As filed with the Securities and Exchange Commission on December 11, 1996
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HEURISTIC DEVELOPMENT GROUP, INC.
(Exact name of Small Business Issuer as specified in its charter)
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<S> <C> <C>
Delaware 7371 95-4491750
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of incorporation) classification code number) identification number)
</TABLE>
17575 Pacific Coast Highway
Pacific Palisades, California 90272
(310) 230-3394
(Address and telephone number of principal executive offices
and principal place of business)
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Jonathan W. Seybold, Chairman of the Board
Heuristic Development Group, Inc.
17575 Pacific Coast Highway
Pacific Palisades, California 90272
(310) 230-3394
(Name, address and telephone number of agent for service)
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Copies to:
Fran M. Stoller, Esq. C. David Selengut, Esq.
Bachner, Tally, Polevoy & Misher LLP Singer Zamansky LLP
380 Madison Avenue 40 Exchange Place
New York, New York 10017 New York, New York 10005
(212) 687-7000 (212) 809-8550
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, please check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
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. | |
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Maximum Aggregate Amount of
Title of Each Class of Amount to Offering Price Offering Registration
Securities to be Registered be Registered Per Unit (1) Price (1) Fee
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Units, each consisting of one share of Common Stock,
$.01 par value, one Class A Warrant and one
Class B Warrant.............................................. 1,380,000(2) $5.00 $ 6,900,000 $ 2,091
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Units, each consisting of one share of Common Stock,
$.01 par value, and one Class B Warrant (3).................. 1,380,000(3) 6.50 8,970,000 2,718
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Common Stock, $.01 par value (4).............................. 2,760,000 8.75 24,150,000 7,318
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Unit Purchase Option (5) ...................................... 120,000 .001 120 --
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Units, each consisting of one share of Common Stock,
$.01 par value, one Class A Warrant and one
Class B Warrant(6) .......................................... 120,000 6.00 720,000 218
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Units, each consisting of one share of Common Stock,
$.01 par value, and Class B Warrant(6)....................... 120,000 6.50 780,000 236
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Common Stock, $.01 par value(6)............................... 240,000 8.75 2,100,000 636
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Class A Warrants (7) .......................................... 500,000 -- -- --
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Units, each consisting of one share of Common Stock,
$.01 par value, and one Class B Warrant (8).................. 500,000 6.50 3,250,000 985
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Common Stock, $.01 par value (9).............................. 500,000 8.75 4,375,000 1,326
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Total ......................................................... $51,245,120 $15,528
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 180,000 Units subject to the Underwriter's over-allotment option.
(3) Issuable upon exercise of the Class A Warrants.
(4) Issuable upon exercise of the Class B Warrants.
(5) To be issued to the Underwriter.
(6) Issuable upon exercise of the Unit Purchase Option and/or the Warrants
issuable thereunder.
(7) Registered for resale by selling security holders.
(8) Issuable upon exercise of the Class A Warrants registered for resale by the
selling securityholders.
(9) Issuable upon exercise of the Class B Warrants underlying the Class A
Warrants registered for resale by the selling securityholders.
Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of Common Stock as may become
issuable pursuant to anti-dilution provisions upon exercise of the Warrants and
the Unit Purchase Option.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
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EXPLANATORY NOTE
This Registration Statement covers the registration of (i) up to 1,380,000
units ("Units"), including Units to cover over-allotments, if any, each Unit
consisting of one share of Common Stock, $.01 par value ("Common Stock"), of
Heuristic Development Group, Inc., a Delaware 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 and (ii) an additional 500,000 Class A Warrants (the "Selling
Securityholder Warrants"), for sale by the holders thereof (the "Selling
Securityholders"), 500,000 Class B Warrants (the "Selling Securityholder Class B
Warrants") underlying the Selling Securityholder Warrants and 1,000,000 shares
of Common Stock (the "Selling Securityholder Stock") underlying the Selling
Securityholder Warrants and the Selling Securityholder Class B Warrants, all for
resale from time to time by the Selling Securityholders subject to the
contractual restriction that the Selling Securityholders may not sell the
Selling Securityholder Warrants for specified periods after the closing of the
underwritten offering. The Selling Securityholder Warrants, the Selling
Securityholder Class B Warrants and the Selling Securityholder Stock are
sometimes collectively referred to herein as the "Selling Securityholder
Securities."
The complete Prospectus relating to the underwritten offering follows
immediately after this Explanatory Note. Following the Prospectus for the
underwritten offering are pages of the Prospectus relating solely to the Selling
Securityholder Securities, including alternative front and back cover pages and
sections entitled "Concurrent Public Offering," "Plan of Distribution," and
"Selling Securityholders" to be used in lieu of the sections entitled
"Concurrent Offering" and "Underwriting" in the Prospectus relating to the
underwritten offering. Certain sections of the Prospectus for the underwritten
offering will not be used in the Prospectus relating to the Selling
Securityholder Securities such as "Use of Proceeds and Plan of Operations" and
"Dilution."
iii
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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 DECEMBER 11, 1996
PROSPECTUS
HEURISTIC DEVELOPMENT GROUP, INC.
1,200,000 Units Consisting of 1,200,000 Shares of
Common Stock, 1,200,000 Redeemable Class A
Warrants and 1,200,000 Redeemable Class B Warrants
Each unit ("Unit") offered by Heuristic Development Group, Inc. (the
"Company") consists of one share of common stock, $.01 par value ("Common
Stock"), one redeemable class A warrant ("Class A Warrants") and one redeemable
class B warrant ("Class B Warrants"). The components of the Units will be
transferable separately immediately upon issuance. Each Class A Warrant entitles
the holder to purchase one share of Common Stock and one Class B Warrant at an
exercise price of $6.50, 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 closing bid price of the Common Stock averages in excess of
$9.10 and $12.25 per share, respectively, for any 30 consecutive trading days
ending within 15 days of the notice of redemption. See "Description of
Securities."
Prior to this offering (the "Offering"), there has been no public market
for the Units, Common Stock or Warrants and there can be no assurance that such
a market will develop. The Company has applied for quotation of the Units,
Common Stock, Class A Warrants and Class B Warrants on the Nasdaq SmallCap
Market ("Nasdaq") under the symbols IFITU, IFIT, IFITW and IFITZ, 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."
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 AND "DILUTION."
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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.
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Underwriting Discounts
and
Price to Public Commissions (1) Proceeds to Company (2)
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Per Unit ............................... $ $ $
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Total (3) .............................. $ $ $
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(footnotes on following page)
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The Units are being offered on a "firm commitment" basis by the Underwriter
when, as and if delivered to and accepted by the Underwriter, subject to its
right to reject orders in whole or in part and subject to certain other
conditions. It is expected that the delivery of the certificates representing
the Units will be made against payment at the offices of D.H. Blair Investment
Banking Corp., 44 Wall Street, New York, New York on or about __________ , 1997.
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D.H. BLAIR INVESTMENT BANKING CORP.
The date of this Prospectus is_____________, 1997
<PAGE>
(footnotes from previous page)
(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $____ , or $____
per Unit ($____ if the over-allotment option is exercised in full); and
(ii) an option, exercisable over a period of four years commencing one year
from the date of this Prospectus, to purchase up to 120,000 Units at $____
per Unit (the "Unit Purchase Option"). The Company has also agreed to
indemnify the Underwriter against certain liabilities under the Securities
Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $__________ payable by the Company,
including the Underwriter' s non-accountable expense allowance.
(3) The Company has granted to the Underwriter a 30-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 $_____ , $_____
and $____ , respectively. See "Underwriting."
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The registration statement of which this Prospectus is a part also covers
the offering for resale by certain securityholders (the "Selling
Securityholders") of 500,000 Class A Warrants (the "Selling Securityholder
Warrants"), and the Common Stock and Class B Warrants underlying the Selling
Securityholder Warrants and the Common Stock issuable upon exercise of such
Class B Warrants. See "Concurrent Offering." The Selling Securityholder Warrants
and the securities underlying such Warrants are sometimes collectively referred
to as the "Selling Securityholder Securities." The Selling Securityholder
Warrants are issuable on the closing of the Offering to the Selling
Securityholders upon the automatic conversion of warrants (the "Bridge
Warrants") acquired by them in the Company's private placement in December 1996
(the "Bridge Financing"). The Selling Securityholders have agreed not to (i)
exercise the Selling Securityholder Warrants for one year after the closing of
the Offering and (ii) sell any of the Selling Securityholder Warrants for at
least 90 days after the closing of the Offering and, for the period expiring 270
days after such closing, have agreed to certain resale restrictions. Sales of
the Selling Securityholder 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.
[Picture]
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON
STOCK AND/OR THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Except as otherwise noted, all information in this Prospectus (i) reflects a
1,339.4362-for-one stock split effected in October 1996; (ii) assumes no
exercise of (a) the Underwriter's over-allotment option; (b) the Warrants; (c)
the Selling Securityholder Warrants; (d) the Unit Purchase Option; (e) options
granted or available for grant under the Company's stock option plan; or (f)
options granted outside of the Company's stock option plan; and (iii) gives
effect to the conversion, on effectiveness of the Offering, of (a) the Bridge
Warrants into the Selling Securityholder Warrants; (b) all outstanding shares of
the Company's Series A preferred stock, $.01 par value ("Series A Preferred
Stock"), into Common Stock; and (c) certain outstanding indebtedness into equity
of the Company. See "Management -- Stock Option Plan," "Certain Transactions"
and "Description of Securities."
The Company
The Company is engaged in the development, marketing and sale of the
IntelliFit System, a computerized system which generates personalized exercise
prescriptions based on, among other things, an individual's weight, ability,
medical history, goals, fitness level and exercise preferences and tracks and
records fitness progress. The IntelliFit System interacts with a user by
applying algorithms to an individual's personal profile and adjusting a user's
exercise prescription based on progress, frequency of workouts and other
variables. The Company believes that this interactive feature helps motivate
users to continue exercising, and allows users to reach their goals more
quickly.
The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf computer hardware purchased from major equipment manufacturers,
including a computer with a touch screen display, a modem used to communicate
with a central database, a motorized smart card reader, a scanner and a printer.
The IntelliFit System is accessed by a smart card, similar in size to a credit
card, which contains a microprocessor chip which is able to store information in
memory (the "IntelliCard").
The Company's strategy is to market and sell the IntelliFit System
initially in selected United States markets. The Company's first target markets
are military facilities, commercial clubs, hospital facilities, corporate
facilities, insurance companies and health maintenance organizations. The
Company believes that these markets have the greater user concentration and that
penetration of these markets would help establish the Company's credibility in
other markets. Subsequent target markets include universities, schools,
government facilities and resorts. The Company expects to add enhancements to
the IntelliFit System to enable the System to serve the rehabilitation market.
This will enable patients who exercise as part of their rehabilitation program
to use the System to follow their exercise program in a local fitness center. In
addition, the Company intends to explore other markets for the IntelliFit
software, including selling the software as an individually packaged product for
use on personal computers and providing the software to Internet users.
The original computer source programs and related documentation and
computerized services and instructional material (collectively, the "EIS
System") on which the IntelliFit System is based was developed for Nautilus
Group Japan, Ltd. ("NGJ Ltd."), a Delaware company operating in Japan. The
Company acquired the rights to the EIS System from NGJ Ltd. in August 1994 and
spent approximately two years modifying and expanding upon the EIS System in
order to create the IntelliFit System. NGJ Ltd. has advised the Company that the
EIS System is currently installed in nine facilities in Japan and has generated
over 7 million individualized exercise prescriptions.
To date, the Company has been engaged primarily in research and development
activities and has conducted only limited marketing activities. The Company has
generated only nominal revenues from product sales and there can be no assurance
that the Company will successfully commercialize the IntelliFit System, generate
any significant revenues or ever achieve profitable operations.
The Company was incorporated in Delaware in July 1994. The Company's
executive offices are located at 17575 Pacific Coast Highway, Pacific Palisades,
California 90272 and its telephone number is (310) 230-3394.
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3
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The Offering
Securities Offered................... 1,200,000 Units, each Unit consisting of
one share of Common Stock, one Class A
Warrant and one Class B Warrant. Each
Class A Warrant entitles the holder to
purchase one share of Common Stock and
one Class B Warrant at an exercise price
of $6.50, 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. The
Warrants are subject to redemption in
certain circumstances. See "Description
of Securities."
Securities Offered Concurrently
by Selling Securityholders......... 500,000 Class A Warrants; 500,000 Class
B Warrants issuable upon exercise of
these Class A Warrants and 1,000,000
shares of Common Stock issuable upon
exercise of these Class A Warrants and
Class B Warrants. See "Concurrent
Offering."
Common Stock Outstanding Before
Offering........................... 800,000 shares (1)
Common Stock Outstanding After
Offering........................... 2,000,000 shares (1)
Use of Proceeds and Plan of
Operations......................... To repay $1,000,000 principal amount of
10% promissory notes (the "Bridge
Notes") issued in the Bridge Financing;
to repay approximately $170,000
principal amount of working capital
advances from stockholders of the
Company, including executive officers
and directors of the Company, (the
"Stockholder Advances"); for capital
expenditures; for research and
development; for sales and marketing;
and for working capital. See "Use of
Proceeds and Plan of Operations."
Proposed Nasdaq Symbols (2)
Units ............................... IFITU
Common Stock: ....................... IFIT
Class A Warrants: ................... IFITW
Class B Warrants: ................... IFITZ
Risk Factors......................... The Offering involves a high degree of
risk and immediate substantial dilution.
See "Risk Factors" and "Dilution."
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(1) Includes 349,370 shares of Common Stock (the "Escrow Shares") and options
to purchase 78,674 shares of Common Stock at $.50 per share, of which
options to purchase 50,630 shares ("Escrow Options") have been deposited
into escrow by the holders thereof. The Escrow Shares and Escrow Options
are subject to cancellation and will be contributed to the capital of the
Company if the Company does not attain certain earnings levels or the
market price of the Company's Common Stock does not achieve certain levels.
If such earnings or market price levels are met, the Company will record a
substantial non-cash charge to earnings, for financial reporting purposes,
as compensation expense relating to the value of the Escrow Shares and
Escrow Options released to Company officers and employees. See "Risk
Factors-Charge to Income in the Event of Release of Escrowed Shares and
Options and as a Result of Issuance of Options," "Capitalization" and
"Principal Stockholders."
(2) Notwithstanding quotation on Nasdaq, there can be no assurance that an
active trading market for the Company's securities will develop or, if
developed, that it will be sustained. See "Risk Factors -- No Public Market
for Securities; Possible Volatility of Market Price; Arbitrary
Determination of Offering Price."
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4
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Summary Financial Information
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July 20, 1994
Nine Months (Commencement
Year Ended Ended of Operations) through
December 31, 1995 September 30, September 30, 1996
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1995 1996
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Statement of Operations Data:
Research and development expenses . $ 397,000 $ 227,000 $ -- $ 475,000
General and administrative expenses 466,000 418,000 808,000 1,433,000
Net loss .......................... (876,000) (647,000) (850,000) (1,956,000)
Pro forma net loss per share(1) ... $ (2.31) $ (2.17)
Shares used in computing pro forma
net loss per share(1) ............. 371,956 371,956
<CAPTION>
At September 30, 1996
-------------------------------------------------
Actual Pro Forma(2) As Adjusted(3)
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<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) ........................ $ (413,000) $ 845,000 $
Total assets ..................................... 571,000 1,711,000
Total current liabilities ........................ 436,000 158,000
Deficit accumulated
during development stage ....................... (1,956,000) (2,078,000)
Total stockholders' equity
(capital deficiency) ........................... $ (701,000) $ 1,133,000 $
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(1) The pro forma net loss per share computation gives retroactive effect to
the conversion on effectiveness of the Offering of (i) $1,083,713 of
outstanding indebtedness at August 31, 1996, plus accrued interest thereon
(the "Stockholder Debt") into 263,921 shares of the Company's Common Stock
and (ii) the Series A Preferred Stock and accrued dividends thereon
aggregating $722,000 into 175,793 shares of Common Stock, excludes the
Escrow Shares and Escrow Options. See "Certain Transactions" and Notes A,
B(4) and I of Notes to Financial Statements.
(2) Gives pro forma effect to (i) the issuance of the Bridge Notes and the
Bridge Warrants subsequent to September 30, 1996; (ii) working capital
advances from stockholders aggregating $140,000 subsequent to September 30,
1996; and (iii) the conversion of the Stockholder Debt and the Series A
Preferred Stock to Common Stock upon effectiveness of the Offering. See
"Capitalization-Bridge Financing," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."
(3) Adjusted to give effect to the sale of the 1,200,000 Units offered hereby
at an assumed offering price of $5.00 per Unit, the receipt of the net
proceeds therefrom and the use of a portion of the net proceeds to repay
the Stockholder Advances and the Bridge Notes and the corresponding charge
to operations through the date of repayment of $910,000, representing debt
discount and debt issuance costs associated with the Bridge Financing. See
"Use of Proceeds and Plan of Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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5
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RISK FACTORS
The Units offered hereby are speculative in nature and an investment in the
Units offered hereby involves a high degree of risk. Prospective investors are
cautioned that the statements in this Prospectus that are not historical facts
may be forward-looking statements that are subject to risks and uncertainties,
including those set forth below. In addition to the other information contained
in this Prospectus, prospective investors should carefully consider the
following risk factors in evaluating whether to purchase the Units offered
hereby.
History of Operating Losses; Need for Additional Financing. The Company has
experienced significant operating losses since it commenced operations in July
1994. As of September 30, 1996, the Company's accumulated deficit was
$(1,956,000). The Company anticipates incurring substantial and increasing
operating losses over the near term and possibly over the next several years.
Such losses have been and will continue to be principally the result of the
various costs associated with the Company's research and development and sales
and marketing activities. In addition, the Company's business is very capital
intensive, requiring substantial outlays for the purchase of kiosks and
hardware. The Company believes that the net proceeds from the Offering, together
with its existing capital resources, will enable it to fund its operations for
approximately 18 months following completion of the Offering. The Company will
be required to seek additional financing to continue its research, development,
design, sales and marketing activities beyond such time and to commercialize the
IntelliFit System on a large scale. The Company has no commitments for any
future funding and there can be no assurance that the Company will be able to
obtain additional financing in the future from either debt or equity financings,
bank loans, collaborative arrangements or other sources on acceptable terms. If
the Company is unable to obtain the necessary financing, it will be required to
significantly curtail its activities or cease operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Early Stage of Company. Although the Company was organized in July 1994,
management has focused on research and development activities and on limited
sales and marketing activities and has generated only nominal revenues to date
from product sales. The Company may experience many of the delays, uncertainties
and complications typically encountered by newly established businesses, many of
which may be beyond the Company's control. These include, but are not limited
to, unanticipated problems relating to product development, testing,
manufacturing, marketing and competition, and additional costs and expenses that
may exceed current estimates. There can be no assurance that the Company will
successfully commercialize its product, generate any significant revenues or
ever achieve profitable operations. See "Business --General" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence Upon One Product. The Company's business is currently dependent
upon sales of one product. Innovative products are often not successful and
successful products are often displaced by the introduction of competitive
products. In the event that the Company is not able to successfully market and
sell the IntelliFit System, this would have a material adverse effect on the
Company. See "Business -- General."
Going Concern Qualification in Independent Auditors' Report. The Company
has received a report from its independent auditors that includes an explanatory
paragraph that describes the substantial doubt as to the ability of the Company
to continue as a going concern. See "Report of Independent Auditors."
Uncertainty of Market Acceptance of IntelliFit System. The success of the
Company's business is dependent upon acceptance of the IntelliFit System by both
the Company's potential customers and the actual users of the system. There can
be no assurance that acceptance by any of the Company's potential customers will
occur. In addition, even if the IntelliFit System is installed in a fitness
center, ultimate success for the Company depends on whether individuals actually
use the system on a regular basis. The Company does not market its product
directly to these users and has limited ability to monitor the manner and
frequency with which fitness center staff introduce the IntelliFit System to new
members or renewing members or stimulate current members' interest in using and
continuing to use the IntelliFit System. A number of companies that have
developed computer-based fitness systems which prescribe personalized exercise
programs have either had limited success or have failed. See "Business --
Marketing."
Potential Development Problems; Potential Hardware Problems. To date the
Company has installed kiosks in only six fitness centers on a test basis. There
can be no assurance that the IntelliFit System will perform as anticipated. In
addition, the software embodied in the IntelliFit System may contain errors
which only become apparent subsequent to widespread commercial use. The
IntelliFit System may require improvements and refinements. Difficulties in
improving and refining the IntelliFit System could delay further introductions
and installations of the
6
<PAGE>
System and could cause the Company to incur additional costs. In addition, the
guidelines and parameters allowing safe progression and improvement for users
which form the basis for the IntelliFit System may be changed or updated which
would require a change in the software embodied in the system. This could have a
material adverse effect on the Company. In addition, technical problems with
computer hardware could cause operation of the IntelliFit System at any location
to be temporarily suspended. See "Business-Marketing" and "Business --
Services."
Competition. The Company competes with companies that have developed
computer-based fitness systems which prescribe personalized exercise programs.
The Company will attempt to compete on the basis of cost, features offered, ease
of use, time spent at the kiosks and service; however, there is no assurance
that the Company will be able to compete successfully with its competitors.
Certain of the Company's competitors have substantially greater financial,
marketing, technical, distribution and other resources and greater name
recognition than the Company. In addition, unlike the Company, certain
competitors have a relationship with companies that manufacture exercise
equipment. The Company may also face competition from new companies that develop
similar products to the IntelliFit System. There can be no assurance that
enhancements to or future generations of competitive products will not be
developed which offer superior prices, more attractive features, easier use
and/or better service than the Company's products. See "Business-Competition."
Dependence on Sole or Limited Sources of Supply. The IntelliFit System
operates from a freestanding kiosk which houses off-the-shelf computer hardware
purchased from major equipment manufacturers. The Company does not intend to
manufacture the kiosks or any of the hardware components of the IntelliFit
System. The kiosks are off-the-shelf products with certain modifications and are
currently manufactured for the Company by one manufacturer. There can be no
assurance that future deliveries of kiosks will be completed on a timely basis.
Failure by the manufacturer to supply the Company with high quality finished
products on commercially reasonable terms, or at all, could have a material
adverse effect on the Company.
The Company purchases its hardware from several suppliers. The failure or
delay of current or alternate suppliers in supplying product to the Company
could result in delays in marketing or operation of the IntelliFit System, which
would have a material adverse effect on the Company. In addition, a change in
certain pieces of hardware could require revisions to the software which could
have a material adverse effect on the Company. The Company currently has only
one written contract with a software developer for the provision of future
development services. Currently, the Company has limited capability internally
to perform upgrades or modifications to the software and there can be no
assurance that any required upgrades or modifications to the software can be
successfully made. This could have a material adverse effect on the Company. See
"Business-Manufacturing and Development," "Principal Stockholders,"
"Management-Executive Officers and Directors."
Dependence on Key Personnel. The Company is highly dependent on the
principal members of its management, including Steven R. Gumins, the Chief
Executive Officer of the Company and Deborah E. Griffin, the Chief Operating
Officer of the Company. The Company has an employment agreement with each of Mr.
Gumins and Ms. Griffin and has obtained a $2,000,000 key person life insurance
policy covering Mr. Gumins' life. The Company is the sole beneficiary of such
life insurance policy. The Company will not be able to obtain key person life
insurance on Deborah Griffin's life in view of health problems affecting Ms.
Griffin. The future success of the Company depends in large part upon its
ability to attract and retain highly qualified personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be able
to hire sufficient qualified personnel on a timely basis or retain such
personnel in the future. The loss of such personnel or the failure to recruit
additional key personnel by the Company could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business-Employees" and "Management."
Potential Product Liability Claims; Insufficiency of Insurance. The
provision of personalized exercise programs may subject the Company to liability
claims of bodily injury and/or property damage to its customers and the ultimate
users of the IntelliFit System and there can be no assurance that the Company
will be able to maintain insurance sufficient to cover any or all claims against
the Company which may arise. If the Company's insurance is insufficient, this
could have a material adverse effect on the Company. See "Business --
Insurance."
Use of Proceeds to Benefit Insiders. An aggregate of approximately $175,000
of the proceeds of the Offering will be used to repay principal and accrued
interest on the Stockholder Advances made by Steven R. Gumins, Chief Executive
Officer of the Company, Deborah E. Griffin, Chief Operating Officer of the
Company, Jonathan W. Seybold, Chairman of the Board of the Company, NGJ, Ltd., a
principal stockholder of the Company, and Dr. William
7
<PAGE>
Blase, a director of the Company. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions."
Charges Arising from Debt Issuance Costs. Upon completion of the Offering
and repayment of the Bridge Notes, a non-recurring charge representing the
unamortized debt discount and debt issuance costs incurred in connection with
the Bridge Financing will be charged to operations in the quarter in which the
Offering is completed. The aggregate debt discount and debt issue costs
associated with the Bridge Notes is $910,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Charge to Earnings in the Event of Release of Escrowed Shares and Options
and as a Result of Issuance of Options. The Securities and Exchange Commission
(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 and Escrow Options, the Company will recognize during the
period in which the earnings thresholds are probable of being met or such stock
levels achieved, a substantial noncash charge to earnings equal to the fair
market value of such shares on the date of their release, 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. Such
charge will not be deductible for income tax purposes. Notwithstanding the
foregoing discussion, there can be no assurance that the Company will attain the
targets which would enable the Escrow Shares and Escrow Options to be released
from escrow. In addition, commencing during the quarter ended December 31, 1996,
the Company will recognize compensation expense relating to the issuance by the
Company of options (including the Escrow Options) to purchase an aggregate of
78,674 shares of Common Stock to certain executive officers of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations, Management -- Stock Option Plan" and "Description of Securities."
Immediate Dilution. The purchasers of the Units in the Offering will incur
an immediate dilution of approximately $2.50 or 50% in the pro forma per share
net tangible book value of their Common Stock ($2.34 or 47% if the Underwriter's
over-allotment option is exercised in full). Additional dilution to public
investors, if any, may result to the extent that the Warrants, the Underwriter's
Unit Purchase Option and/or outstanding options are exercised at a time when the
net tangible book value per share of Common Stock exceeds the exercise price of
any such securities. See "Dilution."
Potential Adverse Effects of Preferred Stock. The Company's Certificate of
Incorporation authorizes the issuance of shares of "blank check" preferred
stock, which will have such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors will be empowered, without stockholder approval (but subject to
applicable government regulatory restrictions), to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Common Stock. In
the event of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of preferred stock, there can be no assurance that the Company will
not do so in the future. See "Description of Securities -- Preferred Stock."
No Dividends. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future. See "Dividend Policy."
No Public Market for Securities; Possible Volatility of Market Price;
Arbitrary Determination of Offering Price. Prior to the Offering, there has not
been any market for any of the Company's securities, and there can be no
assurance that an active trading market will develop or be sustained after the
Offering. The initial public offering price of the Units and the exercise prices
and other terms of the Warrants have been determined by negotiation between the
Company and the Underwriter pursuant to Schedule E of the By-laws of the NASD
and are not necessarily related to the Company's asset value, net worth, results
of operations or any other criteria of value and may not be indicative of the
prices that may prevail in the public market. The market prices of the Units,
Common Stock and Warrants could also be subject to significant fluctuations in
response to variations in the Company's development efforts, intellectual
property position, government regulations, general trends in the industry and
other factors,
8
<PAGE>
including extreme price and volume fluctuations which have been experienced by
the securities markets from time to time. See "Underwriting."
Outstanding Warrants and Options; Exercise of Registration Rights. 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 Securityholder Warrants to
purchase 500,000 shares of Common Stock and 500,000 Class B Warrants; (iv) the
Unit Purchase Option to purchase an aggregate of 480,000 shares of Common Stock,
assuming exercise of the underlying Warrants; and (v) outstanding options
(including the Escrow Options) to purchase 78,674 shares of Common Stock granted
outside of the Company's 1996 Stock Option Plan. The Company also has 250,000
shares of Common Stock reserved for issuance upon exercise of options under its
1996 Stock Option Plan, 200,000 of which have been granted. Holders of such
warrants and options are likely to exercise them when, in all likelihood, the
Company could obtain additional capital on terms more favorable than those
provided by warrants and options. Further, while these warrants and options are
outstanding, the Company's ability to obtain additional financing on favorable
terms may be adversely affected. The holders of the Unit Purchase Option have
certain demand and "piggy-back" registration rights with respect to their
securities. Exercise of such rights could involve substantial expense to the
Company. See "Management-Stock Option Plan," "Principal Stockholders,"
"Description of Securities" and "Underwriting."
Potential Adverse Effect of Redemption of Warrants. Commencing one year
from the date of this Prospectus, the Warrants may be redeemed by the Company at
a redemption price of $.05 per Warrant upon not less than 30 days' prior written
notice if, with respect to the Class A Warrants, the closing bid price of the
Common Stock shall have averaged in excess of $9.10 per share and, with respect
to the Class B Warrants, $12.25 per share, in each instance for 30 consecutive
trading days ending within 15 days of the notice. Redemption of the Warrants
could force the holders (i) to exercise the Warrants and pay the exercise price
therefor at a time when it may be disadvantageous for the holders to do so, (ii)
to sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or (iii) to accept the nominal redemption price
which, at the time the Warrants are called for redemption, is likely to be
substantially less than the market value of the Warrants. See "Description of
Securities-Redeemable Warrants."
Current Prospectus and State Registration to Exercise Warrants. Holders of
Warrants will be able to exercise the Warrants only if (i) a current prospectus
under the Securities Act relating to the securities underlying the Warrants is
then in effect and (ii) such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company has undertaken and
intends to use its best efforts to maintain a current prospectus covering the
securities underlying the Warrants following completion of the Offering to the
extent required by Federal securities laws, there can be no assurance that the
Company will be able to do so. The value of the Warrants may be greatly reduced
if a prospectus covering the securities issuable upon the exercise of the
Warrants is not kept current or if the securities are not qualified, or exempt
from qualification, in the states in which the holders of Warrants reside.
Persons holding Warrants who reside in jurisdictions in which such securities
are not qualified and in which there is no exemption will be unable to exercise
their Warrants and would either have to sell their Warrants in the open market
or allow them to expire unexercised. If and when the Warrants become redeemable
by the terms thereof, the Company may exercise its redemption right even if it
is unable to qualify the underlying securities for sale under all applicable
state securities laws. See "Description of Securities-Redeemable Warrants."
Possible Adverse Effect on Liquidity of the Company's Securities Due to the
Investigation of D.H. Blair Investment Banking Corp. and D.H. Blair & Co., Inc.
by 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
9
<PAGE>
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 the 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. Rule 10b-6 under the Securities 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
from nine business days (or such other applicable period as Rule 10b-6 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 Securityholder Warrants may
not simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period (at least two
and possibly nine business days) prior to the commencement of such distribution.
Accordingly, in the event the Underwriter or Blair & Co. is engaged in a
distribution of the Selling Securityholder 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."
Possible Delisting of Securities from the Nasdaq Stock Market. While the
Company's Units, Common Stock, Class A Warrants and Class B Warrants meet the
current Nasdaq listing requirements and are expected to be initially included on
the Nasdaq SmallCap Market, there can be no assurance that the Company will meet
the criteria for continued listing. Continued inclusion on Nasdaq generally
requires that (i) the Company maintain at least $2,000,000 in total assets and
$1,000,000 in capital and surplus, (ii) the minimum bid price of the Common
Stock be $1.00 per share, (iii) there be at least 100,000 shares in the public
float valued at $200,000 or more, (iv) the Common Stock have at least two active
market makers, and (v) the Common Stock be held by at least 300 holders.
Nasdaq has recently proposed more stringent financial requirements for
listing on Nasdaq. If adopted, the Company will have to meet and maintain such
new requirements. If the Company is unable to satisfy Nasdaq's maintenance
requirements, its securities may be delisted from Nasdaq. In such event,
trading, if any, in the Units, Common Stock and Warrants would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or the
NASD's "Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
reduction in security analysts' and the news media's coverage of the Company and
lower prices for the Company's securities than might otherwise be attained.
Risks of Low-Priced Stock. If the Company's securities were delisted from
Nasdaq (See "Possible Delisting of Securities from the Nasdaq Stock Market"),
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 worths 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 the Offering to sell in
the secondary market any of the securities acquired hereby.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
10
<PAGE>
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. If the Company's securities were subject to the rules on
penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
Shares Eligible for Future Sale. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act, pursuant to the
Concurrent Offering or otherwise, could have an adverse effect on the price of
the Company's securities. Pursuant to the Concurrent Offering, 500,000 Selling
Securityholder Warrants and the underlying securities have been registered for
resale concurrently with the Offering, subject to a contractual restriction that
the Selling Securityholders not sell any of the Selling Securityholder Warrants
for at least 90 days from the date of this Prospectus and, during the period
from 91 to 270 days after the date of this Prospectus, may only sell specified
percentages of such Selling Securityholder Warrants. The shares outstanding
prior to the Offering will be eligible for sale under Rule 144 at various times
beginning 90 days after the date of this Prospectus. An additional 78,674 shares
of Common Stock underlying vested options issued outside of the Company's stock
option plan will be eligible for resale pursuant to Rules 144 and/or 701 under
the Securities Act (subject to the restrictions on transfer applicable to the
Escrow Shares and Escrow Options) beginning 90 days after the date of this
Prospectus. However, holders of all of the outstanding shares of Common Stock
and outstanding options prior to the Offering have agreed not to sell any shares
of Common Stock for a period of 13 months from the date of this Prospectus
without the prior written consent of the Underwriter. The Underwriter has
registration rights covering its securities. Sales of Common Stock, or the
possibility of such sales, in the public market may adversely affect the market
price of the securities offered hereby. See "Concurrent Offering," "Description
of Securities" and "Shares Eligible for Future Sale."
11
<PAGE>
USE OF PROCEEDS AND PLAN OF OPERATIONS
The net proceeds to the Company from the sale of the 1,200,000 Units
offered hereby, after deducting underwriting discounts and commissions and other
expenses of the Offering, are estimated to be approximately $____ ($____ if the
Underwriter's over-allotment option is exercised in full). The Company expects
the net proceeds to be utilized approximately as follows:
<TABLE>
<CAPTION>
Approximate Amount
Application of Net Proceeds
--------- -------------
<S> <C>
Repayment of Bridge Notes (1) .............................................. $1,016,500
Repayment of Stockholder Advances(2) ....................................... 175,000
Capital Expenditures(3) .................................................... 1,000,000
Research and Development(4) ................................................ 500,000
Sales and Marketing (5) .................................................... 500,000
Working Capital(6) .........................................................
---------
Total ...................................................................... $
=========
</TABLE>
- --------
(1) Represents the principal amount and accrued interest at the rate of 10% per
annum (estimated at approximately $ 16,500 through January 31. 1997) of
Bridge Notes issued in the Bridge Financing in December, 1996. The proceeds
of the Bridge Financing were and are being used primarily for working
capital purposes. See "Capitalization -- Bridge Financing" and "Certain
Transactions."
(2) Represents the principal amount and accrued interest at the rate of 10% per
annum of notes issued to executive officers, directors and a principal
stockholder of the Company between September and December 3, 1996. The
proceeds of the Stockholder Advances were and are being used primarily for
working capital purposes. See "Certain Transactions."
(3) Includes costs associated with hardware and purchasing office equipment.
(4) Includes costs associated with modifications of IntelliFit System for new
markets.
(5) Includes costs associated with creation and updating of customer lists,
advertising and attendance at trade shows and other advertising expenses.
(6) Includes general and administrative expenses, including approximately
$450,000 for salaries of the current executive officers during the next 18
months. See "Management -- Employment Agreements."
The foregoing represents the Company's best estimate of its allocation of the
net proceeds of the Offering during the next 18 months. This estimate is based
on certain assumptions, including that no events occur which would cause the
Company to abandon any particular efforts, that competitive conditions remain
stable, that the success of the Company's research and development and sales and
marketing activities will occur as projected, that the Company does not enter
into collaborations to fund a project separately and that the Company will be
able to obtain financing to fund the purchase of kiosks. The amounts actually
expended for each purpose may vary significantly in the event any of these
assumptions prove inaccurate. The Company reserves the right to change its use
of proceeds as unanticipated events may cause the Company to redirect its
priorities and reallocate the proceeds accordingly.
Any additional proceeds received upon exercise of the over-allotment
option, the Warrants or the Selling Securityholder Warrants will be added to
working capital. Pending utilization, the net proceeds of the Offering will be
invested in high-quality short-term, interest-bearing investments.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for use in the expansion of
the Company's business. The declaration and payment of future dividends, if any,
will be at the sole discretion of the Board of Directors and will depend upon
the Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996 (after giving retroactive effect to a 1,339.4362-for-one
stock split effected in October 1996); (ii) pro forma as of September 30, 1996
to reflect (a) the sale of the Bridge Notes and Bridge Warrants subsequent to
such date, (b) receipt of a portion of the Stockholder Advances subsequent to
such date and (c) the conversion of the Stockholder Debt to equity and
outstanding Series A Preferred Stock to Common Stock upon effectiveness of the
Offering; and (iii) as adjusted to reflect the sale of the Units offered hereby
and the application of the net proceeds therefrom to repay the Bridge Notes and
the Stockholder Advances. This table should be read in conjunction with the
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------
Actual Pro Forma As Adjusted
---------- ---------- ---------
<S> <C> <C> <C>
Bridge Notes, net of discount(1).................... $ -- $ 250,000 --
Notes payable and accrued interest
stockholders, non-current......................... 836,000 170,000 --
Stockholders' Equity(2):
Preferred Stock, $.01 par value;
5,000,000 shares authorized;
600 shares of Series A Preferred Stock issued
and outstanding actual; no shares
issued and outstanding pro forma
and as adjusted.................................. -- -- --
Common Stock, $.01 par value;
20,000,000 shares authorized;
281,612 shares issued and outstanding
actual; 721,326 shares issued and
outstanding pro forma; 1,921,326
shares issued and
outstanding as adjusted (3)(4).................. 3,000 7,000
Additional paid-in capital ......................... 1,252,000 3,204,000
Deficit accumulated during
development stage(5).............................. (1,956,000) (2,078,000)
---------- ----------
Total stockholders' equity
(capital deficiency).............................. (701,000) 1,133,000
---------- ----------
Total capitalization ........................... $ 135,000 $1,553,000
========== ==========
</TABLE>
- --------
(1) The Bridge Notes are payable on the earlier of December 2, 1997 or the
completion of the Offering. See "Use of Proceeds and Plan of Operations."
(2) Authorized amounts give effect to an amendment to the Company's Certificate
of Incorporation.
(3) Excludes (i) up to 720,000 shares of Common Stock issuable upon exercise of
the Underwriter's over-allotment option and the underlying Warrants; (ii)
3,600,000 shares of Common Stock issuable upon exercise of the Warrants
included in or underlying the Units offered hereby; (iii) 1,000,000 shares
of Common Stock issuable upon exercise of the Selling Securityholder
Warrants and the underlying Warrants; (iv) 480,000 shares of Common Stock
issuable upon exercise of the Unit Purchase Option and the Warrants
included in or underlying such option; (v) 250,000 shares of Common Stock
reserved for issuance under the Company's 1996 Stock Option Plan, of which
200,000 have been granted and (vi) 78,674 shares of Common Stock issuable
upon exercise of outstanding options granted outside of the Company's 1996
Stock Option Plan. See "Management-Stock Option Plan," "Certain
Transactions," "Description of Capital Stock" and "Concurrent Offering."
(4) Includes the 349,370 Escrow Shares. See "Principal Stockholders-Escrowed
Shares and Options."
(5) Gives effect to recognition of $910,000 of expense upon the closing of the
Offering representing debt discount and debt issuance costs relating to the
Bridge Financing and repayment of the Bridge Notes. See "Use of Proceeds
and Plan of Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
13
<PAGE>
Bridge Financing
In December, 1996, the Company completed the Bridge Financing of an
aggregate of $1,000,000 principal amount of Bridge Notes and 500,000 Bridge
Warrants in which it received net proceeds of approximately $840,000, (after
expenses of the offering). The Bridge Notes are payable, together with interest
at the rate of 10% per annum, on the earlier of December 2, 1997 or the closing
of the Offering. See "Use of Proceeds and Plan of Operations." The Bridge
Warrants entitled the holders thereof to purchase one share of Common Stock
commencing December 2, 1997 but will be exchanged automatically on the closing
of the Offering for the Selling Securityholder Warrants, each of which will be
identical to the Class A Warrants included in the Units offered hereby. The
Selling Securityholder Securities have been registered for resale in the
Registration Statement of which this Prospectus forms a part, subject to the
contractual restriction that the Selling Securityholders have agreed not to
exercise the Selling Securityholder Warrants for a period of one year from the
closing of the Offering and not to sell the Securityholder Warrants except after
specified periods commencing 90 days after the closing date of the Offering. See
"Concurrent Offering."
Upon repayment of the Bridge Notes, the unamortized balance of the $750,000
debt discount attributable to the Bridge Warrants as well as other debt issuance
costs will be charged to the Company's operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
14
<PAGE>
DILUTION
The following discussion and tables allocate no value to the Warrants
contained in the Units.
Dilution represents the difference between the initial public offering
price paid by the purchasers in the Offering and the net tangible book value per
share immediately after completion of the Offering. Net tangible book value per
share represents the amount of the Company's total assets minus the amount of
its intangible assets and liabilities, divided by the number of shares of Common
Stock outstanding. The pro forma adjustment to the historical net tangible book
value gives effect to the issuance in December 1996 of the Bridge Notes, net of
debt issue costs and debt discount, and the conversion on the closing of the
Offering of the Stockholder Debt into equity and the outstanding shares of
Series A Preferred Stock to Common Stock. At September 30, 1996, the Company had
a negative pro forma net tangible book value of $(126,000) or $(.17) per share
($(.34) per share if the Escrow Shares were excluded). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Concurrent Offering," "Certain Transactions" and Notes A, F and I of Notes to
Financial Statements. After giving retroactive effect to the sale of 1,200,000
Units offered hereby, and the Company's receipt of the net proceeds therefrom
less underwriting discounts, commissions and other estimated offering expenses
(anticipated to aggregate $1,080,000), the net tangible book value of the
Company, as adjusted, at September 30, 1996 would have been $4,798,000 or $2.50
per share. This would result in an immediate dilution to the public investors of
$2.50 per share and the aggregate increase in the pro forma net tangible book
value to present stockholders would be $2.67 per share ($3.39 per share if the
Escrow Shares were excluded).
The following table illustrates the pro forma information with respect to
dilution to new investors on a per share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price per share .......................................... $5.00
Pro forma negative net tangible book
value per share before Offering........................................ $(.17)
Increase per share attributable to new investors......................... $2.67
-----
Net tangible book value per share after Offering......................... $2.50
-----
Dilution to new investors(1)............................................. $2.50
=====
</TABLE>
- --------
(1) If the over-allotment option is exercised in full, the net tangible book
value after the Offering would be approximately $2.66 per share, resulting
in dilution to new investors in the Offering of $2.34 per share.
The following table summarizes the differences between existing
stockholders and 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 per share paid by existing stockholders and by new
investors:
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Paid
---------------- ------------------
Average Price
Number Percent Amount(1) Percent Per Share
-------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders ................ 721,326(2) 37.5% $2,174,440 27.0% $2.72
New Investors ........................ 1,200,000 60.5% $6,000,000 73.0% $5.00
--------- ------ ---------- ------
Total ................................ 1,921,326(2) 100.0% $8,174,440 100.0%
========= ====== ========== ======
</TABLE>
- --------
(1) Prior to deduction of costs of issuance.
(2) Includes the 349,370 Escrow Shares. See "Principal Stockholders-- Escrowed
Shares and Options."
The foregoing table does not give effect to exercise of any outstanding
options or warrants. To the extent such options or warrants are exercised there
will be further dilution to new investors. See "Capitalization-Bridge
Financing," "Management-Stock Option Plan" and "Description of Securities."
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the period from July 20,
1994 (commencement of operations) through December 31, 1994, the year ended
December 31, 1995, the nine month periods ended September 30, 1995 and September
30, 1996 and the period from July 20, 1994 (commencement of operations ) through
September 30, 1996, respectively and the balance sheet data at September 30,
1996 have been derived from the Financial Statements of the Company. The data
for the nine month periods ended September 30, 1995 and September 30, 1996
include all adjustments consisting of only normal recurring adjustments that
management considers necessary to fairly present such data. The results for the
nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1996. The Financial
Statements of the Company, together with the notes thereto and the report of
Richard A. Eisner & Company, LLP, independent auditors, are included elsewhere
in this Prospectus. The selected financial data set forth below should be read
in conjunction with the Financial Statements and Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
July 20, 1994 July 20, 1994
(Commencement Nine Months (Commencement
of Operations) Ended of Operations)
through Year Ended September 30, through
December 31, December 31, ------------------- September 30,
1994 1995 1995 1996 1996
---------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Research and development expenses........ $ 78,000 $ 397,000 $ 227,000 $ -- $ 475,000
General and administrative expenses ..... 159,000 466,000 418,000 808,000 1,433,000
Net loss................................. (230,000) (876,000) (647,000) (850,000) (1,956,000)
Pro forma net loss per share(1).......... $ (2.31) $ (2.17)
Shares used in computing pro forma
net loss per share(1).................. 371,956 371,956
<CAPTION>
At September 30, 1996
------------------------
Actual Pro Forma(3)
---------- ----------
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit).................................... $ (413,000) $ 845,000
Total assets................................................. 571,000 1,711,000
Total current liabilities.................................... 436,000 158,000
Deficit accumulated during development stage................. (1,956,000) (2,078,000)
Total stockholders' equity (capital deficiency).............. (701,000) 1,133,000
</TABLE>
- --------
(1) The pro forma net loss per share computation gives retroactive effect to
the conversion on effectiveness of the Offering of (i) $1,083,713 of
outstanding indebtedness at August 31, 1996, plus accrued interest thereon
(the "Stockholder Debt") into 263,921 shares of the Company's Common Stock
and (ii) the Series A Preferred Stock and accrued dividends thereon
aggregating $722,000 into 175,793 shares of Common Stock, excludes the
Escrow Shares and Escrow Options. See "Certain Transactions" and Notes A,
B(4) and I of Notes to Financial Statements.
(2) Gives pro forma effect to (i) the issuance of the Bridge Notes and the
Bridge Warrants subsequent to September 30, 1996; (ii) working capital
advances from stockholders aggregating $140,000 subsequent to September 30,
1996; and (iii) the conversion of the Stockholder Debt and the Series A
Preferred Stock to Common Stock upon effectiveness of the Offering. See
"Capitalization-Bridge Financing," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus.
Results of Operations
The Company is in the development stage. Since its inception in July 1994,
the Company's efforts have been principally devoted to research, development and
design of products, marketing activities and raising capital. The Company has
generated only nominal revenues from the placement of test products and has
incurred substantial operating losses to date, which losses are continuing.
Since inception, the Company has sustained cumulative losses of
$(1,956,000). These losses have resulted primarily from expenditures for general
and administrative activities, including salaries, marketing and professional
fees which have aggregated $1,433,000 since inception. General and
administrative expenses increased from $418,000 during the nine months ended
September 30, 1995 to $808,000 during the nine months ended September 30, 1996,
an increase of 93%. This increase reflects the Company's shift after December
31, 1995 from research and development activities to the initiation of sales and
marketing efforts aimed at commercializing the IntelliFit System. From inception
through December 31, 1995, the Company incurred aggregate research and
development expenses of $475,000. All development costs relating to the
IntelliFit System incurred prior to December 31, 1995 were expensed. See Note
B(1) of Notes to Financial Statements. The Company did not have any expenditures
for research and development during the nine months ended September 30, 1996.
Liquidity and Capital Resources
The Company has funded its activities to date through loans from principal
stockholders and private placements of equity and debt securities. As of
September 30, 1996, the Company had a working capital deficit of $(413,000).
In December, 1996, the Company completed the Bridge Financing which
consisted of $1,000,000 principal amount of Bridge Notes bearing interest at an
annual rate of 10% and warrants to purchase an aggregate of 500,000 shares of
Common Stock. See "Capitalization-Bridge Financing." The proceeds of the Bridge
Financing, which were approximately $840,000 (net of $100,000 in commissions and
a $30,000 expense allowance paid to the Underwriter which acted as placement
agent and other expenses of the private placement) have been utilized by the
Company for working capital purposes including general and administrative
expenses and expenses of the Offering. The Company intends to repay the
principal and accrued interest on the Bridge Notes with a portion of the
proceeds of the Offering. See "Use of Proceeds and Plan of Operations" and
"Certain Transactions."
From time to time, the Company's stockholders, including Steven R. Gumins,
Chief Executive Officer of the Company, Deborah E. Griffin, Chief Operating
Officer, and Jonathan W. Seybold, Chairman of the Board of the Company, have
funded the Company's working capital requirements. All amounts advanced prior to
August 31, 1996 were contributed to the capital of the Company. Between
September 1996 and December 3, 1996, working capital advances in the aggregate
principal amount of $170,000 were made to the Company. The Stockholder Advances
bear interest at the rate of 10% per annum and will be repaid from the proceeds
of the Offering. See "Use of Proceeds and Plan of Operations" and "Certain
Transactions."
During the 12-month period following the Offering, the Company is committed
to pay approximately $300,000 in compensation to its current executive officers.
See "Management Employment Agreements" and "Certain Transactions." In addition,
the Company will be required to obtain financing in order to purchase kiosks.
The report of the independent auditors on the Company's financial
statements as of December 31, 1995 contains an explanatory paragraph regarding
an uncertainty with respect to the ability of the Company to continue as a going
concern. The Company has generated only nominal revenues and has incurred an
accumulated deficit through September 30, 1996 of $(1,956,000). However, the
Company believes that upon the completion of the Offering and the receipt of the
proceeds therefrom, it will have the necessary liquidity and capital resources
to sustain planned operations for the 18 month period following the Offering. In
the event that the Company's internal estimates relating to its planned
expenditures prove materially inaccurate, the Company may be required to
reallocate funds among its planned activities and curtail certain planned
expenditures. In any event, the Company anticipates that it will require
substantial additional financing after such time. There can be no assurance as
to the availability or terms of any required additional financing, when and if
needed. In the event that the Company fails to raise any
17
<PAGE>
funds it requires, it may be necessary for the Company to significantly curtail
its activities or cease operations. See "Use of Proceeds and Plan of
Operations."
Release of Escrowed Shares and Options
In connection with the Offering, the current shareholders of the Company
and holders of options are placing a portion of their shares and/or options in
escrow pending the Company's attainment of certain revenue or market price
goals. See "Principal Stockholders." The Commission has taken the position with
respect to the release of securities from escrow that in the event any of the
shares or options are released from escrow to directors, officers, employees or
consultants of the Company, the release will be treated, for financial reporting
purposes, as compensation expense to the Company. In the event the Company
attains any of the earnings or market price targets required for the release of
Escrow Shares and Options, the release of the Escrow Shares and Options to such
individuals will be deemed additional compensation expense to the Company.
Accordingly, the Company will, in the event of the release of the Escrow Shares
and Options recognize during the period in which the earnings or market price
targets are met, what could be a substantial one-time charge which would
substantially increase the Company's loss or reduce or eliminate earnings, if
any, at such time. Such charge to earnings will not be deductible by the Company
for income tax purposes. The amount of compensation expense recognized by the
Company will not affect the Company's total stockholders' equity. See Note F of
Notes to Financial Statements.
