<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
NOTIFY CORPORATION
(Name of small business issuer in its charter)
CALIFORNIA 3661 77-0382248
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
1054 S. DE ANZA BLVD. SUITE 105
SAN JOSE, CALIFORNIA 95129
(408) 777-7920
(Address and telephone number of principal executive offices)
1054 S. DE ANZA BLVD. SUITE 105
SAN JOSE, CALIFORNIA 95129
(408) 777-7920
(Address of principal place of business or intended principal place of
business)
------------
PAUL F. DEPOND
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1054 S. DE ANZA BLVD. SUITE 105
SAN JOSE, CALIFORNIA 95129
(408) 777-7920
(Name, address and telephone number of agent for service)
------------
Copies to:
HENRY P. MASSEY, JR., ESQ. FRAN STOLLER, ESQ.
PETER S. HEINECKE, ESQ. BACHNER, TALLY, POLEVOY & MISHER LLP
BRADLEY A. BUGDANOWITZ, ESQ. 380 MADISON AVENUE
WILSON SONSINI GOODRICH & ROSATI NEW YORK, NEW YORK 10017-2590
PROFESSIONAL CORPORATION (212) 687-7000
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(415) 493-9300
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 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 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 number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
Continued on next page
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE FEE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each consisting of
one share of Common
Stock, $.001 par value,
one Class A Warrant and
one Class B Warrant (2). 1,610,000 $5.00 $ 8,050,000 $ 2,440
- ------------------------------------------------------------------------------------
One share of Common
Stock, $.001 par value
and one Class B Warrant
(3)..................... 1,610,000 $6.50 $10,465,000 $ 3,172
- ------------------------------------------------------------------------------------
Common Stock, $.001 par
value (4)............... 3,220,000 $8.75 $28,175,000 $ 8,538
- ------------------------------------------------------------------------------------
Unit Purchase Option (5). 140,000 $.001 $ 140 $ --
- ------------------------------------------------------------------------------------
Units, each consisting of
one share of Common
Stock, $.001 par value,
one Class A Warrant and
one Class B Warrant (6). 140,000 $6.00 $ 840,000 $ 255
- ------------------------------------------------------------------------------------
One share of Common
Stock, $.001 par value,
and one Class B Warrant
(7)..................... 140,000 $6.50 $ 910,000 $ 276
- ------------------------------------------------------------------------------------
Common Stock, $.001 par
value (8)............... 280,000 $8.75 $ 2,450,000 $ 743
- ------------------------------------------------------------------------------------
Class A Warrants (9)..... 425,000 -- -- --
- ------------------------------------------------------------------------------------
One share of Common
Stock, $.001 par value
and one Class B Warrant
(10).................... 425,000 $6.50 $ 2,762,500 $ 838
- ------------------------------------------------------------------------------------
Common Stock, $.001 par
value (11).............. 425,000 $8.75 $ 3,718,750 $ 1,127
- ------------------------------------------------------------------------------------
Total.................. $17,389
</TABLE>
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- -------------------------------------------------------------------------------
(1) Estimated solely for the purposes of calculating the registration fee.
(2) Includes 210,000 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.
(7) Issuable upon exercise of the Class A Warrants underlying the Unit
Purchase Option.
(8) Issuable upon exercise of the Class B Warrants underlying the Unit
Purchase Option.
(9) These Class A Warrants are being registered for resale by selling security
holders, each of whom was an investor in the Registrant's private
placement (the "Selling Securityholders").
(10) Issuable upon exercise of Class A Warrants registered for resale by the
Selling Securityholders.
(11) Issuable upon exercise of Class B Warrants registered for resale by the
Selling Securityholders.
PURSUANT TO RULE 416, THERE ARE ALSO BEING REGISTERED SUCH ADDITIONAL SHARES
AND WARRANTS AS MAY BECOME ISSUABLE PURSUANT TO ANTI-DILUTION PROVISIONS UPON
THE EXERCISE OF THE CLASS A WARRANTS, THE CLASS B WARRANTS AND THE UNIT
PURCHASE OPTION.
