
(b) "Corporate Office" shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its principal business
shall be administered, which office is located at the date hereof at 40 Wall
Street, 46th Fl., New York, New York 10005.
(c) "Exercise Date" shall mean, as to any Warrant, the date on
which the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean as to each
Class A Warrant and Class B Warrant __________, 1997.
(e) "Purchase Price" shall mean the purchase price to be paid
upon exercise of each Class A Warrant or Class B Warrant in accordance with the
terms hereof, which price shall be $6.50 as to the Class A Warrants and $8.75 as
to the Class B Warrants, subject to adjustment from time to time pursuant to the
provisions of Section 9 hereof, and subject to the Company's right to reduce the
Purchase Price upon notice to all Registered Holders of Warrants.
(f) "Redemption Price" shall mean the price at which the
Company may, at its option in accordance with the terms hereof, redeem the Class
A Warrants and/or Class B Warrants, which price shall be $0.05 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and as of
any particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean American Stock Transfer &
Trust Company, as the Company's transfer agent, or its authorized successor, as
such.
(i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York
time) on _________, 2002 or, with respect to Warrants which are outstanding as
of the applicable Redemption Date (as defined in Section 8) and specifically
excluding Warrants issuable upon exercise of Unit Purchase Options if the Unit
Purchase Options have not been exercised, the Redemption Date, whichever is
earlier; provided that if such date shall in the State of New York be a holiday
or a day on which banks are authorized or required to close, then 5:00 P.M. (New
York time) on the next following day which in the State of New York is not a
holiday or a day
-2-
<PAGE> 3
on which banks are authorized or required to close. Upon notice to all
Registered Holders, the Company shall have the right to extend the Warrant
Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) A Class A Warrant initially shall entitle the Registered
Holder of the Warrant Certificate representing such Warrant to purchase one
share of Common Stock and one Class B Warrant upon the exercise thereof, in
accordance with the terms hereof, subject to modification and adjustment as
provided in Section 9.
(b) A Class B Warrant initially shall entitle the Registered
Holder of the Warrant Certificate representing such Warrant to purchase one
share of Common Stock upon the exercise thereof, in accordance with the terms
hereof, subject to modification and adjustment as provided in Section 9.
(c) The Class A Warrants and Class B Warrants included in the
offering of Units will be detachable and separately transferable immediately
from the shares of Common Stock constituting part of such Units. The Class B
Warrants will also be detachable and separately transferable immediately from
the shares of Common Stock issued upon exercise of the Class A Warrants.
(d) Upon execution of this Agreement, Warrant Certificates
representing the number of Class A Warrants and Class B Warrants sold pursuant
to the Underwriting Agreement shall be executed by the Company and delivered to
the Warrant Agent. Upon written order of the Company signed by its President or
Chairman or a Vice President and by its Secretary or an Assistant Secretary, the
Warrant Certificates shall be countersigned, issued and delivered by the Warrant
Agent as part of the Units.
(e) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 6,000,000 shares
of Common Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(f) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon
the exercise of fewer than all Warrants represented by any Warrant Certificate,
to evidence any unexercised Warrants held by the exercising Registered Holder,
(iii) those issued upon any transfer or exchange pursuant to Section 6; (iv)
those issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7; (v) those issued pursuant to the Unit
Purchase Option; (vi) at the option of the Company, in such form as may be
approved by the its Board of Directors, to reflect any adjustment or change in
the Purchase Price, the number of
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<PAGE> 4
shares of Common Stock purchasable upon exercise of the Warrants or the Target
Price(s) therefor made pursuant to Section 8 hereof; and (vii) those Class B
Warrants issued upon exercise of Class A Warrants.
(g) Pursuant to the terms of the Unit Purchase Options, the
Underwriter may purchase up to 120,000 Units, which include up to120,000 Class A
Warrants and 120,000 Class B Warrants. Notwithstanding anything to the contrary
contained herein, the Warrants underlying the Unit Purchase Option shall not be
subject to redemption by the Company except under the terms and conditions set
forth in the Unit Purchase Options.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A as to the Class A Warrants and Exhibit B as to
the Class B Warrants (the provisions of which are hereby incorporated herein)
and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Class A Warrants or Class B
Warrants may be listed, or to conform to usage or to the requirements of Section
2(d). The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen, or destroyed Warrant Certificates) and issued in registered form.
Warrant Certificates shall be numbered serially with the letters AW on Class A
Warrants of all denominations and the letters BW on Class B Warrants of all
denominations.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, President or any Vice President and by its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be an officer of the Company or to hold the
particular office referenced in the Warrant Certificate before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates may nevertheless
be countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed such Warrant Certificates had not
ceased to be an officer of the Company or to hold such office. After
countersignature by the Warrant Agent, Warrant Certificates shall be delivered
by the Warrant Agent to the Registered Holder without further action by the
Company, except as otherwise provided by Section 4(a) hereof.
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<PAGE> 5
SECTION 4. Exercise.
(a) Each Warrant may be exercised by the Registered Holder
thereof at any time on or after the Initial Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed to
have been exercised immediately prior to the close of business on the Exercise
Date and the person entitled to receive the securities deliverable upon such
exercise shall be treated for all purposes as the holder of those securities
upon the exercise of the Warrant as of the close of business on the Exercise
Date. As soon as practicable on or after the Exercise Date, the Warrant Agent
shall deposit the proceeds received from the exercise of a Warrant and shall
notify the Company in writing of the exercise of the Warrants. Promptly
following, and in any event within five days after the date of such notice from
the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to
be issued and delivered by the Transfer Agent, to the person or persons entitled
to receive the same, a certificate or certificates for the securities
deliverable upon such exercise, (plus a Warrant Certificate for any remaining
unexercised Warrants of the Registered Holder) unless prior to the date of
issuance of such certificates the Company shall instruct the Warrant Agent to
refrain from causing such issuance of certificates pending clearance of checks
received in payment of the Purchase Price pursuant to such Warrants.
Notwithstanding the foregoing, in the case of payment made in the form of a
check drawn on an account of Blair or such other investment banks and brokerage
houses as the Company shall approve in writing to the Warrant Agent,
certificates shall immediately be issued without prior notice to the Company or
any delay. Upon the exercise of any Warrant and clearance of the funds received,
the Warrant Agent shall promptly remit the payment received for the Warrant (the
"Warrant Proceeds") to the Company or as the Company may direct in writing,
subject to the provisions of Sections 4(b) and 4(c) hereof.