BUSINESS
General
The Company was formed in July 1994 and currently its sole product is the
IntelliFit System, a computerized system which generates personalized exercise
prescriptions and tracks and records fitness progress. The exercise
prescriptions are based on, among other things, an individual's weight, ability,
medical history, goals, fitness level and exercise preferences. The IntelliFit
System interacts with a user by applying algorithms to an individual's personal
profile and adjusting a user's exercise prescription based on progress,
frequency of workouts and other variables. The Company believes that this
interactive feature helps motivate users to continue exercising, and allows
users to reach their goals more quickly. The IntelliFit System is designed to
accommodate all levels of exercise experience and all age groups. The software
embodied in the IntelliFit System is based on training guidelines and circuit
training techniques recommended by the American College of Sports Medicine which
the Company believes provide superior results in less time than other training
methods.
The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf computer hardware purchased from major equipment manufacturers,
including a computer with a touch screen display, a modem used to communicate
with a central database, a motorized smart card reader, a scanner and a printer.
The IntelliFit System is accessed by a smart card, similar in size to a credit
card, which contains a microprocessor chip which is able to store information in
memory (the "IntelliCard").
The original computer source programs and related documentation and
computerized services and instructional material (collectively, the "EIS
System") on which the IntelliFit System is based was developed for Nautilus
Group Japan, Ltd. ("NGJ Ltd."), an American company operating in Japan and
currently the owner of all of the issued and outstanding shares of Series A
Preferred Stock of the Company. The Company acquired the rights to the EIS
System from NGJ Ltd. in August 1994 in exchange for the Series A Preferred Stock
and spent approximately 2 years modifying and expanding upon the EIS System in
order to create the IntelliFit System. NGJ Ltd. has advised the Company that the
EIS System is currently installed in nine facilities in Japan and has generated
over 7 million individualized exercise prescriptions. EIS System users in Japan
range in age and are divided almost equally among males and females. See
"Business-Relationship with NGJ Ltd."
During the first 18 months of the Company's existence, management focused
on research and development activities and on limited sales and marketing
activities. Beginning in the spring of 1996, the Company installed the
IntelliFit System in selected facilities in different markets, including
military, hospital, private and corporate fitness centers. The Company has
refined and improved the IntelliFit System based on its experience in the trial
markets. The Company has recently begun to focus on broader-based marketing
activities. The Company has generated only nominal revenues from product sales
as the Company has concentrated on evaluating acceptance of the IntelliFit
System in a variety of markets, varying sales and pricing approaches and
modifying installation, training and support
18
<PAGE>
services provided. There can be no assurance that the Company will successfully
commercialize its product, generate any significant revenues or ever achieve
profitable operations.
Strategy
The Company's strategy is to market and sell the IntelliFit System
initially in selected United States markets. The Company's first target markets
are military facilities, commercial clubs, hospital facilities, corporate
facilities, insurance companies and health maintenance organizations. The
Company believes that these markets have the greater user concentration and that
penetration of these markets could help establish the Company's credibility in
other markets. Subsequent target markets include universities, schools,
government facilities and resorts. The Company anticipates developing
enhancements to the IntelliFit System to enable the System to serve the
rehabilitation market. This will enable patients who exercise as part of their
rehabilitation program to use the System to follow their exercise program in a
local fitness center. In addition, the Company intends to explore other markets
for the IntelliFit software, including selling the software as an individually
packaged product for use on personal computers and providing the software to
Internet users.
The Company believes that the potential benefits to a fitness center of
installing the IntelliFit System are: (i) membership turnover will be reduced as
use of the IntelliFit System increases member interest by providing
goal-oriented personalized training at affordable prices and reduces the time
spent in the fitness center as a full workout using IntelliFit can be completed
in 30 minutes; (ii) since workouts based on circuit training techniques are
shorter, overcrowding in the fitness center can be reduced; (iii) fitness
centers can use the continual information provided on member usage, interests,
history, performance and goals for marketing purposes; (iv) fitness centers can
track patterns of facility and equipment use and can incorporate such knowledge
into scheduling facility hours and determining staffing requirements; (v) the
fitness facility will be able to standardize the method by which members train
and thereby eliminate the uncertainties created by multiple instructors who use
differing techniques; (vi) fitness centers will be able to reduce the number of
trainers employed; and (vi) fitness centers will be better positioned to
integrate technologies incorporating synergistic products relating to health,
wellness and lifestyle. The Company also believes that insurance companies and
health maintenance organizations ("HMOs") can benefit from the IntelliFit
System. Insurance companies and HMOs are increasingly searching for ways to
reduce medical costs by helping their insureds lead healthier lifestyles. Some
insurance companies and HMOs have begun to offer financial incentives to
insureds who exercise regularly; however, there is a need to monitor compliance
by the insured with any programs offered. The IntelliFit System allows the
insurance companies and HMOs to monitor if, and how frequently, its insureds are
using a fitness center, the types of exercises being done and the progress made.
Weight loss clinics can similarly benefit from the ability to monitor their
clients' exercise routines.
The Company believes that there are many benefits to the users of the
IntelliFit System including, among other things, that it (i) motivates a user by
providing continual encouragement and information on a user's progress in
reaching his goals; (ii) provides interactive personalized training at
affordable prices; and (iii) enables a user to follow his personalized exercise
program in any fitness center that has the IntelliFit System.
Product
The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf hardware purchased from major equipment manufacturers. The
components include a computer with touch screen display, a modem used to
communicate with a central database, a motorized smart card reader, a scanner
and a printer. All user information is stored on the IntelliCard. The
IntelliCard can be used at any site which has an IntelliFit System. The software
embodied in the IntelliFit System is an expert system which takes numerous
variables for each individual, applies the variables to an equation and
determines the best workout program for that specific individual using the
exercise equipment at a particular facility. Each time an individual uses the
IntelliFit System, an individual's variables are updated and a new exercise
program is generated.
The IntelliFit software is written in C++ object-oriented programming
language which allows ease of customization and portability to new hardware
components and platforms.
The IntelliFit software is based on training guidelines and circuit
training techniques recommended by the American College of Sports Medicine.
Circuit training means that a user can perform a single set of approximately 8
to 12 repetitions of different exercises in approximately 30 minutes. This
method contrasts to the traditional multiple sets approach used by many
body-builders. Based on the Company's research, the Company believes that
19
<PAGE>
users of the IntelliFit System will be able to attain their goals using circuit
training techniques and will be more inclined to exercise as 30 minutes of
exercise generally represents a reasonable commitment for many time-pressured
individuals.
The IntelliFit System utilizes an electronic medium, known as digital
insertion media, to display on each personalized workout sheet a specific
advertising, promotional message or announcement targeted to that particular
user. The top right quadrant of the workout sheet is currently dedicated to this
application which the Company believes will become an additional source of
revenue. The IntelliFit system also provides personalized exercise suggestions
and motivational messages on a user's workout sheet based on that specific
user's performance. The Company believes that these personalized suggestions and
messages serve as important deterrents to exercise termination.
Fitness centers are not required to purchase new equipment or modify
existing equipment to use the IntelliFit System, as the System can be used with
any type of exercise equipment. This is unlike certain of the Company's
competitors' products which require fitness centers to use one brand of fitness
equipment or to retrofit existing equipment. The IntelliFit System can prescribe
alternative equipment in order to vary a user's workout or to work around
injuries or machines that are being serviced. As part of the Company's
preinstallation procedures, the Company obtains a list of the equipment
configuration for the fitness center where the IntelliFit System is to be
installed. Based on this information, the IntelliFit System prescribes exercise
programs for users using the equipment in that particular facility. In the event
that a facility changes certain pieces of equipment or in the event that certain
pieces of equipment are being serviced, the facility staff is trained to input
such information into the IntelliFit System and the System will automatically
prescribe around such equipment.
The Company intends to lease the IntelliFit System to its customers for a
set monthly fee and to charge its customers an annual fee for each user which
may be paid by the facility or the user. IntelliFit forms, pencils, clipboards,
cleaning solutions and instruments will be provided to the fitness center with
each installation and additional supplies will be available to be purchased at
cost.
Use of the IntelliFit System. An individual who desires to use the
IntelliFit System first completes a new member form which asks the individual to
answer questions about, among other things, the individual's medical history,
activities in which the individual regularly participates, general fitness goals
and current fitness level. The individual fills in bubbles to answer certain of
the questions and hand writes answers to other questions. A member of the
fitness center staff then scans the form into the IntelliFit System and the
IntelliFit System prints out a personalized printed exercise program for the
user for that day. The Company suggests to each fitness center that a staff
member accompany the user the first time the user follows his personalized
exercise program in order to adjust equipment seat heights and to make any
individualized changes which appear to be necessary. An IntelliCard which
contains the user's personal information and the user's personalized exercise
program is issued to the user the next day. The next time the user goes to the
fitness center, the user is instructed to insert his IntelliCard into the kiosk
through a simple touch-screen interface on the computer screen in the kiosk. The
IntelliFit System generates the user's personalized printed workout sheet which
the user carries with him and marks off as he completes his exercises generally
by filling in bubbles. When the user finishes his workout, the user inserts the
completed workout sheet back into the kiosk. The information from the workout
sheet is scanned into the computer and the user's IntelliCard is updated. The
IntelliFit software then adjusts the user's next workout based on the exercises
the user has completed and the progress the user has made. All user information
is uploaded at the end of each day onto the Company's central database.
Types of Programs Offered. Currently the IntelliFit System provides over
300 goal-oriented programs for users to choose from. The following are some
examples:
Basic Fitness
Basic fitness is designed as an initial exercise program for individuals
who are beginning an exercise program.
General Fitness
General Fitness provides exercises for all the major muscle groups and
cardiovascular exercise to help strengthen the heart and lungs.
20
<PAGE>
Active Fitness
Active Fitness prescribes exercise to increase endurance by strengthening
all the major muscle groups.
Aerobic Protection
Aerobic Protection is designed to strengthen the specific muscle groups
used in aerobic fitness exercises.
CardioFlex
CardioFlex is a comprehensive stretching and strengthening program used to
regain flexibility.
WalkPro
WalkPro strengthens the muscles of the upper and lower body helping to burn
calories while building strength and endurance.
Weight Management
Weight Management concentrates on weight loss goals with three phases and
difficulty levels of exercises.
Corporate Fitness
Corporate Fitness is designed to counteract the physical and emotional
stress of working in an office.
Body Sculpting
Body Sculpting tones and strengthens the entire body as well as specific
areas.
Sports Conditioning
Sports conditioning programs provide specialized workouts designed to
concentrate on specific muscles used in sporting activities.
Each program is presented as a 20-session course. By providing varying work-out
course programs, the Company believes that users will continue to be interested
in and motivated to exercise. Each IntelliFit program accommodates all levels of
experience, from entry-level to seasoned fitness center veteran to professional
athlete. In addition, each IntelliFit program can be used by individuals in any
age group.
Benefits to IntelliFit Customer and User. The Company believes that the
potential benefits to a fitness center of installing the IntelliFit System are:
(i) membership turnover will be reduced as use of the IntelliFit System
increases member interest by providing goal-oriented personalized training at
affordable prices and reduces the time spent in the fitness center as a full
workout using IntelliFit can be completed in 30 minutes; (ii) since workouts
based on circuit training techniques are shorter, overcrowding in the fitness
center can be reduced; (iii) fitness centers can use the continual information
provided on member usage, interests, history, performance and goals for
marketing purposes; (iv) fitness centers can track patterns of facility and
equipment use and can incorporate such knowledge into scheduling facility hours
and determining staffing requirements; (v) the fitness facility will be able to
standardize the method by which members train and thereby eliminate the
uncertainties created by multiple instructors who use differing techniques; (vi)
fitness centers will be able to reduce the number of trainers employed; and (vi)
fitness centers will be better positioned to integrate technologies
incorporating synergistic products relating to health, wellness and lifestyle.
The Company also believes that insurance companies and HMOs can benefit from the
IntelliFit System. Insurance companies and HMOs are increasingly searching for
ways to reduce medical costs by helping their insureds lead healthier
lifestyles. Some insurance companies and HMOs have begun to offer financial
incentives to insureds who exercise regularly; however, there is a need to
monitor compliance by the insured with any programs offered. The IntelliFit
System allows the insurance companies and HMOs to monitor if, and how
frequently, its insureds are using a fitness center, the types of exercises
being done and the progress made. Weight loss clinics can similarly benefit from
the ability to monitor their clients' exercise routines.
The Company believes that there are many benefits to the users of the
IntelliFit System including, among other things, that it (i) motivates a user by
providing continual encouragement and information on a user's progress in
21
<PAGE>
reaching his goals; (ii) provides interactive personalized training at
affordable prices; and (iii) enables a user to follow his personalized exercise
program in any fitness center that has the IntelliFit System.
Marketing
Currently, the Company has only one person dedicated to marketing the
IntelliFit System. As the Company's business grows, the Company will require
additional sales and marketing personnel. There is no assurance that the Company
will be able to recruit, train or retain qualified personnel to sell and market
its product or that it will develop a successful sales and marketing strategy.
The Company also has very limited marketing experience. To date, the Company has
marketed the IntelliFit System primarily through demonstrations at trade shows
and advertisements in trade journals. The Company has allocated $500,000 of the
proceeds of the Offering for sales and marketing purposes. See "Use of Proceeds
and Plan of Operations." There can be no assurance that any sales and marketing
efforts undertaken by the Company will be successful or will result in any
significant sales of its product.
The success of the Company's business is dependent upon acceptance of the
IntelliFit System by both the Company's potential customers and the actual users
of the System. The Company believes that there will be interest in its product
from military facilities, commercial clubs, hospital facilities, corporate
facilities, insurance companies and health maintenance organizations. However,
there can be no assurance that acceptance by any of the Company's potential
customers will occur. In addition, even if the IntelliFit System is installed in
a fitness center, ultimate success for the Company depends on whether
individuals actually use the System on a regular basis. The Company does not
market its product directly to these users. Instead, the Company trains fitness
center staff to use the IntelliFit System, provides each fitness center with
brochures on the IntelliFit System to distribute to users and requires fitness
center staff to introduce the IntelliFit System to its new members and all
renewing members. The Company has limited ability to monitor the manner and
frequency with which fitness center staff introduce the IntelliFit System to its
new members or renewing members or stimulate current member's interest in using
the IntelliFit System. In addition, a user must use the IntelliCard in order to
access the IntelliFit System. Although the Company believes that acceptance of
smart cards is increasing, there can be no assurance that such acceptance will
occur in the near future, if at all. A number of companies that have developed
computer-based fitness systems which prescribe personalized exercise programs
have either had limited success or have failed.
To date, the Company has installed kiosks in only six fitness centers on a
test basis. Three of the kiosks have been installed on one military base, three
have been installed in one hospital fitness center, one kiosk has been installed
in a private fitness center and one kiosk has been installed in a corporate
fitness center. Two kiosks are currently used for demonstrations at trade shows.
There can be no assurance that the IntelliFit System will perform as
anticipated. In addition, the software embodied in the IntelliFit System may
contain errors which only become apparent subsequent to widespread commercial
use. The IntelliFit System may require improvements and refinements.
Difficulties in improving and refining the IntelliFit System could delay further
introductions and installations of the System and could cause the Company to
incur additional costs. This would have a material adverse effect on the
Company.
Relationship with Nautilus Group Japan, Ltd.
In August 1994, pursuant to an Assignment Agreement (the "Assignment
Agreement"), NGJ Ltd. assigned the EIS System along with registration for the
trademark "EIS Expert Instructor System" (the "Trademark") to the Company as a
contribution to capital in consideration for the issuance to NGJ Ltd. of 50
shares of the Company's Series A Preferred Stock, $.01 par value (the "Series A
Preferred Stock"). In addition, in August 1994 the Company issued 550 shares of
Series A Preferred Stock to NGJ for $550,000 in cash. Upon the closing of the
Offering, NGJ Ltd. will convert its shares of Series A Preferred Stock into
175,792 shares of Common Stock. See "Principal Stockholders." The assignment to
the Company is subject to a Japanese company's right to use the EIS System in
Sumitomo Nautilus Clubs in Japan pursuant to an exclusive franchise agreement
(the "NGJ Franchise Agreement") granted to such company by NGJ Ltd. Pursuant to
the Assignment Agreement, the Company granted NGJ Ltd. a royalty-free
non-exclusive license with respect to any and all improved, updated and enhanced
EIS Systems which may be designed, developed and implemented by the Company or
any of the Company's agents, employees and consultants (including, without
limitation, the right to sublicense such use) exclusively in Sumitomo Nautilus
Clubs in Japan pursuant to the NGJ Franchise Agreement. In addition, the Company
granted NGJ Ltd. a non-exclusive license with respect to the EIS Systems and the
Trademark and any and all improved, updated and enhanced EIS Systems (including
the IntelliFit System) ("New Products") which may be designed, developed and
implemented
22
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by the Company or any of the Company's agents, employees and consultants
(including, without limitation, the right to sublicense such use) exclusively in
Japan, such license to be effective upon (i) termination of the NGJ Franchise
Agreement, provided the NGJ Franchise Agreement is not replaced with another
license or franchise agreement between NGJ Ltd. and the Japanese company or (ii)
the date on which NGJ Ltd. reasonably concludes, based on an examination of its
quarterly financial results, that its annual revenue from the NGJ Franchise
Agreement has fallen below $1,000,000 (the "Termination Conditions").
In June 1995, the Company entered into an Exclusive Distribution License
Agreement with NGJ Ltd. pursuant to which the Company granted NGJ Ltd. the
exclusive right and license to market, use and grant sub licenses to others to
distribute all fitness-related hardware and software products owned and
developed by the Company during the term of the Agreement in Japan. The
Agreement is terminable by either party on notice for cause or without cause, on
notice delivered not less than 90 days in advance of and effective on the fifth,
tenth, fifteenth, twentieth, or any subsequent five year anniversary of the date
the product is in a form suitable for sale in Japan (the "Suitability Date"). In
the event that the Company terminates the Agreement without cause, and within
120 days thereafter proposes to enter into an agreement with a third party to
distribute the products in Japan, NGJ Ltd. must be given the right to distribute
the products in Japan on the same terms as are contained in the agreement with
the third party. The Agreement also contains a provision requiring NGJ Ltd. to
use reasonable commercial efforts to exploit the products in Japan. As the sole
remedy for NGJ Ltd.'s failure to exploit the products, the Company may terminate
the Agreement on 60 days notice at any time after the third anniversary of the
Suitability Date.
In November 1996, the Company and NGJ Ltd. entered into a letter agreement
pursuant to which the parties agreed that (i) in the event that neither of the
Termination Conditions have been met, royalties payable by NGJ Ltd. to the
Company on distributions of the EIS System and New Products by NGJ Ltd. outside
of Sumitomo Nautilus Clubs in Japan will be determined by the parties in the
future, and (ii) in the event that either of the Termination Conditions have
been met, no royalties will be payable by NGJ Ltd. to the Company on the first
$2,000,000 of revenue derived from distributions of the EIS System and New
Products by NGJ Ltd. outside of Sumitomo Nautilus Clubs in Japan and all
royalties in excess of such amount will be determined by the parties in the
future.
Service
The Company employs a technical support staff of approximately five
persons. The technical support staff's responsibilities include being present
on-site when the IntelliFit System is delivered to a facility, unpacking and
testing the System and training the facility staff to use the System and to
correct problems with the System. In addition, technical support staff and
engineers who are qualified to answer more complex technical problems are
generally available by telephone during business hours to respond to questions.
In the event that a fitness center has difficulties with its computer hardware,
the Company contracts with local computer service centers for maintenance of the
hardware.
Manufacturing and Development
The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf computer hardware purchased from major equipment manufacturers.
The Company does not intend to manufacture the kiosks or any of the hardware
components of the IntelliFit System. The kiosks are off-the-shelf products with
certain modifications and are currently manufactured for the Company by one
manufacturer. To date kiosks have been manufactured on an as-needed basis;
however, the Company expects that in the future, kiosks will be manufactured in
increments of ten. The manufacturer of the kiosks also installs all of the
hardware in the kiosk and ships the fully-installed kiosk to the Company's
customers. Although all kiosks delivered have met Company specifications, there
can be no assurance that future deliveries of kiosks will be completed on a
timely basis. Although the Company believes that additional alternative sources
are available, failure by the manufacturer to supply the Company with high
quality finished products on commercially reasonable terms, or at all, could
have a material adverse effect on the Company.
The Company purchases its hardware from several suppliers. Although the
Company does not maintain formal agreements with any of its suppliers of
hardware, the Company believes that its current supply arrangements will satisfy
the Company's present and anticipated production requirements, and that the
Company has suitable alternative supply sources in the event that its current
arrangements are terminated or that current suppliers are otherwise unable to
fulfill its needs. However, there can be no assurance that such alternative
suppliers will be available. The failure or delay of other suppliers in
supplying product to the Company could result in delays in marketing or
operation of the IntelliFit System, which would have a material adverse effect
on the Company. In addition, a
23
<PAGE>
change in certain pieces of hardware could require revisions to the software
which could have a material adverse effect on the Company.
The software embodied in the IntelliFit System was developed for the
Company by TransPac and a number of other third party software developers. In
August 1994, the Company entered into a Retainer Agreement with TransPac
pursuant to which TransPac was retained in order to assist the Company in
developing the specification for an update to the EIS System. For TransPac's
work under the Retainer Agreement, the Company paid TransPac a fee of $120,000.
In addition, the Company granted TransPac an option to acquire 10% of the Common
Stock of the Company at an exercise price per share equal to the price paid by
the initial purchasers of the Company's Common Stock. TransPac exercised this
option in February 1996. The Retainer Agreement contains a provision requiring
TransPac to provide future development services to the Company upon the
Company's request on designated, scheduled projects through December 31, 1998.
The first 500 hours of services in a calendar year will be compensated at a rate
of $125 per hour and the second 500 hours of services in a calendar year (and
any additional time) will be compensated at a rate of $150 per hour. Pursuant to
the Retainer Agreement, TransPac shall be entitled to designate one member to
the Company's Board of Directors until December 31, 1998. TransPac's current
designee to the Board of Directors is Kenneth W. Krugler, the President of
TransPac. The Company does not have any written contracts with any other
software developers. Currently, the Company has limited capability internally to
perform upgrades or modifications to the software and there can be no assurance
that any required upgrades or modifications to the software can be successfully
made. This could have a material adverse effect on the Company. See
"Management-Officers and Directors."
Competition
The Company competes with companies that have developed computer-based
fitness systems which prescribe personalized exercise programs. The Company will
attempt to compete on the basis of cost, features offered, ease of use, time
spent at the kiosk and service; however, there is no assurance that the Company
will be able to compete with its competitors. Certain of the Company's
competitor's products require fitness centers to use one brand of fitness
equipment or to retrofit existing equipment. The Company believes that it has a
competitive advantage in this respect as fitness centers do not need to make any
additional expenditures for equipment or parts in order to use the IntelliFit
System. In addition, certain of the Company's competitor's have developed
products that are not interactive. The IntelliFit System interacts with a user
through artificial intelligence and adjusts a user's exercise prescription based
on progress, frequency of workouts and other variables. The Company believes
that this interactive feature helps motivate users to continue exercising,
reduces injuries and allows users to reach their goals more quickly. The
IntelliFit System is simple to use as a user merely inserts his IntelliCard into
the kiosk, receives an exercise program card, marks off the exercises completed
on the card generally by filling in bubbles and feeds the completed card back
into the kiosk. Certain of the Company's competitor's products require users to
type information directly onto the computer in the kiosk. This is time consuming
for the user and can create lines of users waiting to use the kiosk. The
IntelliFit System has been designed so that a user's average length of time
spent at the kiosk is under one minute. Finally, the Company intends to
concentrate on technical support in order to provide the fitness centers with
uninterrupted use of the IntelliFit System.
Certain of the Company's competitors have substantially greater financial,
marketing, technical, distribution and other resources and greater name
recognition than the Company. In addition, certain competitors have a
relationship with companies that manufacture exercise equipment. The Company may
also face competition from new companies that develop similar products to the
IntelliFit System. In addition, certain competitors have a relationship with
companies that manufacture exercise equipment. There can be no assurance that
enhancements to or future generations of competitive products will not be
developed which offer superior prices more attractive features, easier use
and/or better service than the Company's products.
Insurance
The provision of personalized exercise programs may subject the Company to
liability to its customers and/or the ultimate users of the IntelliFit System.
The Company's $1,000,000 insurance policy currently excludes coverage for bodily
injury. Although the Company intends to seek appropriate additional insurance,
there can be no assurance that any insurance obtained by the Company will be
sufficient to cover any or all claims against the Company which may arise. If
such insurance is insufficient, this could have a material adverse effect on the
Company.
24
<PAGE>
Employees
The Company currently has 11 full-time employees and five independent
contractors. The Company is highly dependent on the principal members of its
management including Steven R. Gumins, the Chief Executive Officer of the
Company and Deborah E. Griffin, the Chief Operating Officer of the Company. The
Company has employment agreements with each of Mr. Gumins and Ms. Griffin and
has obtained a $2,000,000 key person life insurance policy covering Mr. Gumins'
life. See "Management-Employment Agreements." The Company is the sole
beneficiary of such life insurance policy. The Company will not be able to
obtain key person life insurance on Deborah Griffin's life in view of health
problems affecting Ms. Griffin. The future success of the Company depends in
large part on its ability to attract and retain highly qualified personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to hire sufficient qualified personnel on a timely basis or
can retain such personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.
Facilities
The Company's corporate headquarters are located at 17575 Pacific Coast
Highway, Pacific Palisades, California 90272 where the Company occupies
approximately 2,000 square feet of space under a lease which expires August 18,
1997. The lease contains an option, exercisable by the Company, to renew for
continual additional one year terms. The lease currently provides for monthly
rental payments of $2,675. The monthly rental payment for each additional one
year term can be increased by no more than 7% per year. The Company believes
that in the event it does not renew this lease it can enter into a new lease for
equivalent space on commercially reasonable terms. The Company believes that its
existing facility is well maintained, in good operating condition and adequate
to meet its current requirements.
Legal Proceedings
The Company is not involved in any material legal proceedings.
25
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jonathan W. Seybold(1)(2) ............ 53 Chairman of the Board of Directors
Gregory L. Zink(2).................... 40 President, Chief Financial Officer and Director
Steven R. Gumins...................... 45 Chief Executive Officer, Vice President--
Sales and Director
Deborah E. Griffin(2)................. 44 Chief Operating Officer, Secretary and Director
William Blase ........................ 45 Director
Kenneth W. Krugler ................... 35 Director
M. Caroline Martin(1) ................ 56 Director
Allan Dalfen(1) ...................... 53 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
JONATHAN W. SEYBOLD has served as a director of the Company since its
inception in July, 1994. Mr. Seybold has served as Chairman of the Board since
July, 1994. Mr. Seybold also founded Seybold Seminars, Inc. ("Seybold
Seminars"), a company which conducts large scale, technology-based trade shows
and conferences and Seybold Publications ("Seybold Publications"), a company
which publishes reports on publishing systems, desktop publishing and digital
data applications. Mr. Seybold served as President of Seybold Seminars and
Seybold Publications from 1981 to 1993.
GREGORY L. ZINK has served as the Company's President and Chief Financial
Officer since July 1994 and a director of the Company since July 1994. Mr. Zink
is not involved in the day to day management of the Company. Mr. Zink has served
as Chief Operating Officer and Chief Financial Officer of Nautilus Group Japan
Ltd. since April 1988. Mr. Zink has also been Vice President of Clark Management
Co. Inc., an investment advisory company, since January 1989. Mr. Zink holds an
M.B.A. from the Wharton Business School.
STEVEN R. GUMINS has been the Company's Chief Executive Officer and Vice
President Sales since August 1994 and a director of the Company since August
1994. From August 1984 to January 1988 Mr. Gumins was the President of Computers
for Education, a provider of publishing materials to schools. From October 1992
to October 1993, Mr. Gumins was a Portfolio Analyst of Guild Investment
Management, Inc., an investment advisory firm. From October 1993 to August 1994,
Mr. Gumins was a Vice President of Portfolio Advisory Services, Inc., an
investment advisory firm. Mr. Gumins has a B.A. from the University of Buffalo
and participated in a United Nations program at the University of Chile in
Santiago, Chile.
DEBORAH E. GRIFFIN has served as the Company's Chief Operating Officer and
a director since August 1994. Prior to joining the Company, from 1982 to 1990,
Ms. Griffin was the Vice President Operations of Seybold Seminars. From November
1990 to July 1994, Ms. Griffin was the Vice President, Operations at Ziff-Davis
Exposition and Conference Company, Inc., a computer publishing company.
WILLIAM BLASE has been a director of the Company since August 1995. Since
1985, Dr. Blase has served a director of California Eye Care, an ophthalmology
practice. Since November 1992, Dr. Blase has been a director of Valley Health
Systems California District Hospital. Dr. Blase has an M.D. from the University
of Virginia School of Medicine and a M.S. from Oxford University in England.
KENNETH W. KRUGLER has served as a director of the Company since July 1994.
Mr. Krugler has served as President of TransPac Software Inc. since founding it
in January 1987. From 1983 to 1987, Mr. Krugler was a software architect at
Apple Computer, Inc. Mr. Krugler has a B.S. in Computer Science and Engineering
from the Massachusetts Institute of Technology.
26
<PAGE>
M. CAROLINE MARTIN has served as a director of the Company since December
1996. Since January 1986, Ms. Martin has served as Executive Vice President of
Riverside Health System, a multi-facility integrated healthcare system. She is
currently a member of the board of directors of Signet Bank.
ALLAN DALFEN has served as a director of the Company since December 1996.
Mr. Dalfen currently serves as President of Kent Spiegel Direct Inc., the
sporting goods and fitness division of Kent & Spiegel. Since January 1995, Mr.
Dalfen has also served as President of Dalfen Corporation, an investment
corporation. From October 1992 to December 1994, Mr. Dalfen served as President
and Chief Executive Officer of Vestro Foods, Inc. and from 1979 to 1992, Mr.
Dalfen served as President and Chief Executive Officer of Weider Health and
Fitness. Mr. Dalfen is currently a director of Vestro Foods, Inc.
Directors serve until the next annual meeting of shareholders or until
their successors are elected and qualified. Officers serve at the discretion of
the Board of Directors, subject to rights, if any, under contracts of
employment. See "Management -- Employment Agreements."
Board Committees and Designated Directors
The Board of Directors has a Compensation Committee which makes
recommendations to the Board concerning salaries and incentive compensation for
officers and employees of the Company and may administer the Company's stock
option plan. See "Management -- Stock Option Plan." The Board of Directors also
has an Audit Committee which reviews the results and scope of the audit and
other accounting related matters.
Pursuant to the Retainer Agreement entered into by the Company and
TransPac, TransPac shall be entitled to designate one member to the Company's
Board of Directors until December 31, 1998. TransPac's current designee to the
Board of Directors is Kenneth W. Krugler, the President of TransPac. See
"Business-Manufacturing and Development."
The Company has agreed, if requested by the Underwriter, to nominate a
designee of the Underwriter to the Company's Board of Directors for a period of
five years from the date of this Prospectus. See "Underwriting."
Director Compensation
Directors are entitled to receive options pursuant to the Company's 1996
Stock Option Plan. See "Management-Stock Option Plan." On effectiveness of the
Offering, the Company will grant options to purchase 1,000 shares of Common
Stock to each of Jonathan W. Seybold, Gregory L. Zink, Dr. William Blase, M.
Caroline Martin, Allan Dalfen and Kenneth W. Krugler. Such options will be
exercisable at $5.00 per share commencing one year from the date of grant.
Executive Compensation
The following Summary Compensation Table sets forth the compensation earned
by Steven Gumins, the Company's Chief Executive Officer and one other executive
officer of the Company whose total annual salary and bonus exceeded $100,000 for
the fiscal year ended December 31, 1995.
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation
Name and --------------------------------
Principal Position Year Salary Bonus
------------------ ---- ------ -----
<S> <C> <C> <C>
Steven R. Gumins, Chief .................................. 1995 $100,000 $6,000
Executive Officer and Vice President-Sales.............. 1994 $ 34,722 --
Deborah E. Griffin, Chief ................................ 1995 $100,000 $6,000
Operating Officer ...................................... 1994 $ 34,722 --
</TABLE>
27
<PAGE>
Employment Agreements
On December 1, 1996, the Company entered into three-year employment
agreements with each of Mr. Gumins and Ms. Griffin. The agreements provide for a
base annual salary of $150,00 and bonuses at the discretion of the Board to be
based on the achievement of performance objectives, with a bonus of $25,000
during the first year of the agreement if the Company attains break-even during
any fiscal quarter of 1997. The agreements provide for severance equal to four
months' base salary in the event of termination other than for "cause" (as
defined), except that in the event of death or disability, severance shall be
equal to six months' base salary. All of the agreements also contain a five-year
post-termination confidentiality provision and a six-month post termination
non-competition provision.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company's Board is comprised of Jonathan
W. Seybold, M. Caroline Martin and Allan Dalfen. None of these individuals other
than Mr. Seybold was at any time during the fiscal year ended December 31, 1995
or at any other time, an officer or employee of the Company. No member of the
Compensation Committee of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
Stock Option Plan
In October 1996, the Board of Directors adopted and the Company's
stockholders approved, the 1996 Stock Option Plan (the Plan") covering 250,000
shares of the Company's Common Stock pursuant to which employees, officers and
directors of, and consultants or advisers to, the Company and any subsidiary
corporations are eligible to receive incentive stock options ("incentive
options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and/or options that do not qualify as incentive
options ("non-qualified options"). The Plan, which expires in October 2006, will
be administered by the Board of Directors or a committee of the Board of
Directors; provided, however, that with respect to "officers" and "directors,"
as such terms are defined for the purposes of Rule 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), such
committee shall consist of "disinterested" directors as defined in Rule 16b-3,
but only if at least two directors meet the criteria of "disinterested"
directors as defined in Rule 16b-3. The purposes of the Plan are to ensure the
retention of existing and future executive personnel, key employees, directors,
consultants and advisors who are expected to contribute to the Company's future
growth and success and to provide additional incentive by permitting such
individuals to participate in the ownership of the Company, and the criteria to
be utilized by the Board of Directors or the committee in granting options
pursuant to the Plan will be consistent with these purposes. The Plan provides
for automatic grants of options to certain directors in the manner set forth
below.
Options granted under the Plan may be either incentive options or
non-qualified options. Incentive options granted under the Plan are exercisable
for a period of up to 10 years from the date of grant at an exercise price which
is not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive option granted under the Plan to a
stockholder owning more than 10% of the outstanding voting power may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of the grant. To the extent that the
aggregate fair market value, as of the date of grant, of the shares for which
incentive options become exercisable for the first time by an optionee during
the calendar year exceeds $100,000, the portion of such option which is in
excess of the $100,000 limitation will be treated as a non-qualified option.
Options granted under the Plan to officers, directors or employees of the
Company may be exercised only while the optionee is employed or retained by the
Company or within 90 days of the date of termination of the employment
relationship or directorship. However, options which are exercisable at the time
of termination by reason of death or permanent disability of the optionee may be
exercised within 12 months of the date of termination of the employment
relationship or directorship. Upon the exercise of an option, payment may be
made by cash or by any other means that the Board of Directors or the committee
determines. No option may be granted under the Plan after October 2006.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. An optionee may be
granted more than one option under the Plan. The Board of Directors or the
committee will, in its discretion, determine (subject to the terms of the Plan)
who will be granted options, the time or times at which options shall be
granted, and the number of shares subject to each option,
28
<PAGE>
whether the options are incentive options or non-qualified options, and the
manner in which options may be exercised. In making such determination,
consideration may be given to the value of the services rendered by the
respective individuals, their present and potential contributions to the success
of the Company and its subsidiaries and such other factors deemed relevant in
accomplishing the purpose of the Plan.
To date, options to purchase an aggregate of 200,000 shares at an exercise
price of $5.00 per share have been granted under the Plan, 100,000 of which were
issued to each of Deborah E. Griffin and Steven R. Gumins. These options are
exercisable in four equal annual installments commencing one year from the date
of grant.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors. This provision does not eliminate
the liability of a director (i) for breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption, or (iv) for transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, the provision is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Such limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or recision.
The Company intends to enter into indemnification agreements
("Indemnification Agreement(s)") with each of its directors and officers after
the Offering. Each such Indemnification Agreement will provide that the Company
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
Such indemnification will be available if the indemnitee acted in good faith and
in a matter he reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful. The Indemnification Agreements will
also require that the Company indemnify the director or other party thereto in
all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement will permit the director or officer that is party
thereto to bring suit to seek recovery or amounts due under the Indemnification
Agreement and to recover the expenses of such a suit if he is successful.
The Company's By-laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
Delaware General Corporation Law, and the Company shall have the right to
purchase and maintain insurance on behalf of any such person whether or not the
Company would have the power to indemnify such person against the liability. The
Company has not currently purchased any such insurance policy on behalf on any
of its directors, officers, employees or agents.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
CERTAIN TRANSACTIONS
In October 1995, the Company borrowed an aggregate of $241,666 from NGJ
Ltd., Deborah E. Griffin, Steven R. Gumins, Jonathan W. Seybold and TransPac. In
March 1996, the Company borrowed an aggregate of $289,579.60 from NGJ Ltd. and
Jonathan W. Seybold. In June 1996, the Company borrowed an aggregate of
$112,810.75 from NGJ Ltd., Jonathan W. Seybold and William Blase. In August
1996, the Company borrowed an aggregate of $129,197.14 from NGJ Ltd., Deborah E.
Griffin, Jonathan W. Seybold and William Blase.
In June 1995, the Company borrowed $250,000 from NGJ Ltd. pursuant to a one
year promissory note at an interest rate of 10% per annum. In September 1996,
NGJ Ltd. extended the repayment date of the promissory note to June 1997.
Repayment of a portion of the loan was secured by 2,988 shares of Common Stock
held by each of
29
<PAGE>
Deborah E. Griffin and Steven R. Gumins. NGJ Ltd. agreed to eliminate the
security for repayment of the note in September 1996.
All of the foregoing indebtedness will be converted upon effectiveness of
the Offering into an aggregate of 263,921 shares, representing a conversion rate
of $4.11 per share.
In August 1996, the Company issued ten-year options to purchase 40,564
shares of Common Stock to Ms. Griffin and options to purchase 38,110 shares of
Common Stock to Mr. Gumins, each at an exercise price of $.50 per share. Such
options are currently exercisable. See "Management Employment Agreements" and
"Principal Stockholders -- Escrowed Shares and Options."
In addition, in October 1996, the Company issued options to purchase
100,000 shares at an exercise price of $5.00 per share to each of Deborah E.
Griffin and Steven R. Gumins under the 1996 Stock Option Plan. Such options are
exercisable in four equal annual installments commencing one year from the date
of grant. See "Management-Stock Option Plan."
From September to December 3, 1996, the Company borrowed an aggregate of
$17,316, $10,221, $47,490, $4,946 and $90,044 from Deborah E. Griffin, Steven R.
Gumins, Jonathan W. Seybold, William Blase and NGJ Ltd., respectively, pursuant
to promissory notes bearing interest at the rate of 10% per annum. Such amount
will be repaid together with accrued interest from the proceeds of the Offering.
See "Use of Proceeds and Plan of Operations."
During the year ended December 31, 1995 and the nine months ended September
30, 1996, the Company paid approximately $10,000 and $79,000, respectively, to
TransPac for services under a Retainer Agreement. Kenneth W. Krugler, a director
of the Company, is the President of TransPac. At September 30, 1996, the Company
had an outstanding payable to Transpac of $61,437.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company has adopted a policy that all future
transactions, including loans, between the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will continue to
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
30
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Common Stock by (i) each person known by the Company to own beneficially more
than 5% of each class of outstanding Common Stock, (ii) each director of the
Company, (iii) each executive officer of the Company named in the Summary
Compensation Table, and (iv) all executive officers and directors of the Company
as a group, (a) prior to the Offering giving pro forma effect to the conversion
of the Stockholder Debt and the Series A Preferred Stock into Common Stock upon
the effectiveness of the Offering and (b) as adjusted to give effect to the sale
of the 1,200,000 Units offered hereby:
<TABLE>
<CAPTION>
Percent of Shares
Beneficially Owned
Shares -------------------
Name and Address Beneficially Before After
of Beneficial Owner Owned(1) Offering Offering
------------------- -------- ------ ------
<S> <C> <C> <C>
Nautilus Group Japan, Ltd.(2) ............................ 366,514 50.8% 19.1%
Clark Trust u/t/d 6/30/69 (3) ............................ 63,456 8.8 3.3
Seybold Family Trust (4) ................................. 141,464 19.6 7.4
Jonathan W. Seybold (5) .................................. 141,464 19.6 7.4
Gregory L. Zink (6) ...................................... 379,908 52.7 19.4
Steven R. Gumins (7) ..................................... 47,078 6.2 2.4
Deborah E. Griffin (8) ................................... 54,182 7.1 2.8
William Blase (9) ........................................ 14,278 2.0 *
Kenneth W. Krugler (10) .................................. -- * *
M. Caroline Martin (11) .................................. -- * *
Allan Dalfen (12) ........................................ -- * *
All executive officers and directors
as a group (eight persons).............................. 636,910 79.6 31.8
</TABLE>
- --------
* Less than 1%.
(1) Includes such individuals' Escrow Shares. See "Escrowed Shares and
Options" below. In computing the number of shares beneficially owned
by a person and the percentage ownership of a person, shares of Common
Stock of the Company, subject to options held by that person that are
currently exercisable or exercisable within 60 days are deemed
outstanding. Such shares, however, are not deemed outstanding for
purposes of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock.
(2) The address of such company is c/o Clark Management Co. Inc., P.O. Box
3090, Boynton Beach, Florida 33424.
(3) The address of such trust is c/o Clark Management Co. Inc., P.O. Box
3090, Boynton Beach, Florida 33424.
(4) The address of such trust is P.O. Box 1315 East Sound, Washington
98245.
(5) Consists of 141,464 shares held by the Seybold Family Trust. Mr.
Seybold is a Trustee of such Trust. The address of such individual is
c/o Heuristic Development Group, Inc., 17575 Pacific Coast Highway,
Pacific Palisades, California 90272.
(6) Includes 366,514 shares held by NGJ Ltd. Mr. Zink is the Chief
Operating Officer of NGJ Ltd. The address of such individual is c/o
Clark Management Co. Inc., P.O. Box 3090, Boynton Beach, Florida
33424.
(7) Includes options to purchase 38,110 shares of Common Stock, a porton
of which are being held in escrow. The address of such individual is
c/o Heuristic Development Group, Inc., 17575 Pacific Coast Highway,
Pacific Palisades, California 90272.
31
<PAGE>
(8) Includes options to purchase 40,564 shares of Common Stock, a portion
of which are being held in escrow. The address of such individual is
c/o Heuristic Development Group, Inc., 17575 Pacific Coast Highway,
Pacific Palisades, California 90272.
(9) Represents shares held by the Blase Family Trust, of which Dr. Blase
is Trustee. The address of such individual is c/o California Eye Care,
2390 East Florida Avenue, Suite 207, Hemet, California 92544.
(10) The address of such company is c/o Clark Management Co. Inc., P.O. Box
3090, Boynton Beach, Florida 33424.
(11) The address of such individual is c/o Riverside Health System, 606
Denbigh Boulevard, Suite 604, Newport News, Virginia 23608
(12) The address of such individual is c/o Kent Spiegel Direct, Inc., 6133
Bristol Parkway, Culver City, California 90230.
Escrowed Shares and Options
In connection with the Offering, the holders of 349,370 shares of the
Company's Common Stock (the "Escrow Shares") and options to purchase 50,630
shares of the Company's Common Stock (the "Escrow Options") have agreed to place
the Escrow Shares and Escrow Options into escrow pursuant to an escrow agreement
(the "Escrow Agreement") with American Stock Transfer & Trust Company, as escrow
agent. The Escrow Shares and Escrow Options are not transferable or assignable;
except upon death, by operation of law, to family members of the holders or to
any trust for the benefit of the holders; provided that such transferees agree
to be bound by the provisions of the Escrow Agreement. The Escrow Shares may be
voted. Holders of Escrow Options may exercise their options prior to their
release from escrow; however, the shares issuable upon such exercise will
continue to be held as Escrow Shares pursuant to the Escrow Agreement.
The Escrow Shares and Escrow Options will be released from escrow if, and
only if, one or more of the following conditions is/are met:
(a) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the
Company's independent public accountants) (the "Minimum Pretax
Income") amounts to at least $3.3 million for the fiscal year ending
December 31, 1998;
(b) the Minimum Pretax Income amounts to at least $4.5 million for the
fiscal year ending December 31, 1999;
(c) the Minimum Pretax Income amounts to at least $5.7 million during the
fiscal year ending December 31, 2000;
(d) the Bid Price (as defined in the Escrow Agreement) of the Common Stock
averages in excess of $12.50 per share for 30 consecutive business
days during the 18-month period commencing on the date of this
Prospectus; or
(e) the Bid Price of the Common Stock averages in excess of $16.75 per
share for 30 consecutive business days during the 18-month period
commencing with the nineteenth month from the date of this Prospectus.
The Minimum Pretax Income amounts set forth above shall (i) be calculated
exclusively of any extraordinary earnings, including any charge to income
resulting from release of the Escrow Shares and Escrow Options and (ii) be
increased proportionately, with certain limitations, in the event additional
shares of Common Stock or securities convertible into, exchangeable for or
exercisable into Common Stock are issued after completion of the Offering. The
Bid Price amounts set forth above are subject to adjustment in the event of any
stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Shares and Escrow Options, 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 and Escrow Options. If none of the applicable
Minimum Pretax Income or Bid Price levels set forth above have been met by March
31, 2001, the Escrow Shares and Escrow Options, as well as any dividends or
other distributions made with respect thereto, will be cancelled and contributed
to the capital of the Company. The Company expects that the release of the
Escrow Shares and Escrow Options to officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a substantial charge to reportable earnings, which
32
<PAGE>
would equal the fair market value of such shares on the date of release. Such
charge could substantially increase the loss or reduce or eliminate the
Company's net income, if any, for financial reporting purposes for the period
during which such shares and options 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 stockholders' 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 F of Notes to Financial Statements.
The Minimum Pretax Income and Bid Price 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.
33
<PAGE>
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. The Selling Securityholders' 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
Selling Securityholders' Warrants are identical to the Class A Warrants included
in the Units offered hereby. All of the Selling Securityholder Warrants issued
upon conversion of the Bridge 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 closing of the Offering, subject to a contractual restriction that
such Class A Warrants and underlying securities may not be sold for a period of
between 90 and 270 days after the effective date of the Offering. The Selling
Securityholders have also agreed not to exercise the Selling Securityholder
Warrants for a period of one year following the effective date of the Offering;
provided, however, that purchasers of such Selling Securityholder Warrants are
not subject to such restrictions on exercise. After the one year period
following the effective date of the Offering, the Selling Securityholders may
exercise and sell the Common Stock issuable upon exercise of the Selling
Securityholder Warrants without restriction if a current prospectus relating to
such Common Stock is in effect and the securities are qualified for sale. The
Company will not receive any proceeds from the sale of the Selling
Securityholder Warrants. Sales of Selling Securityholder Warrants issued upon
conversion of the Bridge 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 Securityholder Warrants
or the 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, a combination of such methods of sale or
otherwise. 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 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 Securityholder' Warrants may not
simultaneously engage in market-making activities with respect to any securities
of the Company during the applicable "cooling-off" period (at least two and
possibly nine business days) prior to the commencement of such distribution.
Accordingly, in the event the Underwriter or Blair & Co. is engaged in a
distribution of the Selling Securityholder 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 Securityholder 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 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 Securityholder.
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 discount and commissions under the Securities Act.
34
<PAGE>
DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to
be complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Certificate of Incorporation and By-laws, the
Warrant Agreement among the Company, the Underwriter and American Stock Transfer
& Trust Company, as warrant agent, pursuant to which the Warrants will be issued
and the Underwriting Agreement between the Company and the Underwriter, copies
of all of which have been filed with the Commission as Exhibits to the
Registration Statement of which this Prospectus is a part.
General
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.01 par value, and 5,000,000 shares of "blank check" preferred
stock, $.01 par value ("Preferred Stock").
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 redeemable 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
The Company has outstanding 721,326 shares of Common Stock which includes
(i) an aggregate of 175,793 shares issuable on the date of this Prospectus upon
the automatic conversion of Preferred Stock and (ii) an aggregate of 263,921
shares issuable on the date of this Prospectus upon the automatic conversion of
the Stockholder Debt. 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. There is no right to cumulate
votes for the election of directors. Stockholders holding a majority of the
voting power of the capital stock issued and outstanding and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any
meeting of the Company's stockholders, and the vote by the holders of a majority
of such outstanding shares is required to effect certain fundamental corporate
changes such as liquidation, merger or amendment of the Company's Certificate of
Incorporation.
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 or subscription 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 non-assessable.
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 ________, 2002.
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
after issuance until 5:00 P.M. New York City Time, on ________, 2002. 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 (as defined above)
35
<PAGE>
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 (the "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
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 of the Common
Stock, with certain exceptions.
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.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Common Stock for issuance upon the exercise of
the Class A Warrants and the Class B Warrants. 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 the 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
shares with respect to which the Warrant is being exercised. Shares issued upon
exercise of Warrants and payment in accordance with the terms of the Warrants
will be fully paid and non-assessable.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the Common Stock, with a resulting
dilution in the interest of all other stockholders. So long as the Warrants are
outstanding, the terms on which the Company could obtain additional capital may
be adversely affected. The holders of the Warrants might be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital by a new offering of securities on terms more favorable than
those provided for by the Warrants.
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.
Unit Purchase Option
The Company has agreed to grant to the Underwriter, upon the closing of the
Offering, a Unit Purchase Option to purchase up to 120,000 Units. These Units
will be identical to the Units offered hereby except that the Class A Warrants
and the Class B Warrants included in the Unit Purchase Option will not be
subject to redemption by the Company, unless at the time the Warrants are called
for redemption, the Unit Purchase Option has been exercised and the underlying
Warrants are outstanding. The Unit Purchase Option cannot be transferred, sold,
assigned or hypothecated for one year, except to any officer of the Underwriter
or members of the selling group or their officers. The Unit Purchase Option is
exercisable during the four-year period commencing one year from the date of
this Prospectus at an exercise price of $ _______ per Unit ( % of the initial
public offering price) subject to adjustment in certain events to protect
against dilution. The holders of the Unit Purchase Option have certain demand
and piggyback registration rights. See "Underwriting."
Preferred Stock
The Company currently has outstanding 600 shares of Series A Preferred
Stock, .01 par value, all of which are held by NGJ Ltd. NGJ Ltd. has agreed to
convert such shares into 175,793 shares of Common Stock on the effectiveness of
the Offering.
After completion of the Offering, the class of Preferred Stock designated
as Series A Preferred Stock will be eliminated and the Company will be
authorized to issue up to 5,000,000 shares of "blank-check" Preferred Stock. The
Board of Directors will have the authority to issue this Preferred Stock in one
or more series and to fix the number of shares and the relative rights,
conversion rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences, without further vote or action by the
stockholders. If shares of Preferred
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<PAGE>
Stock with voting rights are issued, such issuance could affect the voting
rights of the holders of the Company's Common Stock by increasing the number of
outstanding shares having voting rights, and by the creation of class or series
voting rights. If the Board of Directors authorizes the issuance of shares of
Preferred Stock with conversion rights, the number of shares of Common Stock
outstanding could potentially be increased by up to the authorized amount.
Issuance of Preferred Stock could, under certain circumstances, have the effect
of delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Common Stock. Also, Preferred Stock could have
preferences over the Common Stock (and other series of preferred stock) with
respect to dividend and liquidation rights. The Company currently has no plans
to issue any Preferred Stock.