------------
THE REGISTRATION 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 OF THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) up to 1,610,000
units ("Units"), including Units to be issued to cover over-allotments, if
any, each Unit consisting of one share of Common Stock, $.001 par value
("Common Stock"), of Notify Corporation, a California corporation (the
"Company"), one redeemable Class A Warrant ("Class A Warrant") and one
redeemable Class B Warrant ("Class B Warrant"), for sale by the company in an
underwritten public offering, (ii) 140,000 additional Units, purchaseable by
the Underwriter at a price per Unit of 120% of the initial public offering
price upon the exercise of the Underwriter's option to do so (the "Unit
Purchase Option), and (iii) an additional 425,000 Class A Warrants (the
"Selling Securityholders' Class A Warrants"), for sale by the holders thereof
(the "Selling Securityholders"), 425,000 Class B Warrants (the "Selling
Securityholders' Class B Warrants") underlying the Selling Securityholders'
Class A Warrants and 850,000 shares of Common Stock (the "Selling
Securityholders' Stock") underlying the Selling Securityholders' Class A
Warrants and the Selling Securityholders' Class B Warrants, all for resale
from time to time by the Selling Securityholders. The Selling Securityholders
may not sell the Selling Securityholders' Class A Warrants for specified
periods after the closing of the underwritten offering. The Selling
Securityholders' Class A Warrants, the Selling Securityholders' Class B
Warrants and the Selling Securityholders' Stock are sometimes collectively
referred to herein as the "Selling Securityholders' 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 Securityholders' Securities, including alternate 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. The "Dilution" section of the Prospectus for the
underwritten offering will not be used in the Prospectus relating to the
Selling Securityholders' Securities.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- DATED MARCH 14, 1997
PROSPECTUS
NOTIFY CORPORATION
1,400,000 UNITS CONSISTING OF 1,400,000 SHARES OF COMMON STOCK, 1,400,000
REDEEMABLE CLASS A WARRANTS AND 1,400,000 REDEEMABLE CLASS B WARRANTS
Each unit ("Unit") offered by Notify Corporation (the "Company") consists of
one share of common stock, $.001 par value (the "Common Stock"), one redeemable
Class A Warrant (the "Class A Warrant") and one redeemable Class B Warrant (the
"Class B Warrant"). The Class A Warrants and Class B Warrants (collectively,
the "Warrants") 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, 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, until the fifth anniversary of the date of
this Prospectus. The Warrants are subject to redemption by the Company
commencing one year from the date of this Prospectus, at $.05 per Warrant on 30
days' written notice if the closing bid price of the Common Stock for 30
consecutive trading days ending within 15 days of the notice of redemption of
the Warrants averages in excess of $9.10 per share with respect to the Class A
Warrants and $12.10 per share with respect to the Class B Warrants (subject to
adjustment in each case). It is currently anticipated that the initial public
offering price will be $5.00 per Unit. See "Description of Securities."
Prior to this offering (the "Offering") there has been no public market for
the Units, the Common Stock, or the Warrants, and there can be no assurance
that such a market will develop after the completion of the Offering. See
"Underwriting" for a discussion of factors considered in determining the
initial public offering price. The Company has applied for listing of the
Common Stock, the Class A Warrants, the Class B Warrants and the Units for
quotation on the Nasdaq SmallCap Market ("Nasdaq"). For information concerning
a Securities and Exchange Commission investigation relating to the Underwriter,
see "Risk Factors" and "Underwriting."
The registration statement of which this Prospectus is a part also covers the
offering for resale from time to time by certain securityholders (the "Selling
Securityholders") of 425,000 Class A Warrants (the "Selling Securityholders'
Warrants"), and the 425,000 shares of Common Stock and 425,000 Class B Warrants
underlying the Selling Securityholders' Warrants and the 425,000 shares of
Common Stock issuable upon exercise of such Class B Warrants. The Selling
Securityholders' Warrants and the securities underlying such warrants are
sometimes collectively referred to as the "Selling Securityholders'
Securities." The Selling Securityholders' Warrants are issuable upon the
closing of the Offering to the Selling Securityholders upon the automatic
conversion of 425,000 bridge warrants (the "Bridge Warrants") acquired by them
in the Company's private placement completed in March 1997 (the "Bridge
Financing"). The Selling Securityholders have agreed not to exercise the
Selling Securityholders' Warrants for one year after the closing of the
Offering and have agreed to certain restrictions on transferability. See
"Concurrent Securities Offering." Sales of any of the Selling Securityholders'
Securities, or even the potential of such sales at any time, may have an
adverse effect on the market prices of the securities offered hereby. Unless
the context otherwise requires, all references to the Warrants shall include
the Selling Securityholders' Warrants.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 AND "DILUTION."