(b) If, at the Exercise Date in respect of the exercise of any
Warrant after _______, 199_, (i) the market price of the Company's Common Stock
is greater than the then Purchase Price of the Warrant, (ii) the exercise of the
Warrant was solicited by a member of the National Association of Securities
Dealers, Inc. ("NASD") as designated in writing on the Warrant Certificate
Subscription Form, (iii) the Warrant was not held in a discretionary account,
(iv) disclosure of compensation arrangements was made both at the time of the
original offering and at the time of exercise; and (v) the solicitation of the
exercise of the Warrant was not in violation of Rule 10b-6 (as such rule or any
successor rule may be in effect as of such time of exercise) promulgated under
the Securities Exchange Act of 1934, then the Warrant Agent, simultaneously with
the distribution of the Warrant Proceeds to the Company shall, on behalf of the
Company, pay from the Warrant Proceeds, a fee of 5% (the "Blair Fee") of the
Purchase Price to Blair, unless Blair refuses or is unable to solicit such
exercise (of which a portion may be reallowed by Blair to the dealer who
solicited the exercise, which may also be Blair or D.H. Blair & Co., Inc.,
unless Blair refuses or is unable to solicit such exercise). In the event the
Blair Fee is not received within five days of the date on which the Company
receives Warrant Proceeds, unless such failure to make payment occurs as a
result of actions by a person other than the Company and the Company has used
its best efforts to cause the Blair Fee to be paid, then the Blair Fee shall
begin accruing interest at an annual rate of prime plus four percent (4%),
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<PAGE> 6
payable by the Company to Blair at the time Blair receives the Blair Fee. Within
five days after exercise the Warrant Agent shall send to Blair a copy of the
reverse side of each Warrant exercised. Blair shall reimburse the Warrant Agent,
upon request, for its reasonable expenses relating to compliance with this
section 4(b). The Company shall pay all fees and expenses including all blue sky
fees and expenses and all out-of-pocket expenses of Blair, including legal fees,
in connection with the solicitation, redemption or exchange of the Warrants,
unless Blair refuses or is unable to solicit such exercise. In addition, Blair
and the Company may at any time during business hours, examine the records of
the Warrant Agent, including its ledger of original Warrant Certificates
returned to the Warrant Agent upon exercise of Warrants. The provisions of this
paragraph may not be modified, amended or deleted without the prior written
consent of Blair.
(c) In order to enforce the provisions of Section 4(b) above,
in the event there is any dispute or question as to the amount or payment of the
Blair Fee, the Warrant Agent is hereby expressly authorized to withhold payment
to the Company of the Warrant Proceeds unless and until the Company establishes
an escrow account for the purpose of depositing the entire amount of the Blair
Fee, which amount will be deducted from the net Warrant Proceeds to be paid to
the Company. The funds placed in the escrow account may not be released to the
Company without a written agreement from Blair that the required Blair Fee has
been received by Blair.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes;
etc.
(a) The Company covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall, at the time of delivery, be duly and validly issued,
fully paid, nonassessable and free from all taxes, liens and charges with
respect to the issue thereof, (other than those which the Company shall promptly
pay or discharge) and that upon issuance such shares shall be listed on each
national securities exchange, on which the other shares of outstanding Common
Stock of the Company are then listed or shall be eligible for inclusion in the
Nasdaq National Market or the Nasdaq SmallCap Market if the other shares of
outstanding Common Stock of the Company are so included.
(b) The Company covenants that if any securities to be
reserved for the purpose of exercise of Warrants hereunder require registration
with, or approval of, any governmental authority under any federal securities
law before such securities may be validly issued or delivered upon such
exercise, then the Company will in good faith and as expeditiously as reasonably
possible, endeavor to secure such registration or approval. The Company will use
reasonable efforts to obtain appropriate approvals or registrations under state
"blue sky" securities laws. With respect to any such securities, however,
Warrants may not be exercised by, or shares of Common Stock issued to, any
Registered Holder in any state in which such exercise would be unlawful.
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<PAGE> 7
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance or delivery of any shares or Class B
Warrants upon exercise of the Class A Warrants, or the issuance or delivery of
any shares upon exercise of the Class B Warrants; provided, however, that if the
shares of Common Stock or Class B Warrants, as the case may be, are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to
requisition the Company's Transfer Agent from time to time for certificates
representing shares of Common Stock issuable upon exercise of the Warrants, and
the Company will authorize the Transfer Agent to comply with all such proper
requisitions. The Company will file with the Warrant Agent a statement setting
forth the name and address of the Transfer Agent of the Company for shares of
Common Stock issuable upon exercise of the Warrants.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute
and the Warrant Agent shall countersign, issue and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for
any exchange or registration of transfer of Warrant Certificates. In addition,
the Company may require payment by such holder of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith.
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<PAGE> 8
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly cancelled
by the Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement or resignation as Warrant Agent, or, with the
prior written consent of Blair, disposed of or destroyed, at the direction of
the Company.
(f) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary. The Warrants, which are being publicly offered in Units
with shares of Common Stock pursuant to the Underwriting Agreement, will be
immediately detachable from the Common Stock and transferable separately
therefrom.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and
the Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall ( in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a bona
fide purchaser) countersign and deliver to the Registered Holder in lieu thereof
a new Warrant Certificate of like tenor representing an equal aggregate number
of Class A Warrants or Class B Warrants. Applicants for a substitute Warrant
Certificate shall comply with such other reasonable regulations and pay such
other reasonable charges as the Warrant Agent may prescribe.
SECTION 8. Redemption.
(a) Subject to the provisions of paragraph 2(g) hereof, on not
less than thirty (30) days notice given at any time after ___________, 1998 (the
"Redemption Notice"), to Registered Holders of the Warrants being redeemed, the
Warrants may be redeemed, at the option of the Company, at a redemption price of
$0.05 per Warrant, provided the Market Price shall exceed $9.10 with respect to
the Class A Warrants and $12.25 with respect to the Class B Warrants (the
"Target Prices"), subject to adjustment as set forth in Section 8(f), below.
Market Price shall mean (i) the average closing bid price of the Common Stock,
for thirty (30) consecutive business days ending on the Calculation Date as
reported by Nasdaq, if the Common Stock is traded on the Nasdaq SmallCap Market,
or (ii) the average last reported sale price of the Common Stock, for thirty
(30) consecutive business days ending on the Calculation Date, as reported by
the primary exchange on which the Common Stock is traded, if the Common Stock is
traded on a national securities exchange, or by Nasdaq, if the Common Stock is
traded on the Nasdaq National Market. All Warrants of a class must be redeemed
if any of that class are redeemed, provided that the Warrants underlying the
Unit Purchase Option may only be redeemed in compliance with and subject to the
terms and conditions of the Unit Purchase Option. For purposes of this Section
8, the Calculation Date shall mean a date within 15 days of the mailing
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<PAGE> 9
of the Redemption Notice. The date fixed for redemption of the Warrants is
referred to herein as the "Redemption Date". The Class B Warrant Redemption Date
may not be earlier than thirty-one (31) days after the Class A Warrant
Redemption Date.