Transfer Agent
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
Business Combination Provisions
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under the law, a corporation may
not engage in any business combination with any interested stockholder for a
period of three years from the date such person became an interested stockholder
unless certain conditions are satisfied. The statute contains provisions
enabling a corporation to avoid the statute's restrictions.
The Company has not sought to "elect out" of the statute and, therefore,
upon closing of the Offering and the registration of its shares of Common Stock
under the Exchange Act, the restrictions imposed by such statute will apply to
the Company.
Registration Rights
The holders of the Unit Purchase Option will have demand and piggy-back
registration rights relating to such options and the underlying securities. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering the Company will have outstanding 2,000,000
shares of Common Stock. Of these shares, the 1,200,000 shares of Common Stock
offered hereby will be freely transferable without restriction or further
registration under the Securities Act, unless purchased by affiliates of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The 721,326 shares of Common Stock currently outstanding
(giving effect to conversion of the Stockholder Debt and the Series A Preferred
Stock) are "restricted securities" or owned by affiliates within the meaning of
Rule 144 and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. The 721,326 shares of Common Stock currently outstanding will be
eligible for sale in the public market pursuant to Rule 144 at various times
beginning 90 days after the date of this Prospectus. However, holders of the
outstanding shares have agreed not to sell or otherwise dispose of any shares of
Common Stock without the Underwriter's prior written consent for a period of 13
months after the date of this Prospectus. In addition, 349,370 of such shares
are Escrow Shares subject to the restrictions on transfer set forth in the
Escrow Agreement. See "Principal Stockholders -- Escrowed Shares and Options"
and "Underwriting."
In general, under Rule 144 a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least two years that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to the average weekly
trading volume in the Common Stock during the four calendar weeks preceding 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. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least three years is entitled to sell such
shares without regard to the volume or other resale requirements.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
37
<PAGE>
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period. If all the requirements of Rule 701 are
met, an aggregate of 78,674 shares subject to outstanding vested options
(including the Escrow Options) may be sold pursuant to such rule at the end of
this 90-day period, subject to (i) an agreement by all option holders not to
sell or otherwise dispose of any shares of Common Stock for a period of 13
months after the date of this Prospectus without the Underwriter's prior written
consent and (ii) the restrictions on transfer set forth in the Escrow Agreement.
See "Principal Stockholders -- Escrowed Shares and Options." An additional
100,000 shares may be sold from time to time pursuant to this rule as additional
outstanding options vest.
Pursuant to registration rights acquired in the Bridge Financing, the
Company has, concurrently with the Offering, registered for resale on behalf of
the Selling Securityholders, the Selling Securityholder Securities subject to
the contractual restriction that the Selling Securityholders agreed (i) not to
exercise the Selling Securityholder Warrants for a period of one year for the
closing of the Offering and (ii) not to sell the Selling Securityholder Warrants
except pursuant to the restrictions set forth below:
<TABLE>
<CAPTION>
Percentage Eligible
Lock-Up Period for Resale
-------------- ------------------
<S> <C>
Before 90 days after closing ................................................... 0%
Between 91 and 150 days after closing .......................................... 25%
Between 151 and 210 days after closing ......................................... 50%
Between 211 and 270 days after closing ......................................... 75%
After 270 days after closing ................................................... 100%
</TABLE>
The Underwriter also has demand and "piggy-back" registration rights with
respect to the securities underlying the Unit Purchase Option. See
"Underwriting."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
UNDERWRITING
D. H. Blair Investment Banking Corp., the Underwriter, has agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company the 1,200,000 Units offered hereby 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. Blair & Co. is
substantially owned by family members of J. Morton Davis. Mr. Davis is the 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 to certain dealers who are members of the NASD, at such prices
less concessions of not in excess of $_______ per Unit, of which a sum not in
excess of $_______ per Unit may in turn be reallowed to other dealers who are
members of the NASD. After the commencement of the offering, the public offering
price, the concession and the reallowance may be changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of Units offered hereby,
including any Units purchased pursuant to the Underwriter's overallotment
option, $40,000 of which has been paid to date.
The Company has granted to the Underwriter an option exercisable during the
30-day period commencing on the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts, up to 180,000
additional Units for the purpose of covering over-allotments, if any.
All of the Company's current stockholders, officers and directors have
agreed not to sell, assign, transfer or otherwise dispose publicly of any of
their shares of Common Stock for a period of 13 months from the date of this
Prospectus without the prior written consent of the Underwriter.
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<PAGE>
The Underwriter has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the
Offering, although it has not yet selected any such designee. Such designee may
be a director, officer, partner, employee or affiliate of the Underwriter.
During the five-year period from the date of this Prospectus, in the event
the Underwriter originates a financing or a merger, acquisition or a similar
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.
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation. Upon
any exercise of the Warrants after the first anniversary of the date of this
Prospectus, the Company will pay the Underwriter a fee of 5% of the aggregate
exercise price of the Warrants, 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 NASD; (iii) the Warrants are not held in a discretionary account;
(iv) disclosure of compensation arrangements was made both at the time of the
Offering and at the time of exercise of the Warrants; and (v) the solicitation
of exercise of the Warrant was not in violation of Rule 10b-6 promulgated under
the Exchange Act.
Rule 10b-6 may prohibit Blair & Co. from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 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 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, except that the Class
A Warrants and Class B Warrants included therein are subject to redemption by
the Company at any time after the Unit Purchase Option has been exercised and
the underlying warrants are outstanding. The Unit Purchase Option will be
exercisable during the four-year period commencing one year from the date of
this Prospectus at an exercise price of $_______ per Unit, subject to adjustment
in certain events to protect against dilution, and are not transferable for a
period of one year from the date of this Prospectus except to officers of the
Underwriter or members of the selling group or their respective officers. The
Company has agreed to register during the four-year period commencing one year
from the date of this Prospectus, on two separate occasions, the securities
issuable upon exercise thereof 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 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.
The Underwriter acted as Placement Agent for the Bridge Financing in
December, 1996 for which it received a Placement Agent fee of $100,000 and a
non-accountable expense allowance of $30,000.
The 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.
39
<PAGE>
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the public offering price 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. 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, the Company's
capital structure, demand for similar securities of comparable companies and
such other factors as were deemed relevant.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriter by Singer Zamansky LLP,
New York, New York. Bachner, Tally, Polevoy & Misher LLP represents the
Underwriter in other matters.
EXPERTS
The financial statements of the Company at December 31, 1995 and for the
year ended December 31, 1995, and the period from July 20, 1994 (commencement of
all operations) to December 31, 1995 appearing in this Prospectus and
Registration Statement have been audited by Richard A. Eisner & Company, LLP,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph with respect to the uncertainty regarding the Company's
ability to continue as a going concern) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not a reporting company under the Exchange Act. The Company
has filed a Registration Statement on Form SB-2 under the Securities Act with
the Commission in Washington, D.C. with respect to the Units offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Units
offered hereby, reference is hereby made to the Registration Statement and such
exhibits, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at 500 West Madison (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of such site is
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.
40
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
------------
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Changes in Stockholders
Equity (Captial Deficiency) F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Heuristic Development Group, Inc.
Pacific Palisades, California
We have audited the accompanying balance sheet of Heuristic Development
Group, Inc. (a development stage company) as at December 31, 1995, and the
related statements of operations, changes in stockholders' equity (capital
deficiency) and cash flows for each of the years in the two-year period then
ended and for the period from July 20, 1994 (inception) through December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes 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 enumerated above present
fairly, in all material respects, the financial position of Heuristic
Development Group, Inc. at December 31, 1995 and the results of its operations
and cash flows for each of the years in the two-year period then ended and for
the period from July 20, 1994 (inception) through December 31, 1995 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 A to the
financial statements, the Company has sustained recurring losses from operations
and has a net working capital and capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
September 18, 1996
F-2
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
December 31, ------------------------------
1995 1996 1996
----------- ----------- -----------
(Unaudited) (Unaudited)
(Historical) (Pro Forma)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash .................................................................... $ 279,000 $ 18,000 $ 998,000
Due from employees ...................................................... 3,000 3,000
Prepaid expenses and other current assets ............................... 5,000 2,000 2,000
----------- ----------- -----------
Total current assets ............................................ 284,000 23,000 1,003,000
Capitalized software costs ................................................ 267,000 267,000
Furniture and equipment (net of accumulated depreciation) ................. 205,000 199,000 199,000
Organizational costs (net of accumulated amortization) .................... 27,000 21,000 21,000
Deferred registration costs ............................................... 61,000 61,000
Deferred financing costs .................................................. 160,000
----------- ----------- -----------
Total ........................................................... $ 516,000 $ 571,000 $ 1,711,000
=========== =========== ===========
LIABILITIES
Current liabilities:
Accounts payable ........................................................ $ 92,000 $ 110,000 $ 110,000
Accrued expenses ........................................................ 26,000 23,000 23,000
Accrued payroll ......................................................... 24,000 25,000 25,000
Notes payable - stockholders ............................................ 250,000
Interest payable - stockholders ......................................... 28,000
----------- ----------- -----------
Total current liabilities ....................................... 142,000 436,000 158,000
Notes payable-- stockholders .............................................. 492,000 804,000 170,000
Interest payable-- stockholders ........................................... 18,000 32,000
Bridge notes, net of discount ............................................. 250,000
----------- ----------- -----------
Total ................................................. 652,000 1,272,000 578,000
----------- ----------- -----------
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Preferred stock, $.01 par value, authorized 1,500 shares;
issued and outstanding 600 shares (liquidating preference
$682,000 at December 31, 1995 and $733,000 at
September 30, 1996) no shares issued and outstanding
at September 30, 1996 (pro forma)
Common stock - $.01 par value, authorized 20,000,000 shares;
issued and outstanding 276,475 shares at December 31, 1995
and 281,612 shares at September 30, 1996 (historical)
and 721,326 shares at September 30, 1996 (pro forma)
including 349,370 shares in escrow ...................................... 3,000 3,000 7,000
Additional paid-in capital ................................................ 967,000 1,252,000 3,204,000
(Deficit) accumulated during the development stage ........................ (1,106,000) (1,956,000) (2,078,000)
----------- ----------- -----------
Total stockholders' equity (capital deficiency) ................. (136,000) (701,000) 1,133,000
----------- ----------- -----------
Total ........................................................... $ 516,000 $ 571,000 $ 1,711,000
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part thereof.
F-3
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 20, 1994 July 20, 1994
(Inception) Nine Months Ended (Inception)
Year Ended December 31, to September 30, to
-------------------------- December 31, -------------------------- September 30,
1994 1995 1995 1995 1996 1996
----------- ----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development:
Direct expenditures ................... $ 58,000 $ 280,000 $ 338,000 $ 118,000 $ 338,000
Payments under research
services agreement .................. 20,000 117,000 137,000 109,000 137,000
----------- ----------- ----------- ----------- -----------
Total research and development .. 78,000 397,000 475,000 227,000 475,000
General and administrative .............. 159,000 466,000 625,000 418,000 $ 808,000 1,433,000
----------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses ........ 237,000 863,000 1,100,000 645,000 808,000 1,908,000
----------- ----------- ----------- ----------- ----------- -----------
(Loss) from operations .................... (237,000) (863,000) (1,100,000) (645,000) (808,000) (1,908,000)
Interest (expense) ........................ (18,000) (18,000) (7,000) (42,000) (60,000)
Interest income ........................... 7,000 5,000 12,000 5,000 12,000
----------- ----------- ----------- ----------- ----------- -----------
NET (LOSS) ................................ $ (230,000) $ (876,000) $(1,106,000) $ (647,000) $ (850,000) $(1,956,000)
=========== =========== =========== =========== =========== ===========
Pro forma net (loss) per share ............ $ (2.31) $ (2.17)
=========== -----------
Pro forma weighted average
shares outstanding 371,956 371,956
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part thereof.
F-4
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Par Value $.01 Par Value $.01 Additional
----------------- ------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash in August 1994............. 212,456 $2,000 $ 68,000
Issuance of preferred stock for cash in August 1994.......... 550 $-0- 550,000
Issuance of preferred stock in connection with
obtaining assignment rights to developed
technology in August 1994.................................. 50 50,000
Net (loss) for the period from July 20, 1994 (inception)
to December 31, 1994.......................................
--- ---- ------- ------ ----------
Balance-- December 31, 1994.................................. 600 -0- 212,456 2,000 668,000
Surrender of common stock in October 1995.................... (17,928)
Exercise of options in December 1995......................... 81,947 1,000 299,000
Net (loss) for the year ended December 31, 1995..............
--- ---- ------- ------ ----------
Balance-- December 31, 1995.................................. 600 -0- 276,475 3,000 967,000
Exercise of options in March 1996............................ 30,733 10,000
Issuance of common stock for cash in March 1996.............. 9,218 37,000
Surrender of common stock in March 1996...................... (21,770)
Surrender of common stock in June 1996....................... (15,239)
Exercise of options in August 1996........................... 5,358 2,000
Surrender of common stock in August 1996..................... (3,163)
Compensation expense in connection with grant of
option in August 1996...................................... 236,000
Net (loss) for the nine months ended September 30, 1996......
--- ---- ------- ------ ----------
Balance-- September 30, 1996 (unaudited)..................... 600 -0- 281,612 3,000 1,252,000
Pro forma adjustments (Note I):
Warrants issued in connection with Bridge notes............ 750,000
Conversion of preferred stock and accrued and unpaid
dividends to common stock.................................. (600) 175,793 2,000 120,000
Conversion of notes payable-- stockholders and
accrued interest to common stock........................... 263,921 2,000 1,082,000
--- ---- ------- ------ ----------
PRO FORMA BALANCE -- SEPTEMBER 30, 1996
(UNAUDITED)................................................ -0- $-0- 721,326 $7,000 $3,204,000
=== ==== ======= ====== ==========
</TABLE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (Continued)
<TABLE>
<CAPTION>
(Deficit)
Accumulated
During the
Development
Stage Total
----------- ----------
<S> <C> <C>
Issuance of common stock for cash in August 1994............. $ 70,000
Issuance of preferred stock for cash in August 1994.......... 550,000
Issuance of preferred stock in connection with
obtaining assignment rights to developed
technology in August 1994.................................. 50,000
Net (loss) for the period from July 20, 1994 (inception)
to December 31, 1994....................................... $ (230,000) (230,000)
----------- ----------
Balance-- December 31, 1994.................................. (230,000) 440,000
Surrender of common stock in October 1995....................
Exercise of options in December 1995......................... 300,000
Net (loss) for the year ended December 31, 1995.............. (876,000) (876,000)
----------- ----------
Balance-- December 31, 1995.................................. (1,106,000) (136,000)
Exercise of options in March 1996............................ 10,000
Issuance of common stock for cash in March 1996.............. 37,000
Surrender of common stock in March 1996......................
Surrender of common stock in June 1996.......................
Exercise of options in August 1996........................... 2,000
Surrender of common stock in August 1996.....................
Compensation expense in connection with grant of
option in August 1996...................................... 236,000
Net (loss) for the nine months ended September 30, 1996...... (850,000) (850,000)
----------- ----------
Balance-- September 30, 1996 (unaudited)..................... (1,956,000) (701,000)
Pro forma adjustments (Note I):
Warrants issued in connection with Bridge notes............ 750,000
Conversion of preferred stock and accrued and unpaid
dividends to common stock.................................. (122,000) -0-
Conversion of notes payable-- stockholders and
accrued interest to common stock........................... 1,084,000
----------- ----------
PRO FORMA BALANCE -- SEPTEMBER 30, 1996
(UNAUDITED)................................................ $(2,078,000) $1,133,000
=========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part thereof.
F-5
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 20, 1994
(Inception)
Year Ended December 31, to
-------------------------- December 31,
1994 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ............................................... $ (230,000) $ (876,000) $(1,106,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization .......................... 9,000 25,000 34,000
Value of preferred stock charged to research
and development ...................................... 50,000 50,000
Fair value of options granted ..........................
Accrued interest on notes payable-- stockholders ....... 18,000 18,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses .............. (7,000) 1,000 (6,000)
(Increase) in other assets ........................... (38,000) (38,000)
Increase in accounts payable and accrued expenses .... 30,000 111,000 141,000
----------- ----------- -----------
Net cash (used in) operating activities .......... (186,000) (721,000) (907,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisitions of fixed assets ............................. (40,000) (186,000) (226,000)
Advances to employees ....................................
Additions to capitalized software costs ..................
----------- ----------- -----------
Net cash (used in) investing activities .......... (40,000) (186,000) (226,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 70,000 300,000 370,000
Proceeds from sale of preferred stock .................... 550,000 550,000
Proceeds from borrowings-- notes payable-- stockholders .. 492,000 492,000
Deferred financing costs .................................
----------- ----------- -----------
Net cash provided by financing activities ........ 620,000 792,000 1,412,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ............................ 394,000 (115,000) 279,000
Cash-- beginning of period ................................. 394,000
----------- ----------- -----------
CASH-- END OF PERIOD ....................................... $ 394,000 $ 279,000 $ 279,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Noncash transactions:
Preferred stock issued in connection with
assignment agreement ................................. $ 50,000 $ 50,000
</TABLE>
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
July 20, 1994
Nine Months Ended (Inception)
September 30, to
-------------------------- September 30,
1995 1996 1996
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ............................................... $ (647,000) $ (850,000) $(1,956,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization .......................... 16,000 38,000 72,000
Value of preferred stock charged to research
and development ...................................... 50,000
Fair value of options granted .......................... 236,000 236,000
Accrued interest on notes payable-- stockholders ....... 7,000 42,000 60,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses .............. 3,000 3,000 (3,000)
(Increase) in other assets ........................... (38,000)
Increase in accounts payable and accrued expenses .... 57,000 18,000 159,000
----------- ----------- -----------
Net cash (used in) operating activities .......... (564,000) (513,000) (1,420,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisitions of fixed assets ............................. (72,000) (28,000) (254,000)
Advances to employees .................................... (3,000) (3,000)
Additions to capitalized software costs .................. (267,000) (267,000)
----------- ----------- -----------
Net cash (used in) investing activities .......... (72,000) (298,000) (524,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 49,000 419,000
Proceeds from sale of preferred stock ................... 550,000
Proceeds from borrowings-- notes payable-- stockholders .. 250,000 562,000 1,054,000
Deferred financing costs ................................. (61,000) (61,000)
----------- ----------- -----------
Net cash provided by financing activities ........ 250,000 550,000 1,962,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ............................ (386,000) (261,000) 18,000
Cash-- beginning of period ................................. 394,000 279,000
----------- ----------- -----------
CASH-- END OF PERIOD ....................................... $ 8,000 $ 18,000 $ 18,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Noncash transactions:
Preferred stock issued in connection with
assignment agreement ................................. $ 50,000
</TABLE>
The accompanying notes to financial statements
are an integral part thereof.
F-6
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and September 30, 1995)
(NOTE A) -- The Company and Basis of Presentation:
Heuristic Development Group, Inc. (the "Company" or "HDG"), formerly
EIS International Group, Ltd., is a development stage company. The Company is
engaged in the marketing and sale of the IntelliFit System, a computerized
system which generates personalized exercise prescriptions based on, among other
things, an individual's weight, ability, medical history, goals, fitness level
and exercise preferences and tracks and records fitness progress. The Company
was incorporated in Delaware and commenced operations on July 20, 1994. The
Company has not yet generated any revenue.
As reflected in the accompanying financial statements, the Company has
incurred substantial losses since inception and such losses are expected to
continue during the development stage. As at September 30, 1996, the Company has
a working capital and a capital deficiency. These factors raise substantial
doubt about its ability to continue as a going concern. Management's plans
include the following:
a) Obtain a minimum of $500,000 through the sale of Bridge Units
consisting of a $50,000 promissory note and two-year warrants (Note I).
b) Obtain net proceeds of approximately $5,220,000 through the sale of
1,200,000 units consisting of common stock and a Class A and a Class B
warrant in a public offering (see Note F).
c) (i) Convert all of the Series A preferred stock including accrued
and unpaid dividends aggregating $722,000 at August 31, 1996 into 175,793
shares of common stock and (ii) convert notes payable -- stockholders
including accrued interest aggregating $1,084,000 into 263,921 shares of
common stock.
There is no assurance that the above plans can be accomplished. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
(NOTE B) -- Summary of Significant Accounting Policies:
[1] Capitalized software costs:
In accordance with Statement of Financial Accounting Standards No. 86, the
Company capitalizes certain costs associated with the development of computer
software. Such costs will be amortized over their estimated useful lives,
usually seven years. Amortization will commence when the Company has revenue.
Development costs incurred prior to achievement of technological
feasibility (December 31, 1995) are expensed.
[2] Property and equipment:
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the useful lives of the assets which range from
three to seven years.
[3] Income taxes:
The Company has applied to the accompanying financial statements provisions
required by accounting standards which requires the use of the liability method
of accounting for income taxes.
[4] Pro forma net loss per share of common stock:
Pro forma net loss per share assumes the conversion of preferred stock and
notes payable -- stockholders as if such transactions had occurred on January 1,
1995. The stockholders have agreed to place 349,370 shares in escrow and,
accordingly, such shares have been excluded from the computation.
[5] 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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)
(NOTE B) -- Summary of Significant Accounting Policies: (Continued)
[6] Recent pronouncements:
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company will adopt the disclosure requirements of SFAS 123 during the
Company's fiscal year ending December 31, 1996 but will account for its stock
option plans under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" as permitted under SFAS 123.
In addition, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
SFAS 121 is also effective for the Company's fiscal year ending December 31,
1996. The Company believes adoption of SFAS No. 121 will not have a material
impact on its financial statements.
[7] Organizational costs:
Organizational costs incurred by the Company are being amortized over five
years.
[8] Interim financial information:
The financial information presented as of September 30, 1996 and for the
nine-month periods ended September 30, 1996 and September 30, 1995 is unaudited,
but in the opinion of management contains all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of such
financial information. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years.
(NOTE C) -- Property and Equipment:
Property and equipment are summarized as follows:
December 31, September 30,
1995 1996
-------- --------
Assembled units......................... $107,000 $107,000
Components in process and on hand....... 29,000 29,000
Furniture and fixtures.................. 8,000 29,000
Office equipment........................ 65,000 70,000
Leasehold improvements.................. 17,000 18,000
-------- --------
226,000 253,000
Less accumulated depreciation .......... 21,000 54,000
-------- --------
Balance........................... $205,000 $199,000
======== ========
(NOTE D) -- Notes Payable -- Stockholders:
During the year ended December 31, 1995 and the nine months ended September
30, 1996, the Company borrowed approximately $550,000 and $1,024,000,
respectively, from certain stockholders. These notes bear an interest rate of
10%.
Approximately $250,000 of the notes and accrued interest of approximately
$26,000 were due in June 1996. Subsequent to June 1996, the due date was
extended to June 1997. (See Note A with respect to proposed conversion of notes
payable.)
F-8
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)
(NOTE D) -- Notes Payable -- Stockholders: (Continued)
Future principal payments on long-term debt are as follows:
December 31, September 30,
1995 1996
-------- ---------
1997..................................... $250,000 $ 250,000
2000..................................... 242,000 242,000
2001..................................... 562,000
-------- ---------
$492,000 $1,054,000
======== =========
The interest on these notes is payable on the due dates of the notes.
(NOTE E) -- Stockholders' Equity (Capital Deficiency):
[1] Preferred stock:
In August 1994, the Company authorized and issued 600 shares of its $.01
par value Series A preferred stock (the "Series A Preferred"). The holders of
the Series A Preferred are entitled to (i) vote on all matters on which the
common stock can vote and have twenty percent of the total voting power, (ii)
receive cumulative annual dividends equal to $100 per share and (iii)
liquidation preference of $1,000 per share plus any dividends accrued and
unpaid. The Series A Preferred is redeemable at the option of the Company at a
price of $1,000 per share plus accrued and unpaid dividends. (See Note A with
respect to proposed conversion of preferred stock.)
[2] Stock options:
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Shares Option Price Expiration Date
------- ------------ ---------------
<S> <C> <C> <C>
Granted-- year ended December 31, 1994............ 115,359 $ .33-$3.67 December 1995-August 1996
Granted-- year ended December 31, 1995............ 2,679 $ .33 August 1997-August 1999
Exercised-- year ended December 31, 1995.......... (81,947) $3.67
-------
Balance at December 31, 1995...................... 36,091 $ .33 May 1996-August 1999
Granted-- August 1996............................. 78,674 $ .50 August 2006
Exercised-- nine months
ended September 30, 1996........................ (36,091) $ .33
-------
Balance at September 30, 1996..................... 78,674 $ .50 August 2006
=======
</TABLE>
In August 1996, the Company issued to two officers/ stockholders options to
purchase 78,674 shares of its common stock at $.50 per share. The Company has
reflected compensation expense of $236,000 in connection with the issuance of
such options. In connection with the proposed public offering, these options are
subject to escrow provisions as a condition of the offering (Note F).
[3] Stock Option Plan:
In October 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan") which provides for issuance of 250,000 shares of the Company's common
stock. In October 1996, stock options to purchase 200,000 shares of common stock
at $5.00 per share were granted to officers/stockholders.
F-9
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)
(NOTE E) -- Stockholders' Equity (Capital Deficiency): (Continued)
[4] Reorganization:
In October 1996, the Board of Directors and stockholders approved a
1,339.4362 to 1 stock split which has been given retroactive effect in the
accompanying financial statements. All references to shares and per share
amounts in the notes to financial statements have been adjusted to reflect the
stock split.
(NOTE F) -- Proposed Public Offering:
The Company signed a letter of intent with an underwriter with respect to a
proposed public offering of the Company's securities. There is no assurance that
such offering will be consummated. In connection therewith the Company
anticipates incurring substantial expenses which, if the offering is not
consummated, will be charged to expense.
In connection with such offering, the underwriter has required, as a
condition of the offering, that an aggregate of 349,370 shares of the Company's
common stock and outstanding options to purchase 50,630 shares be placed in
escrow until certain pretax income levels or market value targets are met. If
the conditions are not met by March 31, 2001, all shares remaining in escrow
will be returned to the Company as treasury shares for cancellation. There will
be a nondeductible charge to earnings for the fair value of these shares upon
their release.
(NOTE G) -- Commitments and Other Matters:
Research Services Agreement:
In August 1994, the Company entered into a retainer agreement with Transpac
Software, Inc. ("Transpac"). The agreement provides for Transpac to assist the
Company in updating and improving the source programs and in designing,
developing and implementing such improved source programs for use in the EIS
Expert Instructor System. The agreement provides for the payment of $120,000.
Accordingly, the Company paid Transpac $20,000 during the year ended December
31, 1994 and $100,000 during the year ended December 31, 1995.
In addition, the agreement provides for additional services upon the
Company's request in designated, scheduled projects through December 31, 1998.
During the year ended December 31, 1995 and the nine months ended September 30,
1996, the Company paid Transpac approximately $10,000 and $79,000, respectively,
for additional services.
Employment agreements:
The Company has three-year, employment agreements with two officers
providing for aggregate annual base salaries of $300,000 commencing December 1,
1996. The agreements provide for bonuses at the discretion of the Board and
severance salary as defined in the agreements.
(NOTE H) -- Income Taxes:
At December 31, 1995 and September 30, 1996, the Company had available net
operating loss carryforwards to reduce future taxable income of approximately
$456,000 and $710,000, respectively. The net operating loss carryforwards expire
in various amounts through 2011. The Company's ability to utilize its net
operating loss carryforwards may be subject to annual limitations pursuant to
Section 382 of the Internal Revenue Code if future changes in ownership occur.
At December 31, 1995 and September 30, 1996, the Company has a deferred tax
asset of approximately $400,000 and $765,000, respectively, representing the
benefits of its net operating loss carryforwards and deferred taxes resulting
from capitalized start-up costs, cash basis tax reporting and compensation
expense in connection with the grant of options. The Company has provided a 100%
valuation allowance for such asset since the likelihood of realization cannot be
determined.
F-10
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)
(NOTE I) -- Pro Forma Financial Information:
The pro forma balance sheet and statement of changes of stockholders'
equity (capital deficiency) give effect to the following transactions as though
they had occurred on September 30, 1996.
a. Bridge financing:
In December 1996, the Company issued Bridge notes aggregating
$1,000,000 which bear interest at 10% per annum and are due the earlier of
December 2, 1997 or the completion of the proposed public offering. In
connection with the sale of the notes, the Company issued warrants for the
purchase of 500,000 shares of common stock commencing December 2, 1998.
Upon completion of the contemplated public offering, the warrants will be
converted into Class A Warrants containing the same terms as the warrants
included in units expected to be sold in such public offering. The warrants
have been valued at $750,000 and will be accounted for as debt discount
which will be amortized over the life of the loan.
In addition, the Company incurred costs in connection with obtaining
the financing of approximately $ 160,000 which will be amortized over the
life of the loan. The effective interest rate on the notes is 404%.
The pro forma balance sheet, statements of operations and statements
of changes in capital deficiency as if it had occurred on September 30,
1996.
b. Additional borrowings from stockholders aggregating $140,000, bearing
interest at 10% and repayable at the earlier of five years or the effective date
of the Company's proposed public offering.
c. Conversion of notes payable -- stockholders' (Note A).
d. Conversion of preferred stock (Note A).
F-11
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriter.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.
------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 6
Use of Proceeds and Plan of Operations .................................... 12
Dividend Policy............................................................ 12
Capitalization ............................................................ 13
Dilution .................................................................. 15
Selected Financial Data ................................................... 16
Managements' Discussion and Analysis of
Financial Condition and Results of Operations............................ 17
Business .................................................................. 18
Management ................................................................ 26
Certain Transactions ...................................................... 29
Principal Stockholders .................................................... 31
Concurrent Offering ....................................................... 34
Description of Securities ................................................. 35
Shares Eligible
for Future Sale ......................................................... 37
Underwriting .............................................................. 38
Legal Matters ............................................................. 40
Experts ................................................................... 40
Additional Information .................................................... 40
Index to Financial Statements ............................................. F-1
------------
Until , 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
================================================================================
1,200,000 Units
HEURISTIC
DEVELOPMENT
GROUP, INC.
Consisting of 1,200,000 shares of
Common Stock,
1,200,000 Redeemable Class A
Warrants
and
1,200,000 Redeemable Class B
Warrants
---------------
PROSPECTUS
---------------
D.H. BLAIR INVESTMENT
BANKING CORP.
, 1997
================================================================================
<PAGE>
Alternate Prospectus Page
SUBJECT TO COMPLETION -- DATED DECEMBER 11, 1996
PROSPECTUS
HEURISTIC DEVELOPMENT GROUP, INC.
500,000 Redeemable Class A Warrants
500,000 Shares of Common Stock and
500,000 Redeemable Class B Warrants issuable upon exercise of the
Redeemable Class A Warrants and 500,000 Shares of
Common Stock issuable upon exercise of the Class B Warrants
This Prospectus relates to 500,000 Redeemable Class A Warrants (the
"Selling Securityholder Warrants" or the "Class A Warrants") of Heuristic
Development Group, Inc., a Delaware corporation (the "Company"), held by 36
holders (the "Selling Securityholders"), the 500,000 shares of Common Stock,
$.01 par value ("Common Stock"), and 500,000 Redeemable Class B Warrants ("Class
B Warrants") issuable upon the exercise of the Selling Securityholder Warrants,
and 500,000 shares of Common Stock issuable upon exercise of such Class B
Warrants. The Selling Securityholder Warrants and the Class B Warrants are
referred to herein collectively as the "Warrants" and the securities issuable
upon exercise of the Selling Securityholder Warrants, together with the Selling
Securityholder Warrants, are sometimes collectively referred to herein as the
"Selling Securityholder Securities." The Selling Securityholder Warrants were
issued to the Selling Securityholders in exchange for warrants they received in
a private placement by the Company in December, 1996 (the "Bridge Financing").
See "Selling Securityholders" and "Plan of Distribution." Each Selling
Securityholder Warrant entitles the holder to purchase, at an exercise price of
$6.50, subject to adjustment, one share of Common Stock and one Class B Warrant,
and 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 Warrants are
exercisable at any time after issuance through the fifth anniversary of the
closing of the offering (the "Offering") contemplated by this Prospectus
provided that the Selling Securityholders have agreed not to exercise the
Selling Securityholder Warrants for a period of one year from the date of the
closing of the Offering and not to sell the Selling Securityholder Warrants
except after the restrictive periods described under "Plan of Distribution."
Commencing one year from the date hereof 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 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 of the notice of redemption. See "Description
of Securities."
The securities offered by the Selling Securityholders by this Prospectus
may be sold from time to time by the Selling Securityholders or by their
transferees. The distribution of the Class A Warrants, Common Stock and the
Class B Warrants offered hereby by the Selling Securityholders 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 "Securities 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 Securities Act.
The Company will not receive any of the proceeds from the sale of
securities by the Selling Securityholders. In the event the Selling
Securityholder Warrants are exercised, the Company will receive gross proceeds
of $ . See "Selling Securityholders" and "Plan of Distribution."
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company
(the "Offering") of 1,200,000 Units, each Unit consisting of one share of Common
Stock, one Class A Warrant and one Class B Warrant, was declared effective by
the Securities and Exchange Commission (the "Commission"). The Company will
receive approximately $ in 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.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE .
------------
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>
Alternate Prospectus Page
SELLING SECURITYHOLDERS
An aggregate of up to 500,000 Class A Warrants, 500,000 shares of Common
Stock and 500,000 Class B Warrants issuable upon exercise of such Class A
Warrants and 500,000 shares of Common Stock issuable upon exercise of such Class
B Warrants may be offered for resale by investors who received their Class A
Warrants in exchange for warrants received in the Bridge Financing.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering the Selling
Securityholder Securities for resale to the public. The Company will not receive
any of the proceeds from the sale of such securities. To the Company's knowledge
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
Selling Securityholders Maximum Number to be Sold(1)
-------------------- -----------------------------
<S> <C>
Jack A. Bova ........................................................................... 18,750
Nicholas Casale ........................................................................ 6,250
Yong S. Chen ........................................................................... 6,250
Yong S. Chen M.D. Pension Plan.......................................................... 6,250
CRC Communities ........................................................................ 6,250
Digestive Health Associates
Profit Sharing Plan..................................................................... 12,500
E&M RP Trust........................................................................... 25,000
J. Thomas Esslinger..................................................................... 12,500
Steven A. Finkler....................................................................... 12,500
Charles L. Fougerousse.................................................................. 6,250
Robert Franco........................................................................... 6,250
Mark Gilder and Judy Gilder, JTWROS..................................................... 12,500
Ross H. Golding......................................................................... 12,500
Richard C. Lehman....................................................................... 12,500
Loveless OrhopaediCare Profit Sharing Plan.............................................. 12,500
H. John Lyke........................................................................... 25,000
Paul K. Manger and Nancy S. Manger, JTWROS.............................................. 25,000
Arthur M. Marush, M.D................................................................... 18,750
Gary W. Mockler......................................................................... 18,750
Nano-Cap Hyper Growth Partnership L.P................................................... 12,500
Eugene F. Obermeyer and Barbara H. Obermeyer, JTWROS.................................... 25,000
Edwards O. Parry, Jr.................................................................... 12,500
The Mary Patoff Revocable Trust UA DTD 7/8/96........................................... 12,500
Phillip J. Picchietti................................................................... 6,250
Pattabhiraman Rajendran and Pindi L. Rajendran, JTWROS.................................. 12,500
Tushar Ramani........................................................................... 6,250
Brigid Ramchandran and Anjur Ramchandran, JTWROS........................................ 12,500
Sanford Schmookler and Alice Schmookler, JTWROS......................................... 6,250
Ira M. Shepard.......................................................................... 6,250
Doug Terry.............................................................................. 37,500
William P. Tinkler, Jr.................................................................. 25,000
Goss Townes............................................................................. 12,500
Sherwyn Wayne........................................................................... 12,500
George J. Wegler Trust.................................................................. 12,500
Richard D. Wilkinson.................................................................... 6,250
Robert D. Zucker........................................................................ 25,000
</TABLE>
- --------
(1) Does not include shares of Common Stock issuable upon exercise of the Class
A Warrants and issuable upon exercise of the Class B Warrants issuable upon
exercise of the Class A Warrants. The Selling Securityholders have agreed
not to exercise the Class A Warrants being offered hereby for a period of
one year from the date of this Prospectus. None of the Selling
Securityholders beneficially own in excess of 1% of the outstanding shares
of Common Stock after the Offering.
A-2
<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, through the writing of options on the securities,
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.
The 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 discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers 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).
Each Selling Securityholder has agreed (i) not to sell, transfer or
otherwise dispose publicly the Selling Securityholder Warrants except after the
time periods and in the percentage amounts set forth below, on a cumulative
basis, and (ii) not to exercise the Selling Securityholder Warrants for a period
of one year after the closing of this offering. Purchasers of the Selling
Securityholder Warrants will not be subject to such restrictions.
<TABLE>
<CAPTION>
Lock Up Period Percentage Eligible for Resale
-------------- --------------------------
<S> <C>
Before 90 days after Closing ........................................................... 0%
Between 91 and 150 days ................................................................ 25%
Between 151 and 210 days ............................................................... 50%
Between 211 and 270 days ............................................................... 75%
After 270 days ......................................................................... 100%
</TABLE>
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter of the Company's initial public office, unless the Underwriter
declines to make such solicitation. Upon any exercise of the Warrants after the
first anniversary of the date of this Prospectus, the Company will pay the
Underwriter a fee of 5% of the aggregate exercise price of the Warrants, 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 NASD; (iii) the
Warrants are not held in a discretionary account; (iv) disclosure of
compensation arrangements was made both at the time of the Offering and at the
time of exercise of the Warrants; and (v) the solicitation of exercise of the
Warrant was not in violation of Rule 10b-6 promulgated under the Exchange Act.
Under applicable rules and regulations under the Securities Exchange Act of
1934, as amended ("Exchange Act"), any person engaged in the distribution of the
Selling Securityholder Warrants may not simultaneously engage in market making
activities with respect to any securities of the Company during the applicable
"cooling-off" period (at least two, and possibly nine, business days) prior to
the commencement of such distribution. Accordingly, in the event the Underwriter
or D.H. Blair & Co. Inc. ("Blair") is engaged in a distribution of the Selling
Securityholder 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 have agreed to nor are either of them obliged
to act as broker/dealer in the sale of the Selling Securityholder Warrants and
the Selling Securityholders may be required, and in the event Blair 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, 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 sale 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.
CONCURRENT PUBLIC OFFERING
On the date of this Prospectus, a Registration Statement was declared
effective under the Securities Act with respect to an underwritten offering by
the Company of 1,200,000 Units by the Company and up to 180,000 additional Units
to cover over-allotments, if any.
A-3
<PAGE>
Alternate Prospectus Page
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriter.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.
------------
TABLE OF CONTENTS
Page
----
Prospectus Summary.........................................................
Risk Factors...............................................................
Dividend Policy............................................................
Capitalization.............................................................
Dilution...................................................................
Selected Financial Data....................................................
Plan of Operations.........................................................
Business...................................................................
Management.................................................................
Certain Transactions.......................................................
Principal Stockholders.....................................................
Selling Securityholders....................................................
Plan of Distribution.......................................................
Concurrent Public .........................................................
Offering...................................................................
Description of Securities..................................................
Shares Eligible for Future Sale............................................
Legal Matters..............................................................
Experts....................................................................
Additional Information.....................................................
Index to Financial Statements.............................................. F-1
------------
================================================================================
================================================================================
HEURISTIC
DEVELOPMENT
GROUP, INC.
500,000 Redeemable Class A
Warrants
500,000 Shares of Common Stock and
500,000 Redeemable Class B
Warrants
issuable upon exercise of the
Redeemable Class A Warrants and
500,000 Shares of Common Stock
issuable upon exercise of the Class B
Warrants
---------------
PROSPECTUS
---------------
, 1997
================================================================================
<PAGE>
PART II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
The Restated Certificate of Incorporation and By-Laws of the Registrant
provide that the Registrant shall indemnify any person to the full extent
permitted by the Delaware General Corporation Law (the "GAL"). Section 145 of
the GAL, relating to indemnification, is hereby incorporated herein by
reference.
In accordance with Section 102(a)(7) of the GAL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director with certain limited exceptions set forth in
Section 102(a)(7).
The Registrant also intends to enter into indemnification agreements with
each of its officers and directors, the form of which is filed as Exhibit 10.3
and reference is hereby made to such form of agreement.
Reference is made to Section 6 of the Underwriting Agreement (Exhibit 1.1)
which provides for indemnification by the Underwriter of the Registrant, its
officers and directors.
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:
Amount
--------
SEC Registration Fee ..................................... $15,528
NASD Filing Fees ......................................... 5,625
Nasdaq Filing Fees ....................................... *
Printing and Engraving Expenses .......................... *
Accounting Fees and Expenses ............................. *
Legal Fees and Expenses .................................. *
Blue Sky Fees and Expenses ............................... *
Transfer Agent's Fees and Expenses ....................... *
Underwriter's Non-Accountable Expense Allowance .......... *
Miscellaneous Expenses ................................... *
--------
Total ................................................ $ *
========
- ----------
* To be completed by amendment
Item 26. Recent Sales of Unregistered Securities
The following discussion gives retroactive effect to the stock split
effected in October, 1996. Since its organization in July 1994, the Registrant
has sold and issued the following unregistered securities:
In August 1994, the Registrant issued 29,880.14 shares of Common Stock to
Steven R. Gumins for $8,784.29 in cash, 29,880.14 shares of Common Stock to
Deborah E. Griffin for $8,784.29 in cash, 1,339.44 shares of Common Stock to Jay
Shapiro for $438.60 in cash, 13,394.40 shares of Common Stock to Kimitane Sohma
for $4,386.00 in cash, 3,013.73 shares of Common Stock to CMC Partners for
$986.85 in cash (these shares were transferred to Clark Management Co. Inc. in
September 1996), 63,455.79 shares of Common Stock to Clark Trust u/t/d 6/30/69
for $20,778.68 in cash, 9,019 shares of Common Stock to ACC Trust for $2,960.55
in cash, 4,520.60 shares of Common Stock to Brooks Trust, 10/7/72 for $1,480.28
in cash, 13,394.36 shares of Common Stock to Gregory L. Zink for $4,386.00 in
cash, 3,013.56 shares of Common Stock to Arcadian & Co., L.P. for $986.85 in
cash, 1,339.44 shares of Common Stock to John Dobbs for $438.60 in cash,
18,752.64 shares of Common Stock to Jerald N. Downen for $6,140.40 in cash,
20,091.54 shares of Common Stock to Michael A. Hertzberg for $6,579.00 in cash
and 1,339.44 shares of Common Stock to R. Brett Lunger for $438.60 in cash.
II-1
<PAGE>
In August 1994, pursuant to an Assignment Agreement between the Registrant
and NGJ Ltd., the Registrant issued 50 shares of Series A Preferred Stock to NGJ
Ltd. in consideration for an assignment of all of NGJ Ltd.'s right, title and
interest in and to the EIS System and the Trademark. In August 1994, the
Registrant issued 550 shares of Series A Preferred Stock to NGJ Ltd. for $550,00
in cash.
In August 1994, pursuant to a Non-Qualified Stock Option Agreement, the
Company granted to TransPac an option to purchase 30,733.36 shares of Common
Stock. Such Option was amended to decrease the number of shares of Common Stock
purchasable upon exercise of the Option to 13,177.37. In February 1996, TransPac
exercised the Option and the Registrant issued 13,177.37 shares of Common Stock
to TransPac for $10,063.67.
In August 1994, pursuant to a Non-Qualified Stock Option Agreement, the
Company granted to Eric Rhodes an option to purchase 2,678.87 shares of Common
Stock. In September 1996, Mr. Rhodes exercised the Option and the Registrant
issued 2,678.87 shares of Common Stock to Mr. Rhodes for $877.20.
In August 1994, pursuant to a NonQualified Stock Option Agreement, the
Company granted to Jonathan W. Seybold an option to purchase 61,466.73 shares of
Common Stock. Such Option was amended on December 28, 1995 to increase the
number of shares of Common Stock purchasable upon exercise of the Option to
81,946.71. On December 29, 1995, Mr. Seybold exercised the Option and the
Registrant issued 81,946.71 shares of Common Stock to Mr. Seybold for $300,000.
In August 1994, pursuant to a Non-Qualified Stock Option Agreement, the
Company granted to Dr. William Blase an option to purchase 2,678.87 shares of
Common Stock. In September 1996, Dr. Blase exercised the Option and the
Registrant issued 2,678.87 shares of Common Stock to Dr. Blase for $877.20. In
March 1996, the Registrant issued 9,218 shares of Common Stock to Dr. Blase for
$37,500.00 in cash.
In August 1996, the Company also issued 40,564 options to purchase Common
Stock to Ms. Griffin and 38,110 options to purchase Common Stock to Mr. Gumins,
each at an exercise price of $.50 per share. In October 1996, the Company issued
100,000 options to purchase Common Stock to each of Deborah E. Griffin and
Steven R. Gumins, each at an exercise price of $5.00 per share.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. The sale of securities
was without the use of an underwriter, and the certificates evidencing the
shares bear a restrictive legend permitting the transfer thereof only upon
registration of the shares or an exemption under the Securities Act of 1933, as
amended.
Item 27. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1 --Form of Underwriting Agreement
3.1 --Form of Certificate of Incorporation of the Registrant as amended
3.2 --By-laws of the Registrant
4.1 --Form of Bridge Note
4.2 --Bridge Warrant Agreement
4.3 --Form of Warrant Agreement
4.4 --Form of Underwriter's Unit Purchase Option
5.1* --Opinion of Bachner, Tally, Polevoy & Misher LLP
10.1 --1996 Stock Option Plan
10.2 --Form of Escrow Agreement by and between the Registrant,
American Stock Transfer & Trust Company and certain
securityholders of the Registrant
10.3 --Form of Indemnification Agreement
10.4 --Assignment dated August 22, 1994 between Nautilus Group Japan,
Ltd. and the Company
10.5 --Exclusive Distribution License Agreement dated June 1995 between
Nautilus Group Japan, Ltd. and the Company
10.6 --Letter Agreement dated November 27, 1996 between Nautilus Group
Japan, Ltd. and the Company.
II-2
<PAGE>
10.7 --Office Lease dated August 1, 1996 between Paulistic
Productions and the Company.
10.8 --Retainer Agreement dated August 16, 1994 between
TransPac Software Inc. and the Company.
10.9 --Employment Agreement dated as of December 1, 1996 between
the Company and Steven R.Gumins.
10.10 --Employment Agreement dated as of December 1, 1996
between the Company and Deborah E. Griffin.
10.11 --Form of Conversion Agreement between the Company
and the holders of Indebtedness.
10.12 --Conversion Agreement between the Company and
Nautilus Group Japan, Ltd.
23.1* --Consent of Bachner, Tally, Polevoy & Misher LLP --
Included in Exhibit 5.1
23.2 --Consent of Richard A. Eisner & Company, LLP -- Included on
Page II-5
24.1 --Power of Attorney -- Included on Page II-6
27.0 --Financial Data Schedule
- ----------
* To be filed by amendment.
Item 28. Undertakings
(1) The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act,
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement, and
(iii) Include any additional or changed material information on
the plan of distribution.
(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of this offering.
(2) The undersigned Registrant hereby undertakes to 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.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(4) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this registration statement as
of the time it was declared effective.
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE>
CONSENT OF COUNSEL
The consent of Bachner, Tally, Polevoy & Misher will be contained in its
opinion to be filed as Exhibit 5.1 to the Registration Statement.
II-4
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
To The Board of Directors
Heuristic Development Group, Inc.
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated September 18,
1996 in the Registration Statement (Form SB-2) and related prospectus of
Heuristic Development Group, Inc.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
December 10, 1996
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Registration
Statement or Amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Pacific Palisades, State of California
on the 9th day of December, 1996.
HEURISTIC DEVELOPMENT GROUP, INC.
By: /s/ JOHNATHAN W. SEYBOLD
-------------------------------
Jonathan W. Seybold,
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints Jonathan W. Seybold
and Gregory L. Zink, or either of them, his true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities to sign any or all amendments
to this registration statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or Amendment thereto has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jonathan W. Seybold Chairman of the Board December 9, 1996
-------------------------------- (principal executive officer)
Jonathan W. Seybold
/s/ Gregory L. Zink President, Chief Financial Officer December 9, 1996
-------------------------------- and (principal financial officer
Gregory L. Zink Director and principal accounting officer)
/s/ Steven R. Gumins Director December 9, 1996
--------------------------------
Steven R. Gumins
/s/ Deborah E. Griffin Director December 9, 1996
--------------------------------
Deborah E. Griffin
/s/ William Blase Director December 9, 1996
--------------------------------
William Blase
/s/ Kenneth W. Krugler Director December 9, 1996
--------------------------------
Kenneth W. Krugler
/s/ Kenneth W. Krugler Director December 9, 1996
--------------------------------
Kenneth W. Krugler
/s/ Allan Dalfen Director December 9, 1996
--------------------------------
Allan Dalfen
</TABLE>
II-6
1,200,000 Units
(each Unit consisting of (i) one share of Common Stock, par
value $.01 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 warrants)
HEURISTIC DEVELOPMENT GROUP, INC.
UNDERWRITING AGREEMENT
----------------------
D.H. Blair Investment Banking Corp. ____________, 199__
44 Wall Street
New York, New York 10005
Heuristic Development Group, Inc. a Delaware corporation (the "Company"),
proposes to issue and sell to D.H. Blair Investment Banking Corp. (the
"Underwriter") in accordance with the terms 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 share of Common Stock, par
value $.01 per share, ("Shares"), (ii) one redeemable Class A warrant ("Class A
Warrants") 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 at a price
of $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 1,380,000 Units to be sold by the Company, together with
all or any part of the 120,000 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>
(a) A registration statement (File No. 333- ) on Form SB-2 relating to the
public offering of the Units, including a form of prospectus subject to
completion, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (A) if the
Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Units that shall identify the Preliminary Prospectus (as
hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the
Company does not rely on Rule 434 under the Act a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act and in the case of either clause (i)(A) or (i)(B) of
this sentence, as have been provided to and approved by you 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 you
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
-2-
<PAGE>
any term sheet that satisfies the requirements of Rule 434 under the Act. Any
reference to the "date" of a Prospectus that includes a Term Sheet shall mean
the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus. At the time the Registration Statement
becomes effective and at all times subsequent thereto up to and on the Closing
Date (as hereinafter defined) or the Option Closing Date, as 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 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 September 30, 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 relating to the registration of any shares of
Common Stock, except as described in the Registration Statement.
-3-
<PAGE>
The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits provided
by the warrant agreement pursuant to which such Warrants are to be issued (the
"Warrant Agreement"), which will be substantially in the form filed as an
exhibit to the Registration Statement. The shares of 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 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
-4-
<PAGE>
the Company of any court or of any regulatory authority or other governmental
body having jurisdiction over the Company.
(h) Subject to the qualifications stated in the Prospectus, the Company has
good and marketable title to all properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except such as are not materially significant or important in
relation to its business; all of the material leases and subleases under which
the Company is the lessor or sublessor of properties or assets or under which
the Company holds properties or assets as lessee or sublessee as described in
the Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company is not in default in any material respect with respect
to any of the terms or provisions of any of such leases or subleases, and no
claim has been asserted by anyone adverse to rights of the Company as lessor,
sublessor, lessee or sublessee under any of the leases or subleases mentioned
above, or affecting or questioning the right of the Company to continued
possession of the leased or subleased premises or assets under any such lease or
sublease except as described or referred to in the Prospectus; and the Company
owns or leases all such properties described in the Prospectus as are necessary
to its operations as now conducted and, except as otherwise stated in the
Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Richard A. Eisner & Company LLP, who have given their reports on
certain financial statements filed and to be filed with the Commission as a part
of the Registration Statement, which are incorporated in the Prospectus, are
with respect to the Company, independent public accountants as required by the
Act and the Rules and Regulations.