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATIVE TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================
UNDERWRITING
DISCOUNT PROCEEDS TO
PRICE TO PUBLIC AND COMMISSION(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit................................... $ $ $
- ---------------------------------------------------------------------------------------------------
Total(3)................................... $ $ $
===================================================================================================
</TABLE>
(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a nonaccountable expense allowance equal to 3% of the
gross proceeds of the Offering and (ii) an option to purchase up to 140,000
Units at a price per unit equal to 120% of the initial public offering
price, exercisable at any time, in whole or in part, during the four year
period commencing one year from the date of this Prospectus (the "Unit
Purchase Option"). The Company and the Selling Stockholders have agreed to
indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at approximately
$ ($ if the overallotment is exercised in full), including the
Underwriter's nonaccountable expense allowance.
(3) The Company has granted the Underwriter an option exercisable within 30
days of the date of this Prospectus to purchase up to an additional 210,000
Units on the same terms and conditions set forth above, solely for the
purpose of covering over-allotments, if any. If the over-allotment option
is exercised in full, the Price to Public will be $ , the Underwriting
Discount and Commissions will be $ and the Proceeds to the Company will
be $ . See "Underwriting."
--------
THE UNITS ARE BEING OFFERED SUBJECT TO PRIOR SALE, WHEN, AS AND IF DELIVERED
TO AND ACCEPTED BY THE UNDERWRITER, SUBJECT TO OTHER CONDITIONS. THE
UNDERWRITER RESERVES THE RIGHT TO WITHDRAW, CANCEL OR MODIFY THE OFFERING AND
TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
UNITS WILL BE MADE AT THE OFFICES OF D.H. BLAIR INVESTMENT BANKING CORP., NEW
YORK, NEW YORK ON OR ABOUT , 1997.
--------
D.H. BLAIR INVESTMENT BANKING CORP.
--------
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
THE COMPANY INTENDS TO FURNISH ITS SHAREHOLDERS AND WARRANTHOLDERS WITH
ANNUAL REPORTS CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT
AUDITORS.
NOTIFY AND CENTREX AUTO ATTENDANT ARE TRADEMARKS OF THE COMPANY. THE
PROSPECTUS ALSO CONTAINS TRADEMARKS AND REGISTERED TRADEMARKS OF OTHER
COMPANIES.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF UNITS, COMMON STOCK,
CLASS A WARRANTS OR CLASS B WARRANTS, INCLUDING STABILIZING BIDS OR SYNDICATE
COVERING TRANSACTIONS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in its
entirety by the more detailed information and financial data (including the
financial statements and the notes thereto) appearing elsewhere in this
Prospectus. Unless otherwise noted, all information in this Prospectus (a)
assumes no exercise of (i) the Underwriter's over-allotment option, (ii) the
Warrants, (iii) the Underwriter's Unit Purchase Option, (iv) the Selling
Securityholders' Warrants, (v) options available for grant under the Company's
1997 Stock Plan (the "Stock Option Plan") or (vi) other outstanding warrants
and options and (b) gives effect to the conversion, which will occur upon the
closing of the Offering, of (i) the Bridge Warrants into the Selling
Securityholders' Warrants; and (ii) all outstanding shares of the Company's
Series A Preferred Stock and Series B Preferred Stock (collectively, the
"Outstanding Preferred Stock") into shares of Common Stock. All share, per
share and other information contained in this Prospectus has been adjusted to
reflect a 1-for-5.05 reverse split of the Company's Common Stock effected in
February 1997. See "Capitalization," "Management--Stock Option Plan" and
"Description of Securities."
THE COMPANY
The Company is engaged in the development, manufacture, marketing and sale of
computer telephony products for the business, Small Office Home Office ("SOHO")
and residential marketplaces. In recent years, the number of individuals and
businesses relying on their telephone company service provider to provide them
with services such as voice mail and CENTREX, a business-oriented service which
eliminates the need for on-premise telephone switching equipment, has increased
dramatically. The Company's products are designed to enhance the convenience
and utility of these services by providing customers with features which are
either not available or not included in standard service packages. The
Company's MessageAlert product increases the timeliness and ease of message
retrieval for voice mail subscribers by providing a visual indication that a
message has been received. The Company's Centrex Auto Attendant product gives
business and SOHO customers a cost-effective means of ensuring that incoming
calls are properly routed even when a human attendant is not available.