(b) If the conditions set forth in Section 8(a) are met, and
the Company desires to exercise its right to redeem the Warrants, it shall
request Blair to mail a Redemption Notice to each of the Registered Holders of
the Warrants to be redeemed, first class, postage prepaid, not later than the
thirtieth day before the date fixed for redemption, at their last address as
shall appear on the records maintained pursuant to Section 6(b). Any notice
mailed in the manner provided herein shall be conclusively presumed to have been
duly given whether or not the Registered Holder receives such notice.
(c) The Redemption Notice shall specify (i) the redemption
price, (ii) the Redemption Date, (iii) the place where the Warrant Certificates
shall be delivered and the redemption price paid, (iv) that Blair will assist
each Registered Holder of a Warrant in connection with the exercise thereof and
(v) that the right to exercise the Warrant shall terminate at 5:00 P.M. (New
York time) on the business day immediately preceding the Redemption Date. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant
Secretary of Blair or the Company that notice of redemption has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein.
(d) Any right to exercise a Warrant shall terminate at 5:00
P.M. (New York time) on the business day immediately preceding the Redemption
Date. On and after the Redemption Date, Registered Holders of the Warrants shall
have no further rights except to receive, upon surrender of the Warrant, the
Redemption Price.
(e) From and after the Redemption Date, the Company shall, at
the place specified in the Redemption Notice, upon presentation and surrender to
the Company by or on behalf of the Registered Holder thereof of one or more
Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be
delivered to or upon the written order of such Registered Holder a sum in cash
equal to the Redemption Price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants called for redemption, such Warrants shall
expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the Redemption Price, shall
cease.
(f) If the shares of the Company's Common Stock are subdivided
or combined into a greater or smaller number of shares of Common Stock, the
Target Prices shall be proportionally adjusted by the ratio which the total
number of shares of Common Stock outstanding immediately prior to such event
bears to the total number of shares of Common Stock to be outstanding
immediately after such event.
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<PAGE> 10
SECTION 9. Adjustment of Exercise Price and Number of Shares
of Common Stock or Warrants.
(a) Subject to the exceptions referred to in Section 9(g)
below, in the event the Company shall, at any time or from time to time after
the date hereof, sell any shares of Common Stock for a consideration per share
less than the Market Price (as defined in Section 8, except that for purposes of
Section 9, the Calculation Date shall mean the date of the sale or other
transaction referred to in this Section 9) on the date of the sale or issue any
shares of Common Stock as a stock dividend to the holders of Common Stock, or
subdivide or combine the outstanding shares of Common Stock into a greater or
lesser number of shares (any such sale, issuance, subdivision or combination
being herein called a "Change of Shares"), then, and thereafter upon each
further Change of Shares, the Purchase Price in effect immediately prior to such
Change of Shares shall be changed to a price (including any applicable fraction
of a cent) determined by multiplying the Purchase Price in effect immediately
prior thereto by a fraction, the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to the issuance
of such additional shares and the number of shares of Common Stock which the
aggregate consideration received (determined as provided in subsection 9(f)(F)
below) for the issuance of such additional shares would purchase at the Market
Price and the denominator of which shall be the sum of the number of shares of
Common Stock outstanding immediately after the issuance of such additional
shares. Such adjustment shall be made successively whenever such an issuance is
made.
Upon each adjustment of the Purchase Price pursuant to
this Section 9, the total number of shares of Common Stock and Class B Warrants
purchasable upon the exercise of each Class A Warrant or the total number of
shares of Common Stock purchasable upon exercise of each Class B Warrant, as
applicable, shall (subject to the provisions contained in Section 9(b) hereof)
be such number of shares (and Class B Warrants, if applicable) (calculated to
the nearest one hundredth; provided, however, that in no event shall the Class A
Aggregate Per Share Price or the Class B Aggregate Per Share Price as
applicable, increase as a result of such rounding calculation) purchasable at
the Purchase Price in effect immediately prior to such adjustment multiplied by
a fraction, the numerator of which shall be the Purchase Price in effect
immediately prior to such adjustment and the denominator of which shall be the
Purchase Price in effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase
Price hereunder, to adjust the number of Class A Warrants or Class B Warrants
outstanding, in lieu of the adjustment in the number of shares of Common Stock
(and Class B Warrants, if applicable) purchasable upon the exercise of each
Warrant as hereinabove provided, so that each Class A Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock
and one Class B Warrant, and each Class B Warrant outstanding after such
adjustment shall represent the right to purchase one share of Common Stock. Each
Warrant held of record prior to such adjustment of the number of Warrants shall
become that number of Warrants (calculated to the nearest tenth) determined by
multiplying the number one by a fraction, the numerator of which shall be the
Purchase Price in effect immediately prior to such
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<PAGE> 11
adjustment and the denominator of which shall be the Purchase Price in effect
immediately after such adjustment. Upon each adjustment of the number of
Warrants pursuant to this Section 9, the Company shall, as promptly as
practicable, cause to be distributed to each Registered Holder of Warrant
Certificates on the date of such adjustment Warrant Certificates evidencing,
subject to Section 10 hereof, the number of additional Warrants to which such
Holder shall be entitled as a result of such adjustment or, at the option of the
Company, cause to be distributed to such Holder in substitution and replacement
for the Warrant Certificates held by him prior to the date of adjustment (and
upon surrender thereof, if required by the Company) new Warrant Certificates
evidencing the number of Warrants to which such Holder shall be entitled after
such adjustment.
(c) In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a Warrant then outstanding shall
have the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The Company shall
not effect any such consolidation, merger or sale unless prior to or
simultaneously with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Warrant Agent, the obligation
to deliver to the holder of each Warrant such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holders may be
entitled to purchase and the other obligations of the Company under this
Agreement. The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
(d) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(f) hereof, continue to express the Purchase Price per
share, the number of shares purchasable thereunder and the Redemption Price
therefor as the Purchase Price per share, and the number of shares purchasable
and the Redemption Price therefor were expressed in the Warrant Certificates
when the same were
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<PAGE> 12
originally issued.