(j) The financial statements, together with related notes, set forth in the
Prospectus (or if the Prospectus is not in existence, the most recent
Preliminary Prospectus) present fairly the financial position and results of
operations and changes in cash flow position of the Company on the basis stated
in the Registration Statement, at the respective dates and for the respective
periods to which they apply. Said statements and related notes have been
prepared in accordance with generally accepted accounting principles applied on
a basis which is consistent during the periods involved. The information set
forth under the captions "Dilution", "Capitalization", and "Selected Financial
Data" in the Prospectus fairly present, on the basis stated in the Prospectus,
the information included therein. The pro forma financial information filed as
part of the Registration Statement or included in the Prospectus (or such
preliminary prospectus) has been prepared in accordance with the Commission's
rules and guidelines with respect to pro forma financial statements, and
includes all adjustments necessary to present fairly the pro forma financial
condition and results of operations at the respective dates and for the
respective periods indicated and all assumptions used in preparing such pro
forma financial statements are reasonable.
(k) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has not incurred
any liabilities or obligations, direct
-5-
<PAGE>
or contingent, not in the ordinary course of business, or entered into any
transaction not in the ordinary course of business, which is material to the
business of the Company, and there has not been any change in the capital stock
of, or any incurrence of short-term or long-term debt by, the Company or any
issuance of options, warrants or other rights to purchase the capital stock of
the Company or any adverse change or any development involving, so far as the
Company can now reasonably foresee a prospective adverse change in the condition
(financial or other), net worth, results of operations, business, key personnel
or properties of it which would be material to the business or financial
condition of the Company and the Company has not become a party to, and neither
the business nor the property of the Company has become the subject of, any
material litigation whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now pending or, to
the knowledge of the Company, threatened, any action, suit or proceeding to
which the Company is a party before or by any court or governmental agency or
body, which might result in any material adverse change in the condition
(financial or other), business prospects, net worth, or properties of the
Company, nor are there any actions, suits or proceedings related to
environmental matters or related to discrimination on the basis of age, sex,
religion or race; and no labor disputes involving the employees of the Company
exist or are imminent which might be expected to adversely affect the conduct of
the business, property or operations or the financial condition or results of
operations of the Company.
(m) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company.
(n) 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
-6-
<PAGE>
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.
(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-K involving the Company, the
Subsidiaries and
-7-
<PAGE>
any person described in such Item that are required to be disclosed in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and that have not been so disclosed.
(z) The Company has complied with all provisions of Section 517.075 Florida
Statutes relating to doing business with the government of Cuba or with any
person or affiliate located in Cuba.
2. Purchase, Delivery and Sale of the Units.
(a) Subject to the terms and conditions of this Agreement, and upon the
basis of the representations, warranties, and agreements herein contained, the
Company agrees to issue and sell to the Underwriter, and such Underwriter
agrees, to buy from the Company at $_______ per Unit, at the place and time
hereinafter specified, the number of Units set forth in the Prospectus (the
"First Units") plus any additional Units which the Underwriter may become
obligated to purchase pursuant to the provisions of Section 9 hereof. The First
Units shall consist of 1,200,000 Units to be purchased from the Company.
Delivery of the First Units against payment therefor shall take place at
the offices of Underwriter, 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 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 Underwriter, 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
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<PAGE>
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 the 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 certified or bank cashier's checks in New York
Clearing House funds, payable to the order of the Company.
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 the Underwriter, 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 Underwriter 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
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<PAGE>
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 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
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<PAGE>
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.
(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 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 theUnderwriter, 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
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<PAGE>
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 you 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 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 12 consecutive months beginning after
the effective date of the Registration Statement, which shall satisfy the
requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the Units for
the purposes set forth under "Use of Proceeds" in the Prospectus, and will file
such reports with the Commission with respect to the sale of the Units and the
application of the proceeds therefrom as may be required pursuant to Rule 463
under the Act.
(j) The Company will, promptly upon your request, prepare and file with the
Commission any amendments or supplements to the Registration Statement,
Preliminary
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<PAGE>
Prospectus or Prospectus and take any other action, which in the reasonable
opinion of Singer Zamansky 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) The Company will obtain agreements from its officers, directors and
current stockholders to the effect that for a period of 13 months from the First
Closing Date, no officer, director or current stockholder 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 impose stop-transfer
instructions with respect to the shares owned by such stockholders until the end
of such period.
(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
consents 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 holders of more than 5% of the stock of the
Company (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 Unit Purchase Option
filed as an Exhibit to the Registration Statement.
(p) Without the prior written consent of the Underwriter, (i) during the 18
month period commencing on the date of this Agreement, the Company will not
grant options to purchase shares of Common Stock at an exercise price less than
the greater of (x) the initial public offering price of the Units (without
allocating any value to the Warrants) or (y) the fair market value of the Common
Stock on the date of grant; (ii) during the six month period commencing on the
date of this Agreement, grant options to any current officer of the Company;
(iii) during the three year period commencing on the date of this Agreement,
offer or sell any of its securities pursuant to Regulation S under the Act; (iv)
grant registration rights to any person
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which are exercisable sooner than 13 months from the First Closing Date; (v)
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)
or (vi) during the 18 month period commencing on the date of this Agreement,
enter into any agreement or arrangement with any investment banking firm other
than the Underwriter relating to investment banking, corporate finance, merger
and acquisition or other similar advisory or consulting services.
(q) Jonathan W. Seybold shall be the Chairman of the Board and Gregory L.
Zink shall be President of the Company on the Closing Dates. The Company has
obtained key person life insurance on the lives of Messrs. Seybold and Zink in
an amount of not less than $2 million each and will use its best efforts to
maintain such insurance during the five year period commencing with the First
Closing Date unless his employment with the Company is earlier terminated. In
such event, the Company will obtain a comparable policy on the life of his
successor for the balance of the five 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.
(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 such Underwriter or dealer may reasonably request. The
Company shall not call for redemption any of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date fixed
for redemption. In addition, for so long as any Warrant is outstanding, the
Company will promptly notify the 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 _______, 1998, the
Company will pay the Underwriter, a fee of 5% of the aggregate exercise price of
the Warrants, of which ____% may be reallowed to the dealer who solicited 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
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<PAGE>
under the Securities Exchange Act of 1934, as amended. The Company agrees not to
solicit the exercise of any Warrants other than through the Underwriter and will
not authorize any other dealer to engage in such solicitation without the prior
written consent of the Underwriter.
(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 Underwriter or counsel to the Underwriter.
(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.
4. Conditions of 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
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<PAGE>
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 reasonable satisfaction of
Singer Zamansky LLP, counsel to the Underwriter;
(b) At the First Closing Date, you shall have received the opinion,
dated as of the First Closing Date, of Bachner, Tally, Polevoy & Misher
LLP, 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 Delaware, 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
California 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
September 30, 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; the Common Stock, the Warrants, the Unit Purchase Option and
the Warrant Agreement conform to the respective descriptions thereof
contained in the Prospectus; the
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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 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, the M/A Agreement and the Escrow 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;
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(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, the M/A Agreement or the Escrow Agreement, or of any
action taken or to be taken by the Company pursuant to this Agreement,
the Warrant Agreement, the Unit Purchase Option, the M/A Agreement or
the Escrow Agreement; and no such proceedings are known to such
counsel to be contemplated against the Company; 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, the M/A Agreement or the Escrow
Agreement, and the incurrence of the obligations herein and therein
set forth and the consummation of the transactions herein or therein
contemplated, result in a breach or violation of, or constitute a
default under the certificate or articles of incorporation or by-laws,
in the performance or observance of any material obligations,
agreement, covenant or condition contained in any bond, debenture,
note or other evidence of indebtedness or in any contract, indenture,
mortgage, loan agreement, lease, joint venture or other agreement or
instrument to which the Company is a party or by which it or any of
its properties may be bound or in violation of any material order,
rule, regulation, writ, injunction, or decree of any government,
governmental instrumentality or court, domestic or foreign;
(viii) 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
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statement of a material fact required to be stated therein or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus
or any supplement thereto contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
statements therein, in light of the circumstances under which they
were made, not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus
and any supplement thereto, for the financial statements, notes
thereto and other financial 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
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(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-K 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.
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Underwriter or counsel for the Underwriter shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law other than the law of the United
States or of the State of Delaware upon opinion of counsel satisfactory to you,
in which case the opinion shall state that they have no reason to believe that
you and they are not entitled to so rely.
(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 Singer Zamansky LLP, counsel to the
Underwriter, and you shall have received from such counsel a signed opinion,
dated as of the 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
Richard A. Eisner & Company 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
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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).
(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 Singer Zamansky LLP, counsel to theUnderwriter.
(ii) At the Option Closing Date there shall have been delivered
to you the signed opinion of Bachner, Tally, Polevoy & Misher LLP,
counsel for the Company, dated as of the Option Closing Date, in form
and substance satisfactory to Singer Zamansky 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
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Closing Date, in form and substance satisfactory to Singer Zamansky
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 Richard
A. Eisner & Company LLP, dated the Option Closing Date and addressed
to the Underwriters 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 Singer Zamansky
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.
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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 such Underwriter within the meaning of the Act
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all attorneys' fees), to which
such Underwriter or such controlling person may become subject, under the Act or
otherwise, and will reimburse, as incurred, such 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 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,
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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 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 such Underwriter within the meaning of the Act, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both such Underwriter or such
controlling person and the indemnifying party and in the judgment of the
Underwriter, it is advisable for the Underwriter or controlling persons to be
represented by separate counsel (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of such
Underwriter or such controlling person, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for
such Underwriter and controlling persons, which firm shall be designated in
writing
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by you). No settlement of any action against an indemnified party shall be made
without the consent of the indemnifying party, which shall not be unreasonably
withheld in light of all factors of importance to such indemnifying party.
7. Contribution.
In order to provide for just and equitable contribution under the Act in
any case in which (i) any Underwriter makes claim for indemnification pursuant
to Section 6 hereof but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of 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 such case (after
contribution from others) in such proportions that all such 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 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 of the portion of such losses, claims, damages or liabilities for
which the Underwriter 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
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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 (which fees
shall not exceed $150,000) and of the Company's accountants; the costs and
expenses incident to the preparation, printing, filing and distribution under
the Act of the Registration Statement (including the financial statements
therein and all amendments and exhibits thereto), Preliminary Prospectus and the
Prospectus, as amended or supplemented, or the Term Sheet, the fee of the NASD
in connection with the filing required by the NASD relating to the offering of
the Units contemplated hereby; all expenses, including reasonable fees and
disbursements of counsel to the Underwriter, in connection with the
qualification of the 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, Agreement Among Underwriter (if necessary);
Selling Agreement, Underwriters' Questionnaire, Underwriters' 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 the Underwriter 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 expenses of
the Unerwriter, including legal fees up to a maximum of
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$40,000. In the event the transactions contemplated hereby are not consummated
by reason of any action of the Company or because of a breach by the Company of
any covenant, representation or warranty herein, the Company shall be liable for
the accountable expenses of the Underwriter, including legal fees, up to a
maximum of $180,000.
(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, (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 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.
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 and
15 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
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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 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 10 or in Section 9, 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 the
Underwriter or its designees for a consideration of one mill (or such higher
price as you shall determine to be the fair market value) 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.
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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 Singer Zamansky LLP, 40 Exchange Place, New York, New York 10005 or
if sent to the Company, will be mailed, delivered and confirmed to it at
Heuristic Development Group, Inc., 17575 Pacific Coast Highway, Pacific
Palisades, Ca 90272 with a copy to Bachner, Tally, Polevoy & Misher LLP, 380
Madison Avenue, New York, New York 10017.
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 include any purchaser, as such purchaser,
from the Underwriter of the Units.
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,
Heuristic Development Group, Inc.
By: _______________________________
Gregory L. Zink, President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
D.H. Blair Investment Banking Corp.
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By: _______________________________
We hereby agree to be bound by the provisions of Sections 3(l), (n), and
(p) and 12 hereof.
______________________________
______________________________
______________________________
CERTIFICATE OF INCORPORATION
OF
EIS INTERNATIONAL GROUP, LTD.
ARTICLE I
NAME OF CORPORATION
The name of this corporation is
EIS INTERNATIONAL GROUP, LTD.
ARTICLE: II
REGISTERED OFFICE
The address of the registered office of the corporation in the State of
Delaware is 1013 Centre Road, in the City of Wilmington 19805, County of New
Castle; and the name of its registered agent at that address is Corporation
Service Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
The Corporation shall be authorized to issue two classes of stock to be
designated, respectively, Common Stock and Preferred Stock. The total number of
shares which the Corporation shall have the authority to issue is three thousand
(3,000). The total number of shares of Common Stock shall be one thousand five
hundred (1,500) and each such share shall have a par value of one cent ($ .01)
The total number of shares of Preferred Stock stall be one thousand five hundred
(1,500) and each such share shall have a par value of one cent ($ .01).
<PAGE>
1. All shares of Common Stock, whenever issued, shall possess preemptive
rights to subscribe to any and all additional issues of Common Stock of the
Corporation, of any or all classes or series thereof; provided, however, that
the issuance of Common Stock pursuant to the exercise of rights under stock
options granted prior to August 1, 1994 shall not trigger such preemptive rights
with respect to outstanding shares of Common Stock, except as may otherwise be
provided in any such option agreement.
2. The shares of Preferred Stock shall be issued from time to time in one
or more series. The Board of Directors is hereby vested with authority to fix,
pursuant to the bylaws as such may be supplemented from time to time by
resolution or resolutions, the designations and the powers, preferences, and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof; and to fix the number of shares
constituting any such series; and to increase or decrease the number of shares
of any such series (but not below the number of shares thereof then
outstanding).
ARTICLE V
INCORPORATOR
The name and mailing address of the incorporator of the Corporation is
Dawn Szafranski, Corporation Service Company, 1013 Centre Road, Wilmington,
Delaware 19805.
ARTICLE VI
LIMITATION OF DIRECTOR LIABILITY
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or may hereafter be amended, a director of the Corporation shall
not be liable to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director. If the Delaware General Corporation Law
is amended after the date of the filing of this Certificate of Incorporation to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be terminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended from time to time . No repeal or
modification of this Article VI by the stockholders shall adversely affect any
right or protection of a director of the Corporation existing by virtue of this
Article VI at the time of such repeal or modification.
2
<PAGE>
ARTICLE VII
CORPORATE POWER AND MANAGEMENT
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation, and regulation of the
powers of the Corporation and of its directors and of its stockholders or any
class thereof, as the case may be, it is further provided:
1. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights
conferred on stockholders herein are granted subject to this
reservation.
2. After the original or other bylaws of the Corporation have
been adopted, amended, or repealed, as the case may be, and in
furtherance and not in imitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make,
repeal, alter, amend and rescind the bylaws of the Corporation.
3. The management of the business and the conduct of the
affairs of the Corporation shall be vested in its Board of Directors.
The number of directors which shall constitute the whole Board of
Directors shall be fixed by, or in the manner provided in, the
bylaws. The phrase "whole Board" shall be deemed to mean the total
number of directors which the Corporation would have if there were no
vacancies. No election of directors need be by written ballot unless
required by the bylaws of the Corporation.
THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation , do business both within and without the
State of Delaware, and in pursuance of the Delaware General Corporation Law,
does make and file this Certificate on July 20, 1994 .
/s/ Dawn Szafranski
--------------------
Dawn Szafranski
Incorporator
3
<PAGE>
CERTIFICATE OF
OF
CERTIFICATE OF INCORPORATION
OF
EIS INTERNATIONAL GROUP, LTD.
(Pursuant to Section 241 of the
General Corporation Law of the State or Delaware)
The undersigned, being the directors of EIS INTERNATIONAL GROUP, LTD. (the
"Corporation"), do hereby certify:
1. The name of the corporation is EIS International Group, Ltd.
2. The Certificate of Incorporation of the Corporation was filed in the
office of the Secretary of State of the State of Delaware on the 20th day of
July, 1994.
3. RESOLVED, that the Certificate of Incorporation of the Corporation is
hereby amended by deleting Article IV thereof in its entirety and by
substituting a new Article IV which shall read as follows:
ARTICLE IV
AUTHORIZED CAPITAL STOCK
The Corporation shall be authorized to issue two classes of stock to be
designated, respectively, Common Stock and Preferred Stock. The total number of
shares which the Corporation shall have the authority to issue is three thousand
(3,000). The total number of shares of Common Stock shall be one thousand five
hundred (1,500) and each such share shall have a par value of one cent ($ .01).
The total number of shares of Preferred Stock shall be one thousand five hundred
(1,500) and each such share shall have a par value of one cent ($ .01).
1. All shares of Common Stock, whenever issued, shall possess preemptive
rights to subscribe to any and all additional issues of Common Stock of the
Corporation, of any or all classes or series thereof; provided, however, that
the issuance of Common Stock pursuant to the exercise of rights under stock
options granted prior to September 15, 1994 shall not trigger such
<PAGE>
preemptive rights with respect to outstanding shares of Common Stock, except as
may otherwise be provided in any such option agreement.
2. The shares of Preferred Stock shall be issued from time to time in one
or more series. The Board of Directors is hereby vested with authority to fix,
pursuant to the bylaws as such may be supplemented from time to time by
resolution or resolutions, the designations and the powers, preferences, and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof; and to fix the number of shares
constituting any such series; and to increase or decrease the number of shares
of any such series (but not below the number of shares thereof then
outstanding).
4. The Corporation has not yet issued, nor received any payment for, any of
its stock.
5. This Certificate of Amendment has been duly adopted by the Board of
Directors of the Corporation in accordance with Section 241 of the General
Corporation Law of the State of Delaware.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have signed and subscribed to this
Certificate of Amendment and affirm the same as true under the penalties of
perjury as of this 5th day of August, 1994.
/s/ Gregory L. Zink
-----------------------
Gregory L. Zink
Director
/s/ Deborah E. Griffin
-----------------------
Deborah E. Griffin
Director
/s/ Steven R. Gumins
-----------------------
Steven R. Gumins
Director
3
<PAGE>
CERTIFICATE OF DESIGNATION
Series A Preferred Stock
(Par Value $.01 Per Share)
of EIS INTERNATIONAL GROUP, LTD.
---------------------
Pursuant to Section 151
of the General Corporation
Law of the State of Delaware
---------------------
The undersigned does hereby certify that the following resolution setting
forth the preferences and rights of the Series A Preferred Stock was duly
adopted by the Board of Directors of EIS INTERNATIONAL GROUP, LTD., a Delaware
corporation, pursuant to authority contained in Article IV of its Certificate of
Incorporation, dated July 20, 1994 and in accordance with the provisions of
Section 151 of the General Corporation Law of the State of Delaware:
RESOLVED: That the Board of Directors hereby authorizes the issuance of
up to one thousand (1,000) shares of Series A Preferred Stock of the
Corporation, and hereby fixes the rights, preferences, privileges and
restrictions thereon, in addition to those set forth in the Certificate of
Incorporation, as follows:
(a) Designation.
This resolution shall provide for a single series of Preferred
Stock, the designation of which shall be Series A Preferred Stock
(hereinafter "Series A Preferred Stock") and the number of authorized
shares constituting the Series A Preferred Stock is one thousand
(1,000).
(b) Dividend Rate.
(1) Dividends on the shares of Series A Preferred Stock
shall accrue from the date of their original issue at a rate of ten
percent (10%) per annum computed on the basis of the actual number of
days elapsed in a 360-day year, and, to the extent any such dividends
and any other dividends accrued with respect to such dividends
pursuant to this paragraph (1) shall have accrued, but are in arrears
because they have not been declared and paid, such
<PAGE>
undeclared and unpaid dividends shall accrue additional dividends from the date
upon which such undeclared and unpaid dividends accrued until the date upon
which they are paid at the rate of ten percent (10%) per annum (compounded on
the Dividend Payment Dates and computed on the basis of the actual number of
days elapsed in a 360-day year). All such dividends shall be cumulative and
shall be payable when and as declared by the Board of Directors of the
Corporation, out of assets legally available for such purpose, on January 1 and
July 1 of each year, commencing, in the case of the first issuance of shares of
Series A Preferred Stock, January 1, 1995 (each date being hereinafter
individually a "Dividend Payment Date" and collectively the "Dividend Payment
Dates"), except that if any Dividend Payment Date is a Saturday, Sunday or
legal holiday then such dividend shall be paid on the next business day
following such Dividend Payment Date and no additional amount shall accrue as a
result of such delay.
(2) Each dividend shall be paid to the holders of record of shares of
Series A Preferred Stock as they appear on the books of the Corporation on
the record date, not exceeding 30 days prior to the Dividend Payment Date
thereof, as shall be fixed by the Board of Directors of the Corporation.
Dividends in arrears may be declared and paid at any time, without reference to
any regular Dividend Payment Date, to holders of record on such date, not
exceeding 45 days preceding the payment date thereof, as may be fixed by the
Board of Directors of the Corporation.
(3) Except as hereinafter provided, no dividends shall be declared or
paid or set apart for payment on the shares of Series A Preferred Stock for
any period if the Corporation shall be in default in the payment of any
dividends (including cumulative dividends, if applicable) on any shares of
Preferred Stock ranking, as to dividends, prior to the Series A Preferred
Stock, unless a dividend sufficient to cure such default shall be
contemporaneously declared and paid.
(4) Except as hereinafter provided, no dividends shall be declared or
paid or set apart for payment on the Preferred Stack of any series ranking, as
to dividends, on a parity with or junior to the Series A Preferred Stock for
any period unless full cumulative dividends have been or
2
<PAGE>
contemporaneously are declared and paid on the Sales A Preferred Stock
through the last Dividend Payment Date. When dividends are not paid in
full, as at aforesaid, upon the shares of Series A Preferred Stock and any
other Preferred Stock ranking on a parity as to dividends with the Series A
Preferred Stock, all dividends declared upon shares of the Series A
Preferred Stock and any other Preferred Stock ranking on a parity as to
dividends with the Series A Preferred Stock shall be declared pro rata so
that the amount of dividends declared per share on the Series A Preferred
Stock and such other Preferred Stock shall in all cases bear to each other
the same ratio that accrued dividends per share on the shares of the Series
A Preferred Stock and such other Preferred Stock bear to each other.
Holders of shares of Series A Preferred Stock shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, as provided in paragraphs (1) and (2) of this Section
(b), on the Series A Preferred Stock.
(5) So long as any share of the Series A Preferred Stock is
outstanding, no dividend ( other than (i) a dividend in the Corporation's
Common stock, par value $. 01 per share ("the Common Stock"), or in any
other stock of the Corporation ranking junior to the Series A Preferred
Stock as to dividends and upon liquidation or (ii) as provided in paragraph
(4) of this Section (b), shall be declared, paid or set aside for payment,
or other distribution declared or made, upon the Common Stock or upon any
other stock of the Corporation ranking junior to or on a parity with the
Series A Preferred Stock as to dividends or upon liquidation, nor shall any
common Stock nor any other stock of the Corporation ranking junior to or on
a parity with the Series A Preferred Stock as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any shares of any such stock) by the Corporation
(except by conversion into or exchange for stock of a Corporation ranking
junior to the Series A Preferred Stock as to dividends and upon
liquidation); provided, however, that nothing contained in this paragraph
(5) shall prevent the Corporation from repurchasing or redeeming any of its
capital stock pursuant to the terms of any subscription or option agreement
entered into with
3
<PAGE>
any officer, director, employee, or consultant of the corporation.
(c) Optional Redemption.
The shares of Series A Preferred Stock are redeemable on the terms and
conditions set forth below, at any time or from time to time, at the option
of the Corporation expressed by resolution of the Board of Directors at a
per share redemption price to be determined by the Board of Directors plus,
in each case, accrued and unpaid dividends thereon to the date fixed for
redemption.
(d) Procedure for Redemption
(1) If fewer than all the outstanding shares of Series A Preferred
Stock are to be redeemed, the number of shares to be redeemed shall be
determined by the Board of Directors, subject to the provisions of section
(c) above, and the shares to be redeemed shall be determined by lot or pro
rata as may be determined by the Board of Directors or by any other method
as may be determined by the Board of Directors in its sole discretion to be
equitable.
(2) Notice of a redemption shall be given by first class mail, postage
prepaid mailed not less than 30 nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed, at
such holder's address as the same appears on the books of the Corporation.
Each such notice shall state: (i) the redemption date; (ii) the number of
shares of Series A Preferred Stock to be redeemed and, if fewer than all
the shares held by such holder are to be redeemed, the number of such
shares to be redeemed from such holder; (iii) the redemption price; (iv)
the place or places where certificates for such shares are to be
surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and
(vi) any other information required by applicable laws or regulations.
(3) Notice having been mailed as aforesaid from and after the
redemption date (unless default shall be made by the Corporation in
providing money for the payment of the redemption price of the shares
called for redemption) dividends on the shares of Series A Preferred Stock
so called for redemption shall cease to accrue, and said shares
4
<PAGE>
shall no longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive
from the Corporation the redemption price plus accrued and unpaid dividends
to the date fixed for redemption) shall cease. Upon surrender of the
certificates for any shares so redeemed in accordance with said notice
(properly endorsed or assigned for transfer, if the Board of Directors of
the Corporation shall so require and the notice shall so state), such
shares shall be redeemed by the Corporation at the redemption price
aforesaid. In case fewer than all of the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing
the unredeemed shares without cost to the holder thereof.
(4) Any shares of Series A Preferred Stock which shall at any time
have been redeemed shall, after such redemption, have the status of
authorized but unissued shares of Preferred Stock, without designation as
to series until such shares are once more designated as part of a
particular series by the Board of Directors. None of such redeemed shares
of series A Preferred Stock shall be reissued as shares of Series A
Preferred Stock.
(5) If the Corporation shall be in default in the payment of any
dividends on any shares of Preferred Stock ranking, as to dividends, prior
to the Series A Preferred Stock, then no shares of Series A Preferred Stock
shall be redeemed and the Corporation shall not purchase or otherwise
acquire any shares of Series A Preferred Stock.
(6) Notwithstanding the foregoing provisions of this Section (d),
unless the full cumulative dividends on all outstanding shares of Series A
Preferred Stock shall have been paid or contemporaneously are declared
and paid through the last Dividend Payment Date, no shares of Series A
Preferred Stock shall be redeemed unless all outstanding shares of Series
A Preferred Stock are simultaneously redeemed; provided, however, that the
foregoing shall not prevent the purchase or acquisition of shares of Series
A Preferred Stock pursuant to a purchase or exchange offer made on the same
terms to all holders of outstanding shares of Series A Preferred Stock.
5
<PAGE>
(e) Voting:
(1) The shares of Series A Preferred Stock shall have the right to
vote on all matters as to which the Common Stock can vote and shall, so
long as any shares of series A Preferred Stock are outstanding, have twenty
percent 20% of the total voting power with respect to all such matters.
(2) In addition, the shares of Series A Preferred Stock shall have any
other voting powers, either general or special, required by law or
regulation.
(3) In addition, and unless the vote or consent of the holders of a
greater number of shares shall then be required by law, the consent of the
holder of at least a majority of all of the shares of Series A Preferred
Stock, and all other series of Preferred Stack ranking on a parity with the
Series A Preferred Stock either as to dividends or upon liquidation and
upon which like voting rights have been conferred and are then exercisable,
at the time outstanding, given in person or by proxy, either in writing or
by a vote at a meeting called for the purpose at which the holders of such
shares shall vote together as a single class without regard to series,
shall be necessary for authorizing, effecting or validating the amendment,
alteration or repeal of any of the provisions of the Articles of
Incorporation or of any amendatory Statement thereto so as to affect
materially and adversely the rights, preferences, privileges or voting
power of shares of Series A Preferred Stock. In case the shares of Series A
Preferred Stock would be so affected in a materially different manner than
any other series of Preferred Stock then outstanding by any such action,
the holders of shares of Series A Preferred Stock shall be entitled to vote
as a separate class, and the Corporation shall not take such action without
the consent or affirmative vote, as above provided, of at least a majority
of the total number of shares of Series A Preferred Stock then outstanding,
in addition to or as a specific part of the consent or affirmative vote
hereinabove otherwise required .
(4) The increase of the authorized amount of the Preferred Stock, or
the creation, authorization or issuance of any shares of any other class of
stock of the Corporation ranking, (i) junior to the Series A Preferred
Stock, or (ii) on a parity with the shares of Series A Preferred Stock, as
to
6
<PAGE>
dividends or upon liquidation, or the reclassification of any authorized or
outstanding stock of the Corporation into any such junior or parity shares,
or the creation, authorization or issuance of any obligation or security
convertible into or evidencing the right to purchase any such junior or
parity shares shall not be deemed to affect materially and adversely the
rights, preferences, privileges or voting power of shares of Series A
Preferred Stock.
(f) Liquidation Rights.
(1) Upon the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary the holders of the shares of
Series A Preferred Stock shall be entitled to receive out of the assets of
the Corporation available for distribution to stockholders, before any
payment or distribution shall be made on the Common Stock or on any other
class of stock ranking junior to Series A Preferred Stock upon liquidation,
the amount of one thousand dollars ($1,000) per share, plus a sum equal to
all dividends (whether or not earned or declared) on such shares accrued
and unpaid thereon to the date of final distribution.
(2) Neither the sale, lease or exchange (for cash, shares of stock,
securities or other consideration) of all or substantially all the property
and assets of the Corporation nor the merger or consolidation of the
Corporation into or with any other corporation or the merger or
consolidation of any other corporation into or with the Corporation, shall
be deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, for the purposes of this Section (f).
(3) After the payment to the holders of the shares of Series A
Preferred Stock of the full preferential amounts provided for in this
Section (f), the holders of shares of Series A Preferred Stock as such
shall have no right or claim to any of the remaining assets of the
Corporation.
(4) In the event the assets of the Corporation available for
distribution to the holders of shares of Series A Preferred Stock upon
any dissolution, liquidation or winding up of the Corporation, whether
voluntary or involuntary, shall be insufficient to pay in full all
amounts to which such holders are entitled pursuant to paragraph (1)
7
<PAGE>
of this Section if, no such distribution shall be made on account of any
shares of any other class or series of Preferred Stock ranking in whole or
in part on a parity with the shares of Series A Preferred Stock upon such
dissolution, liquidation or winding up unless proportionate distributive
amounts shall be paid on account of the shares of Series A Preferred Stock,
ratably, in proportion to the full distributable parity amounts for which
holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up.
(g) Priority.
For purposes of this resolution, any stock of any class or classes;
of the Corporation shall be deemed to rank:
(1) Prior to the shares of the Series A Preferred Stock, either as to
dividends or upon liquidation, if the holders of such class or classes
shall be entitled to the receipt of dividends or of amounts distributable
upon dissolution, liquidation or winding up of the Corporation, whether
voluntary or involuntary, as the case may be, in preference or priority to
the holders of shares of Series A Preferred Stock.
(2) On a parity with shares of Series A Preferred Stock, either as to
dividends or upon liquidation whether of not the dividend rates, dividend
payment dates or redemption or liquidation prices per share or sinking fund
provisions, if any, be different from those of the Series A Preferred
Stock, if the holders of such stock shall be entitled to the receipt of
dividends or of amounts distributable upon dissolution, liquidation or
winding up of the Corporation, whether voluntary or involuntary, as the
case may be, in proportion to their respective dividend rates or
liquidation prices, without preference or priority, one over the other, as
between the holders of such stock and the holders of shares of Series A
Preferred Stock.
(3) Junior to shares of Series A Preferred Stock, either as to
dividends or upon liquidation, if such class or classes shall be Common
Stock or if the holders of shares of Series A Preferred Stock shall be
entitled to receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, whether
voluntary
8
<PAGE>
or involuntary, as the case may be, in preference or priority to the
holders of shares of such class or classes.
(h) Payments.
All payments to a holder of Series A Preferred Stock shall be made at
the office or agency of the Corporation maintained for such purpose in such
coin or currency of the United States of America as at the time of payment
is legal tender for the payment of public and private debts; provided,
however, that at the option of the Corporation payment may be made (i) by
check mailed to such holder at his address appearing on the records of the
Corporation or, (ii) at the request of such holder, by wire transfer of
immediately available funds to the address designated by such holder in
writing.
IN WITNESS WHEREOF, EIS International Group, Ltd. has caused its corporate
seal to be hereunto affixed and this Certificate to be signed by Gregory L.
Zink, as President and attested by Deborah E. Griffin, its Secretary, this 16th
day of August, 1994. The undersigned do hereby verify and affirm, under
penalties of perjury, that this Certificate is the act and deed of the
Corporation and that the facts stated herein are true.
EIS INTERNATIONAL GROUP, LTD.
a Delaware corporation
By: /s/ Gregory L. Zink
----------------------
Name: Gregory L. Zink
Title: President
(Corporate Seal)
Attest: /s/ Deborah E. Griffin
-----------------------
Name: Deborah E. Griffin
Title: Secretary
9
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
EIS INTERNATIONAL GROUP, LTD.,
EIS INTERNATIONAL GROUP, LTD., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation by unanimous written
consent, adopted the following resolution:
RESOLVED that the Board of Directors hereby declares it advisable and in
the best interest of the Corporation that Article I of the Certificate of
Incorporation be amended to read as follows:
"ARTICLE I
NAME OF CORPORATION
The name of this corporation is:
HEURISTIC DEVELOPMENT GROUP, INC."
SECOND: That said amendment has been consented to and authorized by the
holders of the majority of the issued and outstanding stock entitled to vote by
written consent given in accordance with the provisions of Section 228 or the
General Corporation Law of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
applicable provisions of Sections 242 and 228 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, said corporation has caused this Certificate to be
signed by Gregory L. Zink, its President, this 1st day Of March, A.D 1995
By: /s/ Gregory L. Zink
----------------------------
Gregory L. Zink, President
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
HEURISTIC DEVELOPMENT GROUP, INC.
HEURISTIC DEVELOPMENT GROUP, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), pursuant to the
provisions of the General Corporation Law of the State of Delaware (the "GCL"),
DOES HEREBY CERTIFY as follows:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended by deleting ARTICLE FOURTH of the Certificate of Incorporation in its
present form and substituting therefor a new ARTICLE FOURTH in the following
form:
This Corporation is hereby authorized to issue two classes of shares to be
designated respectively Preferred Stock ("Preferred Stock") and Common Stock
("Common Stock"). The total number of shares of capital stock which the
Corporation shall have authority to issue is twenty-five million (25,000,000).
The total number of shares of Preferred Stock which the Corporation shall have
the authority to issue is Five Million (5,000,000) and the total number of
shares of Common Stock which the Corporation shall have authority to issue is
Twenty Million (20,000,000). The Preferred Stock shall have a par value of $.01
per share and the Common Stock shall have a par value of $.01 per share.
The Board of Directors may divide the Preferred Stock into any number of
series, fix the designation and number of shares of each such series, and
determine or change the designation, relative rights, preferences, and
limitations of any series of Preferred Stock. The Board of Directors (within the
limits and restrictions of any resolutions adopted by it originally fixing the
number of any shares of any series of Preferred Stock) may increase or decrease
the number of shares initially fixed for any series, but no such decrease shall
reduce the number below the number of shares then outstanding or duly reserved
for issuance.
SECOND: The amendment to the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment has been duly adopted in
accordance with the applicable provisions of Section 242 of the GCL (a) the
Board of Directors of the Corporation having duly adopted a resolution setting
forth such amendment and declaring its advisability and submitting it to the
stockholders of the Corporation for their approval, and (b) the stockholders of
the Corporation having duly adopted a resolution setting forth such amendment by
unanimous written consent.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate of Amendment to be signed by Gregory L.
Zink, its President, and attested by Deborah E. Griffin, its Secretary, this
17th day of October, 1996.
HEURISTIC DEVELOPMENT GROUP, INC.
By: /s/Gregory L. Zink
---------------------------------
Gregory L. Zink
President
[CORPORATE SEAL]
ATTEST:
/s/Deborah E. Griffin
- -----------------------------------
Deborah E. Griffin
Secretary
-2-
BYLAWS OF
EIS INTERNATIONAL GROUP, LTD.
(a Delaware corporation)
ARTICLE I
Offices
SECTION 1.01 Registered Office. The registered office of EIS INTERNATIONAL
GROUP, LTD. (hereinafter called the Corporation) in the State of Delaware shall
be at 1013 Centre Road, City of Wilmington 19802, County of New Castle, and the
name of the registered agent in charge thereof shall be Corporation Service
Company.
SECTION 1.02 Other Offices. The Corporation may also have an office or
offices at such other place or places, either within or without the State of
Delaware, as the Board of Directors (hereinafter called the Board) may from time
to time determine or as the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 2.01 Annual Meetings. Annual meetings of the stockholders of the
Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings may be held at such
time, date and place as the Board shall determine by resolution.
SECTION 2.02 Special Meetings. A special meeting of the stockholders for
the transaction of any proper business may be called at any time by the Board,
by any officer of the Corporation, or by a vote of twenty percent (20%) of the
shares then outstanding.
SECTION 2.03 Place of Meetinqs. All meetings of the stockholders shall be
held at such places, within or without the State of Delaware, as may from time
to time be designated by the person or persons calling the respective meeting
and specified in the respective notices or waivers of notice thereof.
SECTION 2.04 Notice of Meetings. Except as otherwise required by law,
notice of each meeting of the stockholders, whether annual or special, shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of record entitled to vote at such meeting by
delivering a typewritten or
<PAGE>
printed notice thereof to him personally, or by depositing such notice in the
United States mail, in a postage prepaid envelope, directed to him at his post
office address furnished by him to the Secretary of the Corporation for such
purpose or, if he shall not have furnished to the Secretary his address for such
purpose, then at his post office address last known to the Secretary, or by
transmitting a notice thereof to him at such address by telecopy, telegraph,
cable, or wireless. Except as otherwise expressly required by law, no
publication of any notice of a meeting of the stockholders shall be required.
Every notice of a meeting of the stockholders shall state the place, date and
hour of the meeting, and, in the case of a special meeting, shall also state the
purpose or purposes for which the meeting is called. Notice of any meeting of
stockholders shall not be required to be given to any stockholder who shall have
waived such notice and such notice shall be deemed waived by any stockholder who
shall attend such meeting in person or by proxy, except as a stockholder who
shall attend such meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Except as otherwise expressly required by law,
notice of any adjourned meeting of the stockholders need not be given if the
time and place thereof are announced at the meeting at which the adjournment is
taken.
SECTION 2.05 Quorum. Except in the case of any meeting for the election
of directors summarily ordered as provided by law, the holders of record of a
majority in voting interest of the shares of stock of the Corporation entitled
to be voted thereat, present in person or by proxy, shall constitute a quorum
for the transaction of business at any meeting of the stockholders of the
Corporation or any adjournment thereof. In the absence of a quorum at any
meeting or any adjournment thereof, a majority in voting interest of the
stockholders present in person or by proxy and entitled to vote thereat or, in
the absence therefrom of all the stockholders, any officer entitled to preside
at, or to act as secretary of, such meeting may adjourn such meeting from time
to time. At any such adjourned meeting at which a quorum is present any business
may be transacted which might have been transacted at the meeting as originally
called.
SECTION 2.06 Voting.
(a) Each stockholder shall, at each meeting of the stockholders, be
entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by him and registered in his name on the books of the
Corporation:
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(i) on the date fixed pursuant to Section 6.05 of these bylaws as
the record date for the determination of stockholders entitled to
notice of and to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then (a) at
the close of business on the day next preceding the day on which
notice of the meeting shall be given or (b) if notice of the meeting
shall be waived, at the close of business on the day next preceding
the day on which the meeting shall be held.
b) Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote such stock. Persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
he shall have expressly empowered the pledgee to vote thereon, in which case
only the pledgee, or his proxy, may represent such stock and vote thereon. Stock
having voting power standing of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants in common, tenants
by entirety or otherwise, or with respect to which two or more persons have the
same fiduciary relationship, shall be voted in accordance with the provisions of
the General Corporation Law of the State of Delaware.
(c) Any such voting rights may be exercised by the stockholder entitled
thereto in person or by his proxy appointed by an instrument in writing,
subscribed by such stockholder or by his attorney thereunto authorized and
delivered to the secretary of the meeting; provided, however, that no proxy
shall be voted or acted upon after three years from its date unless said proxy
shall provide for a longer period. The attendance at any meeting of a
stockholder who may theretofore have given a proxy shall not have the effect of
revoking the same unless he shall in writing so notify the secretary of the
meeting prior to the voting of the proxy. At any meeting of the stockholders all
matters, except as otherwise provided in the Certificate of Incorporation, in
these bylaws or by law, shall be decided by the vote of a majority in voting
interest of the stockholders present in person or by proxy and entitled to vote
thereat and thereon, a quorum being present. The vote at any meeting of the
stockholders on any question need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot each ballot shall be signed by the
stockholder voting, or by his proxy, if there be such proxy, and it shall state
the number of shares voted.
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SECTION 2.07 Action Without Meeting. Any action required to be taken at any
annual or special meeting of stockholders of the Corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE III
Board of Directors
SECTION 3.01 General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by law or by the Certificate of Incorporation directed or required to be
exercised or done by the stockholders.
SECTION 3.02 Number and Term of Office. The number of directors which shall
constitute the whole Board shall be not less than one nor more than fifteen.
Directors need not be stockholders. Each of the directors of the Corporation
shall hold office until his successor shall have been duly elected and shall
qualify or until he shall resign or shall have been removed in the manner
hereinafter provided.
SECTION 3.03 Election of Directors. The directors shall be elected annually
by the stockholders of the Corporation and the persons receiving the greatest
number of votes, up to the number of directors to be elected, shall be the
directors.
SECTION 3.04 Resignations. Any director of the Corporation may resign at
any time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately upon
its receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 3.05 Vacancies. Except as otherwise provided in the Certificate of
Incorporation, any vacancy in the Board, whether because of death, resignation,
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disqualification, an increase in the number of directors, or any other cause,
may be filled by vote of the majority of the remaining directors, although less
than a quorum. Each director so chosen to fill a vacancy shall hold office until
his successor shall have been elected and shall qualify or until he shall resign
or shall have been removed in the manner hereinafter provided.
SECTION 3.06 Meetings.
(a) Place and Manner of Meetings. The Board may hold any of its meetings at
such place or places within or without the State of Delaware as the Board may
from time to time by resolution designate or as shall be designated by the
person or persons calling the meeting or in the notice or a waiver of notice of
any such meeting. Directors may participate in any regular or special meeting of
the Board by means of conference telephone or similar communications equipment
pursuant to which all persons participating in the meeting of the Board can hear
each other, and such participation shall constitute presence in person at such
meeting.
(b) First Meeting. The Board shall meet as soon as practicable after each
annual election of directors and notice of such first meeting shall not be
required.
(c) Regular Meetings. Regular meetings of the Board may be held at such
times as the Board shall from time to time by resolution determine. If any day
fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting shall be held at the same hour and place
on the next succeeding business day not a legal holiday. Except as provided by
law, notice of regular meetings need not be given.
(d) Special Meetings. Special meetings of the Board shall be held whenever
called by any officer of the Corporation or a majority of the appointed
directors. Except as otherwise provided by law or by these bylaws, notice of the
time and place of each such special meeting shall be mailed to each director,
addressed to him at his residence or usual place of business, at least five (5)
days before the day on which the meeting is to lie held, or shall be sent to him
at such place by telecopy, telegraph, cable, or wireless, or be delivered
personally not less than forty-eight (48) hours before the time at which the
meeting is to be held. Except where otherwise required by law or by these
bylaws, notice of the purpose of a special meeting need not be given. Notice of
any meeting of the Board shall not be required to be given to any director who
is present at such meeting, except a director who shall attend such meeting for
the express purpose of objecting, at the beginning of the
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meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
SECTION 3.07 Quorum and Manner of Acting. Except as otherwise provided in
these bylaws or by law, the presence of a majority of the authorized number of
directors shall be required to constitute a quorum for the transaction of
business at any meeting of the Board, and all matters shall be decided at any
such meeting, a quorum being present, by the affirmative votes of a majority of
the directors present. In the absence of a quorum, a majority of directors
present at any meeting may adjourn the same from time to time until a quorum
shall be present. Notice of any adjourned meeting need not be given. The
directors shall act only as a Board, and the individual directors shall have no
power as such.
SECTION 3.08 Action by Consent. Any action required or permitted to be
taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
SECTION 3.09 Removal of Directors. Subject to the provisions of the
Certificate of Incorporation, any director may be removed at any time, either
with or without cause, by the affirmative vote of the stockholders having a
majority of the voting power of the Corporation given at a special meeting of
the stockholders called for the purpose.
SECTION 3.10 Compensation. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution of
the Board. The Board may also provide that the Corporation shall reimburse each
such director for any expense incurred by him on account of his attendance at
any meetings of the Board or Committees of the Board. Neither the payment of
such compensation nor the reimbursement of such expenses shall be construed to
preclude any director from serving the Corporation or its subsidiaries in any
other capacity and receiving compensation therefor.
SECTION 3.11 Committees. The Board may, by resolution passed by a majority
of the whole Board, designate one or more committees, each committee to consist
of one or more of the directors of the Corporation. Any such committee, to the
extent provided in the resolution of the Board and except as otherwise limited
by law, shall have and may exercise all the powers and authority of the Board in
the management of the business and affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it.
Any such
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committee shall keep written minutes of its meetings and report the same to the
Board at the next regular meeting of the Board. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board to
act at the meeting in the place of any such absent or disqualified member.
ARTICLE IV
Officers
SECTION 4.01 Number. The Board shall elect a President, a Secretary and a
Treasurer and it may, if it so determines, choose a Chairman of the Board from
among its members. The Board may also choose one or more Vice Presidents, one or
more Assistant Secretaries and one or more Assistant Treasurers.
SECTION 4.02 Election, Term of Office and Qualifications. The officers of
the Corporation, except such officers as may be appointed in accordance with
Section 4.03, shall be elected annually by the Board at the first meeting
thereof held after the election thereof. Each officer shall hold office until
his successor shall have been duly chosen and shall qualify or until his
resignation or removal in the manner hereinafter provided.
SECTION 4.03 Assistant, Agents and Employees, Etc. In addition to the
officers specified in Section 4.01, the Board may appoint other assistants,
agents and employees as it may deem necessary or advisable, including one or
more Assistant Secretaries, and one or more Assistant Treasurers, each of whom
shall hold office for such period, have such authority, and perform such duties
as the Board may from time to time determine. The Board may delegate to any
officer of the Corporation or any committee of the Board the power to appoint,
remove and prescribe the duties of any such assistants, agents or employees.
SECTION 4.04 Removal. Any officer, assistant, agent or employee of the
Corporation may be removed, with or without cause, at any time: (i) in the case
of an officer, assistant, agent or employee appointed by the Board, only by
resolution of the Board; and (ii) in the case of an officer, assistant, agent or
employee, by any officer of the Corporation or committee of the Board upon whom
or which such power of removal may be conferred by the Board.
SECTION 4.05 Resignations. Any officer or assistant may resign at any time
by giving written notice of his resignation to the Board or the Secretary of the
Corporation. Any such resignation shall take effect at the
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time specified therein, or, if the time be not specified, upon receipt thereof
by the Board or the Secretary, as the case may be; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 4.06 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or other cause, may be filled for the
unexpired portion of the term thereof in the manner prescribed in these bylaws
for regular appointments or elections to such office.
SECTION 4.07 The President. The President of the Corporation, subject to
the direction and control of the Board, shall have general charge of the
business and affairs of the Corporation and over its several officers,
assistants, agents and employees, and may assign such duties to the other
officers of the Corporation as he shall deem appropriate.
SECTION 4.08 The Chief Executive Officer. The Chief Executive Officer shall
be responsible for long-term planning and oversight of the growth and
development of the Corporation's business.
SECTION 4.09 The Chief Operating Officer. The Chief Operating Officer shall
be responsible for management and supervision of day-to-day operations of the
Corporation. In the absence of a President, the Chief Operating Officer shall
perform the duties of the President and, when so acting, shall have all the
powers of, and be subject to all the restrictions upon, the President.
SECTION 4.10 The Chief Financial Officer. The Chief Financial Officer shall
be responsible for management and supervision of the financial affairs of the
Corporation.
SECTION 4.11 The Vice Presidents. Each Vice President shall have such
powers and perform such duties as the Board may from time to time prescribe.
SECTION 4.12 The Secretary. The Secretary shall keep the records of all
meetings of stockholders, the Board and of all committees of which a secretary
shall not have been appointed in one or more books provided for that purpose; he
shall see that all notices are duly given in accordance with these bylaws and as
required by law; he shall be custodian of the seal of the Corporation and shall
affix and attest the seal to all documents to be executed on behalf of the
Corporation under its seal; and, in general, he shall perform all the duties
incident to the office of Secretary and such other duties as may from time to
time be assigned to him by the Board.
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SECTION 4.13 The Assistant Secretary. The Assistant Secretary shall have
such powers and perform such duties as the Board may from time to time
prescribe.
SECTION 4.14 The Treasurer. The Treasurer shall have the general care and
custody of the funds and securities of the Corporation, and shall deposit all
such funds in the name of the Corporation in such banks, trust companies or
other depositories as shall be selected by the Board. He shall receive, and give
receipts for, moneys due and payable to the Corporation from any source
whatsoever. He shall exercise general supervision over expenditures and
disbursements made by officers, agents and employees of the Corporation and the
preparation of such records and reports in connection therewith as may be
necessary or desirable. He shall, in general, perform all other duties incident
to the office of Treasurer and such other duties as from time to time may be
assigned to him by the Board, and shall report to and take direction from the
Chief Financial Officer.
SECTION 4.15 Compensation. The compensation of the officers of the
Corporation shall be fixed from time to time by the Board. None of such officers
shall be prevented from receiving such compensation by reason of the fact that
he is also a director of the Corporation. Nothing contained herein shall
preclude any officer from serving the Corporation, or any subsidiary
corporation, in any other capacity and receiving such compensation by reason of
the fact that he is also a director of the Corporation. Nothing contained herein
shall preclude any officer from serving the Corporation, or any subsidiary
corporation, in any other capacity and receiving proper compensation therefor.
ARTICLE V
Contracts, Checks, Drafts, Bank Accounts, Etc.
SECTION 5.01 Execution of Contracts. Any officer or officers may enter into
any contract or execute any instrument in the name of and on behalf of the
Corporation where such contract or instrument does not involve an amount in
excess of twenty-five thousand dollars ($25,000) for any single contract or
engagement. The Board, except as in these bylaws otherwise provided, may
authorize any officer or officers, agent or agents, to enter into any other
contract or execute any other instrument in the name of and on behalf of the
Corporation, and such authority may be general or confined to specific
instances. Unless so authorized by the Board or by these bylaws, no officer,
agent or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or in any
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amount in excess of twenty-five thousand dollars ($25,000) for any single
contract or engagement
SECTION 5.02 Checks Drafts Etc. All checks, drafts or other orders for
payment of money, notes or other evidence of indebtedness, issued in the name of
or payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such officer, assistant, agent or attorney shall
give such bond, if any, as the Board may require.
SECTION 5.03 Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board may select, or as may
be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the purpose
of collection for the account of the Corporation, the President, any Vice
President or the Treasurer (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation.