Over 14 million business and residential customers receive voice mail service
from their telephone company service provider. Telephone company provided voice
mail has several advantages over traditional answering machines including
better remote access, enhanced message management capabilities, support for
multiple calls and superior reliability. A major drawback to telephone company
provided voice mail is the lack of a visual indication that a message is
waiting; subscribers must pick up their phones and listen for a distinctive
dial tone to determine if they have a message. As a result, messages are often
received substantially later than if the blinking light of a traditional
answering machine had been available. Telephone company product managers
believe that the lack of a visual message indicator is a major reason for
cancellation of voice mail service. The Company has remedied this deficiency in
telephone company provided voice mail by developing an inexpensive, battery
operated device which gives subscribers a visual indication that a message is
waiting. The Company believes its MessageAlert product is the only battery
operated visual message indicator compatible with both of the signaling
standards currently used by U.S. telephone companies.
The Company's second product is designed to enhance the functionality of the
CENTREX services which many small businesses purchase from their telephone
service provider. CENTREX gives small businesses useful business-oriented
telephone capabilities such as extension dialing, conference calling, call
transfer capability and call-forwarding without the need to buy and maintain
expensive telephone switches. The Company's Centrex Auto Attendant product
expands this feature set by providing auto-attendant features such as automatic
call answering, menu-prompted call routing and an automated name directory.
Small businesses can use the Centrex Auto Attendant to answer and route calls
received by their main or 800 number, thereby eliminating the need for
3
<PAGE>
a human receptionist. The Company has designed the Centrex Auto Attendant to be
easy to install and configure and believes it offers a cost-effective solution
to small businesses' call-management needs.
The Company intends to distribute both of these products through or in
conjunction with the large domestic telephone companies and certain of their
authorized resellers. To date, the Company has sold its MessageAlert product to
two of the seven Regional Bell Operating Companies and five of the
approximately 20 large local exchange carriers. The Company's strategy is to
encourage these telephone companies to bundle the MessageAlert product with
their voice mail services in order to increase retention of new subscribers. In
addition, the Company intends to encourage telephone companies and their
authorized resellers which focus on selling CENTREX services to market its
Centrex Auto Attendant as an enhancement to the basic CENTREX service. The
Company believes that relationships with telephone companies it has formed as a
result of its marketing of the MessageAlert product will aid it in developing
the telephone companies as a distribution channel for the Centrex Auto
Attendant.
The Company intends to use a portion of the net proceeds from the Offering to
fund ongoing research and development of new products and product enhancements.
The Company expects to focus its efforts on four areas: cost reduction and
feature enhancement of the MessageAlert; enhancement of the Centrex Auto
Attendant platform to increase its capacity; expansion of the MessageAlert
architecture to create a combination Caller-ID/visual message waiting indicator
product; and completion of a product to provide remote telephone access to e-
mail.
The Company was incorporated in California in August 1994. Its address is
1054 S. DeAnza Blvd., Suite 105, San Jose, CA 95129. Its telephone number at
that address is 408-777-7920.
THE OFFERING
Securities Offered................ 1,400,000 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 on 30
days' written notice. See "Description of
Securities."
Securities Offered Concurrently
by Selling Securityholders....... 425,000 Class A Warrants; 425,000 Class B
Warrants issuable upon exercise of such
Class A Warrants and 850,000 shares of
Common Stock issuable upon exercise of such
Class A Warrants and Class B Warrants. See
"Concurrent Securities Offering."
Common Stock Outstanding Before
the Offering...................... 2,160,000 shares(1)(2)
4
<PAGE>
Common Stock Outstanding After
the Offering...................... 3,560,000 shares(1)(3)
Use of Proceeds................... The net proceeds of the Offering will be
used for product development, sales and
marketing efforts, repayment of the Bridge
Notes and other indebtedness, additional
inventory, investment in fixed assets and
working capital and general corporate
purpose. See "Use of Proceeds."
Risk Factors...................... The Offering involves a high degree of risk
and immediate substantial dilution. See
"Risk Factors" and "Dilution."
Proposed Nasdaq Symbols(4):
Units............................. NTFYU
Common Stock...................... NTFY
Class A Warrants.................. NTFYW
Class B Warrants.................. NTFYZ
- --------
(1) Includes warrants to purchase 185,064 share of Common Stock, of which
warrants to purchase 111,008 shares will be placed in escrow by the holders
thereof (the "Escrow Warrants") and 1,263,537 shares of Common Stock which
the holders thereof have agreed to deposit into escrow (the "Escrow
Shares"). The Escrow Shares and Escrow Warrants 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 Warrants released to
Company officers, directors, employees and consultants. See
"Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Release of Escrow Securities" and
"Principal Shareholders--Escrow Securities."
(2) Does not include (i) 200,000 shares of Common Stock reserved for issuance
upon the exercise of options issuable under the Stock Option Plan, under
which no options are currently outstanding, and (ii) 425,000 shares of
Common Stock issuable upon exercise of the Bridge Warrants. See
"Capitalization" and "Management--Stock Option Plan."