(e) After each adjustment of the Purchase Price pursuant to
this Section 9, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the Registered Holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a
statement showing in detail the method of calculation and the facts upon which
such adjustment or readjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any securities
issued or sold or deemed to have been issued, (b) the number of shares of Common
Stock outstanding or deemed to be outstanding, and (c) the Purchase Price in
effect immediately prior to such issue or sale and as adjusted and readjusted
(if required by Section 9) on account thereof. The Company will promptly file
such certificate with the Warrant Agent and furnish a copy thereof to be sent by
ordinary first class mail to Blair and to each Registered Holder of Warrants at
his last address as it shall appear on the registry books of the Warrant Agent.
No failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the Company
failed to mail such notice, or except as to the holder whose notice was
defective. The Company will, upon the written request at any time of the
Underwriter, furnish to the Underwriter a report by Coopers & Lybrand LLP, or
other independent public accountants of recognized national standing (which may
be the regular auditors of the Company) selected by the Company to verify such
computation and setting forth such adjustment or readjustment and showing in
detail the method of calculation and the facts upon which such adjustment or
readjustment is based. The Company will also keep copies of all such
certificates and reports at its principal office.
(f) For purposes of Section 9(a) and 9(b) hereof, the
following provisions (A) to (F) shall also be applicable:
(A) The number of shares of Common Stock outstanding at
any given time shall include shares of Common Stock owned or
held by or for the account of the Company and the sale or
issuance of such treasury shares or the distribution of any
such treasury shares shall not be considered a Change of
Shares for purposes of said sections.
(B) No adjustment of the Purchase Price shall be made
unless such adjustment would require an increase or decrease
of at least $.10 in the Purchase Price; provided that any
adjustments which by reason of this clause (B) are not
required to be made shall be carried forward and shall be made
at the time of and together with the next subsequent
adjustment which, together with any adjustment(s) so carried
forward, shall require an increase or decrease of at least
$.10 in the Purchase Price then in effect hereunder.
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<PAGE> 13
(C) In case of (1) the sale by the Company for cash (or as
a component of a unit being sold for cash) of any rights or
warrants to subscribe for or purchase, or any options for the
purchase of, Common Stock or any securities convertible into
or exchangeable for Common Stock without the payment of any
further consideration other than cash, if any (such securities
convertible, exercisable or exchangeable into Common Stock
being herein called "Convertible Securities"), or (2) the
issuance by the Company, without the receipt by the Company of
any consideration therefor, of any rights or warrants to
subscribe for or purchase, or any options for the purchase of,
Common Stock or Convertible Securities, in each case, if (and
only if) the consideration payable to the Company upon the
exercise of such rights, warrants or options shall consist of
cash, whether or not such rights, warrants or options, or the
right to convert or exchange such Convertible Securities, are
immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum
aggregate consideration payable to the Company upon the
exercise of such rights, warrants or options, plus the
consideration, if any, received by the Company for the
issuance or sale of such rights, warrants or options, plus, in
the case of such Convertible Securities, the minimum aggregate
amount of additional consideration, other than such
Convertible Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number of shares of
Common Stock issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such
Convertible Securities issuable upon the exercise of such
rights, warrants or options) is less than the Market Price of
the Common Stock on the date of the issuance or sale of such
rights, warrants or options, then the total maximum number of
shares of Common Stock issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange
of such Convertible Securities (as of the date of the issuance
or sale of such rights, warrants or options) shall be deemed
to be outstanding shares of Common Stock for purposes of
Sections 9(a) and 9(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
(D) In case of the sale by the Company for cash of any
Convertible Securities, whether or not the right of conversion
or exchange thereunder is immediately exercisable, and the
price per share for which Common Stock is issuable upon the
conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration
received by the Company for the sale of such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, other than such Convertible Securities,
payable upon the conversion or exchange thereof, by (y) the
total maximum number of shares of Common Stock issuable upon
the conversion or exchange of such Convertible Securities) is
less than the Market Price of the Common Stock on the date of
the sale of such Convertible Securities, then the total
maximum
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<PAGE> 14
number of shares of Common Stock issuable upon the conversion
or exchange of such Convertible Securities (as of the date of
the sale of such Convertible Securities) shall be deemed to be
outstanding shares of Common Stock for purposes of Sections
9(a) and 9(b) hereof and shall be deemed to have been sold for
cash in an amount equal to such price per share.
(E) In case the Company shall modify the rights of
conversion, exchange or exercise of any of the securities
referred to in (C) or (D) above or any other securities of the
Company convertible, exchangeable or exercisable for shares of
Common Stock, for any reason other than an event that would
require adjustment to prevent dilution, so that the
consideration per share received by the Company after such
modification is less than the Market Price on the date prior
to such modification, the Purchase Price to be in effect after
such modification shall be determined by multiplying the
Purchase Price in effect immediately prior to such event by a
fraction, of which the numerator shall be the number of shares
of Common Stock outstanding on the date prior to the
modification plus the number of shares of Common Stock which
the aggregate consideration receivable by the Company for the
securities affected by the modification would purchase at the
Market Price and of which the denominator shall be the number
of shares of Common Stock outstanding on such date plus the
number of shares of Common Stock to be issued upon conversion,
exchange or exercise of the modified securities at the
modified rate. Such adjustment shall become effective as of
the date upon which such modification shall take effect. On
the expiration of any such right, warrant or option or the
termination of any such right to convert or exchange any such
Convertible Securities referred to in Paragraph (C) or (D)
above, the Purchase Price then in effect hereunder shall
forthwith be readjusted to such Purchase Price as would have
obtained (a) had the adjustments made upon the issuance or
sale of such rights, warrants, options or Convertible
Securities been made upon the basis of the issuance of only
the number of shares of Common Stock theretofore actually
delivered (and the total consideration received therefor) upon
the exercise of such rights, warrants or options or upon the
conversion or exchange of such Convertible Securities and (b)
had adjustments been made on the basis of the Purchase Price
as adjusted under clause (a) for all transactions (which would
have affected such adjusted Purchase Price) made after the
issuance or sale of such rights, warrants, options or
Convertible Securities.
(F) In case of the sale for cash of any shares of Common
Stock, any Convertible Securities, any rights or warrants to
subscribe for or purchase, or any options for the purchase of,
Common Stock or Convertible Securities, the consideration
received by the Company therefore shall be deemed to be the
gross sales price therefor without deducting therefrom any
expense paid or incurred by the Company or any underwriting
discounts or commissions or concessions paid or allowed by the
Company in connection therewith.