SECTION 5.04 General and Special Bank Accounts. The Board may from time to
time authorize the opening and keeping of general and special bank accounts with
such banks, trust companies or other depositories as the Board may select or as
may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. The Board may make such special rules and
regulations with respect to such bank accounts, not inconsistent with the
provisions of these bylaws, as it may deem expedient.
ARTICLE VI
Shares and Their Transfer
SECTION 6.01 Certificates for Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by him. The certificates
representing shares of such stock shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
President or a Vice President, and by the Secretary or an
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Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any of or all
of the signatures on the certificates may be a facsimile. In case any officer,
transfer agent or registrar who has signed, or whose facsimile signature has
been placed upon, any such certificate, shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, such certificate
may nevertheless be issued by the Corporation with the same effect as though the
person who signed such certificate, or whose facsimile signature shall have been
placed thereupon, were such officer, transfer agent or registrar at the date of
issue. A record shall be kept of the respective names of the persons, firms or
corporations owning the stock represented by such certificates, the number and
class of shares represented by such certificates, respectively, and the
respective dates thereof, and in case of cancellation, the respective dates of
cancellation. Every certificate surrendered to the Corporation for exchange or
transfer shall be canceled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so canceled, except in cases provided for in Section 6.04.
SECTION 6.02 Transfers of Stock. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary, or with a transfer clerk or a
transfer agent appointed as provided in Section 6.03, and upon surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all taxes thereon. The person in whose name shares of stock stand on the books
of the Corporation shall be deemed the owner thereof for all purposes as regards
the Corporation.
SECTION 6.03 Regulations. The Board may make such rules and regulations as
it may deem expedient, not inconsistent with these bylaws, concerning the issue,
transfer and registration of certificates for shares of the stock of the
Corporation. It may appoint, or authorize any officer or officers to appoint,
one or more transfer clerks or one or more transfer agents and one or more
registrars, and may require all certificates for stock to bear the signature or
signatures of any of them.
SECTION 6.04 Lost, Stolen, Destroyed and Mutilated Certificates. In any
case of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft, destruction,
or mutilation and upon the giving of a bond of indemnity to the Corporation in
such form and in such sum as the Board may direct; provided, however, that a
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new certificate may be issued without requiring any bond when, in the judgment
of the Board, it is proper so to do.
SECTION 6.05 Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any other change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any other action. If in any case involving the determination of
stockholders for any purpose other than notice of or voting at a meeting of
stockholders or expressing consent to corporate action without a meeting the
Board shall not fix such a record date, the record date for determining
stockholders for such purpose shall be the close of business on the day on which
the Board shall adopt the resolution relating thereto. A determination of
stockholders entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of such meeting; provided, however, that the Board may
fix a new record date for the adjourned meeting.
SECTION 6.06 Terms of Preferred Stock. Each share of preferred stock shall
have the right to cumulative dividends. Any and all dividends in arrears shall
accrue interest, compounded annually, at a rate of prime plus three percent
(3%). Each share of preferred stock shall have preference over common stock in
the event of liquidation or redemption. Each share shall have voting rights
limited to issues which affect the terms and conditions of such share, except as
to any additional rights specified by resolution or resolutions of the Board of
Directors. Each share of preferred stock may also have such other voting rights,
designations, preferences, dividend rights and other special rights,
qualifications, limitations and restrictions as shall be stated and expressed in
a resolution or resolutions of the Board of Directors and filed with the
Delaware Secretary of State in accordance with the Delaware General Corporation
Law.
ARTICLE VII
Indemnification
SECTION 7.01 Action. Etc. Other Than by or in the Right of the Corporation.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
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action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, that he had reasonable cause to believe that his conduct was
unlawful.
SECTION 7.02 Actions Etc. by or in the Right of the Corporation. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
SECTION 7.03 Determination of Right of Indemnification. Any indemnification
under Section 7.01 or 7.02 (unless ordered by a court) shall be made by the
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Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 7.01 and 7.02. Such determination shall be made (i) by the Board by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders.
SECTION 7.04 Indemnification Against Expenses of Successful Party.
Notwithstanding the other provisions of this Article, to the extent that a
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in Section 7.01 or 7.02, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys fees) actually and
reasonably incurred by him in connection therewith.
SECTION 7.05 Prepaid Expenses. Expenses (including attorneys' fees)
incurred by an officer or director in defending a civil or criminal action, suit
or proceeding may be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board in the
specific case upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation as authorized in this Article.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board deems appropriate.
SECTION 7.06 Other Rights and Remedies. The indemnification provided by
this Article shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any bylaws, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 7.07 Insurance. Upon resolution passed by the Board, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation,
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partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article.
SECTION 7.08 Constituent Corporations. For the purposes of this Article,
references to "the Corporation" include all constituent corporations absorbed in
a consolidation or merger as well as the resulting or surviving corporation, so
that any person who is or was a director, officer, employee or agent of such a
constituent corporation or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as he would if he had served the resulting or surviving
corporation in the same capacity.
SECTION 7.09 Other Enterprises, Fines, and Serving at Corporation's
Request. For purposes of this Article, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
ARTICLE VIII
Miscellaneous
SECTION 8.01 Seal. The Board shall provide a corporate seal, which shall be
in the form of a circle and shall bear the name of the Corporation and words and
figures showing that the Corporation was incorporated in the State of Delaware
and the year of incorporation.
SECTION 8.02 Waiver of Notices. Whenever notice is required to be given by
these bylaws or the Certificate of Incorporation or by law, the person entitled
to said notice may waive such notice in writing, either before or
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after the time stated therein, and such waiver shall be deemed equivalent to
notice.
SECTION 8.03 Amendments. These bylaws, or any of them, may be altered,
amended or repealed, and new bylaws may be made, (i) by the Board, by vote of a
majority of the number of directors then in office as directors, acting at any
meeting of the Board, or (ii) by the stockholders, at any annual meeting of
stockholders, without previous notice, or at any special meeting of
stockholders, provided that notice of such proposed amendment, modification,
repeal or adoption is given in the notice of special meeting. Any bylaws made or
altered by the stockholders may be altered or repealed by either the Board or
the stockholders.
16
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE
TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR (ii)
RECEIPT BY THE ISSUER OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN
CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY
APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE
ISSUED IN EXCHANGE FOR THIS NOTE.
HEURISTIC DEVELOPMENT GROUP, INC.
No. $
PROMISSORY NOTE
Heuristic Development Group, Inc., a Delaware corporation (the "Company"),
for value received, hereby promises to pay to ______ or registered assigns (the
"Payee") on the earlier of the closing date of the public offering of securities
by the Company contemplated in the Confidential Term Sheet dated October 18,
1996 or December 2, 1997 (the "Maturity Date") at the offices of the Company,
17575 Pacific Coast Highway, Pacific Palisades, California 90272, the principal
amount of ______ ($____), including interest at the rate of ten percent (10%)
per annum accrued through the Maturity Date, in such coin or currency of the
United States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
This Note is issued pursuant to a Subscription Agreement dated as of
December 2, 1996, between the Company and the Payee (the "Subscription
Agreement"), a copy of which agreement is available for inspection at the
Company's principal office. Notwithstanding any provision to the contrary
contained herein, this Note is subject and entitled to certain terms,
conditions, covenants and agreements contained in the Subscription Agreement.
Any transferee or transferees of the Note, by their acceptance hereof, assume
the obligations of the Payee in the Subscription Agreement with respect to the
conditions and procedures for transfer of the Note. Reference to the
Subscription Agreement shall in no way impair the absolute and unconditional
obligation of the Company to pay both principal and interest hereon as provided
herein.
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1. Prepayment
A. The principal amount of this Note may be prepaid by the Company, in
whole or in part, without penalty, at any time.
2. Covenants of Company
A. The Company covenants and agrees that, so long as this Note shall be
outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments, and
governmental charges or levies imposed upon the Company or upon its income
and profits, or upon any of its property, before the same shall become in
default, as well as all lawful claims for labor, materials and supplies
which, if unpaid, might become a lien or charge upon such properties or any
part thereof; provided, however, that the Company shall not be required to
pay and discharge any such tax, assessment, charge, levy or claim so long
as the validity thereof shall be contested in good faith by appropriate
proceedings and the Company shall set aside on its books adequate reserves
with respect to any such tax, assessment, charge, levy or claim so
contested;
(ii) Do or cause to be done all things reasonably necessary to
preserve and keep in full force and effect its corporate existence, rights
and franchises and comply with all laws applicable to the Company, except
where the failure to comply would not have a material adverse effect on the
Company;
(iii) At all times reasonably maintain, preserve, protect and keep its
property used or useful in the conduct of its business in good repair,
working order and condition, and from time to time make all needful and
proper repairs, renewals, replacements, betterments and improvements
thereto as shall be reasonably required in the conduct of its business;
(iv) To the extent necessary for the operation of its business, keep
adequately insured by all financially sound reputable insurers, all
property of a character usually insured by similar corporations and carry
such other insurance as is usually carried by similar corporations; and
(v) At all times keep true and correct books, records and accounts.
(vi) Except for the incurrence of any indebtedness (including without
limitation, the incurrence of any guarantee or contingent payment
obligation with respect thereto) secured by a lien, mortgage or guarantee
on the property (whether real or personal) or equipment of the Company and
any refinancings or replacements thereto or trade debt incurred in the
ordinary course of business, not incur any indebtedness whatsoever which
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indebtedness does not expressly provide that it is wholly subordinated in right
of payment to the indebtedness evidenced by this Note and any identical Notes
issued pursuant to the Term Sheet.
3. Events of Default
A. This Note shall become and be due and payable upon written demand made
by the holder hereof if one or more of the following events, herein called
events of default, shall happen and be continuing:
(i) Default in the payment of the principal and accrued interest on
any of the Notes issued pursuant to the Term Sheet when and as the same
shall become due and payable, whether by acceleration or otherwise;
(ii) Default in the due observance or performance of any material
covenant, condition or agreement on the part of the Company to be observed
or performed pursuant to the terms hereof and such default shall continue
uncured for thirty (30) days after written notice thereof, specifying such
default, shall have been given to the Company by the holder of the Note;
(iii) Default in the payment of any outstanding indebtedness in excess
of $25,000 principal amount or in the due observance or performance of any
material covenant, condition or agreement on the part of the Company with
respect to any outstanding indebtedness with the result that such
outstanding indebtedness shall become due and payable prior to the due date
otherwise specified therefor and such default shall continue uncured or
such acceleration shall not be rescinded or annulled within thirty (30)
days after written notice thereof to the Company from the holder of this
Note;
(iv) Application for, or consent to, the appointment of a receiver,
trustee or liquidator of the Company or of its property;
(v) Admission in writing of the Company's inability to pay its debts
as they mature;
(vi) General assignment by the Company for the benefit of creditors;
(vii) Filing by the Company of a voluntary petition in bankruptcy or a
petition or an answer seeking reorganization, or an arrangement with
creditors;
(viii) Entering against the Company of a court order approving a
petition filed against it under the Federal bankruptcy laws, which order
shall not have been vacated or set aside or otherwise terminated within
sixty (60) days;
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(ix) The sale by the Company of substantially all of its assets; or
(x) The merger by the Company with or into another corporation, other
than for purposes of changing domicile, where the Company is not the
surviving corporation; or
(xi) A material breach of the Company's representations contained in
the Subscription Agreement.
B. The Company agrees that notice of the occurrence of any event of default
will be promptly given to the holder at his or her registered address by
certified mail.
C. Subject to the provisions of 4(B) hereof, in case any one or more of the
events of default specified above shall happen and be continuing, the holder of
this Note may proceed to protect and enforce his rights by suit in the specific
performance of any covenant or agreement contained in this Note or in aid of the
exercise of any power granted in this Note or may proceed to enforce the payment
of this Note or to enforce any other legal or equitable rights as such holder.
4. Amendments and Waivers
A. Subject to the provisions of 4(C) and (D) hereof, the covenants set
forth in 2(A) hereof may be waived by the written consent of the holders of a
majority in outstanding principal amount of the Notes issued pursuant to the
Term Sheet.
B. Subject to the provisions of 4(C) and (D) hereof, the events of default
set forth in clauses (i), (ii), (iii) and (xi) of 3(A) hereof may be waived by
the written consent of the holders of a majority in outstanding principal amount
of the Notes issued pursuant to the Term Sheet.
C. The Company may amend or supplement this Note with the written consent
of the holders of a majority in outstanding principal amount of the Notes issued
pursuant to the Term Sheet; provided, however, that without the consent of each
Noteholder, no amendment, supplement or waiver may:
1. reduce the principal amount of Notes whose holders must
consent to any amendment, supplement or waiver;
2. reduce the rate of interest or principal of the Note;
3. extend the maturity date of the Note or the time for payment
of interest by more than one year from the respective date(s) set
forth herein.
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D. After any waiver, amendment or supplement under this section becomes
effective, the Company shall mail to the holders of the Notes a notice briefly
describing such waiver, amendment or supplement.
5. Miscellaneous
A. The Company may consider and treat the person in whose name this Note
shall be registered as the absolute owner thereof for all purposes whatsoever
(whether or not this Note shall be overdue) and the Company shall not be
affected by any notice to the contrary. The registered owner of this Note shall
have the right to transfer it by assignment (subject to the limitations on
transfer contained in the Subscription Agreement) and the transferee thereof
shall, upon his registration as owner of this Note, become vested with all the
powers and rights of the transferor. Registration of any new owner shall take
place upon presentation of this Note to the Company at its offices, 17575
Pacific Coast Highway, Pacific Palisades, California 90272, together with a duly
authenticated assignment. In case of transfer by operation of law, the
transferee agrees to notify the Company of such transfer and of his address, and
to submit appropriate evidence regarding the transfer so that this Note may be
registered in the name of the transferee. This Note is transferable only on the
books of the Company by the holder hereof, in person or by attorney, on the
surrender hereof, duly endorsed. Communications sent to any registered owner
shall be effective as against all holders or transferees of the Note not
registered at the time of sending the communication.
B. Payments of interest shall be made as specified above to the registered
owner of this Note. Payment of principal and interest shall be made to the
registered owner of this Note upon presentation of this Note upon or after
maturity.
C. This Note shall be construed and enforced in accordance with the laws of
the State of New York.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
name by its President.
HEURISTIC DEVELOPMENT GROUP, INC.
By:
--------------------------------
Gregory L. Zink, President
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WARRANT AGREEMENT
AGREEMENT, dated as of this 2nd day of December, 1996, by and among
HEURISTIC DEVELOPMENT GROUP, INC., a Delaware corporation (the "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 a private placement (the "Private Placement")
of a minimum of ten (10) and a maximum of twenty (20) units ("Units") each Unit
consisting of $50,000 principal amount of 10% Promissory Notes ("Notes"), and
25,000 common stock purchase warrants ("Warrants"), each Warrant exercisable to
purchase one share of the Company's Common Stock, $.01 par value, the Company
will issue up to 500,000 Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any class, whether
now or hereafter authorized, which has the right to participate in the
distributions of earnings and assets of the Company without limit as to amount
or percentage, which at the date hereof consists of 20,000,000 authorized shares
of Common Stock, $.01 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, New
York, New York.
(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
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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 December 2, 1997.
(e) "Purchase Price" shall mean the purchase price to be paid upon exercise
of each Warrant in accordance with the terms hereof, which price shall be $3.00
per share subject to (i) adjustment from time to time pursuant to the provisions
of Section 8 hereof or (ii) conversion of the Warrants pursuant to the
provisions of Section 9 hereof, and subject to the Company's right to reduce the
Purchase Price upon notice to all warrantholders.
(f) "Registered Holder" shall mean the person in whose name any certificate
representing Warrants shall be registered on the books maintained by the Warrant
Agent pursuant to Section 6.
(g) "Transfer Agent" shall mean American Stock Transfer & Trust Company, as
the Company's transfer agent, or its authorized successor, as such.
(h) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on
December 2, 1998; provided that if such date shall in the State of New York be a
holiday or a day on which banks are authorized to close, then 5:00 P.M. (New
York time) on the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close. Upon notice to all
warrantholders the Company shall have the right to extend the Warrant Expiration
Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) A Warrant shall initially 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 8.
(b) From time to time, up to the Warrant Expiration Date, the Transfer
Agent shall execute and deliver stock certificates in required whole number
denominations representing up to an aggregate of 500,000 shares of Common Stock,
subject to adjustment as described herein, upon the exercise of Warrants in
accordance with this Agreement.
(c) From time to time, up to the Warrant Expiration Date, the Warrant Agent
shall execute 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
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exchange pursuant to Section 6; (iv) those issued in replacement of lost,
stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7; and
(v) at the option of the Company, in such form as may be approved by the its
Board of Directors, to reflect (a) any adjustment or change in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, made pursuant to Section 8 hereof and (b) other modifications approved
by Warrantholders in accordance with Section 16 hereof.
(d) In the event of an initial public offering of the Company's securities,
the provisions of Section 9 hereof will govern in certain circumstances
described therein.
SECTION 3. Form and Execution of Warrant Certificates. (a) The Warrant
Certificates shall be substantially in the form annexed hereto as Exhibit A (the
provisions of which are hereby incorporated herein) and may have such letters,
numbers or other marks of identification or designation and such legends,
summaries or endorsements printed, lithographed, engraved or typed thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any law or with any rule
or regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Warrants may be listed, or to conform to usage. The
Warrant Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen, or
destroyed Warrant Certificates) and issued in registered form. Warrants shall be
numbered serially with the letter W.
(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. In
case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer of the Company before the date of
issuance of the Warrant Certificates and issue and delivery thereof, such
Warrant Certificates may nevertheless be issued and delivered with the same
force and effect as though the person who signed such Warrant Certificates had
not ceased to be such officer of the Company. After execution by the Company,
Warrant Certificates shall be delivered by the Warrant Agent to the Registered
Holder.
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 upon exercise thereof 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 promptly after clearance of checks received in payment of the
Purchase Price pursuant to such Warrants, cause to be issued
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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 certificate for any remaining unexercised Warrants
of the Registered Holder). 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, certificates
shall immediately be issued without 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 to the Company or as the Company may direct in
writing.
(b) If on the Exercise Date in respect of the exercise of any Warrant, (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"), (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 receipt of the proceeds upon
exercise of the Warrant(s) so exercised shall pay from the proceeds received
upon exercise of the Warrant(s), a fee of 5% of the Purchase Price to Blair (of
which a portion may be reallowed to the dealer who solicited the exercise).
Within five days after exercise the Warrant Agent shall send 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). In addition, Blair 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. Market price shall be determined in accordance
with the provisions of Section 10.
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 and
payment of the Purchase Price 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).
(b) The Company will use reasonable efforts to obtain appropriate approvals
or registrations under state "blue sky" securities laws with respect to the
exercise of the Warrants; provided, however, that the Company shall not be
obligated to file any general consent to service of process or qualify as a
foreign corporation in any jurisdiction. With respect to any such securities
laws, 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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(c) The Company shall pay all documentary, stamp or similar taxes and other
governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance, or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to requisition the
Company's Transfer Agent from time to time for certificates representing shares
of Common Stock required upon exercise of the Warrants, and the Company will
authorize the Transfer Agent to comply with all such proper requisitions.
SECTION 6. Exchange and Registration of Transfer.
Subject to the restrictions on transfer contained in the Warrant
Certificates and the Subscription Agreements between the Company and the
purchasers of Units:
(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
its 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 of
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,
duly executed by the Registered Holder or his attorney-in-fact duly authorized
in writing.
(d) The Company may require payment by such holder of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange in
case of mutilated Warrant Certificates shall be promptly cancelled by the
Warrant Agent and
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<PAGE>
thereafter retained by the Warrant Agent until termination of this Agreement or
resignation of the 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.
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 bonafide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Adjustment of Exercise Price and Number of Shares of Class A
Common Stock or Warrants.
(a) Subject to the exceptions referred to in Section 8(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
current fair market value per share of the Common Stock 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
8(f)(F) below), if any, for the issuance of such additional shares would
purchase at such current market price per share of Common Stock, 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.
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Upon each adjustment of the Purchase Price pursuant to this Section 8, the
total number of shares of Common Stock purchasable upon the exercise of each
Warrant shall (subject to the provisions contained in Section 8(b) hereof) be
such number of shares (calculated to the nearest tenth) purchasable at the
Purchase Price immediately prior to such adjustment multiplied by a fraction,
the numerator of which shall be the Purchase Price in effect immediately prior
to such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase Price
hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the exercise
of each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock.
Each Warrant held of record prior to such adjustment of the number of Warrants
shall become that number of Warrants (calculated to the nearest tenth)
determined by multiplying the number one by a fraction, the numerator of which
shall be the Purchase Price in effect immediately prior to such adjustment and
the denominator of which shall be the Purchase Price in effect immediately after
such adjustment. Upon each adjustment of the number of Warrants pursuant to this
Section 8, 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 8. 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.
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(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(b) hereof, continue to express the Purchase Price per share and the number of
shares purchasable thereunder as the Purchase Price per share, and the number of
shares purchasable were expressed in the Warrant Certificates when the same were
originally issued.
(e) After each adjustment of the Purchase Price pursuant to this Section 8,
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 brief statement of the facts accounting
for such adjustment. The Company will promptly file such certificate with the
Warrant Agent and cause a brief summary thereof to be sent by ordinary first
class mail to 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 affidavit of an officer of the Warrant Agent or the Secretary or
an Assistant Secretary of the Company that such notice has been mailed shall, in
the absence of fraud, be prima facie evidence of the facts stated therein.
(f) For purposes of Section 8(a) and 8(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 such
price; provided that any adjustments which by reason of this clause (B) are
not required to be made shall be carried forward and shall be made at the
time of and together with the next subsequent adjustment which, together
with any adjustment(s) so carried forward, shall require an increase or
decrease of at least $.10 in the Purchase Price then in effect hereunder.
(C) In case of (1) the sale by the Company for cash of any rights or
warrants to subscribe for or purchase, or any options for the purchase of,
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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 convertible or exchangeable securities 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 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, 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 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
8(a) and 8(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 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
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purposes of Sections 8(a) and 8(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
(E) If the exercise or purchase price provided for in any right,
warrant or option referred to in (C) above, or the rate at which any
Convertible Securities referred to in (C) or (D) above are convertible into
or exchangeable for Common Stock, shall change at any time (other than
under or by reason of provisions designed to protect against dilution), the
Purchase Price then in effect hereunder shall forthwith be readjusted to
such Purchase Price as would have obtained (1) 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, (2) had adjustments been made on the basis of the Purchase
Price as adjusted under clause (1) 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, and (3) had any
such rights, warrants, options or Convertible Securities then still
outstanding been originally issued or sold at the time of such change. 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, the
Purchase Price then in effect hereunder shall forthwith be readjusted to
such Purchase Price as would have obtained (a) had the adjustments made
upon the issuance or sale of such rights, warrants, options or Convertible
Securities been made upon the basis of the issuance of only the number of
shares of Common Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such rights, warrants
or options or upon the conversion or exchange of such Convertible
Securities and (b) had adjustments been made on the basis of the Purchase
Price as adjusted under clause (a) for all transactions (which would have
affected such adjusted Purchase Price) made after the issuance or sale of
such rights, warrants, options or Convertible Securities.
(F) In case of the sale for cash of any shares of Common Stock, any
Convertible Securities, any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, the consideration received by the Company therefore shall be
deemed to be the gross sales price therefor without deducting therefrom any
expense paid or incurred by the Company or any underwriting discounts or
commissions or concessions paid or allowed by the Company in connection
therewith.
(g) No adjustment to the Purchase Price of the Warrants or to the number of
shares of Common Stock purchasable upon the exercise of each Warrant will be
made, however,
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(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 grant or exercise of any other options which may
hereafter be granted or exercised under the Plan or under any other
employee benefit plan of the Company; or
(iii) upon the sale or exercise of the Warrants or any other Warrants
issued by the Company; or
(iv) upon the issuance of any shares of Common Stock or warrants sold
to the public or the underwriter in the Company's initial public offering,
or upon exercise of warrants comprising or underlying any Units sold in the
Company's initial public offering, including any shares or warrants
underlying the underwriter's warrants or unit purchase option; 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; or
(vii) upon any amendment to or change in the terms of any rights or
warrants to subscribe for or purchase, or options for the purchase of,
Common Stock or Convertible Securities or in the terms of any Convertible
Securities, including, but not limited to, any extension of any expiration
date of any such right, warrant or option, any change in any exercise or
purchase price provided for in any such right, warrant or option, any
extension of any date through which any Convertible Securities are
convertible into or exchangeable for Common Stock or any change in the rate
at which any Convertible Securities are convertible into or exchangeable
for Common Stock (other than rights, warrants, options or Convertible
Securities issued or sold after the close of business on the date of the
original issuance of the Warrants (i) for which an adjustment in the
Purchase Price then in effect was theretofore made or required to be made,
upon the issuance or sale thereof, or (ii) for which such an adjustment
would have been required had the exercise or purchase price of such rights,
warrants or options at
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<PAGE>
the time of the issuance or sale thereof or the rate of conversion or
exchange of such Convertible Securities, at the time of the sale of such
Convertible Securities, or the issuance or sale of rights or warrants to
subscribe for or purchase, or options for the purchase of, such Convertible
Securities, been the price or rate as changed, in which case the provisions
of Section 8(f)(E) hereof shall be applicable if, but only if, the exercise
or purchase price thereof, as changed, or the rate of conversion or
exchange thereof, as changed, consists of cash or requires the payment of
additional consideration, if any, consisting of cash and the Company did
not receive any consideration other than cash, if any, in connection with
such change).
(viii) upon the stock split and recapitalization contemplated in the
Confidential Term Sheet dated October 18, 1996 to be effected on or before
the initial closing of the Private Placement and effectiveness of the IPO
(as defined below), respectively.
(h) As used in this Section 8, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date of the original issue
of the Units and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Certificate of Incorporation as Common Stock on the
date of the original issue of the Units or (i), in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Section 8(c) hereof, the stock, securities or property
provided for in such section or (ii), in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or consisting of a change
in par value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the Purchase Price in
effect hereunder is required pursuant to Section 8, or as to the amount of any
such adjustment, if required, shall be binding upon the holders of the Warrants
and the Company if made in good faith by the Board of Directors of the Company.
(j) If and whenever the Company shall declare any dividends or
distributions or 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 notify each
of the then Registered Holders of the Warrants of such event prior to its
occurrence to enable such Registered Holders to exercise their Warrants and
participate as holders of Common Stock in such event.
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SECTION 9. Conversion of Warrants and Registration Under The Securities Act
of 1933.
(a) In the event the Company consummates an initial public offering of its
securities ("IPO") through the Placement Agent, and the securities offered in
the IPO include warrants which are exercisable to purchase common stock ("Class
A Warrants"), the Warrants will be automatically converted on the closing date
of the IPO with no action needed on the part of the holder into Class A Warrants
with the identical terms as the Class A Warrants offered to the public, which
may be redeemed by the Company under certain conditions. On such closing date,
this Warrant Agreement shall terminate and the Class A Warrants into which the
Warrants convert will be governed by the warrant agreement covering the Class A
Warrants sold in the IPO.
(b) The Company agrees to register for resale (i) the Class A Warrants into
which the Warrants are exchangeable, (ii) the warrants issuable upon exercise
thereof, if any, (the "Class B Warrants") and the shares of Common Stock issued
or issuable upon exercise of the Class A and Class B Warrants under the
Securities Act of 1933, as amended (the "Act") contemporaneously with its
initial public offering as more fully set forth in Section IV of the
Subscription Agreement between the Company and each of the investors in the
Private Placement, subject to certain contractual restrictions applicable to the
Holder.
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 8 hereof, the Company shall
nevertheless 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 any exercise
hereof, 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 listed for
trading on the Nasdaq National Market System ("NMS"), the current market
value shall be the last reported sale price of the Common Stock on such
exchange on the last business day prior to the date of exercise of this
Warrant or if no such sale is made on such day or no closing sale price is
quoted, the average of the closing bid and asked prices for such day on
such exchange or system; or
(2) If the Common Stock is listed in the over-the-counter market
(other than on NMS) or admitted to unlisted trading privileges, the current
market value shall be the mean of the last reported bid and asked prices
reported 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>
(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, on 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 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 the Company
shall not 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 cancelled by it and retired.
The Warrant Agent shall also
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<PAGE>
cancel Common Stock following exercise of any or all of the Warrants represented
thereby or delivered to it for transfer, splitup, combination 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 account promptly to the Company with respect to
Warrants exercised and concurrently pay the Company, as provided in Section 4,
all moneys received by the Warrant Agent upon the exercise of such Warrants. The
Warrant Agent shall, upon request of the Company from time to time, deliver to
the Company such complete reports of registered ownership of the Warrants and
such complete records of transactions with respect to the Warrants and the
shares of Common Stock as the Company may request. The Warrant Agent shall also
make available to the Company and Blair for inspection by their agents or
employees, from time to time as either of them may request, such original books
of accounts and record (including original Warrant Certificates surrendered to
the Warrant Agent upon exercise of Warrants) as may be maintained by the Warrant
Agent in connection with the issuance and exercise of Warrants hereunder, such
inspections to occur at the Warrant Agent's office as specified in Section 17,
during normal business hours.
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 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,
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<PAGE>
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.
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. 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.
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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 may by supplemental agreement make any changes or
corrections in this Agreement (i) that it shall deem appropriate to cure any
ambiguity or to correct any defective or inconsistent provision or manifest
mistake or error herein contained; (ii) to reflect an increase in the number of
Warrants which are to be governed by this Agreement resulting from an increase
in the size of the Private Placement; or (iii) that it 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.
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 17575 Pacific Coast Highway, Pacific Palisades, CA
90272, Attention: Chief Executive Officer; if to the Warrant Agent, at its
Corporate Office and if to Blair, at D.H. Blair Investment Banking Corp., 44
Wall Street, New York, New York 10005, Attention: Martin A. Bell, Esq.
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 on the earlier to
occur of (i) the close of business on the Expiration Date of all the Warrants;
(ii) the closing date
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of an IPO which results in the conversion of the Warrants; or (iii) the date
upon which all Warrants have been exercised.
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.
HEURISTIC DEVELOPMENT GROUP, INC.
By: ___________________________
Gregory L. Zink, President
D.H. BLAIR INVESTMENT BANKING CORP.
By: ______________________________
Martin A. Bell, Vice Chairman and General
Counsel
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: _______________________________
Authorized Officer
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<PAGE>
THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED
UNTIL (1) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO, OR (2) RECEIPT BY THE ISSUER
OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT
THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES
LAWS.
No. Warrants
VOID AFTER December 2, 1998
WARRANT CERTIFICATE FOR PURCHASE
OF COMMON STOCK
HEURISTIC DEVELOPMENT GROUP, INC.
This certifies that FOR VALUE RECEIVED ________________________ or
registered assigns (the "Registered Holder") is the owner of the number of
Warrants ("Warrants") specified above. Each Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Certificate and the Warrant Agreement (as hereinafter defined), one fully
paid and nonassessable share of Common Stock, $.01 par value ("Common Stock") of
Heuristic Development Group, Inc., a Delaware corporation (the "Company") at any
time commencing December 2, 1997 and prior to 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 an
amount equal to $3.00 for each Warrant (the "Purchase Price") in lawful money of
the United States of America in cash or by official bank or certified check made
payable to Company. The Company may, at its election, reduce the Purchase Price.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated December 2, 1996
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 Warrant represented hereby are subject to
modification or adjustment.
A-1
<PAGE>
Each 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 Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or arrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on December
2, 1998. If such date shall in the State of New York be a holiday or a day on
which the banks are authorized to close, then the Expiration Date shall mean
5:00 P.M. (New York time) the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close. The Company
may, at its election, extend the Expiration Date.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any tax or other governmental
charge imposed in connection therewith, for registration of transfer of this
Warrant Certificate at such office, a new Warrant Certificate or Warrant
Certificates representing an equal aggregate number of Warrants will be issued
to the transferee in exchange therefor, subject to the limitations provided in
the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any 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.
Prior to due presentment for registration of transfer hereof, the Company
may deem and treat the Registered Holder as the absolute owner hereof and of
each Warrant represented hereby (notwithstanding any notations of ownership or
writing hereon made by anyone other than a duly authorized officer of the
Company) 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
this Warrant.
This Warrant will automatically convert into a like number of new warrants
under certain circumstances in the event the Company completes an initial public
offering of its securities having the terms and conditions specified in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
HEURISTIC DEVELOPMENT GROUP, INC.
Dated: December 2, 1996
By: _____________________________
Gregory L. Zink, President
By: ________________________
Deborah E. Griffin, Secretary
[seal]
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: _____________________________
A-3
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
__________________________
__________________________
__________________________
__________________________
[please print or type name and address]
and be delivered to
__________________________
__________________________
__________________________
__________________________
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
The undersigned represents that the exercise of the within Warrant 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.
---------------------------------
(Name of NASD Member if other
than D.H. Blair Investment
Banking Corp.)
A-4
<PAGE>
Dated: ______________________
X______________________
__________________
__________________
Address
______________________
Taxpayer Identification Number
______________________________
Signature Guaranteed
____________________
A-5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ___________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
__________________________
__________________________
__________________________
__________________________
[please print or type name and address]
_________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
____________________________________ _______________________________ Attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: ______________________
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 COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
A-6
WARRANT AGREEMENT
AGREEMENT, dated as of this ____th day of ___________, 199_, by and among
HEURISTIC DEVELOPMENT GROUP, INC., a Delaware 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" or the
"Underwriter").
W I T N E S S E T H
WHEREAS, in connection with a public offering of up to 1,380,000 units
("Units"), each unit consisting of one (1) share of the Company's Common Stock,
$.01 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
_______________, 199_ between the Company and Blair and 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 __________, 199_ (the "Unit
Purchase Options"), the Company may issue up to 1,500,000 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 1,500,000 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, pursuant to a private placement in December 1996, the Company
issued to the selling securityholders (the "Selling Securityholders") an
aggregate of 500,000 Class A Warrants and upon exercise of the Class A Warrants,
the Company may issue an addition 500,000 Class B Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the Registered Holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
<PAGE>
SECTION 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Aggregate Per Share Price" shall mean the Purchase Price per share
multiplied by the number of shares of Common Stock purchasable upon the exercise
of a Warrant.
(b) "Class A Aggregate Per Share Price" shall mean $6.50.
(c) "Class B Aggregate Per Share Price" shall mean $8.75.
(d) "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 20,000,000 shares of Common
Stock, $.01 par value.
(e) "Corporate Office" shall mean the office of the Warrant Agent (or its
successor) at which at any particular time its principal business shall be
administered, which office is located at the date hereof at 40 Wall Street, New
York, NewYork.
(f) "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.
(g) "Initial Warrant Exercise Date" shall mean as to each Class A Warrant
and Class B Warrant __________, 1997.
(h) "Market Price" shall mean 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.
(i) "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.
-2-
<PAGE>
(j) "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.
(k) "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.
(l) "Transfer Agent" shall mean American Stock Transfer & Trust Company, as
the Company's transfer agent, or its authorized successor, as such.
(m) "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 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
-3-
<PAGE>
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 7,000,000 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 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 to 120,000 Class A Warrants and
240,000 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.
-4-
<PAGE>
(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.
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 the Underwriter or
such other investment banks and brokerage houses as the Company shall approve in
writing to the Warrant Agent, certificates shall immediately be issued without
prior notice to the Company or any delay. Upon the exercise of any Warrant and
clearance of the funds received, the Warrant Agent shall promptly remit the
payment received for the Warrant (the "Warrant Proceeds") to the Company or as
the Company may direct in writing, subject to the provisions of Sections 4(b)
and 4(c) hereof.
(b) If, at the Exercise Date in respect of the exercise of any Warrant
after _____, 1998, (i) the market price of the Company's 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
-5-
<PAGE>
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
"Exercise Fee") of the Purchase Price to the Underwriter (of which a portion may
be reallowed by the Underwriter to the dealer who solicited the exercise, which
may also be the Underwriter or D.H. Blair & Co., Inc.). In the event the
Exercise Fee is not received within five days of the date on which the Company
receives Warrant Proceeds, then the Exercise Fee shall begin accruing interest
at an annual rate of prime plus four percent (4%), payable by the Company to the
Underwriter at the time the Underwriter receives the Exercise Fee. Within five
days after exercise the Warrant Agent shall send to the Underwriter a copy of
the reverse side of each Warrant exercised. The Underwriter 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 the
Underwriter, including legal fees, in connection with the solicitation,
redemption or exchange of the Warrants. In addition, the Underwriter 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 the
Underwriter.
(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 Exercise
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 Exercise
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 the Underwriter that the required
Exercise Fee has been received by the Underwriter.
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
-6-
<PAGE>
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.
(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
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<PAGE>
and deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for registration or
transfer, or for exchange or exercise, the subscription form on the reverse
thereof shall be duly endorsed, or be accompanied by a written instrument or
instruments of transfer and subscription, in form satisfactory to the Company
and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any exchange
or registration of transfer of Warrant Certificates. In addition, the Company
may require payment by such holder of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange in
case of mutilated Warrant Certificates shall be promptly cancelled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination of
this Agreement or resignation as Warrant Agent, or, with the prior written
consent of the Underwriter, 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.
-8-
<PAGE>
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 at any time after
____, 1998 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. 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 fifteen (15) days of the mailing of the Redemption
Notice. The date fixed for redemption of the Warrants is referred to herein as
the "Redemption Date". 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 the
Underwriter 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 the Underwriter 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 the Underwriter 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,
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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.
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) 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. For purposes of this Section 9, the Calculation Date shall mean the date
of the sale, issuance, modification or other transaction referred to in this
Section 9.
Upon each adjustment of the Purchase Price pursuant to this Section 9, the
total number of shares of Common Stock 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
(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
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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
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 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
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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
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 the Underwriter 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 Richard A. Eisner & Company 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 (G) 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
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such treasury shares shall not be considered a Change of Shares for
purposes of said sections.
(B) No adjustment of the Purchase Price shall be made unless such
adjustment would require an increase or decrease of at least $.10 in the
Purchase Price; provided that any adjustments which by reason of this
clause (B) are not required to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment
which, together with any adjustment(s) so carried forward, shall require an
increase or decrease of at least $.10 in the Purchase Price then in effect
hereunder.
(C) In case of (1) the sale by the Company for cash (or as a component
of a unit being sold for cash) of any rights or warrants to subscribe for
or purchase, or any options for the purchase of, Common Stock or any
securities convertible into or exchangeable for Common Stock without the
payment of any further consideration other than cash, if any (such
securities convertible, exercisable or exchangeable into Common Stock being
herein called "Convertible Securities"), or (2) the issuance by the
Company, without the receipt by the Company of any consideration therefor,
of any rights or warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or Convertible Securities, in each case, if
(and only if) the consideration payable to the Company upon the exercise of
such rights, warrants or options shall consist of cash, whether or not such
rights, warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such rights,
warrants or 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 on the Calculation Date, then the total maximum
number of shares of Common Stock issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such Convertible
Securities (as of the date of the issuance or sale of such rights, warrants
or options) shall be deemed to be outstanding shares of Common Stock for
purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
(D) In case of the sale by the Company for cash of any Convertible
Securities, whether or not the right of conversion or exchange thereunder
is
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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 on the Calculation Date, then the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of such
Convertible Securities (as of the date of the sale of such Convertible
Securities) shall be deemed to be outstanding shares of Common Stock for
purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
(E) In case the Company shall modify the rights of conversion,
exchange or exercise of any of the securities referred to in (C) or (D)
above or any other securities of the Company convertible, exchangeable or
exercisable for shares of Common Stock, for any reason other than an event
that would require adjustment to prevent dilution, so that the
consideration per share received by the Company after such modification is
less than the Market Price on the Calculation Date, 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.
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(F) In case of the sale for cash of any shares of Common Stock, any
Convertible Securities, any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, the consideration received by the Company therefore shall be
deemed to be the gross sales price therefor without deducting therefrom any
expense paid or incurred by the Company or any underwriting discounts or
commissions or concessions paid or allowed by the Company in connection
therewith.
(G) In case any event shall occur as to which the provisions of
Section 9 are not strictly applicable but the failure to make any
adjustment would not fairly protect the purchase rights represented by the
Warrants in accordance with the essential intent and principles of Section
9, then, in each such case, the Board of Directors of the Company shall in
good faith by resolution provide for the adjustment, if any, on a basis
consistent with the essential intent and principles established in Section
9, necessary to preserve, without dilution, the purchase rights represented
by the Warrants. The Company will promptly make the adjustments described
therein.
(g) No adjustment to the Purchase Price of the Warrants or to the number of
shares of Common Stock purchasable upon the exercise of each Warrant will be
made, however,
(i) upon the exercise of any of the options presently issued to
Deborah E. Griffin and Steven R. Gumins, or 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 underwriters in connection with such offering; or
(v) upon the sale by the Company of any shares of Common Stock and/or
Convertible Securities in a private placement for which the Underwriter is
the Placement Agent; or
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(vi) upon the issuance or sale of Common Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, whether or not such rights, warrants or options were
outstanding on the date of the original sale of the Warrants or were
thereafter issued or sold; or
(vii) upon the issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, whether or not any adjustment in
the Purchase Price was made or required to be made upon the issuance or
sale of such Convertible Securities and whether or not such Convertible
Securities were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold.
(h) As used in this Section 9, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date of the original issue
of the Units and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Certificate of Incorporation as Common Stock on the
date of the original issue of the Units or (i), in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities or property
provided for in such section or (ii), in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or consisting of a change
in par value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the Purchase Price in
effect hereunder is required pursuant to Section 9, or as to the amount of any
such adjustment, if required, shall be binding upon the holders of the Warrants
and the Company if made in good faith by the Board of Directors of the Company.
(j) If and whenever the Company shall grant to the holders of Common Stock,
as such, rights or warrants to subscribe for or to purchase, or any options for
the purchase of, Common Stock or securities convertible into or exchangeable for
or carrying a right, warrant or option to purchase Common Stock, the Company
shall concurrently therewith grant to each Registered Holder as of the record
date for such transaction of the Warrants then outstanding, the rights, warrants
or options to which each Registered Holder would have been entitled if, on the
record date used to determine the stockholders entitled to the rights, warrants
or options being granted by the Company, the Registered Holder were the holder
of record of the number of whole shares of Common Stock then issuable upon
exercise (assuming, for purposes of this Section 9(j), that exercise of Warrants
is permissible during periods prior to the Initial Warrant Exercise Date) of
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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
(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.
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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 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
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(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.
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
-19-
<PAGE>
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 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.
-20-
<PAGE>
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 17575 Pacific Coast Highway, Pacific Palisades, CA
90272, attention: Deborah E. Griffin, 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 the Underwriter, 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.
-21-
<PAGE>
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.
HEURISTIC DEVELOPMENT GROUP, INC.
By: __________________________________
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: ____________________________
Authorized Officer
D.H. BLAIR INVESTMENT BANKING CORP.
By ______________________________
Authorized Officer
-22-
<PAGE>
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
HEURISTIC DEVELOPMENT GROUP, 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,
$.01 par value ("Common Stock"), of Heuristic Development Group, Inc., a
Delaware 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 Heuristic Development Group, Inc.
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.
A-1
<PAGE>
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 designated by such
Registered Holder at the time of such surrender. Upon due presentment with a $
transfer fee per certificate in addition to any tax or other governmental charge
imposed in connection therewith, 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
A-2
<PAGE>
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 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.
HEURISTIC DEVELOPMENT GROUP, INC.
Dated: ________ By: ______________________________
By: ______________________________
[seal]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Warrant Agent
By ___________________________
Authorized Officer
A-3
<PAGE>
[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.
A-4
<PAGE>
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 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 ENLARGE- MENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
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 ENLARGE- MENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-6
<PAGE>
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
HEURISTIC DEVELOPMENT GROUP, 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, $.01 par value ("Common
Stock"), of Heuristic Development Group, Inc., a Delaware 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 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 Heuristic Development Group, Inc.
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>
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 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.
B-2
<PAGE>
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.
HEURISTIC DEVELOPMENT GROUP, INC.
Dated: _________________ By: _____________________________
By: _____________________________
[seal]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
_____________________, as Warrant Agent
By: ______________________________
Authorized Officer
B-3
<PAGE>
[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.
B-4
<PAGE>
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.
------------------------------------
(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 ENLARGE- MENT 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
B-5
<PAGE>
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 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 ENLARGE- MENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
B-6
Option to Purchase
_______Units
HEURISTIC DEVELOPMENT GROUP, 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 HEURISTIC DEVELOPMENT GROUP,
INC., a Delaware corporation (hereinafter called the "Company"), at the prices
and during the periods as hereinafter specified, up
to___________________________ (_______) Units ("Units"), each Unit consisting of
one share of the Company's Common Stock, $.01 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-_______ ) 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 $120 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 Public Units (the "Public Warrants"). The Company will
<PAGE>
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 _______, 1998 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 _______, 1998 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 _______, 1998 and _______,2002 inclusive, the Holder shall
have the option to purchase Option Units hereunder at a price of $6.00 per
Unit. For purposes of the adjustments under Section 8 hereof, the Per Share
Exercise Price shall be deemed to be $6.00, 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
persons in whose name or names
-2-
<PAGE>
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 the
twenty (20) 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 Stock
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<PAGE>
or Warrants, respectively, on such exchange or market for the twenty (20)
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 the twenty (20) 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 one year commencing 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
authorized and reserved a
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<PAGE>
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
two 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 seven 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.
If any registration pursuant to this Section 6(a) shall be underwritten in
whole or in part, the Company may require that the Registrable Securities
requested for inclusion pursuant to this Section 6(a) be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. In the event that the Registrable Securities
requested for inclusion pursuant to this Section 6(a) together with any other
shares which have similar piggyback registration rights (such shares and the
Registrable Securities being collectively referred to as the "Requested Stock")
would constitute more than 5% of the total number of shares to be included in a
proposed underwritten public offering, and if in the good faith judgment of the
managing underwriter of such public offering the inclusion of all of the
Requested Stock originally covered by a request for registration would reduce
the number of shares to be offered by the Company or interfere with the
successful marketing of the shares of stock offered by the Company, the number
of shares of Requested Stock otherwise to be included in the underwritten public
offering may be reduced pro rata (by number of shares) among the holders thereof
requesting such registration or excluded in their entirety if so required by the
underwriter. To the extent only a portion of the Requested Stock is included in
the underwritten public offering, those shares of Requested Stock which are thus
excluded from the underwritten public offering shall be withheld from the market
by the holders thereof for a period, not to exceed 60 days, which the managing
underwriter reasonably determines is necessary in order to effect the
underwritten public offering.
(b) If D.H. Blair Investment Banking Corp., D.H. Blair & Co., Inc. or
J. Morton Davis (the "Requesting Holder") 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
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<PAGE>
distribution (within the meaning of the Act) of any such securities will be
involved then the Company will promptly, but no later than three weeks after
receipt of such notice, file a post-effective amendment to the current
Registration Statement or a new registration statement on Form S-1 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 Requesting 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 Requesting 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 Requesting
Holder has not given notice of exercise of the Option. The Requesting 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 and/or the Common Stock issuable upon the exercise of the
Warrants, and such registration rights may be exercised by the Requesting 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 ________, 2002, 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. If the Company determines to include securities to be sold by it in any
registration statement originally requested pursuant to this Section 6(b), such
registration shall instead be deemed to have been a registration under Section
6(a) and not under this Section 6(b).
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<PAGE>
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) 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 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.
(d) 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
Requesting Holder.
(e) 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.
(f) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below and to
the managing
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<PAGE>
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 "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
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<PAGE>
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.
(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 Subsections (a), above, (i) the number of shares of
Common
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<PAGE>
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 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 (c)
inclusive above.
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<PAGE>
(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
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, HEURISTIC DEVELOPMENT GROUP, INC. has caused this
Option to be signed by its duly authorized officers under its corporate seal,
and this Option to be dated __________ ___, 1997.
HEURISTIC DEVELOPMENT GROUP, INC.
By: ____________________________
Gregory L. Zink, President
(Corporate Seal)
Attest:
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Deborah E. Griffin, Secretary
<PAGE>
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 HEURISTIC DEVELOPMENT GROUP, INC. , each Unit
consisting of one share of $.01 Par Value Common Stock, one Class A Warrant to
purchase one share of Common Stock and one Class B Warrant(s) and herewith makes
payment of $_________ thereof.
Dated: _________, 19__. Instructions for Registration of Stock and Warrants
----------------------------------------
Print Name
----------------------------------------
Address
----------------------------------------
Signature
<PAGE>
OPTION EXCHANGE
The undersigned, pursuant to the provisions of the foregoing Option, hereby
elects to exchange its Option for _________ Units of HEURISTIC DEVELOPMENT
GROUP, INC., each Unit consisting of one share of $.01 Par Value Common Stock,
One Class A Warrant(s) 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>
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:
HEURISTIC DEVELOPMENT GROUP, INC.
1996 STOCK OPTION PLAN
1. Purpose.
The purpose of this plan (the "Plan") is to secure for Heuristic
Development Group, Inc. (the "Company") and its shareholders the benefits
arising from capital stock ownership by employees, officers and directors of,
and consultants or advisors to, the Company who are expected to contribute to
the Company's future growth and success. Except where the context otherwise
requires, the term "Company" shall include all present and future subsidiaries
of the Company as defined in Sections 424(e) and 424(f) of the Internal Revenue
Code of 1986, as amended or replaced from time to time (the "Code"). Those
provisions of the Plan which make express reference to Section 422 shall apply
only to Incentive Stock Options (as that term is defined in the Plan).
2. Type of Options and Administration.
(a) Types of Options. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (or a Committee
designated by the Board of Directors) and may be either incentive stock options
("Incentive Stock Options") meeting the requirements of Section 422 of the Code
or non-statutory options which are not intended to meet the requirements of
Section 422 of the Code.
(b) Administration. The Plan will be administered by a committee (the
"Committee") appointed by the Board of Directors of the Company, whose
construction and interpretation of the terms and provisions of the Plan shall be
final and conclusive. The delegation of powers to the Committee shall be
consistent with applicable laws or regulations (including, without limitation,
applicable state law and Rule 16b-3 promulgated under the Securities Exchange
Act of 1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3")). The
Committee may in its sole discretion grant options to purchase shares of the
Company's Common Stock, $.01 par value per share ("Common Stock"), and issue
shares upon exercise of such options as provided in the Plan. The Committee
shall have authority, subject to the express provisions of the Plan, to construe
the respective option agreements and the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the terms and
provisions of the respective option agreements, which need not be identical, and
to make all other determinations in the judgment of the Committee necessary or
desirable for the administration of the Plan. The Committee may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director or person acting pursuant to authority delegated by the
Board of Directors shall be liable for any action or determination under the
Plan made in good faith. Subject to adjustment as provided in Section 15 below,
the aggregate number of shares of
<PAGE>
Common Stock that may be subject to Options or granted to any person in a
calendar year shall not exceed 100,000 shares.
(c) Applicability of Rule 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 shall apply to the Company only at such time as
the Company's Common Stock is registered under the Exchange Act, subject to the
last sentence of Section 3(b), and then only to such persons as are required to
file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. Eligibility.
(a) General. Options or Restricted Stock Awards may be granted to persons
who are, at the time of grant, employees, officers or directors of, or
consultants or advisors to, the Company or any subsidiaries of the Company as
defined in Sections 424(e) and 424(f) of the Code ("Participants") provided,
that Incentive Stock Options may only be granted to individuals who are
employees of the Company (within the meaning of Section 3401(c) of the Code). A
person who has been granted an option may, if he or she is otherwise eligible,
be granted additional options if the Committee shall so determine.