(3) Does not include (i) 4,200,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby; (ii) 840,000
shares of Common Stock issuable upon exercise of the Underwriter's over-
allotment option and underlying Warrants; (iii) 560,000 shares of Common
Stock issuable upon exercise of the Unit Purchase Option and the underlying
Warrants; (iv) 850,000 shares of Common Stock issuable upon exercise of the
Selling Securityholders' Warrants and the underlying warrants; or (v)
200,000 shares of Common Stock reserved for issuance under the Stock Option
Plan. See "Capitalization" and "Management--Stock Option Plan".
(4) Notwithstanding quotation on Nasdaq, there can be no assurance that an
active trading market for the Company's securities will develop or, if
developed, that it will be sustained.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------
1995 1996 1995 1996
------------ ------------- --------- ---------
<S> <C> <C> <C> <C>
Product sales................ $ 9,333 $ 308,067 $ 4,903 $ 396,294
Cost of sales................ 7,929 428,112 2,775 351,079
----------- ------------- --------- ---------
Gross profit (loss).......... 1,404 (120,045) 2,128 45,215
Operating expenses:
Research and development.... 159,163 537,902 147,272 149,415
Sales and marketing......... 122,884 549,916 116,672 153,399
General and administrative.. 146,756 440,089 84,194 138,787
----------- ------------- --------- ---------
Total operating expenses..... 428,803 1,527,907 348,138 441,601
----------- ------------- --------- ---------
Loss from operations......... (427,399) (1,647,952) (346,010) (396,386)
Interest expense, net........ 1,337 (9,267) 6,806 (19,583)
----------- ------------- --------- ---------
Net loss..................... $ (426,062) $ (1,657,219) $(339,204) $(415,969)
=========== ============= ========= =========
Pro forma net loss per
share(1).................... $ (1.89) $ (0.47)
============= =========
Shares used in computing pro
forma net loss per share(1). 875,092 882,787
============= =========
</TABLE>
- --------
(1) The pro forma net loss per share computation gives retroactive effect to
the conversion of the Outstanding Preferred Stock into Common Stock upon
the closing of the Offering, and excludes the Escrow Securities. See Note 1
of Notes to Financial Statements for an explanation of the calculation for
pro forma net loss per share. See "Capitalization--Bridge Financing," "--
Restructuring," "Certain Relationships and Related Transactions," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
---------- ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ (706,643) $ 131,732 $
Total assets............................. 738,633 1,463,633
Total liabilities........................ 1,343,589 1,230,214
Total shareholders' equity (net capital
deficiency)............................. (604,956) 233,419
</TABLE>
- --------
(1) Gives pro forma effect to (i) the sale of the Bridge Notes and Bridge
Warrants subsequent to December 31, 1996, (ii) the conversion of certain of
the Convertible Shareholder Notes into equity in connection with a
restructuring effected by the Company in January 1997 and (iii) the
conversion of the Outstanding Preferred Stock into Common Stock upon
completion of the Offering. See "Capitalization--Bridge Financing," "--
Restructuring," "Certain Relationships and Related Transactions," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Adjusted to give effect to the sale of the 1,400,000 Units offered hereby,
the application of a portion of the net proceeds therefrom to repay the
Bridge Notes and other indebtedness and the corresponding non-recurring
charge which will be incurred upon the closing of the Offering of
approximately $231,000 representing debt discount and debt issuance costs
associated with the Bridge Financing. See "Use of Proceeds," "Certain
Relationships and Related Transactions," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
6
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including, without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
in the following risk factors and elsewhere in this Prospectus. In evaluating
the Company's business, prospective investors should consider carefully the
following factors in addition to the other information set forth in this
Prospectus.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; WORKING CAPITAL DEFICIT; NO
ASSURANCE OF FUTURE PROFITABILITY
The Company commenced operations in August 1994 and through January 1996 was
engaged primarily in research and development. For the fiscal year ended
September 30, 1996, the Company incurred a net loss of $1,657,219. As of
December 31, 1996, the Company had an accumulated deficit of $2,499,250 and a
working capital deficit of $706,643. The Company incurred a net loss of
$415,969 for the quarter ended December 31, 1996 and expects to incur further
operating losses during at least the next three quarters and until such time,
if ever, as there is a substantial increase in orders for the Company's
products and product sales generate sufficient revenue to fund its continuing
operations. There can be no assurance that sales of the Company's products
will ever generate significant revenue, that the Company will ever generate
positive cash flow from its operations or that the Company will attain or
thereafter sustain profitability in any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business--Sales, Marketing and Distribution."