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<PAGE> 15
(G) In case any event shall occur as to which the
provisions of Section 9 are not strictly applicable but the
failure to make any adjustment would not fairly protect the
purchase rights represented by the Warrants in accordance with
the essential intent and principles of Section 9, then, in
each such case, the Board of Directors of the Company shall in
good faith by resolution provide for the adjustment, if any,
on a basis consistent with the essential intent and principles
established in Section 9, necessary to preserve, without
dilution, the purchase rights represented by the Warrants. The
Company will promptly make the adjustments described therein.
(g) No adjustment to the Purchase Price of the Warrants or to
the number of shares of Common Stock purchasable upon the exercise of each
Warrant will be made, however,
(i) upon the exercise of any of the options presently
outstanding under the Company's Stock Option Plan (the "Plan")
for officers, directors and certain other key personnel of the
Company; or
(ii) upon the issuance or exercise of any other securities
which may hereafter be granted or exercised under the Plan or
under any other employee benefit plan of the Company approved
by the Company's stockholders; or
(iii) upon the sale or exercise of the Warrants, including
without limitation the sale or exercise of any of the Warrants
comprising the Unit Purchase Option or upon the sale or
exercise of the Unit Purchase Option; or
(iv) upon the sale of any shares of Common Stock and/or
Convertible Securities in a firm commitment underwritten
public offering, including, without limitation, shares sold
upon the exercise of any overallotment option granted to the
Underwriter in connection with such offering; or
(v) upon the issuance or sale of Common Stock or
Convertible Securities upon the exercise of any rights or
warrants to subscribe for or purchase, or any options for the
purchase of, Common Stock or Convertible Securities, whether
or not such rights, warrants or options were outstanding on
the date of the original sale of the Warrants or were
thereafter issued or sold; or
(vi) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities, whether
or not any adjustment in the Purchase Price was made or
required to be made upon the issuance or sale of such
Convertible Securities and whether or not such Convertible
Securities were outstanding on the date of the original sale
of the Warrants or were thereafter issued or sold.
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<PAGE> 16
(h) Any determination as to whether an adjustment in the
Purchase Price in effect hereunder is required pursuant to Section 9, or as to
the amount of any such adjustment, if required, shall be binding upon the
holders of the Warrants and the Company if made in good faith by the Board of
Directors of the Company.
(i) If and whenever the Company shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding, the
rights, warrants or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this Section 9(j), that
exercise of Warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his Warrants. Such grant by the Company to the holders of the
Warrants shall be in lieu of any adjustment which otherwise might be called for
pursuant to this Section 9.
SECTION 10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock purchasable upon
the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the
Company nevertheless shall not be required to issue fractions of shares, upon
exercise of the Warrants or otherwise, or to distribute certificates that
evidence fractional shares. With respect to any fraction of a share called for
upon the exercise of any Warrant, the Company shall pay to the Holder an amount
in cash equal to such fraction multiplied by the current market value of such
fractional share, determined as follows:
(1) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such
exchange or is traded on the Nasdaq National Market, the
current market value shall be the last reported sale price of
the Common Stock on such exchange or market on the last
business day prior to the date of exercise of this Warrant or
if no such sale is made on such day, the average of the
closing bid and asked prices for such day on such exchange or
market; or
(2) If the Common Stock is not listed or admitted to
unlisted trading privileges on a national securities exchange
or is not traded on the Nasdaq National Market, the current
market value shall be the mean of the last reported bid and
asked prices reported by the Nasdaq SmallCap Market or, if not
traded thereon, by the National Quotation Bureau, Inc. on the
last business day prior to the date of the exercise of this
Warrant; or
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<PAGE> 17
(3) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not
so reported, the current market value shall be an amount
determined in such reasonable manner as may be prescribed by
the Board of Directors of the Company.
SECTION 11. Warrant Holders Not Deemed Stockholders. No holder
of Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon exercise
of such Warrants for any purpose whatsoever, nor shall anything contained herein
be construed to confer upon the holder of Warrants, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue or reclassification of stock, change of par value or
change of stock to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
subscription rights, until such holder shall have exercised such Warrants and
been issued shares of Common Stock in accordance with the provisions hereof.
SECTION 12. Rights of Action. All rights of action with
respect to this Agreement are vested in the respective Registered Holders of the
Warrants, and any Registered Holder of a Warrant, without consent of the Warrant
Agent or of the holder of any other Warrant, may, in his own behalf and for his
own benefit, enforce against the Company his right to exercise his Warrants for
the purchase of shares of Common Stock in the manner provided in the Warrant
Certificate and this Agreement.
SECTION 13. Agreement of Warrant Holders. Every holder of a
Warrant, by his acceptance thereof, consents and agrees with the Company, the
Warrant Agent and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books
of the Warrant Agent by the Registered Holder thereof in person or by his
attorney duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant Agent,
duly endorsed or accompanied by a proper instrument of transfer satisfactory to
the Warrant Agent and the Company in their sole discretion, together with
payment of any applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the holder and as
the absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice or knowledge to the contrary, except as otherwise expressly provided in
Section 7 hereof.
SECTION 14. Cancellation of Warrant Certificates. If the
Company shall purchase or acquire any Warrant or Warrants, the Warrant
Certificate or Warrant Certificates evidencing the same shall thereupon be
delivered to the Warrant Agent and cancelled by it and
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<PAGE> 18
retired. The Warrant Agent shall also cancel the Warrant Certificate or Warrant
Certificates following exercise of any or all of the Warrants represented
thereby or delivered to it for transfer or exchange.
SECTION 15. Concerning the Warrant Agent. The Warrant Agent
acts hereunder as agent and in a ministerial capacity for the Company, and its
duties shall be determined solely by the provisions hereof. The Warrant Agent
shall not, by issuing and delivering Warrant Certificates or by any other act
hereunder be deemed to make any representations as to the validity, value or
authorization of the Warrant Certificates or the Warrants represented thereby or
of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.
The Warrant Agent shall not at any time be under any duty
or responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price or the Redemption Price provided in
this Agreement, or to determine whether any fact exists which may require any
such adjustments, or with respect to the nature or extent of any such
adjustment, when made, or with respect to the method employed in making the
same. It shall not (i) be liable for any recital or statement of facts contained
herein or for any action taken, suffered or omitted by it in reliance on any
Warrant Certificate or other document or instrument believed by it in good faith
to be genuine and to have been signed or presented by the proper party or
parties, (ii) be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained in this Agreement or
in any Warrant Certificate, or (iii) be liable for any act or omission in
connection with this Agreement except for its own negligence or wilful
misconduct.
The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board, President, any Vice President, its
Secretary, or Assistant Secretary, (unless other evidence in respect thereof is
herein specifically prescribed). The Warrant Agent shall not be liable for any
action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand believed by it to be
genuine.