(b) Grant of Options to Reporting Persons. The selection of a director or
an officer who is a Reporting Person (as the terms "director" and "officer" are
defined for purposes of Rule 16b-3) as a recipient of an option, the timing of
the option grant, the exercise price of the option and the number of shares
subject to the option shall be determined either (i) by the Board of Directors,
or (ii) by a committee consisting solely of two or more directors having full
authority to act in the matter, each of whom shall be a "Non-Employee Director".
For the purposes of the Plan, a director shall be deemed to be a "Non-Employee
Director" only if such person qualifies as a "Non-Employee Director" within the
meaning of Rule 16b-3, as such term is interpreted from time to time. If at
least two of the members of the Board of Directors do not qualify as a
"Non-Employee Director" within the meaning of Rule 16b-3, as such term is
interpreted from time to time, then the granting of options to officers and
directors who are Reporting Persons under the Plan shall not be determined in
accordance with this Section 3(b) but shall be determined in accordance with the
other provisions of the Plan.
4. Stock Subject to Plan.
The stock subject to options granted under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. Subject to adjustment as
provided in Section 15 below, the maximum number of shares of Common Stock of
the Company which may be issued and sold under the Plan is 250,000 shares. If an
option granted under the Plan shall expire, terminate or is cancelled for any
reason without having been exercised in full, the unpurchased shares subject to
such option shall again be available for subsequent option grants under the
Plan.
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<PAGE>
5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients.
6. Purchase Price.
(a) General. The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Board of Directors at the time
of grant of such option; provided, however, that in the case of an Incentive
Stock Option, the exercise price shall not be less than 100% of the Fair Market
Value (as hereinafter defined) of such stock, at the time of grant of such
option, or less than 110% of such Fair Market Value in the case of options
described in Section 11(b). "Fair Market Value" of a share of Common Stock of
the Company as of a specified date for the purposes of the Plan shall mean the
closing price of a share of the Common Stock on the principal securities
exchange (including the Nasdaq National Market) on which such shares are traded
on the day immediately preceding the date as of which Fair Market Value is being
determined, or on the next preceding date on which such shares are traded if no
shares were traded on such immediately preceding day, or if the shares are not
traded on a securities exchange, Fair Market Value shall be deemed to be the
average of the high bid and low asked prices of the shares in the
over-the-counter market on the day immediately preceding the date as of which
Fair Market Value is being determined or on the next preceding date on which
such high bid and low asked prices were recorded. If the shares are not publicly
traded, Fair Market Value of a share of Common Stock (including, in the case of
any repurchase of shares, any distributions with respect thereto which would be
repurchased with the shares) shall be determined in good faith by the Board of
Directors. In no case shall Fair Market Value be determined with regard to
restrictions other than restrictions which, by their terms, will never lapse.
(b) Payment of Purchase Price. Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or by any other means which the Board of Directors determines are consistent
with the purpose of the Plan and with applicable laws and regulations
(including, without limitation, the provisions of Rule 16b-3 and Regulation T
promulgated by the Federal Reserve Board).
7. Option Period.
Subject to earlier termination as provided in the Plan, each option and all
rights thereunder shall expire on such date as determined by the Board of
Directors and set forth in the applicable option agreement, provided, that such
date shall not be later than (10) ten years after the date on which the option
is granted.
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<PAGE>
8. Exercise of Options.
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the option agreement evidencing such option, subject to the provisions
of the Plan. No option granted to a Reporting Person for purposes of the
Exchange Act, however, shall be exercisable during the first six months after
the date of grant. Subject to the requirements in the immediately preceding
sentence, if an option is not at the time of grant immediately exercisable, the
Board of Directors may (i) in the agreement evidencing such option, provide for
the acceleration of the exercise date or dates of the subject option upon the
occurrence of specified events, and/or (ii) at any time prior to the complete
termination of an option, accelerate the exercise date or dates of such option.
9. Nontransferability of Options.
No option granted under this Plan shall be assignable or otherwise
transferable by the optionee except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined in
the Code or Title I of the Employee Retirement Income Security Act, or the rules
thereunder. An option may be exercised during the lifetime of the optionee only
by the optionee. In the event an optionee dies during his employment by the
Company or any of its subsidiaries, or during the three-month period following
the date of termination of such employment, his option shall thereafter be
exercisable, during the period specified in the option agreement, by his
executors or administrators to the full extent to which such option was
exercisable by the optionee at the time of his death during the periods set
forth in Section 10 or 11(d).
10. Effect of Termination of Employment or Other Relationship.
Except as provided in Section 11(d) with respect to Incentive Stock Options
and except as otherwise determined by the Committee at the date of grant of an
Option, and subject to the provisions of the Plan, an optionee may exercise an
option at any time within three months following the termination of the
optionee's employment or other relationship with the Company or within one (1)
year if such termination was due to the death or disability of the optionee but,
except in the case of the optionee's death, in no event later than the
expiration date of the Option. If the termination of the optionee's employment
is for cause or is otherwise attributable to a breach by the optionee of an
employment or confidentiality or non-disclosure agreement, the option shall
expire immediately upon such termination. The Board of Directors shall have the
power to determine what constitutes a termination for cause or a breach of an
employment or confidentiality or non-disclosure agreement, whether an optionee
has been terminated for cause or has breached such an agreement, and the date
upon which such termination for cause or breach occurs. Any such determinations
shall be final and conclusive and binding upon the optionee.
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<PAGE>
11. Incentive Stock Options.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) Express Designation. All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
(b) 10% Shareholder. If any employee to whom an Incentive Stock Option
is to be granted under the Plan is, at the time of the grant of such
option, the owner of stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company (after taking into
account the attribution of stock ownership rules of Section 424(d) of the
Code), then the following special provisions shall be applicable to the
Incentive Stock Option granted to such individual:
(i) The purchase price per share of the Common Stock subject to
such Incentive Stock Option shall not be less than 110% of the Fair
Market Value of one share of Common Stock at the time of grant; and
(ii) The option exercise period shall not exceed five years from
the date of grant.
(c) Dollar Limitation. For so long as the Code shall so provide,
options granted to any employee under the Plan (and any other incentive
stock option plans of the Company) which are intended to constitute
Incentive Stock Options shall not constitute Incentive Stock Options to the
extent that such options, in the aggregate, become exercisable for the
first time in any one calendar year for shares of Common Stock with an
aggregate Fair Market Value, as of the respective date or dates of grant,
of more than $100,000.
(d) Termination of Employment, Death or Disability. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee
is, and has been continuously since the date of grant of his or her option,
employed by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period
of three months after the date the optionee ceases to be an employee
of the Company (or within such lesser period as may be specified in
the applicable option agreement), provided, that the agreement with
respect to such option may designate a longer exercise period and that
the exercise after such three-month period shall be treated as the
exercise of a non-statutory option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee,
the Incentive Stock Option may be exercised by the person to whom it
is transferred by will or
-5-
<PAGE>
the laws of descent and distribution within the period of one year
after the date of death (or within such lesser period as may be
specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of
Section 22(e)(3) of the Code or any successor provisions thereto)
while in the employ of the Company, the Incentive Stock Option may be
exercised within the period of one year after the date the optionee
ceases to be such an employee because of such disability (or within
such lesser period as may be specified in the applicable option
agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions.
(a) Additional Option Provisions. The Board of Directors may, in its sole
discretion, include additional provisions in option agreements covering options
granted under the Plan, including without limitation restrictions on transfer,
repurchase rights, rights of first refusal, commitments to pay cash bonuses, to
make, arrange for or guaranty loans or to transfer other property to optionees
upon exercise of options, or such other provisions as shall be determined by the
Board of Directors; provided, that such additional provisions shall not be
inconsistent with any other term or condition of the Plan and such additional
provisions shall not cause any Incentive Stock Option granted under the Plan to
fail to qualify as an Incentive Stock Option within the meaning of Section 422
of the Code.
(b) Acceleration, Extension, Etc. The Board of Directors may, in its sole
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular, option or options granted under the
Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3 (if applicable).
13. General Restrictions.
(a) Investment Representations. The Company may require any person to whom
an Option is granted, as a condition of exercising such option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option or award, for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws, or with covenants or representations made by
the Company in connection
-6-
<PAGE>
with any public offering of its Common Stock, including any "lock-up" or other
restriction on transferability.
(b) Compliance With Securities Law. Each Option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or automated quotation system or under any state or
federal law, or the consent or approval of any governmental or regulatory body,
or that the disclosure of non-public information or the satisfaction of any
other condition is necessary as a condition of, or in connection with the
issuance or purchase of shares thereunder, such option may not be exercised, in
whole or in part, unless such listing, registration, qualification, consent or
approval, or satisfaction of such condition shall have been effected or obtained
on conditions acceptable to the Board of Directors. Nothing herein shall be
deemed to require the Company to apply for or to obtain such listing,
registration or qualification, or to satisfy such condition.
14. Rights as a Stockholder.
The holder of an option shall have no rights as a stockholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
15. Adjustment Provisions for Recapitalizations, Reorganizations and Related
Transactions.
(a) Recapitalizations and Related Transactions. If, through or as a result
of any recapitalization, reclassification, stock dividend, stock split, reverse
stock split or other similar transaction, (i) the outstanding shares of Common
Stock are increased, decreased or exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other non-cash assets are distributed with respect to such
shares of Common Stock or other securities, an appropriate and proportionate
adjustment shall be made in (x) the maximum number and kind of shares reserved
for issuance under or otherwise referred to in the Plan, (y) the number and kind
of shares or other securities subject to any then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable. Notwithstanding the foregoing, no adjustment shall
be made pursuant to this Section 15 if such adjustment (i) would cause the Plan
to fail to comply with Section 422 of the Code or with Rule 16b-3 or (ii) would
be considered as the adoption of a new plan requiring stockholder approval.
(b) Reorganization, Merger and Related Transactions. All outstanding
Options under the Plan shall become fully exercisable for a period of sixty (60)
days following the occurrence of any Trigger Event, whether or not such Options
are then exercisable under the
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<PAGE>
provisions of the applicable agreements relating thereto. For purposes of the
Plan, a "Trigger Event" is any one of the following events:
(i) the date on which shares of Common Stock are first purchased
pursuant to a tender offer or exchange offer (other than such an offer by
the Company, any Subsidiary, any employee benefit plan of the Company or of
any Subsidiary or any entity holding shares or other securities of the
Company for or pursuant to the terms of such plan), whether or not such
offer is approved or opposed by the Company and regardless of the number of
shares purchased pursuant to such offer;
(ii) the date the Company acquires knowledge that any person or group
deemed a person under Section 13(d)-3 of the Exchange Act (other than the
Company, any Subsidiary, any employee benefit plan of the Company or of any
Subsidiary or any entity holding shares of Common Stock or other securities
of the Company for or pursuant to the terms of any such plan or any
individual or entity or group or affiliate thereof which acquired its
beneficial ownership interest prior to the date the Plan was adopted by the
Board), in a transaction or series of transactions, has become the
beneficial owner, directly or indirectly (with beneficial ownership
determined as provided in Rule 13d-3, or any successor rule, under the
Exchange Act), of securities of the Company entitling the person or group
to 30% or more of all votes (without consideration of the rights of any
class or stock to elect directors by a separate class vote) to which all
shareholders of the Company would be entitled in the election of the Board
of Directors were an election held on such date;
(iii) the date, during any period of two consecutive years, when
individuals who at the beginning of such period constitute the Board of
Directors of the Company cease for any reason to constitute at least a
majority thereof, unless the election, or the nomination for election by
the stockholders of the Company, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period; and
(iv) the date of approval by the stockholders of the Company of an
agreement (a "reorganization agreement") providing for:
(A) The merger of consolidation of the Company with another
corporation where the stockholders of the Company, immediately prior
to the merger or consolidation, do not beneficially own, immediately
after the merger or consolidation, shares of the corporation issuing
cash or securities in the merger or consolidation entitling such
shareholders to 80% or more of all votes (without consideration of the
rights of any class of stock to elect directors by a separate class
vote) to which all stockholders of such corporation would be entitled
in the
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<PAGE>
election of directors or where the members of the Board of Directors
of the Company, immediately prior to the merger or consolidation, do
not, immediately after the merger or consolidation, constitute a
majority of the Board of Directors of the corporation issuing cash or
securities in the merger or consolidation; or
(B) The sale or other disposition of all or substantially all the
assets of the Company.
(c) Board Authority to Make Adjustments. Any adjustments under this Section
15 will be made by the Board of Directors, whose determination as to what
adjustments, if any, will be made and the extent thereof will be final, binding
and conclusive. No fractional shares will be issued under the Plan on account of
any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
(a) General. In the event of any sale, merger, transfer or acquisition of
the Company or substantially all of the assets of the Company in which the
Company is not the surviving corporation, and provided that after the Company
shall have requested the acquiring or succeeding corporation (or an affiliate
thereof), that equivalent options shall be substituted and such successor
corporation shall have refused or failed to assume all options outstanding under
the Plan or issue substantially equivalent options, then any or all outstanding
options under the Plan shall accelerate and become exercisable in full
immediately prior to such event. The Committee will notify holders of options
under the Plan that any such options shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the options will terminate
upon expiration of such notice.
(b) Substitute Options. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. No Special Employment Rights.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
-9-
<PAGE>
18. Other Employee Benefits.
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. Amendment of the Plan.
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect; provided, however, that if at any time the
approval of the stockholders of the Company is required under Section 422 of the
Code or any successor provision with respect to Incentive Stock Options, the
Board of Directors may not effect such modification or amendment without such
approval; and provided, further, that the provisions of Section 3(c) hereof
shall not be amended more than once every six months, other than to comport with
changes in the Code, the Employer Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
(b) The modification or amendment of the Plan shall not, without the
consent of an optionee, affect his or her rights under an option previously
granted to him or her. With the consent of the optionee affected, the Board of
Directors may amend outstanding option agreements in a manner not inconsistent
with the Plan. The Board of Directors shall have the right to amend or modify
(i) the terms and provisions of the Plan and of any outstanding Incentive Stock
Options granted under the Plan to the extent necessary to qualify any or all
such options for such favorable federal income tax treatment (including deferral
of taxation upon exercise) as may be afforded incentive stock options under
Section 422 of the Code and (ii) the terms and provisions of the Plan and of any
outstanding option to the extent necessary to ensure the qualification of the
Plan under Rule 16b-3.
20. Withholding.
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a Fair
Market Value equal to such withholding obligation as of the date that the amount
of tax to be withheld is to be determined. An optionee who has made an election
pursuant to this Section 20(a) may only satisfy his or her
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<PAGE>
withholding obligation with shares of Common Stock which are not subject to any
repurchase, forfeiture, unfulfilled vesting or other similar requirements.
(b) The acceptance of shares of Common Stock upon exercise of an Incentive
Stock Option shall constitute an agreement by the optionee (i) to notify the
Company if any or all of such shares are disposed of by the optionee within two
years from the date the option was granted or within one year from the date the
shares were issued to the optionee pursuant to the exercise of the option, and
(ii) if required by law, to remit to the Company, at the time of and in the case
of any such disposition, an amount sufficient to satisfy the Company's federal,
state and local withholding tax obligations with respect to such disposition,
whether or not, as to both (i) and (ii), the optionee is in the employ of the
Company at the time of such disposition.
(c) Notwithstanding the foregoing, in the case of a Reporting Person whose
options have been granted in accordance with the provisions of Section 3(b)
herein, no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements of Rule
16b-3.
21. Cancellation and New Grant of Options, Etc.
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no Incentive Stock Options shall be granted thereafter. Amendments to the
Plan not requiring stockholder approval shall become effective when adopted by
the Board of Directors; amendments requiring shareholder approval (as provided
in Section 21) shall become effective when adopted by the Board of Directors,
but no Incentive Stock Option granted after the date of such amendment shall
become exercisable (to the extent that such amendment to the Plan was required
to enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted
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<PAGE>
on or after the date of such amendment shall terminate to the extent that such
amendment to the Plan was required to enable the Company to grant such option to
a particular optionee. Subject to this limitation, options may be granted under
the Plan at any time after the effective date and before the date fixed for
termination of the Plan.
(b) Termination. Unless sooner terminated in accordance with Section 16,
the Plan shall terminate upon the earlier of (i) the close of business on the
day next preceding the tenth anniversary of the date of its adoption by the
Board of Directors, or (ii) the date on which all shares available for issuance
under the Plan shall have been issued pursuant to the exercise or cancellation
of options granted under the Plan. If the date of termination is determined
under (i) above, then options outstanding on such date shall continue to have
force and effect in accordance with the provisions of the instruments evidencing
such options.
23. Provision for Foreign Participants.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
24. Governing Law.
The provisions of this Plan shall be governed and construed in accordance
with the laws of the State of Delaware.
Adopted by the Board of Directors as of October 16, 1996
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ESCROW AGREEMENT
----------------
AGREEMENT, dated as of the ____ day of November, 1996, by and among
American Stock Transfer & Trust Company, a New York corporation (hereinafter
referred to as the "Escrow Agent"), Heuristic Development Group, Inc., a
Delaware corporation (the "Company"), and the stockholders of the Company who
have executed this Agreement (hereinafter collectively called the
"Stockholders") and the holders of options issued by the Company who have
executed this Agreement (hereinafter collectively called the "Optionholders").
WHEREAS, the Company contemplates a public offering ("Public Offering") of
Units ("Units"), each Unit consisting of one share of its Common Stock, par
value $.01 per share (the "Common Stock"), one redeemable Class A Warrant (the
"Class A Warrant"), and one redeemable Class B Warrant ("Class B Warrant"),
through D.H. Blair Investment Banking Corp. as underwriter (the "Underwriter")
pursuant to a Registration Statement on Form SB-2 to be filed with the
Securities and Exchange Commission (the "Registration Statement"); and
WHEREAS, the Stockholders have agreed to deposit in escrow an aggregate of
349,370 shares of Common Stock and the Optionholders have agreed to deposit in
escrow options to purchase an aggregate of 50,630 shares of Common Stock upon
the terms and conditions set forth herein.
In consideration of the mutual covenants and promises herein contained, the
parties hereto agree as follows:
1. The Stockholders, the Optionholders and the Company hereby appoint
American Stock Transfer & Trust Company as Escrow Agent and agree that the
Stockholders,
<PAGE>
the Optionholders will, prior to the Effective Date (as hereinafter defined) of
the Public Offering, deliver to the Escrow Agent to hold in accordance with the
provisions hereof certificates representing an aggregate of 349,370 shares of
Common Stock owned of record by the Stockholders in the respective amounts set
forth on Exhibit A hereto (the "Escrow Shares"), together with stock powers
executed in blank, and agreements representing options to purchase an aggregate
of 50,630 shares of Common Stock held by the Optionholders in the respective
amounts set forth on Exhibit B hereto (the "Escrow Options"). The Escrow Agent,
by its execution and delivery of this Agreement hereby acknowledges receipt of
the Escrow Shares and Escrow Options and accepts its appointment as Escrow Agent
to hold the Escrow Shares and Escrow Options in escrow, upon the terms,
provisions and conditions hereof.
2. This Agreement shall become effective upon the date on which the
Securities and Exchange Commission declares effective the Registration Statement
("Effective Date") and shall continue in effect until the earlier of (i) the
date specified in paragraph 4(e) hereof or (ii) the distribution by the Escrow
Agent of all of the Escrow Shares and Escrow Options in accordance with the
terms hereof (the "Termination Date"). The period of time from the Effective
Date until the Termination Date is referred to herein as the "Escrow Period."
3. During the Escrow Period, the Escrow Agent shall receive all of the
money, securities, rights or property distributed in respect of the Escrow
Shares and Escrow Options then held in escrow, including any such property
distributed as dividends or pursuant to any stock split, merger,
recapitalization, dissolution, or total or partial liquidation of the Company,
such property to be held and distributed as herein provided and hereinafter
referred to collectively as the "Escrow Property."
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<PAGE>
4. (a) The Escrow Shares and Escrow Options are subject to release to the
Stockholders and Optionholders, as applicable, only in the event the conditions
set forth herein are met. The Escrow Agent, upon notice to such effect from the
Company as provided in paragraph 5 hereof, shall deliver the Escrow Shares,
together with stock powers executed in blank, and Escrow Options, and the Escrow
Property deposited in escrow with respect to such Escrow Shares and Escrow
Options, to the respective Stockholders, if, and only if, one of the following
conditions is met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the
Company's independent public accountants) (the "Minimum Pretax
Income") amounts to at least $3.3 million for the fiscal year ending
December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $4.5 million for the
fiscal year ending December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $5.7 million during the
fiscal year ending December 31, 2000;
(iv) the Bid Price (as hereafter defined) of the Common Stock averages in
excess of $12.50 per share for 30 consecutive business days during
the 18-month period commencing on the Effective Date; or
(v) the Bid Price of the Common Stock averages in excess of $16.75 per
share for 30 consecutive business days during the 18-month period
commencing with the nineteenth month from the Effective Date.
(b) As used in this Section 4, the term "Bid Price" shall be subject to
adjustments in the event of any stock dividend, stock distribution, stock split
or other similar event and shall mean:
(i) If the principal market for the Common Stock is a national securities
exchange or the Nasdaq National Market, the closing sales price of
the Common Stock as reported by such exchange or market, or on a
consolidated tape reflecting transactions on such exchange or market;
or
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(ii) if the principal market for the Common Stock is not a national
securities exchange or the Nasdaq National Market and if the Common
Stock is quoted on the Nasdaq SmallCap Market, the closing bid price
of the Common Stock as quoted on the Nasdaq SmallCap Market; or
(iii) if the principal market for the Common Stock is not a national
securities exchange or the Nasdaq National Market and if the Common
Stock is not quoted on the Nasdaq SmallCap Market, the closing bid
for the Common Stock as reported by the National Quotation Bureau,
Inc. ("NQB") or at least two market makers in the Common Stock if
quotations are not available from NQB but are available from market
makers.
(c) The determination of Minimum Pretax Income shall be calculated
exclusive of (i) any extraordinary earnings or charges (including any charges
incurred by the Company in connection with the release from escrow of the Escrow
Shares and Escrow Options and any Escrow Property in respect thereof pursuant to
the provisions of this paragraph 4) and (ii) any shares of Common Stock issued
upon conversion of securities outstanding immediately prior to the Effective
Date which are convertible into Common Stock without the payment of additional
consideration.
(d) The Minimum Pretax Income amounts set forth in subparagraph (a) above
shall be increased during each fiscal year during the Escrow Period to reflect
the issuance of any additional securities after the Effective Date, including
any shares of Common Stock 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 (excluding options granted under
the Company's 1996 Stock Option Plan (the "Plan") which, in the aggregate, do
not exceed 5% of the then outstanding shares of Common Stock, including Escrow
Shares) in accordance with the following formula: The Minimum Pretax Income
shall be increased during each fiscal year to an Adjusted Minimum Pretax Income
calculated by multiplying the applicable Minimum
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<PAGE>
Pretax Income amount by a fraction, the numerator of which shall be the weighted
average number of shares of Common Stock outstanding during the fiscal year for
which the determination is being made (including the Escrow Shares and Escrow
Options and any shares of Common Stock issuable upon conversion of any
outstanding securities but excluding shares of Common Stock issuable upon
exercise of (i) outstanding Class A and Class B Warrants sold pursuant to the
Prospectus included in the Registration Statement; (ii) outstanding Unit
Purchase Options (and the Class A and Class B Warrants included therein) issued
to the Underwriter and (iii) options outstanding under the Plan), and the
denominator of which shall be the sum of (x) the number of shares of Common
Stock outstanding on the Effective Date (including the Escrow Shares, Escrow
Options and any shares of Common Stock issuable upon conversion of securities
outstanding immediately prior to the Effective Date which are convertible into
Common Stock without the payment of additional consideration), plus (y) the
number of shares of Common Stock sold pursuant to the Prospectus included in the
Registration Statement.
(e) If the Escrow Agent has not received the notice provided for in
Paragraph 5 hereof and delivered all of the Escrow Shares, Escrow Options and
related Escrow Property in accordance with the provisions of this Paragraph 4 on
or prior to March 31, 2001, the Escrow Agent shall deliver the certificates
representing all of the Escrow Shares, together with stock powers executed in
blank, and any related Escrow Property to the Company to be placed in the
Company's treasury for cancellation thereof as a contribution to capital. After
such date, the Stockholders shall have no further rights as a stockholder of the
Company with respect to any of the cancelled Escrow Shares and the Optionholders
shall have no further rights with respect to any of the cancelled Escrow
Options.
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<PAGE>
5. Upon the occurrence or satisfaction of any of the events or conditions
specified in Paragraph 4 hereof, the Company shall promptly give appropriate
notice to the Escrow Agent, the Underwriter (and if the transfer agent of the
Company's Common Stock is different from the Escrow Agent, such transfer agent)
and present such documentation as is reasonably required by the Escrow Agent to
evidence the satisfaction of such conditions.
6. It is understood and agreed by the parties to this Agreement as follows:
(a) The Escrow Agent is not and shall not be deemed to be a trustee
for any party for any purpose and is merely acting as a depository and in a
ministerial capacity hereunder with the limited duties herein prescribed.
(b) The Escrow Agent does not have and shall not be deemed to have any
responsibility in respect of any instruction, certificate or notice
delivered to it or of the Escrow Shares, Escrow Options or any related
Escrow Property other than faithfully to carry out the obligations
undertaken in this Agreement and to follow the directions in such
instruction or notice provided in accordance with the terms hereof.
(c) The Escrow Agent is not and shall not be deemed to be liable for
any action taken or omitted by it in good faith and may rely upon, and act
in accordance with, the advice of its counsel without liability on its part
for any action taken or omitted in accordance with such advice. In any
event, its liability hereunder shall be limited to liability for gross
negligence, willful misconduct or bad faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in accordance
with any certificate, instruction, notice, letter, telegram, cablegram or
other written instrument believed by it to be genuine and to have been
signed by the proper party or parties.
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<PAGE>
(e) The Company agrees (i) to pay the Escrow Agent's reasonable fees
and to reimburse it for its reasonable expenses including attorney's fees
incurred in connection with duties hereunder and (ii) to save harmless,
indemnify and defend the Escrow Agent for, from and against any loss,
damage, liability, judgment, cost and expense whatsoever, including counsel
fees, suffered or incurred by it by reason of, or on account of, any
misrepresentation made to it or its status or activities as Escrow Agent
under this Agreement except for any loss, damage, liability, judgment, cost
or expense resulting from gross negligence, willful misconduct or bad faith
on the part of the Escrow Agent. The obligation of the Escrow Agent to
deliver the Escrow Shares to either the Stockholders or the Company or the
Escrow Options to either the Optionholders or the Company shall be subject
to the prior satisfaction upon demand from the Escrow Agent, of the
Company's obligations to so save harmless, indemnify and defend the Escrow
Agent and to reimburse the Escrow Agent or otherwise pay its fees and
expenses hereunder.
(f) The Escrow Agent shall not be required to defend any legal
proceeding which may be instituted against it in respect of the subject
matter of this Agreement unless requested to do so by the Stockholders or
the Optionholders and indemnified to the Escrow Agent's satisfaction
against the cost and expense of such defense by the party requesting such
defense. If any such legal proceeding is instituted against it, the Escrow
Agent agrees promptly to given notice of such proceeding to the
Stockholders, the Optionholders and the Company. The Escrow Agent shall not
be required to institute legal proceedings of any kind.
(g) The Escrow Agent shall not, by act, delay, omission or otherwise,
be deemed to have waived any right or remedy it may have either under this
Agreement or
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<PAGE>
generally, unless such waiver be in writing, and no waiver shall be valid
unless it is in writing, signed by the Escrow Agent, and only to the extent
expressly therein set forth. A waiver by the Escrow Agent under the term of
this Agreement shall not be construed as a bar to, or waiver of, the same
or any other such right or remedy which it would otherwise have on any
other occasion.
(h) The Escrow Agent may resign as such hereunder by giving 30 days
written notice thereof to the Stockholders, the Optionholders and the
Company. Within 20 days after receipt of such notice, the Stockholders, the
Optionholders and the Company shall furnish to the Escrow Agent written
instructions for the release of the Escrow Shares, the Escrow Options and
any related Escrow Property (if such shares, options and property, if any,
have not yet been released pursuant to Paragraph 4 hereof) to a substitute
Escrow Agent which (whether designated by written instructions from the
Stockholders, the Optionholders and the Company jointly or in the absence
thereof by instructions from a court of competent jurisdiction to the
Escrow Agent) shall be a bank or trust company organized and doing business
under the laws of the United States or any state thereof. Such substitute
Escrow Agent shall thereafter hold any Escrow Shares, Escrow Options and
any related Escrow Property received by it pursuant to the terms of this
Agreement and otherwise act hereunder as if it were the Escrow Agent
originally named herein. The Escrow Agent's duties and responsibilities
hereunder shall terminate upon the release of all shares then held in
escrow according to such written instruction or upon such delivery as
herein provided. This Agreement shall not otherwise be assignable by the
Escrow Agent without the prior written consent of the Company.
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<PAGE>
7. The Stockholders shall have the sole power to vote the Escrow Shares and
any securities deposited in escrow under this Agreement while they are being
held pursuant to this Agreement.
8. (a) Each of the Stockholders agrees that during the term of this
Agreement he will not sell, transfer, hypothecate, negotiate, pledge, assign,
encumber or otherwise dispose of any or all of the Escrow Shares set forth
opposite his name on Exhibit A hereto, unless and until the Company shall have
given the notice as provided in Paragraph 5. This restriction shall not be
applicable to transfers upon death, by operation of law, to family members of
the Stockholders or to any trust for the benefit of the Stockholders, provided
that such transferees agree to be bound by the provisions of this Agreement.
(b) The Stockholders and the Optionholders will take any action necessary
or appropriate, including the execution of any further documents or agreements,
in order to effectuate the transfer of the Escrow Shares and Escrow Options to
the Company if required pursuant to the provisions of this Agreement.
9. Each of the certificates representing the Escrow Shares will bear
legends to the following effect, as well as any other legends required by
applicable law:
(a) "The sale, transfer, hypothecation, negotiation, pledge, assignment,
encumbrance or other disposition of the shares evidenced by this
certificate are restricted by and are subject to all of the terms,
conditions and provisions of a certain Escrow Agreement entered into
among American Stock Transfer & Trust Company, Heuristic Development
Group, Inc. (the "Company") and the Stockholders of the Company dated
as of _________, 1996, a copy of which may be obtained from the
Secretary of the Company. No transfer, sale or other disposition of
these shares may be made unless specific conditions of such agreement
are satisfied.
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<PAGE>
(b) "The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended. No transfer, sale or
other disposition of these shares may be made unless a registration
statement with respect to these shares has become effective under said
act, or the Company is furnished with an opinion of counsel
satisfactory in form and substance to it that such registration is not
required."
Upon execution of this Agreement, the Company shall direct the transfer
agent for the Company to place stop transfer orders with respect to the Escrow
Shares and to maintain such orders in effect until the transfer agent and the
Underwriter shall have received written notice from the Company as provided in
Paragraph 5.
10. At any time during the Escrow Period, an Optionholder may exercise all
or a portion of his Escrow Options in accordance with the terms of his option
agreement. The Company shall deliver a certificate for the purchased shares with
stock powers executed in blank attached to the Escrow Agent against delivery of
the Escrow Options which have been exercised, and the Escrow Agent shall hold
such shares as Escrow Shares in accordance with the provisions of this
Agreement.
11. Each notice, instruction or other certificate required or permitted by
the terms hereof shall be in writing and shall be communicated by personal
delivery, fax or registered or certified mail, return receipt requested, to the
parties hereto at the addresses set forth below, or at such other address as any
of them may designate by notice to each of the others:
(i) If to the Company, to:
Heuristic Development Group, Inc.
17575 Pacific Coast Highway
Pacific Palisades, California 92072
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<PAGE>
(ii) If to the Stockholders to their respective addresses as set forth on
Exhibit A hereto.
(iii) If to the Escrow Agent, to:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(iv) If to the Underwriter, to:
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
Att: Martin A. Bell, Esq.
Fax: 212-514-7837
All notices, instructions or certificates given hereunder to the Escrow Agent
shall be effective upon receipt by the Escrow Agent. All notices given hereunder
by the Escrow Agent shall be effective and deemed received upon personal
delivery or transmission by fax or, if mailed, five (5) calendar days after
mailing by the Escrow Agent.
A copy of all communications sent to the Company, the Stockholders or the
Escrow Agent shall be sent by ordinary mail to Bachner, Tally, Polevoy & Misher
LLP, 380 Madison Avenue, New York, New York 10017, Attention: Sheldon E. Misher,
Esq. A copy of all communications sent to the Underwriter shall be sent by
ordinary mail to Singer, Blenenstock, Zamansky, Ogele & Selengut LLP, 40
Exchange Place, New York, New York 10005, Attention: C. David Selengut, Esq.
12. Except as set forth in paragraph 13 hereof, this Agreement may not be
modified, altered or amended in any material respect or cancelled or terminated
except with the prior consent of the holders of all of the outstanding shares of
Common Stock of the Company.
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<PAGE>
13. In the event that the Public Offering is not consummated within
twenty-five (25) days of the Effective Date of the Registration Statement, this
Agreement shall terminate and be of no further force and effect and the Escrow
Agent, upon written notice from both the Company and the Underwriter in
accordance with paragraph 10 hereof of such termination, will return the Escrow
Shares, Escrow Options and any Escrow Property in respect thereof to the
Stockholders.
14. This Agreement shall be governed by and construed in accordance with
the laws of New York and shall be binding upon and inure to the benefit of all
parties hereto and their respective successors in interest and assigns.
15. This Agreement may be executed in several counterparts, which taken
together shall constitute a single instrument.
* * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers on the day and year first above
written.
HEURISTIC DEVELOPMENT GROUP, INC.
By: __________________________
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: __________________________
STOCKHOLDERS:
BROOKS TRUST, 10/7/72
By:___________________________
Title:________________________
CLARK TRUST, u/t/d 6/30/69
By:___________________________
Title:________________________
CLARK MANAGEMENT CO. INC.
By:___________________________
Title:________________________
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<PAGE>
NAUTILUS GROUP JAPAN LTD.
By:___________________________
Title:________________________
ARCADIAN & CO., L.P.
By:___________________________
Title:________________________
TRANSPAC SOFTWARE INC.
By:___________________________
Title:________________________
ACC TRUST
By:___________________________
Title:________________________
______________________________
Jerald N. Downen
______________________________
Michael A. Hertzberg
______________________________
Kimitane Sohma
______________________________
John Dobbs
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<PAGE>
______________________________
R. Brett Lunger
______________________________
Jay Jay Shapiro
______________________________
Gregory L. Zink
______________________________
Deborah E. Griffin
______________________________
Steven R. Gumins
______________________________
Eric Rhodes
SEYBOLD FAMILY TRUST
By:____________________________
Title:_________________________
BLASE FAMILY TRUST
By:____________________________
Title:_________________________
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<PAGE>
EXHIBIT A
---------
STOCKHOLDERS' LIST
<TABLE>
<CAPTION>
Name of Stockholder Address Number of Escrow Shares
- ------------------- ------- -----------------------
<S> <C> <C>
Brooks Trust, 10/7/72 c/o Clark Management Co. Inc. 2,260.5
P.O. Box 3090
Boynton Beach, FL 33424
Clark Trust, u/t/d 6/30/69 c/o Clark Management Co. Inc. 31,728
P.O. Box 3090
Boynton Beach, FL 33424
Clark Management Co. Inc. P.O. Box 3090 1,507
Boynton Beach, FL 33424
Nautilus Group Japan Ltd. P.O. Box 3090 183,257.5
Boynton Beach, FL 33424
Arcadian & Co., L.P. c/o Patterson, Belknap, Webb & Tyler 1,507
1133 Avenue of the Americas
New York, New York 10036-6710
Attn: Mr. Robert Pennoyer
Transpac Software Inc. 467 Saratoga Avenue 10,554
Suite 550
San Jose, CA 95219
ACC Trust c/o Clark Management Co. Inc. 4,520.5
P.O. Box 3090
Boynton Beach, FL 33424
Jerald N. Downen 1390 South Clinton Road 9,376
Denver, CO 80231
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Michael A. Hertzberg c/o Howery & Simon 10,046
1299 Pennsylvania Avenue N.W.
Washington, D.C. 2004-2402
Kimitane Sohma c/o Nautilus Group Japan, Inc. 6,697
Landic Akasaka 2nd Bldg. 2F
10-9, Akasaka 2-Chome
Minato-ku, Tokyo
John Dobbs 8404 Winding Trail Place 669.5
Mason, OH 45040
R. Brett Lunger 301 Snuff Mill Road 669.5
Wilmington, DE 19807-1025
Jay Jay Shapiro 1149 East Alemeda 669.5
Santa Fe, NM 87501
Gregory L. Zink 54 River Drive 6,697
Ocean Ridge, FL 33435
Eric Rhodes 500 Lunalilo Home Road 1,339.5
Apartment 13-A
Honolulu, HI 96825
Seybold Family Trust P.O. Box 1315 70,732
Eastsound, WA 98245
Att: Jonathan W. Seybold
Blase Family Trust 448 Adelaide Drive 7,139.5
Santa Monica, CA 90402 -------
Att: Dr. William Blase
Total: 349,370
====== =======
</TABLE>
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<PAGE>
EXHIBIT B
---------
OPTIONHOLDERS' LIST
<TABLE>
<CAPTION>
Name of Optionholder Address Number of Escrow Options
- -------------------- ------- ------------------------
<S> <C> <C>
Deborah E. Griffin 3590 Las Flores Canyon Road 27,091
Malibu, CA 90265
Steven R. Gumins 2677 Rambla Pacifico 23,539
Malibu, CA 90265 ------
Total: 50,630
====== ======
</TABLE>
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT, made and entered into this ___ day of
________, 1996 ("Agreement"), by and between Heuristic Development Group, Inc.,
a Delaware corporation (the "Corporation"), and________ ("Indemnitee").
WHEREAS, recently, highly competent persons have become more reluctant to
serve both privately and publicly-held corporations as directors, officers, or
in other capacities, unless they are provided with better protection from the
risk of claims and actions against them arising out of their service to and
activities on behalf of such corporations; and
WHEREAS, the current impracticability of obtaining adequate insurance and
the uncertainties related to indemnification have increased the difficulty of
attracting and retaining such persons; and
WHEREAS, the Board of Directors of the Corporation (the "Board") has
determined that the ability to attract and retain such persons is in the best
interests of the Corporation's shareholders and that such persons should be
assured that they will have better protection in the future; and
WHEREAS, it is reasonable, prudent and necessary for the Corporation to
obligate itself contractually to indemnify such persons to the fullest extent
permitted by applicable law, so that such persons will serve or continue to
serve the Corporation free from undue concern that they will not be adequately
indemnified; and
WHEREAS, this Agreement is a supplement to and in furtherance of any rights
granted under the Certificate of Incorporation of the Corporation or the By-Laws
of the Corporation and any resolutions adopted pursuant thereto shall not be
deemed to be a substitute therefor nor to diminish or abrogate any rights of
Indemnitee thereunder; and
WHEREAS, Indemnitee is willing to serve, continue to serve and to take on
additional service for or on behalf of the Corporation on the condition that he
be indemnified according to the terms of this Agreement;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Corporation and Indemnitee do hereby covenant and agree as
follows:
Section 1. Definitions. For purposes of this Agreement:
(a) "Change in Control" means a change in control of the Corporation
of a nature that would be required to be reported in response to Item 6(e)
of Schedule l4A of Regulation l4A (or in response to any similar item on
any similar schedule or form) promulgated under the
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<PAGE>
Securities Exchange Act of 1934 (the "Act"), whether or not the Corporation
is then subject to such reporting requirement; provided, however, that,
without limitation, such a Change in Control shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule
l3d-3 under the Act), directly or indirectly, of securities of the
Corporation representing 20% or more of the combined voting power of the
Corporation's then outstanding securities without the prior approval of at
least two-thirds of the members of the Board in office immediately prior to
such person attaining such percentage interest; (ii) the Corporation is a
party to a merger, consolidation, sale of assets or other reorganization,
or a proxy contest, as a consequence of which members of the Board in
office immediately prior to such transaction or event constitute less than
a majority of the Board thereafter; or (iii) during any period of two
consecutive years, individuals who at the beginning of such period
constituted the Board (including for this purpose any new director whose
election or nomination for election by the Corporation's shareholders was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period) cease for any
reason to constitute at least a majority of the Board.
(b) "Corporate Status" means the status of a person who is or was a
director, officer, employee, agent or fiduciary of the Corporation or of
any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the request
of the Corporation.
(c) "Disinterested Director" means a director of the Corporation who
is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(d) "Expenses" means all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a
witness in a Proceeding.
(e) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is,
nor in the past five years has been, retained to represent: (i) the
Corporation or Indemnitee in any other matter material to either such
party, or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term
"Independent Counsel" shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Corporation or Indemnitee
in an action to determine Indemnitee's rights under this Agreement.
(f) "Proceeding" means any action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any
other proceeding, whether civil,
-2-
<PAGE>
criminal, administrative or investigative, except one initiated by an
Indemnitee pursuant to Section 11 of this Agreement to enforce his rights
under this Agreement.
Section 2. Services by Indemnitee. Indemnitee agrees to serve as a
[director][officer] of the Corporation, and, at its request, as a director,
officer, employee, agent or fiduciary of certain other corporations and
entities. Indemnitee may at any time and for any reason resign from any such
position (subject to any other contractual obligation or any obligation imposed
by operation of law).
Section 3. Indemnification - General. The Corporation shall indemnify, and
advance Expenses to, Indemnitee as provided in this Agreement to the fullest
extent permitted by applicable law in effect on the date hereof and to such
greater extent as applicable law may thereafter from time to time permit. The
rights of Indemnitee provided under the preceding sentence shall include, but
shall not be limited to, the rights set forth in the other Sections of this
Agreement.
Section 4. Proceedings Other Than Proceedings by or in the Right of the
Corporation. Indemnitee shall be entitled to the rights of indemnification
provided in this Section if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to any threatened, pending, or completed
Proceeding, other than a Proceeding by or in the right of the Corporation.
Pursuant to this Section, Indemnitee shall be indemnified against Expenses,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with any such
Proceeding or any claim, issue or matter therein, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Corporation, and, with respect to any criminal Proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 5. Proceedings by or in the Right of the Corporation. Indemnitee
shall be entitled to the rights of indemnification provided in this Section if,
by reason of his Corporate Status, he is, or is threatened to be made, a party
to any threatened, pending, or completed Proceeding brought by or in the right
of the Corporation to procure a judgment in its favor. Pursuant to this Section,
Indemnitee shall be indemnified against Expenses, judgments, penalties, fines
and amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with any such Proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation. Notwithstanding the foregoing, no indemnification against such
Expenses shall be made in respect of any claim, issue or matter in any such
Proceeding as to which Indemnitee shall have been adjudged to be liable to the
Corporation if applicable law prohibits such indemnification.
Section 6. Indemnification for Expenses of a Party Who is Wholly or Partly
Successful. Notwithstanding any other provision of this Agreement, to the extent
that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified against all Expenses actually and reasonably incurred by him or
-3-
<PAGE>
on his behalf in connection therewith. If Indemnitee is not wholly successful in
such Proceeding but is successful, on the merits or otherwise, as to one or more
but less than all claims, issues or matters in such Proceeding, the Corporation
shall indemnify Indemnitee against all Expenses actually and reasonably incurred
by him or on his behalf in connection with each successfully resolved claim,
issue or matter. For the purposes of this Section and without limiting the
foregoing, the termination of any claim, issue or matter in any such Proceeding
by dismissal, with or without prejudice, shall be deemed to be a successful
result as to such claim, issue or matter.
Section 7. Indemnification for Expenses of a Witness. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding, he shall be indemnified
against all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith.
Section 8. Advancement of Expenses. The Corporation shall advance all
Expenses incurred by or on behalf of Indemnitee in connection with any
Proceeding within twenty days after the receipt by the Corporation of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses.
Section 9. Procedure for Determination of Entitlement to Indemnification.
(a) To obtain indemnification under this Agreement in connection with any
Proceeding, and for the duration thereof, Indemnitee shall submit to the
Corporation a written request, including therein or therewith such documentation
and information as is reasonably available to Indemnitee and is reasonably
necessary to determine whether and to what extent Indemnitee is entitled to
indemnification. The Secretary of the Corporation shall, promptly upon receipt
of any such request for indemnification, advise the Board in writing that
Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to
Section 9(a) hereof, a determination, if required by applicable law, with
respect to Indemnitee's entitlement thereto shall be made in such case: (i) if a
Change in Control shall have occurred, by Independent Counsel (unless Indemnitee
shall request that such determination be made by the Board or the shareholders,
in which case in the manner provided for in clauses (ii) or (iii) of this
Section 9(b)) in a written opinion to the Board, a copy of which shall be
delivered to Indemnitee; (ii) if a Change of Control shall not have occurred,
(A) by the Board by a majority vote of a quorum consisting of Disinterested
Directors, or (B) if a quorum of the Board consisting of Disinterested Directors
is not obtainable, or even if such quorum is obtainable, if such quorum of
Disinterested Directors so directs, either (x) by Independent Counsel in a
written opinion to the Board, a copy of which shall be delivered to Indemnitee,
or (y) by the shareholders of the Corporation, as determined
-4-
<PAGE>
by such quorum of Disinterested Directors, or a quorum of the Board, as the case
may be; or (iii) as provided in Section 10(b) of this Agreement. If it is so
determined that Indemnitee is entitled to indemnification, payment to Indemnitee
shall be made within ten (10) days after such determination. Indemnitee shall
cooperate with the person, persons or entity making such determination with
respect to Indemnitee's entitlement to indemnification, including providing to
such person, persons or entity upon reasonable advance request any documentation
or information which is not privileged or otherwise protected from disclosure
and which is reasonably available to Indemnitee and reasonably necessary to such
determination. Any costs or expenses (including attorneys' fees and
disbursements) incurred by Indemnitee in so cooperating with the person, persons
or entity making such determination shall be borne by the Corporation
(irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Corporation hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
(c) If required, Independent Counsel shall be selected as follows: (i) if a
Change of Control shall not have occurred, Independent Counsel shall be selected
by the Board, and the Corporation shall give written notice to Indemnitee
advising him of the identity of Independent Counsel so selected; or (ii) if a
Change of Control shall have occurred, Independent Counsel shall be selected by
Indemnitee (unless Indemnitee shall request that such selection be made by the
Board, in which event (i) shall apply), and Indemnitee shall give written notice
to the Corporation advising it of the identity of Independent Counsel so
selected. In either event, Indemnitee or the Corporation, as the case may be,
may within 7 days after such written notice of selection shall have been given,
deliver to the Corporation or to Indemnitee, as the case may be, a written
objection to such selection. Such objection may be asserted only on the grounds
that Independent Counsel so selected does not meet the requirements of
"Independent Counsel" as defined in Section 1 of this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. If such written objection is made, Independent Counsel so selected
may not serve as Independent Counsel unless and until a court has determined
that such objection is without merit. If, within 20 days after submission by
Indemnitee of a written request for indemnification pursuant to Section 9(a)
hereof, no Independent Counsel shall have been selected and not objected to,
either the Corporation or Indemnitee may petition a court of competent
jurisdiction for resolution of any objection which shall have been made by the
Corporation or Indemnitee to the other's selection of Independent Counsel and/or
for the appointment as Independent Counsel of a person selected by such court or
by such other person as such court shall designate, and the person with respect
to whom an objection is so resolved or the person so appointed shall act as
Independent Counsel under Section 9(b) hereof. The Corporation shall pay any and
all reasonable fees and expenses of Independent Counsel incurred by such
Independent Counsel in connection with its actions pursuant to this Agreement,
and the Corporation shall pay all reasonable fees and expenses incident to the
procedures of this Section 9(c), regardless of the manner in which such
Independent Counsel was selected or appointed. Upon the due commencement date of
any judicial proceeding or arbitration pursuant to Section 11(a)(iii) of this
Agreement, Independent Counsel shall be discharged and relieved of any further
responsibility in such capacity (subject to the applicable standards of
professional conduct then prevailing).
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Section 10. Presumption and Effects of Certain Proceedings.
(a) If a Change of Control shall have occurred, in making a determination
with respect to entitlement to indemnification hereunder, the person or persons
or entity making such determination shall presume that Indemnitee is entitled to
indemnification under this Agreement if Indemnitee has submitted a request for
indemnification in accordance with Section 9(a) of this Agreement, and the
Corporation shall have the burden of proof to overcome that presumption in
connection with the making by any person, persons or entity of any determination
contrary to that presumption.
(b) If the person, persons or entity empowered or selected under Section 9
of this Agreement to determine whether Indemnitee is entitled to indemnification
shall not have made a determination within 60 days after receipt by the
Corporation of the request therefor, the requisite determination of entitlement
to indemnification shall be deemed to have been made and Indemnitee shall be
entitled to such indemnification, absent (i) a misstatement by Indemnitee of a
material fact, or an omission of a material fact necessary to make Indemnitee's
statement not materially misleading, in connection with the request for
indemnification, or (ii) prohibition of such indemnification under applicable
law; provided, however, that such 60-day period may be extended for a reasonable
time, not to exceed an additional 30 days, if the person, persons or entity
making the determination with respect to entitlement to indemnification in good
faith require(s) such additional time for the obtaining or evaluating of
documentation and/or information relating thereto; and provided, further, that
the foregoing provisions of this Section 10(b) shall not apply (i) if the
determination of entitlement to indemnification is to be made by the
shareholders pursuant to Section 9(b) of this Agreement and if (A) within 15
days after receipt by the Corporation of the request for such determination the
Board has resolved to submit such determination to the shareholders for their
consideration at an annual meeting thereof to be held within 75 days after such
receipt and such determination is made thereat, or (B) a special meeting of
shareholders is called within 15 days after such receipt for the purpose of
making such determination, such meeting is held for such purpose within 60 days
after having been so called and such determination is made thereat, or (ii) if
the determination of entitlement to indemnification is to be made by Independent
Counsel pursuant to Section 9(b) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter
therein, by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not (except as otherwise expressly provided
in this Agreement) of itself adversely affect the right of Indemnitee to
indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation or, with respect to any criminal
Proceeding, that Indemnitee had reasonable cause to believe that his conduct was
unlawful.
Section 11. Remedies of Indemnitee.
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(a) In the event that (i) a determination is made pursuant to Section 9 of
this Agreement, (ii) advancement of Expenses is not timely made pursuant to
Section 8 of this Agreement, (iii) the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 9(b) of
this Agreement and such determination shall not have been made and delivered in
a written opinion within 90 days after receipt by the Corporation of the request
for indemnification, (iv) payment of indemnification is not made pursuant to
Section 7 of this Agreement within ten (10) days after receipt by the
Corporation of a written request therefor, or (v) payment of indemnification is
not made within ten (10) days after a determination has been made that
Indemnitee is entitled to indemnification or such determination is deemed to
have been made pursuant to Section 9 or 10 of this Agreement, Indemnitee shall
be entitled to an adjudication in the Chancery Court of the State of Delaware,
or in any other court of competent jurisdiction, of his entitlement to such
indemnification or advancement of Expenses. Alternatively, Indemnitee, at his
option, may seek an award in arbitration to be conducted by a single arbitrator
in Delaware. Indemnitee shall commence such proceeding seeking an adjudication
or an award in arbitration within 180 days following the date on which
Indemnitee first has the right to commence such proceeding pursuant to this
Section 11(a). The Corporation shall not oppose Indemnitee's right to seek any
such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to
Section 9 of this Agreement that Indemnitee is not entitled to indemnification,
any judicial proceeding or arbitration commenced pursuant to this Section shall
be conducted in all respects as a de novo trial or arbitration on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination. If a
Change of Control shall have occurred in any judicial proceeding or arbitration
commenced pursuant to this Section, the Corporation shall have the burden of
proving that Indemnitee is not entitled to indemnification or advancement of
Expenses, as the case may be.