UNCERTAINTY AS TO ABILITY TO CONTINUE AS A GOING CONCERN
The Company has received a report from its independent auditors containing
an explanatory paragraph that describes the uncertainty as to the ability of
the Company to continue as a going concern due to the Company's recurring
losses from operations. There can be no assurance that the Company will
achieve profitable operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Financial Statements--
Report of Independent Auditors."
UNCERTAINTY OF PRODUCT ACCEPTANCE
The Company sold its first MessageAlert in January 1996 and its first
Centrex Auto Attendant in December 1996. To date, the Company has received
only limited revenue from the sale of these products. While the Company
believes that its products are commercially viable, developing products for
the consumer and business marketplaces is inherently difficult and uncertain.
The Company does not believe its sales to date are sufficient to determine
whether or not there is meaningful consumer or business demand for its
products. The Company intends to devote a significant portion of the proceeds
of the Offering to its sales and marketing efforts and to promote consumer and
business interest in its products. There can be no assurance that such efforts
will be successful or that significant market demand for the Company's
products will ever develop. See "Business--Products," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Use of
Proceeds."
DEPENDENCE ON LIMITED NUMBER OF POTENTIAL CUSTOMERS; NEED TO DEVELOP MARKETING
CHANNELS
The Company believes its success, if any, will be largely dependent on its
ability to either sell its products to or enter into joint marketing
arrangements with the seven Regional Bell Operating Companies (RBOCs) and
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approximately 20 large Local Exchange Carriers (LECs) in the United States. In
particular, the Company believes that its MessageAlert product can be sold
profitably only if it is sold to or in conjunction with the RBOCs and LECs.
The Company also expects to rely significantly on the RBOCs and LECs as a
channel for its Centrex Auto Attendant product. To date, the Company has sold
its products to two RBOCs and seven LECs. Qualifying its product and
developing the marketing relationships necessary to make these sales took
substantially longer than the Company originally anticipated. RBOCs and LECs
tend to be hierarchical organizations characterized by distributed decision-
making authority and an institutional reluctance to take risks. Selling a
product to or entering into a marketing relationship with an RBOC or LEC is
generally a lengthy process requiring multiple meetings with numerous people
in the organization. A failure by the Company to develop significantly
enhanced relationships with the RBOCs and LECs would have a materially adverse
effect on the Company's business and operating results.
Sales to RBOCs and LECs constituted 69% and 78% of revenue for the fiscal
year ended September 30, 1996 and the quarter ended December 31, 1996,
respectively. In addition, three customers accounted for 30%, 18% and 16% of
sales in fiscal 1996, and for 31%, 19% and 13% of sales in the quarter ended
December 31, 1996.
The Company also intends to develop other distribution channels for its
products including certain authorized service resellers of the RBOCs and LECs,
retail stores and mail order catalogues. Development of any one of these
channels will require the expenditure of substantial time and effort by the
Company's management. Because the Company's marketing efforts have been
largely focused on the RBOCs and LECs, its management has had only limited
experience in selling the Company's products through these channels. There can
be no assurance that the Company will be able to implement such a marketing
and distribution program or that any marketing efforts undertaken by or on
behalf of the Company will be successful. See "Business--Sales, Marketing and
Distribution."
RISK OF PRODUCT DEFECTS
The Company's products incorporate a combination of reasonably sophisticated
computer chip design, electric circuit design and telephony technology. The
Company has devoted substantial resources to researching and developing each
of these elements. In order to reduce the manufacturing costs, limit the power
consumption and otherwise enhance the operation of its products, the Company
has from time to time redesigned its products. The Company expects that in the
future it will engage in similar redesigns of its products. In addition, the
Company is in the process of developing new, similarly complex products.
Though the Company extensively tests its products before marketing them, any
new, redesigned or current product may contain design flaws which are
undetected by the Company's testing procedures. For example, in August 1996,
the Company recalled 6,500 of an earlier version of its MessageAlert product
as a result of a design flaw and, in November 1996, the Company recalled
14,000 of its MessageAlert product, also as a result of a design flaw. The
direct cost to re-work and repair the defective products in these instances
was approximately $29,000 and $13,000, respectively. In addition, the Company
relies on subcontractors to manufacture and assemble its products. Though the
Company has quality control procedures designed to detect manufacturing
errors, there can be no assurance that the Company will identify all defective
products. The Company believes that reliable operation will be an important
purchase consideration for both its consumer and business customers. A failure
by the Company to detect and prevent a design flaw or a widespread product
defect could materially adversely affect the sales of the affected product and
the Company's other products and materially adversely affect the Company's
business, financial condition and operating results. See "Business--Products."