The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; it further agrees to indemnify the Warrant Agent and save it
harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence
or wilful misconduct.
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<PAGE> 19
The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities arising as
a result of the Warrant Agent's own negligence or wilful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to the Registered Holder of
each Warrant Certificate at the Company's expense. Upon such resignation, or any
inability of the Warrant Agent to act as such hereunder, the Company shall
appoint a new warrant agent in writing. If the Company shall fail to make such
appointment within a period of 15 days after it has been notified in writing of
such resignation by the resigning Warrant Agent, then the Registered Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its stockholders,
of not less than $10,000,000 or a stock transfer company that is a registered
transfer agent under the Securities Exchange Act of 1934. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further act,
provided that such corporation is eligible for appointment as successor to the
Warrant Agent under the provisions of the preceding paragraph. Any such
successor warrant agent shall promptly cause notice of its succession as warrant
agent to be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
SECTION 16. Modification of Agreement. Subject to the
provisions of Section 4(b), the parties hereto and the Company may by
supplemental agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; (ii) to reflect an increase in the number of Class A or Class B
Warrants which
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<PAGE> 20
are to be governed by this Agreement resulting from(a) a subsequent public
offering of Company securities which includes Class A or Class B Warrants or (b)
a subsequent private placement of Company securities which includes Class A or
Class B Warrants, in either case having the same terms and conditions as the
Class A or Class B Warrants, respectively, originally covered by or subsequently
added to this Agreement under this Section 16, provided, however, that in the
case of a private placement, the amendment to this Agreement will be effective
only at such time as the resale of such Warrants, as well as the securities
underlying such Warrants is covered by an effective registration statement under
the Act; or (iii) that they may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Warrant Certificates; provided,
however, that this Agreement shall not otherwise be modified, supplemented or
altered in any respect except with the consent in writing of the Registered
Holders of Warrant Certificates representing not less than 50% of the Warrants
then outstanding; and provided, further, that no change in the number or nature
of the securities purchasable upon the exercise of any Warrant, or the Purchase
Price therefor, or the acceleration of the Warrant Expiration Date, shall be
made without the consent in writing of the Registered Holder of the Warrant
Certificate representing such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed or are made in
compliance with applicable law.
SECTION 17. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company, at 1839 West Drake, Suite B, Tempe, Arizona 85283,
attention: Timothy M. Brannan, or at such other address as may have been
furnished to the Warrant Agent in writing by the Company; if to the Warrant
Agent, at its Corporate Office; if to Blair, at D.H. Blair Investment Banking
Corp., 44 Wall Street, New York, New York 10005.
SECTION 18. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.
SECTION 19. Binding Effect. This Agreement shall be binding
upon and inure to the benefit of the Company and, the Warrant Agent and their
respective successors and assigns, and the holders from time to time of Warrant
Certificates . Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
SECTION 20. Termination. This Agreement shall terminate at the
close of business on the earlier of the Warrant Expiration Date or the date upon
which all Warrants (including the warrants issuable upon exercise of the Unit
Purchase Options) have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 15
hereof shall survive such termination.
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<PAGE> 21
SECTION 21. Counterparts. This Agreement may be executed in
several counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
PIRANHA INTERACTIVE PUBLISHING, INC.
By: ______________________________
Timothy M. Brannan
President
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By: ______________________________
Authorized Officer
D.H. BLAIR INVESTMENT BANKING CORP.
By: ______________________________
Martin A. Bell
Vice Chairman and General Counsel
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<PAGE> 22
EXHIBIT A
[FORM OF FACE OF CLASS A WARRANT CERTIFICATE]
No. AW _____ Class A Warrants
VOID AFTER __________, 2002
CLASS A WARRANT CERTIFICATE FOR PURCHASE
OF COMMON STOCK AND REDEEMABLE CLASS B WARRANTS
PIRANHA INTERACTIVE PUBLISHING, INC.
This certifies that FOR VALUE RECEIVED __________________ or
registered assigns (the "Registered Holder") is the owner of the number of Class
A Warrants ("Class A Warrants") specified above. Each Class A Warrant
represented hereby initially entitles the Registered Holder to purchase, subject
to the terms and conditions set forth in this Warrant Certificate and the
Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.001 par value ("Common Stock"), of Piranha Interactive
Publishing, Inc., a Nevada corporation (the "Company"), and one Class B Warrant
of the Company at any time between ____________, 1997 and the Expiration Date
(as hereinafter defined), upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly executed, at
the corporate office of American Stock Transfer & Trust Company as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of $6.50
(the "Purchase Price") in lawful money of the United States of America in cash
or by official bank or certified check made payable to the Company.
This Warrant Certificate and each Class A Warrant represented
hereby are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
______________, 1997 by and among the Company, the Warrant Agent and D.H. Blair
Investment Banking Corp.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price or the number of shares of Common Stock
and Class B Warrants subject to purchase upon the exercise of each Class A
Warrant represented hereby are subject to modification or adjustment.
Each Class A Warrant represented hereby is exercisable at the
option of the Registered Holder, but no fractional shares of Common Stock will
be issued. In the case of the
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<PAGE> 23
exercise of less than all the Class A Warrants represented hereby, the Company
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such Class
A Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York
time) on _________________, 2002 or such earlier date as the Class A Warrants
shall be redeemed. If such date shall in the State of New York be a holiday or a
day on which banks are authorized to close, then the Expiration Date shall mean
5:00 P.M. (New York time) the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of the Class A Warrants represented hereby unless a
registration statement under the Securities Act of 1933, as amended, with
respect to such securities is effective. The Company has covenanted and agreed
that it will file a registration statement and will use its best efforts to
cause the same to become effective and to keep such registration statement
current while any of the Class A Warrants are outstanding. The Class A Warrants
represented hereby shall not be exercisable by a Registered Holder in any state
where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant Agent,
for a new Warrant Certificate or Warrant Certificates of like tenor representing
an equal aggregate number of Class A Warrants, each of such new Warrant
Certificates to represent such number of Class A Warrants as shall be designated
by such Registered Holder at the time of such surrender. Upon due presentment
for registration of transfer of this Class A Warrant Certificate at such office,
a new Warrant Certificate or Warrant Certificates representing an equal
aggregate number of Class A Warrants will be issued to the transferee in
exchange therefor, subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Class A Warrant represented
hereby, the Registered Holder shall not be entitled to any rights of a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends or other distributions, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided in the
Warrant Agreement.