(c) If a determination shall have been made or deemed to have been made
pursuant to Section 9 or 10 of this Agreement that Indemnitee is entitled to
indemnification, the Corporation shall be bound by such determination in any
judicial proceeding or arbitration commenced pursuant to this Section, absent
(i) a misstatement by Indemnitee of a material fact, or an omission of a
material fact necessary to make Indemnitee's statement not materially
misleading, in connection with the request for indemnification, or (ii)
prohibition of such indemnification under applicable law.
(d) The Corporation shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section that the procedures
and presumptions of this Agreement are not valid, binding and enforceable and
shall stipulate in any such court or before any such arbitrator that the
Corporation is bound by all the provisions of this Agreement.
(e) In the event that Indemnitee, pursuant to this Section, seeks a
judicial adjudication of, or an award in arbitration to enforce, his rights
under, or to recover damages for breach of, this Agreement, Indemnitee shall be
entitled to recover from the Corporation, and shall be indemnified by the
Corporation against, any and all expenses (of the kinds described in the
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<PAGE>
definition of Expenses) actually and reasonably incurred by him in such judicial
adjudication or arbitration, but only if he prevails therein. If it shall be
determined in such judicial adjudication or arbitration that Indemnitee is
entitled to receive part but not all of the indemnification or advancement of
expenses sought, the expenses incurred by Indemnitee in connection with such
judicial adjudication or arbitration shall be appropriately prorated.
Section 12. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification and to receive advancement of Expenses as
provided by this Agreement shall not be deemed exclusive of any other rights to
which Indemnitee may at any time be entitled under applicable law, the
Certificate of Incorporation or the By-Laws of the Corporation, any agreement, a
vote of shareholders for a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or any provision hereof shall be
effective as to any Indemnitee with respect to any action taken or omitted by
such Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal.
(b) To the extent that the Corporation maintains an insurance policy or
policies providing liability insurance for directors, officers, employees,
agents or fiduciaries of the Corporation or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Corporation, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee, agent or fiduciary under such policy or policies.
(c) In the event of any payment under this Agreement, the Corporation shall
be subrogated to the extent of such payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and take all action necessary
to secure such rights, including execution of such documents as are necessary to
enable the Corporation to bring suit to enforce such rights.
(d) The Corporation shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if and to the extent that
Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
Section 13. Duration of Agreement. This Agreement shall continue until and
terminate upon the later of: (a) 10 years after the date that Indemnitee shall
have ceased to serve as a director, officer, employee, agent or fiduciary of the
Corporation or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which Indemnitee served at the request
of the Corporation; or (b) the final termination of all pending Proceedings in
respect of which Indemnitee is granted rights of indemnification or advancement
of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to
Section 11 of this Agreement. This
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Agreement shall be binding upon the Corporation and its successors and assigns
and shall inure to the benefit of Indemnitee and his heirs, executors and
administrators.
Section 14. Severability. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason whatsoever:
(a) the validity, legality and enforceability of the remaining provisions of
this Agreement (including, without limitation, each portion of any Section of
this Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby; and (b) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that is not itself invalid, illegal or
unenforceable shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
Section 15. Exception to Right of Indemnification or Advancement of
Expenses. Except as provided in Section 11(e), Indemnitee shall not be entitled
to indemnification or advancement of Expenses under this Agreement with respect
to any Proceeding, or any claim therein, brought or made by him against the
Corporation.
Section 16. Identical Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
Section 17. Headings. The headings of the paragraphs of this Agreement are
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
Section 18. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
Section 19. Notice by Indemnitee. Indemnitee agrees promptly to notify the
Corporation in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder.
Section 20. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom such
notice or other communication shall
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have been directed, or (ii) mailed by certified or registered mail with postage
prepaid, on the third business day after the date on which it is so mailed:
(a) If to Indemnitee, to:
(b) If to the Corporation, to:
Heuristic Development Group, Inc.
17575 Pacific Coast Highway
Pacific Palisades, California 90272
or to such other address as may have been furnished to Indemnitee by the
Corporation or to the Corporation by Indemnitee, as the case may be.
Section 21. Governing Law. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware.
Section 22. Miscellaneous. Use of the masculine pronoun shall be deemed to
include usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
CORPORATION
HEURISTIC DEVELOPMENT GROUP, INC.
By:______________________________
Gregory L. Zink, President
INDEMNITEE
________________________________
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ASSIGNMENT
THIS ASSIGNMENT made as of this 22nd day of August 1994 by and between
Nautilus Group Japan, Ltd., a Delaware corporation having its principal office
at Post Office Box 3090, Boynton Beach, Florida 33424 ("Assignor"), and EIS
International Group, Ltd., a Delaware corporation having its principal office
at 17575 Pacific Coast Highway, Pacific Palisades, California 90272
("Assignee").
WITNESSETH
WHEREAS, Assignor is the owner of computer source programs and related
documentation (the "Source Programs") for proprietary computerized systems
relating to the management and functioning of health clubs and similar
facilities using exercise or fitness equipment including without limitation
computerized services and instructional material for patrons of such clubs and
facilities (collectively the "EIS Expert Instructor System");
WHEREAS, Assignor has granted an exclusive franchise to Sumitomo Fudosan
Fitness Co., Ltd., to operate and nominate others to operate fitness and
conditioning centers in Japan under the Nautilus trademark, and in conjunction
with such operation to utilize the EIS Expert Instructor System in Sumitomo
Nautilus Clubs in Japan (the "Franchise Agreement");
WHEREAS, Assignor owns, and has initiated filings to obtain a registration
with the United States Department of Commerce, Patent and Trademark Office under
Serial Number 74/367092 for, the trademark "EIS Expert Instructor System" (the
"Trademark");
WHEREAS, Assignee wishes to obtain the rights to the Trademark, the Source
Programs and the EIS Expert Instructor System in order to update and improve the
Source Programs and to design, develop implement such improved Source
Programs for use in the EIS Expert Instructor System and related uses in the
United States and other countries;
WHEREAS, Assignor wishes to transfer and assign to Assignee all of
Assignor's right, title and interest in and to the Trademark, the Source
Programs, and the EIS Expert Instructor System except for the right to use such
Source Programs and EIS Expert Instructor System in Sumitomo Nautilus Clubs
pursuant to the Franchise Agreement, such transfer and assignment to be a
contribution to the capital of Assignee in consideration for the issuance to
Assignor of Assignee's preferred stock in the face amount of $50,000;
<PAGE>
NOW, THEREFORE, for and in consideration of the issuance to Assignor of
fifty (50) shares of Assignor's Series A Preferred Stock (Par Value of $0.01 per
share) each in the face amount of one thousand dollars ($1,000) per share, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Assignment of Interest. Assignor hereby assigns, transfers,conveys and
delivers to Assignee all of Assignor's right, title and interest in and to the
Trademark, the Source Programs and the EIS Expert Instructor System except for
the right to use such Source Programs and EIS Expert Instructor System in
Sumitomo Nautilus Clubs pursuant to the Franchise Agreement (such Trademark,
Source Programs and the EIS Expert Instructor System, except for the right to
use such Source Programs and EIS Expert Instructor System in Sumitomo Nautilus
Clubs pursuant to the Franchise Agreement being hereinafter referred to as the
"Assigned Property"), as a contribution to the capital of Assignee;
2. Representations. Warranties and Agreements of Assignor. Assignor does
hereby represent, warrant, covenant and agree with Assignee that:
(i) Assignor has full and complete power and authority to convey the
Assigned Property to Assignee hereunder;
(ii) Assignor is the sole owner of the Assigned Property and has not
previously transferred, conveyed, assigned, hypothecated, or encumbered the
Assigned Property or any portion thereof;
(iii) There are no pending suits, judgments, bankruptcies, executions,
liens for past due taxes, assessments, or encumbrances affecting Assignor's
title to the Assigned Property or constituting a lien thereon;
(iv) The Assigned Property is free and clear of all claims, charges,
liens, or encumbrances whatsoever, and as a result of the Assignment of the
Assigned Property to Assignee hereunder, Assignee has acquired full and
complete title to the Assigned Property free and clear of all claims,
charges, liens and encumbrances whatsoever;
(v) Assignor will warrant and further defend title to the Assigned
Property assigned and conveyed to Assignee hereunder from and against all
claims of all persons and entities whomsoever; and
(iv) Assignor shall promptly execute and deliver all such further
deeds, conveyances, forms of
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assignment, and other documents as Assignee may from time to time
reasonably request in order to further confirm the Assignment and transfer
of the Assigned Property to Assignee, as long as such documents are in form
and substance reasonably satisfactory to Assignor.
3. Withdrawal by Assignor. Assignor acknowledges that by virtue of this
Assignment, Assignor shall cease to have any interest in or claim against or to
the Assigned Property (except for the right to use the Source Programs and EIS
Expert Instructor System in Sumitomo Nautilus Clubs pursuant to the Franchise
Agreement, which right has specifically been excluded from the Assigned
Property) all of said interest and claims of Assignor being hereby terminated
and released;
4. Indemnification of Assignee. Nothing herein shall operate or be deemed
to release or discharge Assignor from any personal obligation or liability
incurred by Assignor as the owner of the Assigned Property prior to the date of
this Assignment and not previously disclosed to Assignee. Assignor hereby agrees
to indemnify and hold Assignee harmless from and against any and all demands,
claims, causes of action, liabilities, judgments, losses, damages, costs, and
expenses of any kind whatsoever (including, without limitation, attorneys' fees
and court costs incurred in connection with the enforcement of this indemnity)
resulting from or arising out of any obligation or liability, not otherwise
previously disclosed to Assignee, incurred by Assignor prior to the date hereof
as the owner of the Assigned Property.
5. Indemnification of Assignor. Assignee hereby agrees to indemnify and
hold Assignor harmless from and against any and all demands, claims, causes of
action, liabilities, judgments, losses, damages, costs, and expenses of any kind
whatsoever (including, without limitation, attorneys' fees and court costs
incurred in connection with the enforcement of this indemnity) resulting from or
arising out of any use of the Assigned Property from and after the date hereof.
6. License to Assignor.
(a) Assignee hereby grants Assignor a royalty-free non-exclusive
license with respect to any and all improved, updated and enhanced Source
Programs and EIS Expert Instructors System which may be designed, developed
and implemented by Assignee, or for Assignee by its agents, employees and
consultants, for use (including, without limitation, the right to
sublicense such use) exclusively in Sumitomo Nautilus Clubs an Japan
pursuant to the Franchise Agreement.
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(b) Assignee hereby grants Assignor a nonexclusive license with
respect to the Trademark, the Source Programs, and the EIS Expert
Instructor System and any and all improved, updated and enhanced Source
Programs and EIS Expert Instructor System which may be designed, developed
and implemented by Assignee, or for Assignee by its agents, employees and
consultants, for use (including, without limitation, the right to
sublicense such use) exclusively in Japan, such license to be effective
only upon the first to occur of (i) the termination of the Franchise
Agreement, provided the Franchise Agreement is not replaced with another
license or franchise agreement between Assignor and Sumitomo Fudosan
Fitness Co., Ltd., and (ii) the date on which Assignor reasonably
concludes, based on an examination of its quarterly financial results,
that its annual revenue from the Franchise Agreement has fallen below one
million dollars. No royalty shall be paid by Assignor (as licensee) to
Assignee (as licensor) with respect to the first two million dollars of
revenue per year derived from Assiqnor's use of the license; however,
Assignor shall pay Assignee a royalty equal to eighty per cent (80%) of the
gross revenue in excess of two million dollars in any year derived by
Assignor from its use of this license. Such royalty payments shall not
apply with respect to Assignor's use of the license granted under
subparagraph (a) of this paragraph 6.
7. Binding Effect. This Assignment shall inure to the benefit and shall be
binding upon the parties hereto and their respective legal representatives,
successors and assigns.
8. Governing Law. This Assignment shall be deemed to be made in and in all
respects shall be interpreted, construed, and governed by and in accordance with
the laws of the State of California.
9. Headings. The paragraph headings contained in this Assignment are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Assignment.
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IN WITNESS WHEREOF, the parties hereto have executed, sealed and delivered
this Assignment as of the date first above written.
ASSIGNOR:
NAUTILUS GROUP JAPAN, LTD.,
a Delaware corporation
Attest: /s/Carmen Zink By: /s/Gregory L. Zink
---------------- ------------------------
Gregory L. Zink
Chief Operating Officer
ASSIGNEE:
EIS INTERNATIONAL GROUP, LTD.,
a Delaware corporation
Attest: /s/ illegible By: /s/Deborah E. Griffin
---------------- ------------------------
Deborah E. Griffin
Chief Operating Officer
5
EXCLUSIVE DISTRIBUTION
LICENSE AGREEMENT
THIS AGREEMENT is made as of the day of June, 1995, by and between
HEURISTIC DEVELOPMENT GROUP, INC. a Delaware corporation, headquartered at 17575
Pacific Coast Highway, Pacific Palisades, California 90272 (hereinafter referred
to as "HDG"), and NAUTILUS GROUP JAPAN, LTD., a Delaware corporation,
headquartered at P.O. Box 3090, Boynton Beach, Florida 33424 (hereinafter
referred to as "Distributor");
WITNESSETH:
THAT WHEREAS, HDG is engaged in the business of designing, developing and
distributing throughout the world, proprietary software and hardware products
and proprietary computerized systems relating to the management and functioning
of health clubs and similar facilities using exercise or physical fitness
equipment including without limitation computerized services and instructional
material for patrons of such clubs and facilities; as defined in Section 1.01;
and
WHEREAS, Distributor is desirous of acquiring certain exclusive territorial
rights in Japan to act as a Distributor for certain products developed by HDG;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
of the parties hereto, and in accordance with the terms and conditions specified
herein, HDG and Distributor hereby agree as follows:
ARTICLE I - DEFINITIONS
1.01 Products. Products means any and all "fitness-related" hardware and
software products owned and developed by HDG or any entity more than 50%
controlled by HDG (unless waived by NGJ, with additions and modifications by and
for HDG during the term of this Agreement, including, but not limited to those
which are merchandised under various HDG Trademarks, but specifically excludes
any products not related to the fitness market. Other than the rights granted
herein, NGJ shall have no rights to or in the Products.
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"Fitness-related" is further defined to include only those facilities that
utilize physical fitness products such as weight training equipment, exercise
equipment, cardiovascular equipment, rehabilitation equipment, aerobic training
and equipment and other such devices as part of conducting their trade or
business. The parties hereto agree that the market includes, but is not limited
to, any type of facility that would be a customer or potential customer of a
supplier of any of the above types of equipment or training programs.
HDG will provide all software necessary to operate the Intellihealth System,
however, this obligation does not extend to Intellihealth System hardware.
1.02 HDG Trademarks. Trademarks means any and all trademarks and service
marks used to identify the products and services of HDG.
1.03 Territory. Territory means Japan.
ARTICLE II - RIGHTS AND DUTIES
2.01 Designation of Distributor. HDG hereby grants Distributor the
exclusive right and license to market, use and grant sub licenses to others to
distribute the Products within the Territory during the term of this Agreement.
2.02 Expansion of Product Lines. HDG agrees that it will extend any or all
of the rights granted herein to Distributor for all other fitness industry
products that HDG or any entity more than 50% controlled by HDG may subsequently
design, develop, license and/or distribute pursuant to Section 1.01 herein.
2.03 Compliance with Laws. Distributor shall comply with all laws, rules
and regulations existing in the Territory from time to time concerning the
Products and shall keep HDG informed of any relevant changes therein.
Distributor shall provide any import licenses that may be required for the
importation of the Products and, except as provided in Section 4.01 hereof,
shall pay all custom duties as well as any other duties and taxes payable at the
time of or by reason of the importation of the Products.
2.04 Competing Products. During the term of this Agreement, without the
prior written approval of HDG, neither Distributor nor any of its affiliates
shall distribute, manufacture or sell in the Territory any products which are
competitive with the Products; provided, however, that neither the foregoing
terms of this Section 2.04 nor the terms of Section 2.06 hereof shall apply to
or in any manner diminish or affect either (i) the rights retained by
Distributor in Section 1 of the Assignment made as of August 22, 1994 by and
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between Nautilus Group Japan, Ltd. and EIS International Group, Ltd. (since
renamed Heuristic Development Group, Ltd.) (i.e., the right to use the "Source
Programs" and the "EIS Expert Instructor System" in Sumitomo Nautilus Clubs
pursuant to the "Franchise Agreement", as such terms are used in the
Assignment), or (ii) the licenses granted by EIS International Group, Ltd. to
Nautilus Group Japan, Ltd. pursuant to Paragraphs 6(a) and 6(b) of said
Assignment.
2.05 Activities Outside the Territory. Distributor shall not seek
customers, establish branches or maintain distribution depots for the Products
outside the Territory. Without limiting the foregoing, Distributor shall not
sell the Products to any customer who Distributor knows or has reason to believe
will sell or ship the Products outside the Territory.
2.06 Alteration of Products. Distributor shall not make any alteration to
the Products unless such alteration shall have been approved in writing by HDG.
ARTICLE III - PRICING, PAYMENT AND SHIPPING
3.01 Pricing and Payment Terms. HDG and Distributor agree that, at such
time as they believe that the Products offered for sale by HDG are in a form
suitable for sale in the Territory, they will negotiate the royalty which
Distributor shall pay HDG and the associated payment terms. It is understood
that Distributor shall pay HDG an arm's length royalty or fee on terms no less
favorable than those granted by HDG to its other distributors, but only out of
any royalties, fees or other income received by NGJ from the distribution,
license or exploitation of any such products or services in the Territory. If
HDG and Distributor cannot agree on such an arms length royalty or payment
terms, then both parties agree to settle such dispute via arbitration which will
be in California and will be in accordance with the Commercial Arbitration Rules
of the American Arbitration Association. The decisions rendered by the
arbitrator(s) will be final and binding upon both parties. Each party will bear
its own expenses in any such arbitration. The costs and fees paid to the
arbitrator(s) will be split equally between HDG and Distributor.
3.02 Orders and Shipment.
(a) HDG shall use its best efforts to produce and to ship all approved
orders of Products in a timely manner and, whenever commercially
practical, within 45 days of the date an order is accepted. Orders
shall be accepted by HDG only on the terms and conditions agreed to by
HDG and in accordance with the procedures established by HDG for the
review, acceptance and
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processing of such orders, the approval of which will not be
unreasonably withheld.
(b) All shipments of Products shall be EX-WORKS HDG's facilities in Los
Angeles, California USA, unless agreed to otherwise by HDG and
Distributor.
(c) All claims for damage, delay or shortage during transit shall be made
directly against the carrier by the Distributor. The Distributor shall
inspect all shipments of Products upon receipt, and shall notify HDG
of any damage or shortage within ten (10) days of receipt of such
shipment by the ultimate customer of Distributor. Failure to so notify
HDG shall constitute acceptance by the Distributor, thereby relieving
HDG of all liability for damages or shortages.
ARTICLE IV-INTELLECTUAL PROPERTY RIGHTS
4.01 Trademarks, Patents and Proprietary Rights. HDG agrees to reimburse
Distributor promptly upon request or pay directly all fees and expenses
associated with the registration, application and enforcement of all trademarks,
patents and proprietary rights within the Territory.
4.02 Trademark Rights. HDG shall retain full ownership of all HDG related
trademarks and associated registrations and applications therefor in the
Territory during the entire term of this Agreement and thereafter, and
Distributor agrees that nothing contained herein shall give to Distributor any
right, title or interest in the HDG trademarks in the Territory or elsewhere
except the right to use the same in accordance with the terms of this Agreement.
Distributor agrees that any and all use which it makes of the HDG trademarks
shall inure exclusively to the benefit of HDG.
4.03 Trademark Notice. Distributor agrees to depict appropriate trademark
notices, such as "(R)" and "TM", whenever it uses the HDG trademarks on or in
connection with the Products and related services covered by this Agreement.
Distributor shall obtain the prior approval of HDG of all advertising,
promotional material, labels and other items containing HDG's tradenames or
trademarks. For purposes of this Section 4.03, if HDG shall not reject any
advertising, promotional material, labels or other items within fifteen (15)
days of receipt, it shall be deemed to have granted its approval.
4.04 Notification of Infringement. Distributor agrees to notify HDG
promptly in the event Distributor determines that any patent, trademark or
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other proprietary rights of HDG are being infringed by any unauthorized acts of
third parties, and Distributor further agrees to take no action of any kind with
respect to such infringement except in accordance with the express written
authorization of HDG. While it shall be at the sole discretion of HDG whether to
take appropriate action with respect to such infringement, HDG shall use its
best efforts to abate such infringement, and if any action is taken, HDG shall
be solely responsible for the prosecution and expense of such action, and HDG
shall retain any and all monetary recoveries derived therefrom. Distributor
shall cooperate with HDG in the prosecution of any such infringement.
Distributor shall be reimbursed for its reasonable out-of-pocket expenses
incurred in connection with any such prosecution.
ARTICLE V - TERM AND TERMINATION
5.01 Term. This Agreement shall be effective as of the date which the first
set forth above, and shall remain in effect until it is terminated by notice in
writing:
(a) delivered not less than ninety (90) days in advance by either party to
the other, effective on the fifth, tenth, fifteenth, twentieth, or any
subsequent five-year anniversary of the date (as agreed to in writing
by the parties hereto) on which the first Product is in a form
suitable for sale within the Territory (the "Commencement Date");
(b) delivered by either party to the other, effective as of the last day
of any month, if the party receiving such notice is in default in the
payment of any sums due under this Agreement, or has breached any
covenant or agreement contained in this Agreement, and such default or
breach has continued unremedied for thirty days after receipt by the
defaulting or breaching party of written notice thereof;
(c) delivered by either party to the other, effective as of the last day
of any month, if the party receiving such notice has been adjudicated
bankrupt or makes a general assignment for the benefit of creditors;
or has commenced a voluntary proceeding under any bankruptcy,
insolvency or similar law or acquiesces in the commencement of such
proceeding; or has such a proceeding commenced against it which
remains undismissed for thirty days; or suffers the appointment of a
receiver, liquidator or custodian for its assets which appointment
remains undischarged for thirty days.
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(d) delivered pursuant to Section 5.03 (b).
5.02 Right of First Refusal. If HDG shall terminate this Agreement pursuant
to Section 5.01(a) hereof, and within one hundred twenty (120) days thereafter
propose to enter into an agreement with a third party (the "New Agreement") to
distribute the Products in the Territory, HDG shall provide Distributor with the
proposed terms of the New Agreement. Distributor may elect to distribute the
Products in the Territory on the terms of the New Agreement by giving notice to
HDG within thirty (30) days of receipt of the terms of the New Agreement.
5.03 Injunctive Relief and Failure to Exploit.
(a) HDG trademarks and other assets proprietary to HDG which are the
subject of this Agreement are unique and of great value to HDG, and
would be impossible to replace. Accordingly, because a breach of this
Agreement by Distributor would cause HDG irreparable damage, HDG
shall have the right to injunctive relief in the event of such a
breach, in addition to all other remedies available at law or equity,
all of which remedies shall be cumulative.
(b) Distributor shall use reasonable commercial efforts to exploit the
Products in the Territory during the term of this Agreement. If
Distributor shall fail to use such reasonable commercial efforts, then
HDG, at its option, and as its sole remedy for such failure fly
Distributor, may terminate this Agreement upon sixty days' notice to
Distributor, at any time after the third anniversary of the
Commencement Date.
5.04 Survival of Covenants. Termination of this Agreement shall not affect
the continuing validity and enforceability of Sections 4.02, 6.04 and 6.12
hereof.
ARTICLE VI - MISCELLANEOUS
6.01 Assignability.
(a) This Agreement and the rights granted hereunder to Distributor shall
in no event be construed to be an assignment to Distributor of any
ownership interest in the property rights of HDG which are the subject
of this Agreement. The rights herein granted shall be personal to
Distributor and shall not be sold, assigned, divided, transferred or
encumbered, but may be sub licensed in connection with sales of the
Products by Distributor, either
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voluntarily or by operation of law, without the prior written consent
of HDG, which consent shall not be unreasonably withheld.
(b) This Agreement, and all terms and conditions provided herein, shall
inure to the benefit of HDG and to its successors and assigns, and to
NGJ and to its successors and permitted assigns, without limitation.
6.02 Independent Contractor Status. No joint venture, association or
partnership is created by this Agreement, and HDG and Distributor are
independent contractors with respect to each other, and neither shall have any
power, nor shall either represent that it has any power, to bind the other or to
assume or to create any obligation, express or implied, on behalf of the other
party, or in the other party's name.
6.03 Warranties and Maintenance. With respect to Products purchased by
Distributor from HDG, HDG shall furnish Distributor with its standard written
limited warranties, which in turn Distributor shall furnish to the ultimate
customer to whom Distributor or its representative sells the Product.
Distributor is not authorized to make and shall not make on behalf of HDG any
warranties or representations concerning the workmanship, merchantability or
fitness for a particular purpose of any such Products, other than those
contained in HDG's standard written limited warranties, except as required by
law. Distributor shall be responsible for performing all warranty, repairs and
all maintenance on such Products sold by Distributor or its representatives
within a reasonable time after notification by the customer or HDG of the need
therefor, and all such repairs and maintenance shall be done in a competent and
workmanlike manner so that the Products shall perform according to HDG's
specifications. Distributor shall not make any alterations in or modifications
of any HDG product without written authorization from HDG but shall make all
such alterations and modifications required by HDG, at the expense of HDG.
Distributor shall be reimbursed for its out-of-pocket expenses reasonably
incurred in connection with all warranty service work requested or authorized by
HDG. Nothing herein shall prohibit Distributor from performing any warranty work
required by law provided that Distributor notifies HDG, prior to performing such
work, of such requirement.
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6.04 Indemnity.
(a) Distributor shall indemnify HDG from any and all liability, loss,
damage, expense, costs and attorney's fees HDG may suffer or incur as
a result of asserted claims, demands, costs or judgments against it
arising out of any claimed or actual defects or negligence pertaining
to the services rendered by Distributor or its employees or agents,
regardless of the nature of the claimed or actual defects or
negligence except for design defects in Products specified by HDG, and
as a result of any breach of any term or condition of this Agreement
by Distributor or arising from any contractual dispute between
Distributor and Sumitomo Nautilus Clubs.
(b) During the entire Term of this Agreement, Distributor shall maintain
adequate amounts of general liability insurance directed to its
operations and the Products subject to this Agreement, but not less
than One Million Dollars ($l,000,000.00) in cumulative coverage, and
the coverage of such insurance shall extend to HDG and to the
customers of Distributor. Distributor shall furnish HDG a
certificate(s)) evidencing the aforementioned minimum amount of
general and product liability Insurance, and Distributor agrees that
no reduction in the amount of such general liability insurance shall
be made without the prior written consent of HDG.
(c) HDG shall indemnify Distributor from any and all liability, loss,
damage, expense, costs and attorney's fees Distributor may suffer or
incur as a result of Distributor merchandising the Products in the
Territory pursuant to the provisions of this Agreement, based upon any
asserted claims, demands, costs or judgments against Distributor (i)
arising out of any claimed or actual infringement of trademark,
patent, trade secret or similar proprietary rights owned by third
parties in the Territory with respect to the HDG trademarks or the
Products, or (ii) arising out of any claimed or alleged defective
Products, warranty claims respecting the Products and other similar
actions.
(d) During the entire Term of this Agreement, HDG shall maintain adequate
amounts of general liability and product liability insurance directed
to its operations and the Products subject to this Agreement, but not
less than One Million Dollars ($1,000,000.00) in cumulative coverage,
and the coverage of such insurance shall extend to both HDG and its
customers, including Distributor and its customers in the Territory.
HDG shall furnish Distributor a certificate(s) evidencing the
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aforementioned minimum amount of general and product liability
insurance, and HDG agrees that it will not reduce its coverage of such
insurance below the aforementioned minimum amount without the prior
written consent of Distributor.
6.05 Advertising Support and Cooperation. HDG shall furnish Distributor,
without charge, such advertising, promotional and merchandising support
materials which HDG prepares in the normal course of business for its
distributors. Upon request of Distributor, and subject to availability, HDG
shall furnish Distributor, without charge, proofs, prints and camera-ready
artwork with respect to such materials for the use of Distributor in adapting
such materials for use in the Territory. Distributor may have the English
language text of such materials translated into Japanese for use in the
Territory, it being understood that all claims to copyright in such materials,
whether in English or Japanese, shall remain the property of HDG. All claims to
copyright with respect to original materials prepared by or for Distributor
which use the HDG trademarks shall be the property of HDG.
6.06 Severability. In the event any one or more of the provisions contained
in this Agreement shall, for any reason, by held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
6.07 Modification. No renewal or termination notice hereof, or modification
or waiver of any of the provisions herein contained, or any future
representation, promise or condition in connection with the subject matter
hereof, shall be binding upon either party unless made in writing and signed on
its behalf. A mere acknowledgment or acceptance of any action inconsistent with
the provisions of this Agreement, or failure to object thereto, shall not be
deemed an acceptance or approval of such inconsistent provisions.
6.08 Authority. HDG and Distributor each represent and warrant to each
other that it has duly authorized the execution of this Agreement, that its
obligations hereunder are legal and binding upon it and do not violate any other
agreement to which it is a party and that it will use its best efforts to carry
out the marketing activities and other actions called for herein with respect to
sales of the Products in the Territory.
6.09 Integration. This Agreement supersedes and is in lieu of all existing
Agreements or arrangements between the parties relating to the subject matter
hereof, and contains the entire Agreement between HDG and
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Distributor. There are merged herein all prior and collateral representations,
promises and conditions in connection with the subject matter hereof. Any
representation, promise or condition not incorporated herein shall not binding
upon either party.
6.10 Governing Law. The construction, validity and performance of this
Agreement shall be determined in accordance with and governed by the laws of the
State of California. HDG and Distributor both waive any and all objections,
including, without limitation, objections to jurisdiction, to the exclusive use
of the state and federal courts of the State of California for the resolution of
any and all disputes which may arise between the parties.
If such disputes, controversies, or differences cannot be settled between the
parties, they will be settled finally by arbitration which will be in California
and will be in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. The decisions rendered by the arbitrator(s) will be
final and binding upon both parties. Each party will bear its own expenses in
any such arbitraton. The costs and fees paid to the arbitrator(s) will be split
equally between HDG and Distributor.
6.11 Notices. Notices to be sent under the terms of this Agreement shall be
sent to the following addresses:
If to Nautilus Group Japan, Ltd.:
c/o Clark Management Company
P.O. Box 3090
Boynton Beach, FL 33424
Attention: Gregory L. Zink, Chief Operating Officer
If to Heuristic Development Group, Inc.:
17575 Pacific Coast Highway
Pacific Palisades, CA 90272
Attention: Deborah E. Griffin, Chief Operating Officer
6.12 Confidentiality. Distributor agrees that neither it nor its employees
or agents shall make any unauthorized use or disclosure of Confidential
Information. Distributor shall be responsible for any unauthorized use or
disclosure of Confidential Information made by any of its employees and agents
and shall take reasonable precautions to prevent such use or disclosure. As used
herein, "Confidential Information" shall mean any and all trade secrets and
other information relating to the Products and the business of HDG or this
Agreement that has not been previously
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publicly released by duly authorized representatives of HDG. The term
"Confidential Information" shall not, however, include (i) information that, at
the time of use or disclosure is publicly known, other than as a result of a
breach of this Agreement, (ii) information that Distributor can demonstrate was
known to it prior to the time it was obtained from HDG, and (iii) information
which was obtained from a third party who was entitled to provide such
information to Distributor.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
hereby have by their respective duly authorized officers caused this Agreement
to be executed and attested, all being done as of the day and year first above
written.
HEURISTIC DEVELOPMENT GROUP, INC
By: /s/ Steven R. Gumins
--------------------------
Steven R. Gumins
Chief Executive Officer
Attest:
By: /s/ Deborah E. Griffin
-------------------------
Deborah E.Griffin
Chief Operating Officer
NAUTILUS GROUP JAPAN, LTD.
By: /s/ Gregory L. Zink
--------------------------
Gregory L. Zink
Chief Operating Officer
Attest:
By: /s/ Jerald N. Downen
--------------------------
Jerald N. Downen
Executive Vice President
11
Heuristic Development Group, Inc.
17575 Pacific Coast Highway
Pacific Palisades, California 90272
November 27, 1996
Nautilus Group Japan, Ltd.
P.O. Box 3090
Boynton Beach, Florida 33424
Dear Sir or Madam:
Reference is made to the Assignment (the "Assignment") dated as of August
22, 1994 between Heuristic Development Group, Inc. (the "HDG") and Nautilus
Group Japan, Ltd. ("Distributor") and the Exclusive Distribution License
Agreement (the "Distribution Agreement") dated as of June __, 1995 between the
HDG and Distributor. HDG and Distributor hereby agree as follows:
(a) The last two sentences of Section 6(b) of the Assignment is hereby
deleted in full.
(b) The first sentence of Section 3.01 of the Distribution Agreement is
hereby deleted in full and a new first two sentences of Section 3.01 are added
to the Distribution Agreement to read in full as follows:
"HDG and Distributor hereby agree that in the event that (i) the Franchise
Agreement (as defined in the Assignment Agreement) is terminated and is not
replaced with another franchise agreement between Distributor and Sumitomo
Fudosan Fitness Co., Ltd. or (ii) Distributor reasonably concludes, based
on an examination of its quarterly financial results, that its annual
revenue from the Franchise Agreement has fallen below one million dollars
($1,000,000) ((i) and (ii) above are collectively referred to as the
"Conditions") then the royalty payments owed by Distributor to HDG for all
Products distributed outside of Sumitomo Nautilus Clubs in Japan will be as
follows:
(a) No royalty will be payable by Distributor to HDG with respect to
the first two million dollars of revenue per year derived from
Distributor's use of the license.
(b) The royalty payable by Distributor to HDG with respect to all
revenue in excess of two million dollars per year derived from
Distributor's use of the license will be determined by Distributor and
HDG prior to distribution of the Products in the Territory.
<PAGE>
In the event that neither of the Conditions has been met the royalty
payments owed by Distributor to HDG for all Products distributed
outside of Sumitomo Nautilus Clubs in Japan will be negotiated by
Distributor and HDG."
All other terms of the Assignment and Distribution Agreement will remain in
full force and effect.
Please indicate your acceptance of and agreement with the foregoing by
signing the enclosed counterpart of this letter and returning it to HDG,
whereupon this shall be a binding agreement between the parties.
Very truly yours,
HEURISTIC DEVELOPMENT GROUP, INC.
/s/ Deborah E. Griffin
------------------------------------
Deborah E. Griffin
Chief Operating Officer
Accepted and Agreed:
NAUTILUS GROUP JAPAN, LTD.
/s/ Gregory L. Zink
- ------------------------------
Gregory L. Zink
Chief Operating Officer
-2-
THIS LEASE is made and executed this first day of August, 1996 BETWEEN PAULIST
PRODUCTIONS, Lessor (whether one or more), AND HEURISTIC DEVELOPMENT GROUP,
Lessee (whether one or more),
WITNESSETH:
That Lessor hereby leases to Lessee, and Lessee hereby hires from Lessor
those certain premises known as: Suite No. Penthouse on the third floor and one
room on the first floor of that certain Building known as the _____________ at
17575 Pacific Palisades, California 90272
NOW, THEREFORE, it is mutually agreed as follows:
1. The Term of this lease shall be for a period of 1 years, beginning on
the 18th day of August, 1996.
2. Lessee agrees to pay to Lessor as rental for said premises the total sum
of $2675.00.
Lessee and Lessor agree that this is a continuous agreement based on
original agreement dated August 3, 1994, with specific changes. Therefore,
deposit had already been complied with, as well as last month's rent.
Each installment of rental shall be payable in advance on this first day of
each month, execpt the first monthly installment which shall be payable by
Lessee to Lessor upon the date of the execution of this Lease by Lessee. All
rental installments payable hereunder shall be paid in lawful money of the
United States at the Lessor's office address appearing under Lessor's signature
hereinbelow, or at such other place as Lessor may from time to time designate in
writing, and shall be free from all demands, claims or set-offs against Lessor.
3. As a separate and independent consideration for the execution of this
Lease by the Lessor, Lessee has paid to Lessor and Lessor acknowledges receipt
from Lessee of the sum of $ -n/a-, and it is hereby agreed that if on the date
of the commencement of the last month of the term of this lease, Lessee has
faithfully and fully performed the terms and provisions of this Lease on Lesees
part to be kept and performed hereunder and has paid to Lessor the rental as
herein provided to be paid by Lessee to Lessor, Lessee shall be permitted to
occupy, use and enjoy the demised premises during the last month of the term of
this Lease beginning on the 18th day of August 1997 and ending on the 17th day
of September 1997 without obligation or liability to pay any rental for said
month.
4. If for any reason whatever Lessor cannot deliver possession of the
demised premises to Lessee at the commencement of the term of this Lease, as
hereinbefore specified, this Lease shall not be void or voidable, nor shall
Lessor be liable to Lessee for any loss or damage resulting therefrom. In such
event, this Lease shall automatically commence upon the date the demised
premises are ready for delivery to Lessee and, regardless of the date above
specified for the commencement and termination of said Lease, this Lease shall
continue from the date the demised premises are ready for occupancy or are
occupied by Lessee (whichever date shall first occur) and shall continue
thereafter for the full period specified above constituting the duration of the
term of this Lease plus a preliminary period comprising the number of days
elapsing between the day of the commencement of the term (if such day be other
than on the first day of the month) and the first day of the month next
succeeding such date, provided, however, that no rent shall be due hereunder
until the demised premises are ready for occupancy or are occupied by Lessee,
whichever date shall first occur, and the rent shall be prorated on the thirty
(30) day basis for the number of days, if any, elapsing from and after
commencement date and the first day of the immediately ensuing month comprising
the first full month of the leasehold term. If for any reason the Building
should not be completed or occupancy of Lessee's suite is not furnished to
Lessee on or before the 18th day of August 1996 so as to result in the actual
commencement of the term of this Lease on or before said date, said Lease shall
be of no further force or effect and Lessor shall be relieved of all further
liability or responsibility to Lessee upon returning in full (a) the first
monthly installment of rent paid by Lessee to Lessor upon the date of the
execution of this Lease by Lessee, and (b) the sum acknowledged by Lessor under
the provisions of Paragraph 3 as having been received from Lessee.
5. Lessee shall use the leased premises as and for Software development
offices and for no other purposes unless the consent of Lessor in writing for a
different use by Lessee is first had and obtained by Lessee.
6. Lessee will conduct himself and will cause Lessee's employees, agent
and invitees to conduct themselves with full regard for the rights, convenience
and welfare of all other tenants of the Building. Should Lessee be a physician,
dentist, chiropractor, chiropodist, radiologist, or plastic surgeon, Lessee
agrees to comply with all applicable written or unwritten professional codes or
rules of ethics, including those of the American Medical Association.
Lessee further agrees to comply with and cause the employees, agents
and invitees of Lessee to comply with the rules and regulations of the Building,
which are hereinafter set forth and hereby made a part of this Lease, and with
all supplements and amendments thereto which Lessor may, after giving notice,
hereafter adopt. Any violation by Lessee or by its employees, agents or invitees
of any such rule or regulation heretofore or hereafter adopted, amended or
supplemented by Lessor shall constitute a default by Lessee under this Lease and
shall make available to Lessor the remedies hereunder provided by Paragraph 14.
7. Lessee shall not assign or hypothecate this Lease or any interest
therein and shall not sublet the demised premises or any part thereof in whole
or in part or suffer any other person, save and except the employees or agents
of Lessee, to occupy said demised premises without the written consent of Lessor
being first had and obtained. A consent to one assignment, subletting,
occupation or use by any other person shall not be deemed to be a consent to any
subsequent assignment, subletting, occupation or use by another person. Any such
assignment or subletting without such consent aforesaid by Lessor shall be void
and shall, at the option of Lessor, terminate this Lease. This Lease shall not,
nor shall any interest therein, be assignable, as to the interest of Lessee, by
operation of law, without the written consent of Lessor.
8. Lessee states and covenants that no representations as to the use or
condition of said premises or as to the terms of this Lease were made by Lessor
or Lessor's agents prior to or at the execution of this Lease, other than as may
be otherwise expressly set forth and contained herein and that there are no oral
agreements between Lessee and Lessor in respect to the demised premises or the
use or the condition thereof, that said premises shall not be altered, repaired
or changed by Lessee without the written consent of Lessor, and that unless
otherwise provided by this Lease, all alterations, improvements, or changes
shall be done either by or under the direction of Lessor, but at the cost of
Lessee and all alterations, additions or improvements made in or to said
premises shall be the property of Lessor and shall remain and be surrendered
with said premises upon the termination of this Lease, or, at the option of
Lessor, said premises shall be restored to their original condition at the cost
of Lessee, that all damage or injury done to the prmises by Lessee, or by any
person who may be in or upon the premises by the consent of Lessee, shall be
paid for by Lessee upon demand, and that said premises shall be surrendered in
as good condition as the same are now in, depreciation for reasonable use
thereof excepted. Any and all basins, lavatories, sinks, water closets, lighting
fixtures, receptacles, hardware, cabinets, partitions, doors and floor coverings
other than carpets, are herein construed to be permanent improvements and shall
not be removed from the premises upon the expiration or termination of this
Lease, unless otherwise herein stated.
<PAGE>
9. In the event of a partial destruction of the demised premises during
said term, from any cause, Lessee shall promptly give written notice thereof to
Lessor and Lessor thereafter shall proceed forthwith to repair said premises,
provided that following the receipt by Lessor of such written notice from
Lessee, such repairs can be made within sixty (60) days under the laws and
regulations of State, County or Municipal authorities, but such partial
destruction shall in nowise annul or void this Lease, except that Lessee shall
be entitled to a proportionate deduction of rent while such repairs are being
made, such proportionate deduction to be based upon the extent to which the
making of such repairs shall interfere with the business carried on by Lessee on
said premises. If such repairs cannot be made in sixty (60) days, Lessor may, at
Lessor's option, make the same within a reasonable time, this Lease continuing
in full force and effect and the rent to be proportionately rebated as aforesaid
in this paragraph provided. In the event that Lessor does not so elect to make
such repairs which cannot be made in sixty (60) days, or such repairs cannot be
made under such laws and regulations, this Lease may be terminated at the option
of either party. In the event that the Building be destroyed to the extent of
not less than 33 1/3 per cent of the replacement cost thereof, Lessor may elect
to terminate this Lease, whether the demised premises be injured or not. A total
destruction of the Building shall terminate this Lease.
10. Lessee agrees that it will, at its own expense at all times during
the leased term, maintain in force a policy or policies of comprehensive
liability insurance, including property damage, written by one or more
responsible insurance companies, which shall insure Lessee against liability for
injury to persons and/or property and the death of any person or persons
occurring in or about the premises. Each such policy shall be approved as to
form and insurance company by Lessor and shall contain a clause or endorsement
wherein the Insurer agrees to indemnify and hold Lessor and Lessor's agent,
servants, and employees harmless from and against all costs, expenses, and/or
liability arising out of or based upon any and all claims, injuries and damages.
11. During usual business hours (8 A.M. to 7 P.M., Sundays and holidays
excluded) Lessor agrees to supply for the demised premises hereby lease water,
heat, gas, service and electric current for lighting and air conditioning
purposes. Lessor shall be the sole judge of the character and amount of said
water, heat, gas, service, and Lessor shall not be liable for any stoppage or
interruption of any said services caused by riot, strike, labor disputes,
accident or necessary repairs.
12. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, shall not work a merger, and shall, at the option
of Lessor, terminate all or any existing subleases or subtenancies, or may, at
the option of Lessor, operate as an assignment to him of any or all such
subleases or subtenancies.
13. Lessee acknowledges that Lessee's acceptance of possession of the
demised premises will constitute a conclusive admission that Lessee has
inspected the same and found said demised premises to be in good condition and
repair and in all respects in accordance with the obligation of Lessor under
this Lease, Lessee hereby waiving all right to make repairs at Lessor's expense.
During the term hereof Lessee will maintain the demised premises in good
condition and repair in compliance with Lessor's written instructions, except
for damage not caused by any negligence of Lessee or of any employee, agent or
invitee of Lessee, and Lessee will maintain all of Lessee's furniture,
furnishings and equipment located on the demised premises in a good, neat and
attractive condition and in good taste and repair. Lessee will not make any
alterations or additions to or install partitions or built-in fixtures or
facilities on the demised premises without Lessor's previous written consent.
Any alterations, additions, partitions, or built-in fixtures made to or
installed on the demised premises by Lessee with Lessor's consent will be done
in accordance with and subject to the written directions and conditions issued
by Lessor, and shall become a part of the Building and property of Lessor. All
such construction, alterations, or repairs in or to the demised premises shall
be at Lessee's expense.
Lessor shall not be obligated or required to replace or repair any
plumbing in, upon, or about the demised premises should such replacement or
repair be made necessary by the fault or neglect of Lessee. Lessor shall not be
liable for any damage occasioned by the demised premises being out of repair,
nor for any damage done to or done or occasioned by or from plumbing or from
gas, water, steam, or other pipes, or the bursting, leaking or running of any
closet, tank, plumbling or other damage by water in, above, or upon the demised
premises, except as provided for by law, nor for any damage arising from any act
or neglect of any co-tenant or other occupants of the Building or by occupants
of adjoining or contiguous property. Lessee shall reimburse Lessor for all
damage to the Building or to any suite therein, as well as for all damage to
tenants or occupants thereof caused by any negligent act of omission or
commission on the part of Lessee, its agents, servants, or invitees, or by
Lessee's misuse or neglect of the demised premises, its apparatus or
appurtenances, and Lessee agrees to hold Lessor harmless from all loss, expense
or liability or from any claim for damages to persons or property resulting from
the neglect or misuse of the demised premises by Lessee or by Lessee's
employees, agents, invitees or guests.
14. In the event of any breach of this Lease by Lessee, then Lessor,
besides other rights or remedies he may have, shall after giving proper notice
have the immediate right of re-entry and may remove all persons and property
from the demised premises. Such property may be removed and stored in any other
place in the Building, or in any other place, for the account of, and at the
expense and at the risk of Lessee. Lessee hereby waives all claims for damages
which may be caused by Lessor's removing or storing the furniture and property
as herein provided, and will save Lessor harmless from any loss, costs, or
damages occasioned Lessor thereby, and no such re-entry shall be considered or
construed to be a forceable entry. Should Lessor elect to re-enter, as herein
provided, or should he take possession pursuant to legal proceedings or pursuant
to any notice provided for by law, he may either terminate this Lease or he may
from time to time, without terminating this Lease, re-let the demised premises
or any part thereof for such term or terms and at such rental or rentals and
upon such other terms and conditions as Lessor in his sole discretion may deem
advisable, with the right to make alterations and repairs to the demised
premises. Rentals received by Lessor from such reletting shall be applied first,
to the payment of any indebtedness, other than rent, due hereunder from Lessee
to Lessor; second, to the payment of any cost of such re-letting; third, to the
payment of the cost of any alterations and repairs to the demised premises;
fourth, to the payment of rent due and unpaid hereunder, and the residue, if
any, shall be held by Lessor and applied in payment of future rent as the same
may become due and payable hereunder. Should such rentals received from such
re-letting during any months be less than that agreed to be paid during that
month by Lessee hereunder, then Lessee shall pay such deficiency to Lessor. Such
deficiency shall be calculated and paid monthly. No such re-entry or taking
possession of the demised premises by Lessor shall be construed as an election
on Lessor's part to terminate this Lease unless a written notice of such
intention be given to Lessee or unless the termination thereof be decreed by a
Court of competent jurisdiction. Notwithstanding any such re-letting without
termination, Lessor may at any time thereafter elect to terminate this Lease for
such previous breach. Should Lessor at any time terminate this Lease for any
breach, in addition to any other remedies he may have, he may recover from
Lessee all damages Lessor may incur by reason of such breach, including the cost
of recovering the demised premises, and including the worth at the time of such
termination of the excess if any, of the amount of rent and charges equivalent
to rent reserved in this Lease for the remainder of the stated term over the
then reasonable rental value of the demised premises for the remainder of the
stated term.
15. Lessor shall not be liable and Lessee hereby waives all claims for
damages that may be caused by Lessor in re-entering and taking possession of the
demised premises as herein provided, and all claims for damages that may result
from the destruction of or injury to the demised premises or the Building.
Lessor shall not, in any event, be liable for any loss, theft, damage or
injuries to the property or person of Lessee, or any occupants of the demised
premises.
16. Either (a) the appointment of a Receiver to take possession of all
or substantially all of the assets of Lessee, or (b) a general assignment by
Lessee for the benefit of creditors, or (C) any action taken or suffered by
Lessee under any insolvency or bankruptcy act shall constitute a breach of this
Lease by Lessee.
17. If Lessee be an individual and should die, or during a national
emergency should enter the Armed Forces of the United States, this Lease may be
terminated within sixty (60) days thereafter at the option of Lessor or of
Lessee or of Lessee's personal representative, upon Lessor giving to Lessee or
Lessee's personal representative, or Lessee or Lessee's personal representative
giving to Lessor, not less than thirty (30) days' notice in writing. By the
effective date of the accelerated termination under this paragraph Lessee or
Lessee's personal representative will pay to Lessor all rent due up to the date
of the accelerated termination and any other sums owing to Lessor under the
provisions of this Lease, and will remove all personal property in the demised
premises owned by Lessee of Lessee's estate. If Lessee be a partnership or
co-tenancy and one of the partners or co-tenants should die, or during a
national emergency should enter the Armed Forces of the United States, he or his
estate will be released from all prospective, but not accrued, liability under
this Lease, provided the surviving or remaining partners or co-tenants execute
an assumption agreement acceptable to Lessor.
If during the term of this Lease, Lessee becomes disabled to the extent
that Lessee is unable to practice his profession profitably, further obligation
under this Lease shall cease upon payment of three (3) months' rent after
notifying Lessor in writing of the existence of such disability. This provision
will not operate to relieve Lessee of liability for rent unless Lessee furnishes
Lessor with a certificate of such disability duly certified by a physician to be
mutually agreed upon by both parties, said physician to be an M.D.
18. Lessee shall permit Lessor and Lessor's agent to enter into and
upon the demised premises at all reasonable times upon proper notice for the
purpose of inspecting the same, cleaning windows and performing other janitor
service, or for the purpose of maintaining the Building in which the demised
premises are situated, or for the purpose of making repairs, alterations or
additions to any other portion of said Building including the erection of
scaffolding, props, or other mechanical devices, or for the purpose of posting
notices of non-liability for alterations, additions or repairs, or for the
purpose of placing upon the property in which the demised premises are located
any usual or ordinary "FOR SALE" signs, without any rebate of rent to Lessee or
damages for any loss of occupation or quiet enjoyment of the demised premises
thereby occasioned, and shall permit Lessor, at any time within thirty (30)days
prior to the expiration of this Lease, to place upon the windows and doors of
the premises any usual or ordinary "FOR RENT" signs. Lessor and Lessor's agents
may during said last mentioned period, at reasonable hours, enter upon the
demised premises and exhibit the same to prospective lessees.
<PAGE>
19. This Lease shall be, and is hereby declared to be, subject to all
present or future mortgages or deeds of trust affecting the said building or the
land covered thereby.