COMPETITION
The Company believes the market for its products is highly competitive and
that competition is likely to intensify. In the market for visual message
waiting indicators, the Company competes with Voicewaves, Inc., Consumerware,
Inc., SNI Innovation, Inc. and AASTRA TELECOM. Certain of these companies have
greater financial, technical and marketing resources than the Company. In
addition, there are several companies with
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substantially greater technical, financial and marketing resources than the
Company which could produce competing products. These companies include
telephone equipment manufacturers such as CIDCO Incorporated, Intelidata,
Inc., Northern Telecom, Inc., and Lucent Technologies, Inc. In the market for
auto-attendant products, the Company competes directly with Bogen
Communications, Inc. and Cobtyx Corporation, Inc. In addition, the Company
competes with alternative products such as PC-based auto-attendant and voice
mail products offered by companies such as Active Voice Corporation, Altigen
Communications, and Voice Systems Research Corporation. The Company expects
that to the extent that the market for its products develops, competition will
intensify and new competitors will enter the market. There can be no assurance
that the Company will be able to compete successfully against existing and new
competitors as the market for its products evolves and the level of
competition increases. A failure to compete successfully against existing and
new competitors would have a materially adverse effect upon the Company's
business and results of operations. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon certain key
management employees, including its Chairman, President and Chief Executive
Officer, Mr. Paul F. DePond, and its Vice President of Operations, Gaylan
Larson. The Company has applied for three-year key-man term life insurance on
each of Messrs. DePond and Larson in the amount of $2,000,000 and has entered
into employment agreements with them along with Gerald Rice, the Company's
Chief Financial Officer and David Yewell, the Company's Vice-President of
Sales and Marketing. The loss of their services or those of any of the
Company's other key employees would have a materially adverse effect on the
Company. The Company's success, if any, will also be dependent on its ability
to attract and retain highly skilled technical personnel as well as marketing
and sales personnel. If the Company is unable to hire the necessary personnel,
the development of new products and enhancements to current products would
likely be delayed or prevented. Competition for highly-skilled technical,
managerial, sales, and marketing personnel is intense. There can be no
assurance that the Company will be successful in retaining its key personnel
and in attracting and retaining the personnel it requires for expansion. See
"Business--Employees" and "Management."
RISKS OF LIMITED PROTECTION FOR COMPANY'S INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS AND INFRINGEMENT OF THIRD PARTIES' RIGHTS
The Company regards various features and design aspects of its products as
proprietary and relies primarily on a combination of trademark, copyright and
trade secret laws and employee and third-party nondisclosure agreements to
protect its proprietary rights. The Company has been issued one patent
covering the design of its MessageAlert products, has applied for a patent
covering the MultiSense technology used in its MessageAlert product and
intends to continue to apply for patents, as appropriate, for its future
technologies and products. There are few barriers to entry into the market for
the Company's products, and there can be no assurance that any patents applied
for by the Company will be granted or that the scope of the Company's patent
or any patents granted in the future will be broad enough to protect against
the use of similar technologies by the Company's competitors. There can be no
assurance, therefore, that any of the Company's competitors, some of whom have
far greater resources than the Company, will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Further, the Company intends to distribute its products in a
number of foreign countries. The laws of those countries may not protect the
Company's proprietary rights to the same extent as the laws of the United
States.
The Company may be involved from time to time in litigation to determine the
enforceability, scope and validity of any proprietary rights of the Company or
of third parties asserting infringement claims against the Company. Any such
litigation could result in substantial costs to the Company and diversion of
efforts by the Company's management and technical personnel. In particular,
the Company is aware that a manufacturer of computer telephony products has
filed a patent application purporting to cover any device which electronically
detects stutter dial tone signaling. The Company expects that the patent will
be issued and believes that the manufacturer may assert that the Company's
MessageAlert product infringes upon the patent. If the patent is
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issued and such an assertion is made, the Company intends to challenge either
the validity of the patent or its application to the MessageAlert product or
enter into a licensing agreement with the patent holder. There can be no
assurance that the Company will be able to challenge the patent successfully
or enter into a licensing arrangement on commercially reasonable terms. A
failure of the Company to challenge the patent successfully or enter into a
licensing arrangement, would, in all probability, force the Company to cease
selling the MessageAlert product and would have a materially adverse affect on
the Company's business, financial condition and results of operation. In
addition, the expense associated even with a successful challenge to the
patent or a licensing arrangement could have a materially adverse affect on
the Company's business, financial condition and results of operations. See
"Business--Proprietary Rights."