The Class A Warrants represented hereby may be redeemed at the
option of the Company, at a redemption price of $.05 per Class A Warrant at any
time after __________, 1998 provided the Market Price (as defined in the Warrant
Agreement) for the Common Stock shall exceed $9.10 per share. Notice of
redemption shall be given not later than the thirtieth day before the date fixed
for redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect to
the Class A Warrants represented hereby except to receive the $.05 per Class A
Warrant upon surrender of this Warrant Certificate.
A-2
<PAGE> 24
Prior to due presentment for registration of transfer hereof,
the Company and the Warrant Agent may deem and treat the Registered Holder as
the absolute owner hereof and of each Class A Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary.
The Company has agreed to pay a fee of 5% of the Purchase
Price upon certain conditions as specified in the Warrant Agreement upon the
exercise of the Class A Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by
the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile, by two of its
officers thereunto duly authorized and a facsimile of its corporate seal to be
imprinted hereon.
PIRANHA INTERACTIVE PUBLISHING, INC.
Dated: _____________ By: ______________________________
Timothy M. Brannan
President
By: ______________________________
J. Wade Stallings, II, Vice President
[seal]
Countersigned:
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY, Warrant Agent
By ___________________________
Authorized Officer
A-3
<PAGE> 25
[FORM OF REVERSE OF WARRANT CERTIFICATE]
TRANSFER FEE: $_______ PER CERTIFICATE ISSUED
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise _______ Class A Warrants represented by this Warrant Certificate, and
to purchase the securities issuable upon the exercise of such Class A Warrants,
and requests that certificates for such securities shall be issued in the name
of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
_____________________
_____________________
_____________________
_____________________
[please print or type name and address]
and be delivered to
_____________________
_____________________
_____________________
_____________________
[please print or type name and address]
and if such number of Class A Warrants shall not be all the Class A Warrants
evidenced by this Warrant Certificate, that a new Class A Warrant Certificate
for the balance of such Class A Warrants be registered in the name of, and
delivered to, the Registered Holder at the address stated below.
The undersigned represents that the exercise of the Class A
Warrants evidenced hereby was solicited by a member of the National Association
of Securities Dealers, Inc. If not
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<PAGE> 26
solicited by an NASD member, please write "unsolicited" in the space below.
Unless otherwise indicated by listing the name of another NASD member firm, it
will be assumed that the exercise was solicited by D.H. Blair Investment Banking
Corp. or D.H. Blair & Co., Inc.
____________________________________
(Name of NASD Member)
Dated: X ___________________________
____________________________________
____________________________________
Address
____________________________________
Taxpayer Identification Number
____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
(INSERT THE FOLLOWING ON BOTH CERTIFICATES) ONLY IF FCC OR OTHER REGULATIONS
LIMIT OWNERSHIP BY NON-U.S. PERSONS ("ALIENS"):
A-5
<PAGE> 27
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
OF TRANSFEREE
_____________________
_____________________
_____________________
_____________________
[please print or type name and address]
_________________ of the Class A Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
____________________________________ Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
Dated:________________ X ______________________________
Signature Guaranteed
_______________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-6
<PAGE> 28
EXHIBIT B
[FORM OF FACE OF CLASS B WARRANT CERTIFICATE]
No. BW __ Class B Warrants
VOID AFTER _____________ 2002
CLASS B WARRANT CERTIFICATE FOR
PURCHASE OF COMMON STOCK
PIRANHA INTERACTIVE PUBLISHING, INC.
This certifies that FOR VALUE RECEIVED _______________________
or registered assigns (the "Registered Holder") is the owner of the number of
Class B Warrants specified above. Each Class B Warrant represented hereby
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Warrant Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.001 par value ("Common Stock"), of Piranha Interactive Publishing, Inc., a
Nevada corporation (the "Company"), at any time between _____________, 1997 and
the Expiration Date (as hereinafter defined), upon the presentation and
surrender of this Warrant Certificate with the Subscription Form on the reverse
hereof duly executed, at the corporate office of American Stock Transfer & Trust
Company, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied
by payment of $8.75 (the "Purchase Price") in lawful money of the United States
of America in cash or by official bank or certified check made payable to the
Company.
This Warrant Certificate and each Class B Warrant represented
hereby are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
___________, 1997 by and among the Company, the Warrant Agent and D.H. Blair
Investment Banking Corp.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price or the number of shares of Common Stock
subject to purchase upon the exercise of each Class B Warrant represented hereby
are subject to modification or adjustment.
Each Class B Warrant represented hereby is exercisable at the
option of the Registered Holder, but no fractional shares of Common Stock will
be issued. In the case of the exercise of less than all the Class B Warrants
represented hereby, the Company shall cancel this Warrant Certificate upon the
surrender hereof and shall execute and deliver a new Warrant Certificate or
Warrant Certificates of like tenor, which the Warrant Agent shall countersign,
for the balance of such Class B Warrants.
B-1
<PAGE> 29
The term "Expiration Date" shall mean 5:00 P.M. (New York
time) on _______________, 2002 or such earlier date as the Class B Warrants
shall be redeemed. If such date shall in the State of New York be a holiday or a
day on which banks are authorized to close, then the Expiration Date shall mean
5:00 P.M. (New York time) the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of the Class B Warrants represented hereby unless a
registration statement under the Securities Act of 1933, as amended, with
respect to such securities is effective. The Company has covenanted and agreed
that it will file a registration statement and will use its best efforts to
cause the same to become effective and to keep such registration statement
current while any of the Class B Warrants are outstanding. The Class B Warrants
represented hereby shall not be exercisable by a Registered Holder in any state
where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant Agent,
for a new Warrant Certificate or Warrant Certificates of like tenor representing
an equal aggregate number of Class B Warrants, each of such new Warrant
Certificates to represent such number of Class B Warrants as shall be designated
by such Registered Holder at the time of such surrender. Upon due presentment
with any applicable transfer fee in addition to any tax or other governmental
charge imposed in connection therewith, for registration of transfer of this
Warrant Certificate at such office, a new Warrant Certificate or Warrant
Certificates representing an equal aggregate number of Class B Warrants will be
issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Class B Warrant represented
hereby, the Registered Holder shall not be entitled to any rights of a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends or other distributions, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided in the
Warrant Agreement.