20. Lessee is hereby given an option to extend the term of this Lease
for a period of year to year commencing immediately after the expiration date of
the original term hereof, upon the same terms and conditions, but at the average
rate charged for other offices in the Building at the beginning of this option.
Lessee may exercise this option by written notice to Lessor not later than
ninety (90) days prior to the expiration date of the original term of this
Lease. See below.
21. Upon expiration or other termination of this Lease, Lessee shall be
entitled to removal from the demised premises of all Lessee's movable furniture,
equipment, trade fixtures, and personal property.
22. In case Lessor should bring suit or cross complaint against Lessee
in any suit for the purpose of recovering possession of the premises, for the
recovery of any sum due hereunder, or because of the breach of any covenant
herein on the part of Lessee, or in case Lessee should bring suit against Lessor
or cross complaint against Lessor in any suit for breach of any covenant herein
on the part of Lessor, and should Lessor or Lessee, as the case may be, prevail
in any such suit, or prevail upon a cross complaint filed by Lessor or Lessee in
any such suit, the party against whom judgment in any such suit is rendered
shall pay to the other party a reasonable attorney's fee and shall be entitled
to a specific provision in the judgment awarding such prevailing party such
reasonable attorney's fee.
23. This Agreement is binding on the heirs, executors, administrators,
personal representatives, assigns and successors in interest of the parties
hereto.
24. All notices to be given to Lessee may be given in writing
personally or by depositing the same in the United States Mail, postage
pre-paid, and addressed to Lessee at the demised premises, whether or not Lessee
has departed from, abandoned or vacated the demised premises.
25. The waiver by Lessor of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition herein contained. The acceptance of rent hereunder shall
not be construed to be a waiver of any breach by lessee of any term, covenant,
or condition of this Lease.
26. It is understood and agreed that the remedies herein given to
Lessor shall be cumulative, and the exercise of any one remedy by Lessor shall
not be to the exclusion of any other remedy.
27. If Lessee holds possession of the demised premises after the term
of this Lease, such Lessee shall become a tenant from month-to-month upon the
terms herein specified and at the same monthly rental as is herein provided to
be paid by Lessee to Lessor, such rental to be payable monthly in advance in
lawful money of the United States on the first day of each month commencing on
the first day of the month following the expiration of the term of this Lease.
Lessee shall continue to be such tenant until such tenancy shall be terminated
by Lessor, or until Lessee shall have given to Lessor a written notice at least
one (1) month prior to the date of termination of such monthly tenancy of his
intention to terminate such tenancy.
28. Time is of the essence of this Lease.
Item 20 cont.: Monthly rental on follow-on lease for each additional
year will be adjusted at a rate not to exceed 7 percent.
IN WITNESS WHEREOF, the parties hereto have executed this Lease in
duplicate the day and year first above written.
PAULIST PRODUCTIONS, INC. HEURISTIC DEVELOPMENT
Lessor GROUP
Lessee
/s/ Enid Sevilla /s/ Steven R.Gummins
- ---------------- --------------------
Enid Sevilla Steven R. Gumins
17575 Pacific Coast Highway 2677 Rambla Pacifico
Pacific Palisades, CA 90272 Malibu, CA 90265
<PAGE>
RULES AND REGULATIONS OF THE BUILDING
1. No loitering or gatherings shall be permitted in the entranceway,
hallways, stairways, corridors or rest rooms of the Building. The elevators, the
spaces and the rooms which are made available for use by Tenants and their
employees and invitees in common shall be used only for the respective intended
purposes.
2. All plumbing fixtures and facilities in the offices and in the rest
rooms shall be used for the respective intended purposes and no act will be
permitted which might cause a stoppage or an overflow.
3. The Building Management shall determine the location of connecting
inlets of all telephones and all electrical, gas and water appliances, none of
which may be installed by a Tenant without the written consent of the Building
Management, and then only in compliance with its directions and at Tenant's risk
and expense. Each Tenant shall be responsible to the Owner of the Building and
to other Tenants for any damage that might be caused by the installation,
maintenance or operation of any telephone or any electrical, gas or water
appliance which shall be installed by a Tenant with the consent of the Building
Management.
4. Tenant shall not mark, drive nails or screws, or drill into, paint,
or in any way deface the walls, ceilings, partitions, floors, wood, stone or
iron work.
5. No object or article which is unusually weighty or bulky shall be
used or maintained in any office without the written consent of the Building
Management, and then only in compliance with its directions as to size, weight,
location, type of platform and maintenance.
6. Tenant shall not do anything in the premises, or bring or keep
anything therein, which will in any way increase or tend to increase the risk of
fire or the rate of insurance, or which shall conflict with the regulations of
the Fire Department or the fire laws or with any insurance policy on the
building or any part thereof, or with any rules or ordinances established by the
Board of Health; and Tenant shall not use any machinery or device therein which
may cause any noticeable noise or jar, or tremor or injury to the floors,
ceiling or walls, or which by its weight might injure the floors or walls of the
building.
7. No person, other than an employee of the Building, shall be allowed
to do any work or perform any installation, repair or maintenance service in any
office on furniture, fixtures or equipment owned or installed by a Tenant unless
a Work Permit on the form furnished by the Building Management shall be filled
in and signed by the Tenant and countersigned by the Building Management. The
work or installation authorized by the Work Permit shall be done at Tenant's
risk and expense.
8. No part of any office shall be used as a dwelling. No household
cooking, assembling or manufacturing shall be permitted in any office, and no
dogs, other animals or birds shall be allowed in any office or any part of the
Building.
9. No Tenant shall be entitled to obtain any rubbish, waste matter or
discarded objects in any office more than forty-eight (48) hours, and shall not
place any object or material in the corridors, stairways, entranceway, elevators
or rest rooms.
10. All janitor and cleaning service in the offices and in the Building
shall be performed only by employees of the Building or persons approved in
writing by the Building Management.
11. Name plates of Tenants shall be uniform and shall be installed at
the locations and shall be of the size and type as prescribed by the Building
Management.
12. No unusual or abnormal noises, either mechanical or vocal, shall be
permitted, and the transmission by Tenant of audible sound by electrical or
mechanical means or by radio, television or phonograph shall not be permitted,
except with the written approval of the Building Management.
<PAGE>
13. Nothing shall be thrown or allowed to drop out of any window or
down the stairways or the elevator shaft, and no device or object shall be
placed, erected or maintained in window sills or in the window space, other than
window blinds, or drapes and devices furnished by Tenant and approved in writing
by the Building Management.
14. No auction or public sale shall be conducted in any office. No
Tenant shall invite or permit to remain in any office, or in any part of the
Building, any peddler, beggar or solicitor, or any person who may be
objectionable to other Tenants because of intoxication, belligerence or other
reasons.
15. No mechanical conveyances, including baby carriages, but excepting
wheelchairs, shall be allowed in the elevators, on the stairways or in the upper
hallways of the Building.
16. No device or substance which shall emit any discernible obnoxious
odors or any smoke, gas or vapor shall be allowed to escape from any office into
any part of the Building.
17. Unless approved in writing by the Building Management, no windows,
glass doors, transoms, skylights or other opaque areas in the Building which are
designed to admit or transmit natural or artificial light shall be covered,
obscured or obstructed in any manner. No awnings shall be allowed. Any window
shade desired by a Tenant shall be installed at his expense and must be of such
uniform shape, color, material and make as may be prescribed by the Building
Management.
18. No name, sign, trademark, design, notice, legend or advertisement
shall be painted or applied on or affixed to the doors or windows or to the
exterior of any wall of any office without the written approval of the Building
Management, and then only in compliance with its directions and at Tenant's risk
and expense.
19. No office shall be redecorated or restyled without the written
approval of the Building Management, and then only in compliance with its
<PAGE>
directions and at Tenant's risk and expense.
20. Tenants shall purchase supplies only from those firms which will
comply with the regulations controlling deliveries that are prescribed by the
Building Management.
21. All equipment or personal property of a size or weight which might
interrupt elevator service must be delivered or removed from the Building in
accordance with regulations posted or retained in the office of the Building.
22. No employee of the Building or independent contractor performing
services in or about the same will be allowed to perform any services for or
fulfill any instructions of a Tenant, except on specific authorization from the
Building Management, and no Tenant shall request any special service or issue
any instructions to employees of the Building except with the written approval
of the Building Management. All special services of employees of the Building
which shall be approved by the Building Management shall be done at Tenant's
risk and expense.
DO NOT RECORD
This standard form covers most usual problems in the field indicated. Before you
sign, read it, fill in all blanks, and make changes proper to your transaction.
Consult a lawyer if you doubt the form's fitness for your purpose.
RETAINER AGREEMENT
THIS AGREEMENT, made as of August 16, 1994 by and between EIS INTERNATIONAL
GROUP, LTD., a Delaware corporation ("EISIG"), and TRANSPAC SOFTWARE, INC., a
California corporation ("TPS"),
WITNESSETH:
THAT WHEREAS, EISIG is the owner, through assignment from Nautilus Group
Japan, Ltd., of computer source programs and related documentation (the "Source
Programs") for proprietary computerized systems relating to the management and
functioning of health clubs and similar facilities using exercise or fitness
equipment including without limitation computerized services and instructional
material for patrons of such clubs and facilities (collectively the "EIS Expert
Instructor System");
WHEREAS, EISIG wishes to retain TPS to assist EISIG in updating and
improving the Source Programs and in designing, developing and implementing such
improved Source Programs for use in the EIS Expert Instructor System and related
uses including, without limitation, other applications of the Source Programs
including insurance, weight loss, home and commercial exercise equipment, home
entertainment and credit and debit cards;
WHEREAS, TPS wishes to provide such assistance to EISIG upon the terms set
forth below;
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby mutually
acknowledged, the undersigned parties hereby covenant and agree as follows:
1. Services.
1.1. Software Specification. TPS and EISIG will jointly develop the
specification for an update to the existing Source Programs (the
"Specification"). The product described by the Specification (the "Release")
will be an advance over the existing EIS Expert Instructor System, and will
require approximately 2,200 hours of development time, with a minimum of 250
hours of development time per month. It is anticipated that the Release will
require no more than six months of development by TPS, using best commercially
reasonable efforts. When TPS and EISIG have mutually agreed upon the
Specification, the Specification will be incorporated
<PAGE>
into this Agreement as Appendix A, and development of the Release based on the
Specification will commence.
1.2. Software Release. TPS will use its best commercially reasonable
efforts to complete the Release as promptly as practicable, and in any event
within six months from the date that the Specification is mutually Agreed upon.
1.3. TPS's Performance. TPS will perform the services under the direction
of EISIG. TPS, however, will determine the manner and means by which the
services are accomplished, subject to the express condition that TPS will at all
times comply with applicable law. TPS is an independent contractor without
authority to bind EISIG by contract or otherwise, and neither TPS nor TPS's
employees and agents are employees or agents of EISIG. TPS will provide
semi-monthly progress reports to EISIG in a form to be agreed upon by TPS and
EISIG.
1.4 Acceptance and Testing. Upon TPS's determination that the Release is
finished, TPS will deliver to EISIG the Release and written notice thereof.
EISIG will have fifteen (15) business days from TPS's delivery of the Release to
accept or reject the Release. EISIG will not unreasonably withhold its
acceptance.
1.5 Rejection of Release. In the event of EISIG's rejection of the Release,
EISIG will give to TPS written notice specifying the errors causing rejection.
If an express written approval or rejection is not received by TPS within such
period of fifteen (15) business days, EISIG will be deemed to have accepted the
Release.
1.6. Resubmission. In the event of such rejection, TPS will have a period
of ten (10) business days after receipt of notification of rejection to cure the
defects or other nonconformity set forth in such notice. Upon completion of such
cure TPS may resubmit the Release for acceptance in accordance with Section 1.4
above. The sequence of submission, rejection, and resubmission may occur
multiple times.
1.7 Maintenance. TPS will provide error fixes to the Release on a priority
basis for a period of three (3) months immediately following acceptance of the
Release by EISIG, at no further cost to EISIG. Errors include but are not
limited to conditions which result in system crashes, the failure to provide a
specified function, the failure to provide a specified user interface, and the
failure to provide the specified performance ("TPS Errors"). TPS Errors do not
include errors which were known to exist in the existing EIS Expert Instructor
System at the time that development of the
2
<PAGE>
Release began and the correction of which were not included in the Specification
(all such excluded errors being set forth in Appendix B attached hereto), or
errors which are the result of errors in code or data which was not developed by
TPS. The hours spent by TPS investigating error reports which are determined by
mutual consent of TPS and EISIG not to be TPS Errors will be compensated at the
consulting rate specified by Paragraph 2.4 of this Agreement.
1.8 Arbitration. TPS and EISIG will use their best efforts to resolve by
mutual agreement any disputes, controversies, or differences which may arise
from, under, out of, or in connection with acceptance of the Release. If such
disputes, controversies , or differences cannot be settled between the parties,
they will be settled finally by arbitration which will be in California and will
be in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. The decisions rendered by the arbitrator(s) will be
final and binding upon both parties. Each party will bear its own expenses in
any such arbitration. The costs and fees paid to the arbitrator(s) will be
split equally between TPS and EISIG.
2. Payment.
2.1. Fees. EISIG shall pay TPS a fee of $120,000 for its development and
completion of the Release as described in Paragraphs 1.1 and l.2 above. The fee
will be paid in six monthly installments of $20,000, commencing approximately
30 days after agreement upon the Specification. There will be no reduction in
the fee if the Release is completed prior to the expiration of the six-month
period and no additional payment if the Release is not completed until after the
expiration of the six-month period. The fee referred to above is inclusive of
all services required, including testing and revisions required in the release
cycle to produce a final product for acceptance by EISIG.
2.2. Stock Option. As an additional incentive to TPS to complete the
development of the Release as quickly as possible, EISIG shall grant to TPS an
option to acquire ten percent (10%) of the common stock of EISIG at an exercise
price per share equal to that paid by the initial purchasers of EISIG's common
stock. The option shall become exercisable upon EISIG's written acceptance of
the Release pursuant to Paragraphs 1.4 through 1.6 hereof.
2.3. Preemptive Rights. TPS shall have a preemptive right, but no
obligation, to acquire additional shares of EISIG common stock at the same price
per share at which TPS may acquire its shares upon exercise of its option, to
the extent necessary to avoid dilution of its common stock
3
<PAGE>
interest to less than 10%, provided that such preemptive right shall only apply
with respect to any purchase or purchases of EISIG common stock, up to an
aggregate of twenty percent (20%) of such stock, by Jonathan Seybold. Such
preemptive right shall terminate on the day which is six months after the
earlier of (i) the date on which EISIG shall have provided TPS with written
notice that EISIG has accepted the Release, and (ii) the date on which EISIG
shall have been deemed to accept the Release pursuant to Paragraph 1.5 above.
2.4 Future Services. Following completion of the Release, EISIG shall not
guarantee any additional contracted work for TPS . However, TPS agrees to
provide its services upon EISIG's request in designated, scheduled projects
through December 31, 1998. The first 500 hours of services per calendar year
(ignoring for this purpose any services provided in development of the Release
pursuant to Paragraphs 1.1 through 1.3 hereof) shall be paid at a rate of $125
per hour, and the second 500 hours of services per calendar year (and any
additional time) shall be paid at a rate of $150 per hour. TPS will submit
written invoices to EISIG promptly with respect to each semi-monthly period
ending on the 15th or last day of each calendar month during which such services
are performed, detailing in summary form the services performed by TPS for EISIG
since the commencement of the designated project or the period covered by the
last invoice, as the case may be, and the number of hours devoted to such
services. EISIG will, if practicable, pay each such invoice within fifteen
days of its receipt by EISIG, but shall have a 30-day grace period in which to
complete the payment of any such invoice .
2.5. Vesting. The stock acquired upon exercise of the option described in
Paragraph 2.2 and pursuant to the preemptive rights described in Paragraph 2.3
shall vest at a rate of 25% per calendar year, and shall occur at December 31 of
each calendar year following the exercise of the option regardless of when the
preemptive rights are exercised, but in no event earlier than December 31, 1995.
Vesting in any year shall be contingent on TPS performing up to l,OOO hours of
service during such year (but not to exceed 5O hours in any calendar week
without TPS' consent), exclusive of any services provided pursuant to Paragraphs
1.l through 1.3 hereof, upon written request from EISIG and upon the terms
described in Paragraph 2.4. If EISIG does not request that TPS perform such
services in any year, then vesting for such year shall occur as though such
services had been requested and performed. If TPS fails to perform such
requested services in any year, all of TPS's shares which have not vested prior
to such year shall be subject to an option by EISIG to redeem such shares at a
price per share equal to the lesser of book value per share or the price per
share paid by TPS to purchase such shares pursuant to its option (the
"Redemption Option").
4
<PAGE>
Notwithstanding anything in the foregoing provisions of this Paragraph 2.5 to
the contrary, any and all of TPS's shares which have neither vested nor become
subject to the Redemption option as of the date of the occurrence of the first
of the following events to occur, shall upon such occurrence immediately vest:
(i) the closing of an initial public offering of the Company's stock or a
private placement of the Company's stock for an amount in excess of $5,000,000;
(ii) the Company's adoption of any plan of liquidation providing for the
distribution of all or substantially all of its assets; and (iii) a disposition
of all or substantially all of the business of the Company by sale or pursuant
to a merger, consolidation or other transaction (unless the existing
shareholders own, directly or indirectly, 50% or more of the voting stock or
other ownership interests of the entity or entities, if any, that succeed to the
business of the Company).
3. Board Representation.
TPS shall have one representative on EISIG's board of directors, which
board shall initially be comprised of six members, but may be expanded to
fifteen members. Each member of the board shall have one vote.
4. Term.
The term of this Agreement shall commence as of the date first set forth
above and shall terminate at December 31, 1998.
5. Exclusivity of Retainer.
Without the prior written consent of EISIG, neither TPS nor any of its
present employees shall, prior to the termination date of this Agreement and for
two years thereafter, develop or market software which is competitive with the
Release or the EIS Expert Instructor System as enhanced by the Release (the
"Enhanced EIS Expert Instructor System") or knowingly assist others in such
development.
6. Ownership.
6.1. Disclosure and Right to Use. With respect to all subject matter,
including ideas, processes, designs and methods, which TPS shall disclose or use
in its performance under this Agreement, TPS warrants that it has the right to
make such disclosure and it and EISIG have the right to use such subject matter
without liability to others.
6.2. Assignment of Rights. All copyright, intellectual property rights and
analogous rights throughout
5
<PAGE>
the world in the EIS Expert Instructor System, the Enhanced EIS Expert
Instructor System and the Release, to the extent now or hereafter possessed by
TPS or its employees, are hereby assigned to EISIG.
6.3. Ownership by EISIG. The product of all work performed under this
Agreement, including without limitation reports, documentation, drawings,
computer programs, inventions, masks, mask-works, devices, models and work in
progress, shall be the sole property of EISIG, and TPS hereby assigns to EISIG
all right, title and interest thereto. TPS agrees to assist EISIG and its
nominees in every proper way, entirely at EISIG's expense, to secure, maintain,
and defend for EISIG's benefit all copyrights, intellectual property rights and
patents relating to the Enhanced EIS Expert Instructor System and the Release in
any and all countries, such material to remain the property of EISIG whether
copyrighted, patented or not. Without limiting the generality of the foregoing,
TPS will execute and deliver such further conveyances, transfers and other
instruments as EISIG may request further to confirm and effect EISIG's ownership
of all such material.
6.4. Delivery of Source Files. Upon execution of this Agreement, TPS will
(i) deliver to EISIG a fully commented and properly documented copy of the
current version of the source files and object programs of the EIS Expert
Instructor System and all documentation associated with such source files and
object programs, and (ii) commence delivery to EISIG of a fully commented and
properly documented copy of the version of the source files and object programs
of the Release (in such stage of development as the Release shall be from time
to time) which copy is current at the time of delivery, and all documentation
associated with such source files and object programs, delivery being made upon
request from EISIG, but not more often than every 30 days. It is understood by
both parties that a source file is the version of the computer software program
that is intelligible to humans. Throughout the term of this Agreement, TPS will
diligently maintain the source files and object programs of the Release and all
documentation associated therewith so that at all times such source files and
associated documentation are functionally identical (using industry standard
levels of accuracy) to the object programs of the EIS Expert Instructor System
and Release which are operative from time to time. If, from time to time after
the Release, EISIG desires documentation (for example, functional
specifications) in addition to that which exists for the most current version of
the Release, TPS will develop the documentation under the post-Release
consulting terms contained in Paragraph 2.4 of this Agreement.
6
<PAGE>
6.5. Return of Property. TPS shall not remove any EISIG property from the
premises of EISIG without the prior written consent of EISIG. TPS shall return
to EISIG any EISIG property that has come into its possession during the term of
this Agreement when requested by EISIG, and in any event shall do so upon
termination of this Agreement unless TPS receives written authorization from
EISIG to keep such property.
6.6. Use by TPS of Knowledge. Notwithstanding the foregoing, nothing in
this Agreement will operate to prohibit or restrict TPS or any person related to
TPS from exercising any general skill, knowledge and experience derived in the
course of carrying out its obligations under this Agreement, provided such
exercise does not breach TPS's obligations of confidentiality pursuant to
Paragraph 7 below.
7. Confidentiality.
Neither TPS nor EISIG will, either during or subsequent to the term of this
Agreement, directly or indirectly divulge to any unauthorized person any
information designated as confidential by the other, nor will either disclose to
anyone other than their respective employees or use in any way, other than in
the course of the performance of this Agreement, any information regarding the
other including the other's know-how not known to the general public or
recognized as standard practice. The foregoing restrictions shall not apply to
information which (a) is known to the receiving party at the time of disclosure
to the receiving party, (b) has become publicly known through no wrongful act of
the receiving party, (c) has been rightfully received by the receiving party
from a third party without restriction on disclosure and without breach of this
Agreement, (d) has been independently developed by the receiving party, (e) has
been approved for release by written authorization of the other party or (f) has
been disclosed pursuant to a requirement of law.
8. Indemnity.
8.1. Mutual Indemnification. TPS will indemnify EISIG and hold it harmless
from and against all claims, damages, losses and expenses, including without
limitation reasonable attorneys' fees and costs of suit, to the extent arising
out of or in connection with (a) any knowing and willful infringement of the
patent, copyright, or intellectual property rights of others on the part of TPS
or TPS's employees or agents; or (b) any grossly negligent or willful act or
omission of TPS or TPS's employees or agents which proximately causes or
contributes to (i) any bodily injury, sickness, disease or death; (ii) any
injury to or destruction of tangible or intangible property (including computer
7
<PAGE>
programs and data) or any loss of use resulting therefrom; or (iii) any
violation of any statute, ordinance or regulation; or (c) any claim by a party
unaffiliated with EISIG with respect to misleading statements,
misrepresentations or fraud on the part of TPS or any TPS employee, agent or
representative, provided TPS is notified promptly in writing and is given full
authority, information and assistance for the defense, and provided further that
TPS will not be responsible for any settlement made without its consent or for
any of EISIG' s attorneys' fees or costs after TPS assumes the defense.
If TPS receives notice of an alleged infringement or if EISIG's use of any
product developed under this Agreement by TPS (a "Product") is prevented by an
injunction based on an alleged infringement, TPS will have the right, at its
option, to obtain the rights to continued use of the Product, to substitute
other suitable software, or to modify the Product so that it is suitable but no
longer infringing. TPS will have no liability to EISIG under this Paragraph 8.1
if a claim is based upon the use of Products in combination with equipment,
devices or software not delivered by TPS, or the use of any Products in a manner
for which the same were not designed or approved by TPS, or the modification of
Products by EISIG or any third party without the approval of TPS.
EISIG will indemnify TPS and hold it harmless from and against all claims,
damages, losses and expenses, including without limitation reasonable attorneys
fees and costs of suit, to the extent arising out of or in connection with (a)
any negligent or willful act or omission of EISIG or EISIG's employees or agents
which proximately causes or contributes to (i) any bodily injury, sickness,
disease or death; (ii) any injury to or destruction of tangible or intangible
property (including computer programs and data) or any loss of use resulting
therefrom; or (iii) any violation of any statute, ordinance or regulation; or
(b) any claim by a party unaffiliated with TPS with respect to misleading
statements, misrepresentations or fraud on the part of EISIG or any EISIG
employee, agent or representative, provided EISIG is notified promptly in
writing and is given full authority, information and assistance for the defense,
and provided further that EISIG will not be responsible for any settlement made
without its consent or for any of TPS's attorneys' fees or costs after EISIG
assumes the defense.
8.2. Indemnity for Certain Taxes. TPS will indemnify EISIG and hold it
harmless to the extent of any obligation imposed on EISIG (a) to pay any
individual income withholding taxes, social security, unemployment or disability
insurance or similar items, including interest and penalties thereon, in
connection with any payments made to TPS by EISIG
8
<PAGE>
pursuant to this Agreement or (b) resulting from TPS's being determined not to
be an independent contractor.
8.3. Insurance. TPS agrees to carry the following minimum insurance:
(a) Comprehensive General Liability with limits not less than $500,000
combined single limit.
(b) Automobile Liability with limits not less than $500,000 bodily
injury and property damage combined.
(c) Workers Compensation and Employers Liability in compliance with
all statutory and regulatory requirements in California .
Before beginning work under this Agreement, TPS will deliver to EISIG a
Certificate of Insurance which shows the coverage specified above, which names
EISIG as an additional insured, and which provides a 3O-day notice period for
cancellation or reduction in coverage or limits.
9. Effect of Termination.
Upon the termination of this Agreement each party shall be released from
all obligations and liabilities to the other occurring or arising hereunder
thereafter, except that such termination shall not relieve (a) TPS of its
obligations under Paragraph 5, 6, 7 or 8, (b) EISIG of its obligations under
Paragraph 7 or 8, or (c) either party from liability arising from breach of this
Agreement.
10. Assignment.
The rights and liabilities of the parties hereto shall bind and inure to
the benefit of their respective successors, executors, administrators and
assigns, as the case may be; provided that, since EISIG has specifically
contracted for TPS's services, TPS may not assign or delegate its obligations
under this Agreement either in whole or in part without the prior written
consent of EISIG. EISIG may in its discretion assign this Agreement in whole or
in part.
11. Equitable Relief and Attorneys' Fees.
11.1. Equitable Relief. Because the services to be provided by TPS
hereunder are personal and unique, and because TPS shall have access to and
become acquainted with confidential information of EISIG, TPS expressly agrees
that breach of this Agreement will result in irreparable harm to EISIG and that
EISIG will have the right to enforce this Agreement and its provisions by
injunction, specific
9
<PAGE>
performance or other equitable relief without prejudice to any other rights and
remedies that EISIG may have.
11.2. Attorneys' Fees. If any action at law or in equity is necessary to
enforce the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, expert witness fees, costs of suit and expenses in
addition to any other relief to which such prevailing party may be entitled.
12. Governing Law.
The parties agree that this Agreement will be governed by and construed in
accordance with the laws of the State of California as applied to transactions
taking place wholly within California between California residents. If any
provision of this Agreement is for any reason found by a court of competent
jurisdiction to be unenforceable, such unenforceability will not render this
Agreement unenforceable or invalid as a whole and, in such event, such provision
will be changed and interpreted so as to best accomplish the objectives of such
unenforceable provision within the limits of applicable law.
13. Complete Understanding, Modification.
TPS and EISIG acknowledge that each has read this Agreement, understands
it, and agrees to be bound by its terms. TPS and EISIG further agree that this
Agreement and any written modifications made pursuant to it constitute the
complete and exclusive expression of the terms of the Agreement between TPS and
EISIG, and supersede all prior or contemporaneous proposals, oral or written,
understandings, representations, conditions, warranties, covenants and all other
communications between TPS and EISIG relating to the subject matter of this
Agreement. TPS and EISIG further agree that the headings of this Agreement are
for convenience of reference only and are not part of the substance of this
Agreement. TPS and EISIG further agree that this Agreement may not in any way be
explained or supplemented by a prior or existing course of dealings between the
parties, by any usage of trade or custom, or by any prior performance between
the parties pursuant to this Agreement or otherwise. The terms of this Agreement
apply to all purchase orders or analogous documents issued by EISIG before or
after execution of this Agreement, and the additional terms and conditions
contained in any such purchase orders are of no force and effect. Any waiver,
modification or amendment of any provision of this Agreement will be effective
only if in writing and signed by the parties to this Agreement.
14. DISCLAIMER OF WARRANTIES AND LIMITATION OF LIABILITY
10
<PAGE>
14.1. DISCLAIMER OF WARRANTIES. PARAGRAPHS 6.1 AND 8 STATE TPS'S SOLE AND
EXCLUSIVE OBLIGATION TO EISIG FOR ANY ALLEGED INFRINGEMENT OF ANY PROPRIETARY
RIGHT OR BREACH OF WARRANTY. EXCEPT FOR THE EXPRESS WARRANTIES STATED IN THIS
AGREEMENT, TPS MAKES NO ADDITIONAL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS
TO ANY MATTER WHATSOEVER. IN PARTICULAR, ANY AND ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED.
14.2. LIMITATION OF LIABILITY. THE RIGHTS GRANTED TO EISIG UNDER PARAGRAPHS
6.1 AND 8 WILL BE EISIG's SOLE AND EXCLUSIVE REMEDY FOR ANY ALLEGED INFRINGEMENT
OF ANY PATENT, COPYRIGHT, TRADEMARK OR OTHER PROPRIETARY RIGHT AND FOR BREACH OF
WARRANTY. TPS WILL HAVE NO LIABILITY TO EISIG OR OTHER PARTIES FOR ANY DAMAGES,
INCLUDING ANY LOST PROFITS, LOST SAVINGS OR OTHER INCIDENTAL, CONSEQUENTIAL OR
SPECIAL DAMAGES EVEN IF TPS OR ANY TPS SALES REPRESENTATIVE HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANY OTHER PARTY.
15. Notices.
All notices and other communications required or permitted to
be given under this Agreement must be in writing and will be effective when
delivered personally or deposited in the mail, postage prepaid and addressed to
the parties at their respective addresses set forth below, or at any new address
or addresses subsequently designated in writing by either party to the other:
EISIG TPS
17575 Pacific Coast Highway 4300 Stevens Creek Blvd.
Pacific Palisades, CA Suite 245
90272 San Jose, CA 95129
IN WITNESS WHEREOF the parties have executed this Agreement by their agents
duly authorized in that regard on the date first written above.
EIS INTERNATIONAL GROUP, LTD. TRANSPAC SOFTWARE, INC.
/s/ Deborah E. Griffin /s/ Kenneth Krugler
----------------------- ------------------------
Deborah E. Griffin Kenneth Krugler
Chief Operating Officer President
11
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT, dated as of December 1, 1996, between Heurisitic Development
Group, Inc. , a Delaware corporation (the "Company"), and Steven R. Gumins (the
"Employee").
WHEREAS, the Company desires to obtain the services of the Employee, and
the Employee desires to provide such services to the Company, on the terms set
forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and obligations
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Employment and Duties.
(a) The Company hereby employs the Employee, and the Employee accepts
employment, to serve as Chief Executive Officer of the Company and to perform
such duties consistent with his position as may be assigned to him from time to
time by the Company's Board of Directors.
(b) The Employee hereby agrees to perform such duties, to fulfill such
responsibilities and to serve the Company faithfully, industriously and to the
best of his ability, subject to the direction and control of the Company's Board
of Directors, and to devote his best efforts and his full working time and
attention to advancing the interests of the Company.
2. Term; Termination.
Except in the case of earlier termination as hereinafter specifically
provided in Paragraph 4, this Agreement shall be effective as of the date hereof
and shall continue until December 31, 1999 (the "Term").
3. Compensation; Expenses; Benefits.
(a) As compensation for his services hereunder in whatever capacity
rendered, the Company shall pay the Employee a base salary, payable in equal
monthly or more frequent installments, at a rate of $150,000 per year, which
amount may be increased at the discretion of the Board commencing thirteen
months after the completion by the Company of an initial public offering of its
securities.
(b) The Company shall pay the Employee an annual bonus based upon the
attainment of performance objectives determined at the discretion of the Board.
The bonus amount shall be $25,000 during the first year of the Term if during
any fiscal quarter of 1997, the Company achieves break even (giving effect to
such bonus).
<PAGE>
(c) The Company shall supply to the Employee the use of a corporate
vehicle and shall pay all costs, including insurance, associated therewith,
providing that Employee's personal use of such vehicle shall not exceed 20% of
the total vehicle usage.
(d) The Employee shall be entitled to medical benefits generally
available to executive officers of comparable companies having approximately the
same sales and profits as the Company, so long as such benefits comply with
applicable law and are available at commercially reasonable rates.
(e) The Employee shall be entitled to reimbursement for his ordinary
and necessary business expenses incurred in the performance of his duties
hereunder provided that his claims therefor are supported by documentation.
4. Termination of Employment. If any of the following events occur before
the expiration of the Term, the Employee's employment with the Company shall
terminate upon the occurrence of such event:
(a) The Employee's death, or any illness, disability or other
incapacity that renders the Employee physically unable regularly to perform his
duties hereunder for a period in excess of 120 consecutive days or an aggregate
of 150 days within any 12 month period. The determination regarding whether the
Employee is physically unable regularly to perform his duties hereunder shall be
made by the Company's Board of Directors in the reasonable, good faith exercise
of their judgment. In the event of termination pursuant to this Paragraph (a) or
in the event of Employee's death, the Company shall continue to pay to the
Employee the base salary set forth in Paragraph 3(a) for a period of six months
following the date of termination or death.
(b) Thirty (30) days after the Company gives the Employee written
notice of the termination of Employee's employment if said termination is for
cause. For purposes of this Paragraph 4(d), "cause" is defined as (i) Employee's
conviction of a crime constituting a felony or involving moral turpitude or (ii)
an act by Employee of material dishonesty or fraud in connection with Employee's
performance of his duties to the Company.
(c) Thirty (30) days after the Company gives the Employee written
notice of the termination of Employee's employment if said termination is other
than pursuant to (a) or (b) above. In such event, the Company shall continue to
pay to the Employee the base salary set forth in Paragraph 3(a) for a period of
four months following the date of termination.
-2-
<PAGE>
5. Noncompetition.
(a) At any time during the Term hereof and for an additional period of
five years thereafter, the Employee will not reveal, divulge or make known to
any individual, partnership, joint venture, corporation or other business entity
(other than the Company or its affiliates) or use for the Employee's own account
any customer lists, trade secrets or any confidential information of any kind
("Protected Information") used by the Company or any of its commonly controlled
affiliates in the conduct of the Company's business and made known to the
Employee by reason of the Employee's employment with the Company or any of its
affiliates (whether or not with the knowledge and permission of the Company and
whether or not developed, devised or otherwise created in whole or in part by
the efforts of the Employee); provided, that Protected Information shall not
include information that shall become known to the public or the trade without
violation of this Section 5(a); and provided, further, that the Employee shall
not violate this Section 5(a) if Protected Information is disclosed by the
Employee at the direction of the Company in connection with the performance of
the Employee's duties or if the Employee is required to provide Protected
Information in any legal proceeding or by order of any court.
(b) During the Term hereof and for an additional six months
thereafter, the Employee will not, directly or indirectly, engage in the
business of, or own or control an interest in (except as a passive investor
owning less than two percent (2%) of the equity securities of a publicly owned
company), or act as director, officer or employee of, or consultant to, any
individual, partnership, joint venture, corporation or other business entity
known to the Employee to be directly or indirectly engaged anywhere in the
actual or intended geographic location in which the Company conducts business,
in any business competing with any business then being carried on by the
Company.
(c) The Employee agrees that during the Term hereof and for an
additional period of two years thereafter, the Employee shall not knowingly
employ or solicit, encourage or induce any person (except Employee's spouse) who
at any time within one year prior to the Employee's termination of employment
shall have been an employee of the Company or any of its commonly controlled
affiliates, to become employed by or associated with any individual,
partnership, joint venture, corporation or other business entity other than the
Company, and the Employee shall not knowingly approach any such employee for
such purpose or authorize or knowingly approve the taking of such actions by any
other individual, partnership, joint venture, corporation or other business
entity or knowingly assist any such individual, partnership, joint venture,
corporation or other business entity in taking such action.
6. Acknowledgments.
(a) The Employee acknowledges that the provisions of Paragraph 5 above
are reasonable and necessary for the protection of the Company and that each
provision, and the period or periods of time, geographic areas and types and
scope of restrictions on the
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<PAGE>
activities specified herein are, and are intended to be divisible. In the event
that anyprovision of this Agreement, including any sentence, clause or part
hereof, shall be deemed contrary to law or invalid or unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall not
be affected, but shall, subject to the discretion of such court, remain in full
force and effect and any invalid and unenforceable provisions shall be deemed,
without further action on the part of the parties hereto, modified, amended and
limited to the extent necessary to render the same valid and enforceable.
(b) The Employee acknowledges that the Company will be irrevocably
damaged if the covenants contained herein are not specifically enforced.
Accordingly, the Employee agrees that, in addition to any other relief to which
the Company may be entitled, the Company shall be entitled to seek and obtain
injunctive relief from a court of competent jurisdiction for the purposes of
restraining the Employee from any actual or threatened breach of such covenants.
7. Representations, Warranties and Covenants of Employee. The Employee
represents, warrants and covenants to and with the Company that (a) he is not
and will not become a party to any agreement, contract or understanding, whether
employment or otherwise, and that he is not subject to any order, judgment or
decree of any court or governmental agency, which would, in any way, restrict or
prohibit him from undertaking or performing his employment in accordance with
the terms and conditions of this Agreement and (b)s he is of satisfactory
physical and mental health to fulfill his duties, obligations and
responsibilities under the terms of this Agreement.
8. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California applicable to agreements
made and to be performed in that state.
(b) Notices. All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given when
(a) delivered by hand, (b) sent by telex or telecopier (with receipt confirmed),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) when received by the addressee, if sent by Express Mail, Federal Express or
other express delivery service (receipt requested), in each case to the
appropriate addresses and telecopier numbers set forth below (or to such other
addresses and telecopier numbers as a party may designate as to itself by notice
to the other parties):
If to the Employee:
2677 Ramble Pacifico
Malibu, California 90265
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<PAGE>
If to the Company:
17575 Pacific Coast Highway
Pacific Palisades, California 90272
(c) Entire Agreement; Amendment. This Agreement shall supersede all
existing agreements between the Employee and the Company relating to the terms
of his employment. It may not be amended except by a written agreement signed by
both parties.
IN WITNESS WHEREOF, the parties hereto have each executed this Agreement as
of the day and year first above written.
HEURISTIC DEVELOPMENT GROUP, INC.
By:/s/ Gregory L. Zink
--------------------------------
Gregory L. Zink, President
/s/ Steven R. Gumins
--------------------------------
Steven R. Gumins, Employee
-5-
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT, date d as of December 1, 1996, between Heurisitic Development
Group, Inc. , a Delaware corporation (the "Company"), and Deborah E. Griffin
(the "Employee").
WHEREAS, the Company desires to obtain the services of the Employee, and
the Employee desires to provide such services to the Company, on the terms set
forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and obligations
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Employment and Duties.
(a) The Company hereby employs the Employee, and the Employee accepts
employment, to serve as Chief Operating Officer of the Company and to perform
such duties consistent with her position as may be assigned to her from time to
time by the Company's Board of Directors.
(b) The Employee hereby agrees to perform such duties, to fulfill such
responsibilities and to serve the Company faithfully, industriously and to the
best of her ability, subject to the direction and control of the Company's Board
of Directors, and to devote her best efforts and her full working time and
attention to advancing the interests of the Company.
2. Term; Termination.
Except in the case of earlier termination as hereinafter specifically
provided in Paragraph 4, this Agreement shall be effective as of the date hereof
and shall continue until December 31, 1999 (the "Term").
3. Compensation; Expenses; Benefits.
(a) As compensation for his services hereunder in whatever capacity
rendered, the Company shall pay the Employee a base salary, payable in equal
monthly or more frequent installments, at a rate of $150,000 per year, which
amount may be increased at the discretion of the Board commencing thirteen
months after the completion by the Company of an initial public offering of its
securities.
(b) The Company shall pay the Employee an annual bonus based upon the
attainment of performance objectives determined at the discretion of the Board.
The bonus amount shall be $25,000 during the first year of the Term if during
any fiscal quarter of 1997, the Company achieves break even (giving effect to
such bonus).
-1-
<PAGE>
(c) The Company shall supply to the Employee the use of a corporate
vehicle and shall pay all costs, including insurance, associated therewith,
providing that Employee's personal use of such vehicle shall not exceed 20% of
the total vehicle usage.
(d) The Employee shall be entitled to medical benefits generally
available to executive officers of comparable companies having approximately the
same sales and profits as the Company, so long as such benefits comply with
applicable law and are available at commercially reasonable rates.
(e) The Employee shall be entitled to reimbursement for her ordinary
and necessary business expenses incurred in the performance of her duties
hereunder provided that her claims therefor are supported by documentation.
4. Termination of Employment. If any of the following events occur before
the expiration of the Term, the Employee's employment with the Company shall
terminate upon the occurrence of such event:
(a) The Employee's death, or any illness, disability or other
incapacity that renders the Employee physically unable regularly to perform her
duties hereunder for a period in excess of 120 consecutive days or an aggregate
of 150 days within any 12 month period. The determination regarding whether the
Employee is physically unable regularly to perform her duties hereunder shall be
made by the Company's Board of Directors in the reasonable, good faith exercise
of their judgment. In the event of termination pursuant to this Paragraph (a) or
in the event of Employee's death, the Company shall continue to pay to the
Employee the base salary set forth in Paragraph 3(a) for a period of six months
following the date of termination or death.
(b) Thirty (30) days after the Company gives the Employee written
notice of the termination of Employee's employment if said termination is for
cause. For purposes of this Paragraph 4(d), "cause" is defined as (i) Employee's
conviction of a crime constituting a felony or involving moral turpitude or (ii)
an act by Employee of material dishonesty or fraud in connection with Employee's
performance of her duties to the Company.
(c) Thirty (30) days after the Company gives the Employee written
notice of the termination of Employee's employment if said termination is other
than pursuant to (a) or (b) above. In such event, the Company shall continue to
pay to the Employee the base salary set forth in Paragraph 3(a) for a period of
four months following the date of termination.
-2-
<PAGE>
5. Noncompetition.
(a) At any time during the Term hereof and for an additional period of
five years thereafter, the Employee will not reveal, divulge or make known to
any individual, partnership, joint venture, corporation or other business entity
(other than the Company or its affiliates) or use for the Employee's own account
any customer lists, trade secrets or any confidential information of any kind
("Protected Information") used by the Company or any of its commonly controlled
affiliates in the conduct of the Company's business and made known to the
Employee by reason of the Employee's employment with the Company or any of its
affiliates (whether or not with the knowledge and permission of the Company and
whether or not developed, devised or otherwise created in whole or in part by
the efforts of the Employee); provided, that Protected Information shall not
include information that shall become known to the public or the trade without
violation of this Section 5(a); and provided, further, that the Employee shall
not violate this Section 5(a) if Protected Information is disclosed by the
Employee at the direction of the Company in connection with the performance of
the Employee's duties or if the Employee is required to provide Protected
Information in any legal proceeding or by order of any court.
(b) During the Term hereof and for an additional six months
thereafter, the Employee will not, directly or indirectly, engage in the
business of, or own or control an interest in (except as a passive investor
owning less than two percent (2%) of the equity securities of a publicly owned
company), or act as director, officer or employee of, or consultant to, any
individual, partnership, joint venture, corporation or other business entity
known to the Employee to be directly or indirectly engaged anywhere in the
actual or intended geographic location in which the Company conducts business,
in any business competing with any business then being carried on by the
Company.
(c) The Employee agrees that during the Term hereof and for an
additional period of two years thereafter, the Employee shall not knowingly
employ or solicit, encourage or induce any person (except Employee's spouse) who
at any time within one year prior to the Employee's termination of employment
shall have been an employee of the Company or any of its commonly controlled
affiliates, to become employed by or associated with any individual,
partnership, joint venture, corporation or other business entity other than the
Company, and the Employee shall not knowingly approach any such employee for
such purpose or authorize or knowingly approve the taking of such actions by any
other individual, partnership, joint venture, corporation or other business
entity or knowingly assist any such individual, partnership, joint venture,
corporation or other business entity in taking such action.
6. Acknowledgments.
(a) The Employee acknowledges that the provisions of Paragraph 5 above
are reasonable and necessary for the protection of the Company and that each
provision, and the period or periods of time, geographic areas and types and
scope of restrictions on the activities specified herein are, and are intended
to be divisible. In the event that any
-3-
<PAGE>
provision of this Agreement, including any sentence, clause or part hereof,
shall be deemed contrary to law or invalid or unenforceable in any respect by a
court of competent jurisdiction, the remaining provisions shall not be affected,
but shall, subject to the discretion of such court, remain in full force and
effect and any invalid and unenforceable provisions shall be deemed, without
further action on the part of the parties hereto, modified, amended and limited
to the extent necessary to render the same valid and enforceable.
(b) The Employee acknowledges that the Company will be irrevocably
damaged if the covenants contained herein are not specifically enforced.
Accordingly, the Employee agrees that, in addition to any other relief to which
the Company may be entitled, the Company shall be entitled to seek and obtain
injunctive relief from a court of competent jurisdiction for the purposes of
restraining the Employee from any actual or threatened breach of such covenants.
7. Reresentations, Warranties and Covenants of Employee. The Employee
represents, warrants and covenants to and with the Company that (a) she is not
and will not become a party to any agreement, contract or understanding, whether
employment or otherwise, and that she is not subject to any order, judgment or
decree of any court or governmental agency, which would, in any way, restrict or
prohibit her from undertaking or performing her employment in accordance with
the terms and conditions of this Agreement and (b)s he is of satisfactory
physical and mental health to fulfill her duties, obligations and
responsibilities under the terms of this Agreement.
8. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California applicable to agreements
made and to be performed in that state.
(b) Notices. All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given when
(a) delivered by hand, (b) sent by telex or telecopier (with receipt confirmed),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) when received by the addressee, if sent by Express Mail, Federal Express or
other express delivery service (receipt requested), in each case to the
appropriate addresses and telecopier numbers set forth below (or to such other
addresses and telecopier numbers as a party may designate as to itself by notice
to the other parties):
If to the Employee:
3590 Las Flores
Canyon Road
Malibu, California 90265
-4-
<PAGE>
If to the Company:
17575 Pacific Coast Highway
Pacific Palisades, California 90272
(c) Entire Agreement; Amendment. This Agreement shall supersede all
existing agreements between the Employee and the Company relating to the terms
of her employment. It may not be amended except by a written agreement signed by
both parties.
IN WITNESS WHEREOF, the parties hereto have each executed this Agreement as
of the day and year first above written.
HEURISTIC DEVELOPMENT GROUP, INC.
By: /s/ Steven R. Gumins
------------------------------------------
Steven R. Gumins, Chief Executive Officer
/s/ Deborah E. Griffin
------------------------------------------
Deborah E. Griffin, Employee
-5-
CONVERSION AGREEMENT
THIS AGREEMENT, dated as of the 29th day of August, 1996 between Heuristic
Development Group, Inc., a Delaware corporation (hereinafter called the
"Company") and Jonathan W. Seybold, (hereinafter called "Seybold"),
WHEREAS, the Company has entered into a letter of intent (the "Letter") for a
proposed initial public offering of its securities (the "IPO") through D.H.
Blair Investment Banking Corp. ("Blair"), as underwriter, and
WHEREAS, the Letter contains as a condition to the IPO that the Company effect a
recapitalization which includes the conversion of all of its outstanding shares
of Series A Preferred Stock, $.01 par value (the "Preferred Stock") into Common
Stock, $.01 par value (the "Common Stock"), and
WHEREAS, the Letter contains as a further condition to the IPO that the Company
not have any outstanding indebtedness on its books other than as contemplated by
the Letter and subsequent discussions between the Company and Blair; and
WHEREAS, at the date hereof, the Company had a total of $244,391.69 of
outstanding indebtedness, including accrued interest, owed to Seybold ( the
"Seybold Debt"); and
WHEREAS, the Company and Seybold believe it is in their mutual best interests
for the IPO contemplated by the Letter to go forward.
NOW, THEREFOR, in consideration of the foregoing and the mutual promises and
covenants herein contained, it is hereby agreed as follows:
1. Conversion of Debt: Effective on the Closing Date, the Seybold Debt shall be
converted into 59,517.65 shares of Common Stock (on a post-split basis),
representing a conversion rate of $4.11 per share.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HEURISTIC DEVELOPMENT GROUP, INC.
By: /s/ Deborah E. Griffin
------------------------------
Chief Operating Officer
JONATHAN W. SEYBOLD
By: /s/ Jonathan W. Seybold
------------------------------
Jonathan W. Seybold
CONVERSION AGREEMENT
THIS AGREEMENT, dated as of the 29th day of August, 1996 between Heuristic
Development Group, Inc., a Delaware corporation (hereinafter called the
"Company") and Nautilus Group Japan Ltd., a Delaware corporation (hereinafter
called "NGJ")
WHEREAS, the Company has entered into a letter of intent (the "Letter") for
a proposed initial public offering of its securities (the "IPO") through D. H.
Blair Investment Banking Corp. ("Blair"), as underwriter; and
WHEREAS, the Letter contains as a condition to the IPO that the Company
effect a recapitalization which includes the conversion of all of its
outstanding shares of Series A Preferred Stock, $.01 par value (the "Preferred
Stock") into Common Stock, $.01 par value (the "Common Stock"); and
WHEREAS, the Letter contains as as further condition to the IPO that the
Company not have any outstanding indebtedness on its books other than as
contemplated by the Letter and subsequent discussions between the Company and
Blair; and
WHEREAS, NGJ holds 600 shares of Preferred Stock, plus accrued and unpaid
dividends, representing all of the Company's outstanding shares of Preferred
Stock; and
WHEREAS, at the date heeof, the Company had a total of $783,143.66 of
outstanding indebtedness , including accrued interest, owed to NGJ (the "NGJ
Debt"); and
WHEREAS, the Company and NGJ believe it is their mutual best interests
for the IPO contemplated by the Letter to go forward.
NOW, THEREFOR, in consideration of the foregoing and the mutual promises
and covenants herein contained, it is hereby agreed as follows:
1. Conversion of Preferred Stock. Effective on the closing date of the
IPO (the "Closing Date"), all shares of Preferred Stock held by NGJ
shall be converted into 175,792.48 shares of Common Stock (on a
post-split basis.)
2. Conversion of Debt. Effective on the Closing Date, the NGJ Debt shall
be converted into 190,721.99 shares of Common Stock (on a post-split
basis), representing a conversion rate of $4.40 per share.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HEURISTIC DEVELOPMENT GROUP, INC.
By:/s/ Deborah E. Griffin
-------------------------
Chief Operating Officer
NAUTILUS GROUP JAPAN, LTD.
By: /s/ Gregory L. Zink
-------------------------
Chief Operating Officer
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 SEP-30-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 279,000 18,000
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 284,000 23,000
<PP&E> 226,000 253,000
<DEPRECIATION> 21,000 54,000
<TOTAL-ASSETS> 516,000 571,000
<CURRENT-LIABILITIES> 142,000 436,000
<BONDS> 0 0
0 0
0 0
<COMMON> 3,000 3,000
<OTHER-SE> (139,000) (704,000)
<TOTAL-LIABILITY-AND-EQUITY> 516,000 571,000
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 863,000 808,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 18,000 42,000
<INCOME-PRETAX> (876,000) (850,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (876,000) (850,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (876,000) (850,000)
<EPS-PRIMARY> 0 0.00
<EPS-DILUTED> 0 0.00
</TABLE>