The Class B Warrants represented hereby may be redeemed at the
option of the Company, at a redemption price of $.05 per Class B Warrant at any
time after _____________, 1998 provided the Market Price (as defined in the
Warrant Agreement) for the Common Stock shall exceed $12.25 per share. Notice of
redemption shall be given not later than the thirtieth day before the date fixed
for redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect to
the Class B Warrants represented hereby except to receive the $.05 per Class B
Warrant upon surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof,
the Company and the Warrant Agent may deem and treat the Registered Holder as
the absolute owner hereof and of each Class B Warrant represented hereby
(notwithstanding any notations of ownership or writing
B-2
<PAGE> 30
hereon made by anyone other than a duly authorized officer of the Company or the
Warrant Agent) for all purposes and shall not be affected by any notice to the
contrary.
The Company has agreed to pay a fee of 5% of the Purchase
Price upon certain conditions as specified in the Warrant Agreement upon the
exercise of the Class B Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by
the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile, by two of its
officers thereunto duly authorized and a facsimile of its corporate seal to be
imprinted hereon.
PIRANHA INTERACTIVE PUBLISHING, INC.
Dated: _________________ By: _______________________________
Timothy M. Brannan
President
By: ______________________________
J. Wade Stallings, II
Vice President
[seal]
Countersigned:
AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
By: ______________________________
Authorized Officer
B-3
<PAGE> 31
[FORM OF REVERSE OF WARRANT CERTIFICATE]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise _____________ Class B Warrants represented by this Warrant Certificate,
and to purchase the securities issuable upon the exercise of such Class B
Warrants, and requests that certificates for such securities shall be issued in
the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
_____________________
_____________________
_____________________
_____________________
[please print or type name and address]
and be delivered to
_____________________
_____________________
_____________________
_____________________
[please print or type name and address]
and if such number of Class B Warrants shall not be all the Class B Warrants
evidenced by this Warrant Certificate, that a new Warrant Certificate for the
balance of such Class B Warrants be registered in the name of, and delivered to,
the Registered Holder at the address stated below.
The undersigned represents that the exercise of the Class B
Warrants evidenced hereby was solicited by a member of the National Association
of Securities Dealers, Inc. If not
B-4
<PAGE> 32
solicited by an NASD member, please write "unsolicited" in the space below.
Unless otherwise indicated by listing the name of another NASD member firm, it
will be assumed that the exercise was solicited by D.H. Blair Investment Banking
Corp.
____________________________________
(Name of NASD Member)
Dated: X ___________________________
____________________________________
____________________________________
Address
____________________________________
Taxpayer Identification Number
____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ___________________ hereby sells, assigns and transfers unto
B-5
<PAGE> 33
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
OF TRANSFEREE
_____________________
_____________________
_____________________
_____________________
[please print or type name and address]
_________________ of the Class B Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
__________________________________ Attorney to transfer this Warrant Certificate
on the books of the Company, with full power of substitution in the premises.
Dated: X ______________________________
Signature Guaranteed
_______________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
B-6
<PAGE> 1
Exhibit 5.1
[SQUIRE, SANDERS & DEMPSEY Letterhead]
January 28, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: PIRANHA INTERACTIVE PUBLISHING, INC.
Ladies and Gentlemen:
This firm is special counsel for Piranha Interactive Publishing, Inc., a
Nevada corporation (the "Company") with respect to the sale of up to 1,380,000
units, each unit consisting of one share of the Company's $.001 par value
Common Stock, one Redeemable Class A Warrant and one Redeemable Class B Warrant
(the "Units") which are the subject of a Form SB-2 Registration Statement (File
No. 333-18605) under the Securities Act of 1933, as amended. In such capacity,
we are familiar with the Articles of Incorporation and Bylaws of the Company,
as well as resolutions adopted by its Board of Directors authorizing the
issuance and sale of such securities. In addition, we have examined such
documents and undertaken such further inquiry as we consider necessary for
rendering the opinions set forth below:
Based upon the foregoing, it is our opinion that:
1. The Company is a corporation duly organized and validly existing
under the laws of the State of Nevada.
2. The Units and the securities underlying the Units when issued,
will be duly and validly issued, fully paid and nonassessable.
We acknowledge that we are referred to under the heading "Legal
Matters" of the Prospectus which is part of the Company's Form SB-2
Registration Statement relating to the
<PAGE> 2
[SQUIRE, SANDERS & DEMPSEY L.L.P. Letterhead]
Securities and Exchange Commission
January 28, 1997
Page 2
Units and we hereby consent to such use of our name in such Registration
Statement and to the filing of this opinion with state regulatory agencies in
such states as may require such filing in connection with the registration of
the Units and the securities underlying the Units for offer and sale in such
states.
Very truly yours,
SQUIRE, SANDERS & DEMPSEY L.L.P.
/s/ Squire Sanders & Dempsey L.L.P.
<PAGE> 1
EXHIBIT 11.1
PIRANHA INTERACTIVE PUBLISHING, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
<S> <C> <C>
Pro forma net income (loss) for earnings
per share calculation $ 109,123 $ (834,874)
========== ==========
Shares:
Weighted average number of common
shares outstanding 1,335,511 1,265,809
========== ==========
Less the weighted average number of
shares of common stock in escrow 824,604 825,000
---------- ----------
Weighted average number of common
shares outstanding 510,907 440,809
========== ==========
Pro forma net income (loss) per common share $ 0.21 $ (1.89)
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form SB-2 of
our report, which includes an explanatory paragraph concerning the substantial
doubt about the Company's ability to continue as a going concern, dated January
27, 1997, on our audit of the financial statements of Piranha Interactive
Publishing, Inc. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
February 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<EXCHANGE-RATE> 1 1
<CASH> 246,732 202,216
<SECURITIES> 0 0
<RECEIVABLES> 4,420 137,663
<ALLOWANCES> 62,221 55,736
<INVENTORY> 137,807 143,119
<CURRENT-ASSETS> 493,506 491,086
<PP&E> 71,274 25,563
<DEPRECIATION> 21,008 6,033
<TOTAL-ASSETS> 1,053,870 521,166
<CURRENT-LIABILITIES> 1,708,289 317,160
<BONDS> 0 0
0 0
0 0
<COMMON> 1,200 1,336
<OTHER-SE> (490,703) 4,187
<TOTAL-LIABILITY-AND-EQUITY> 1,053,870 521,166
<SALES> 424,810 1,342,034
<TOTAL-REVENUES> 424,810 1,342,034
<CGS> 318,938 900,967
<TOTAL-COSTS> 1,301,765 1,148,425
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 35,383 5,466
<INCOME-PRETAX> (912,338) 188,143
<INCOME-TAX> (77,464) 79,020
<INCOME-CONTINUING> (834,874) 109,123
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (834,874) 109,123
<EPS-PRIMARY> (1.89) 0.21
<EPS-DILUTED> (1.89) 0.21
</TABLE>