DEPENDENCE ON SUPPLIERS AND SUBCONTRACTORS
Certain key components used in the Company's products are currently
available only from single or limited sources. The Company does not have long
term supply contracts with these or any other component vendors and purchases
all of its components on a purchase order basis. No assurance can be given
that component shortages will not occur or that the Company will be able to
obtain the components it needs in a timely manner and on a commercially
reasonable basis. In particular, the application specific integrated circuit
(ASIC) which forms the core of the Company's MessageAlert product is
manufactured only by Microchip Technology, Inc. From time to time, the
semiconductor industry has experienced extreme supply constraints. An
inability of the Company to obtain sufficient quantities of ASICs from
Microchip Technology, Inc. would have a materially adverse effect on the
Company's business and operating results.
The Company subcontracts the manufacture of its board level assemblies to
third parties, and there can be no assurance that these subcontractors will be
able to support the manufacturing requirements of the Company. An inability to
obtain sufficient quantities of sole-source components or subassemblies, or to
develop alternative sources as required in the future, could result in delays
or reductions in product shipments or could force the Company to redesign its
products, either of which could materially adversely effect the Company's
business and operating results. See "Business--Manufacturing."
COMPLIANCE WITH REGULATIONS AND INDUSTRY STANDARDS
The Company's products must comply with a variety of regulations and
standards including regulations and standards set by the Federal
Communications Commission, Underwriters Laboratories, National Registered
Testing Laboratories, and Bell Communications Research. As the Company enters
international markets it will be required to comply with whatever governmental
regulations and industry standards exist in those markets. In addition, the
U.S. telecommunications market is evolving rapidly in part due to recently
enacted laws revamping the telecommunications regulatory structure. Additional
legislative or regulatory changes are possible. A failure by the Company to
comply with existing regulations and standards or to adapt to new regulations
and standards could have a material adverse effect on the Companies business
and operating results. See "Business--Governmental Regulation and Industry
Standards."
DISCRETION TO REALLOCATE USE OF PROCEEDS; USE OF PROCEEDS TO BENEFIT INSIDERS
The proposed use of the net offering proceeds described herein represents
the Company's anticipated use of proceeds based upon current operating plans
and certain assumptions, including those relating to the Company's future
revenue levels and expenditures, and assumptions regarding industry and
general economic conditions and other conditions. Future events, including
problems, delays, expenses, and complications frequently encountered by early-
stage companies, as well as changes in competitive conditions affecting the
Company's business and the success or lack thereof of the Company's research
and development or marketing efforts, may make it necessary or advisable for
the Company to reallocate the net proceeds among the described uses or use
portions of the net proceeds for other purposes. Any such shifts will be at
the discretion of the Company. Further, $1,120,000 of the net proceeds will be
used to repay certain indebtedness of the Company, including approximately
$865,000 to repay the Bridge Notes (including approximately $51,000 which will
be paid to Paul
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F. DePond, the Company's President and Chief Executive Officer), approximately
$215,000 to repay the Outstanding Convertible Shareholder Notes, and
approximately $40,000 to repay certain loans made to the Company by Mr.
DePond. See "Use of Proceeds" and "Certain Relationships and Related
Transactions."
RISKS ASSOCIATED WITH PLANNED GROWTH
The Company plans to expand significantly its operations during 1997, which
could place a significant strain on its limited personnel, financial,
management and other resources. In order to manage its planned growth, the
Company will need to significantly expand its product development and sales
and marketing capabilities and personnel. In addition, the Company will need
to adapt its financial planning, accounting systems and management structure
to accommodate such growth if it occurs. A failure by the Company to properly
anticipate or manage its growth, if any, could adversely affect its business,
operating results and financial condition. In the last quarter of fiscal 1996,
the Company over-estimated its growth rate and, as a result, built-up
excessive inventories of certain products and components. There can be no
assurance that the Company will not experience similar or more severe
difficulties in the future. See "Business."
POSSIBLE FLUCTUATIONS IN QUARTERLY RESULTS
The Company anticipates that it may experience significant fluctuations in
operating results in the future. Fluctuations in operating results may result
in volatility in the price of the Company's Common Stock, Units and Warrants.
Operating results may fluctuate as a result of many factors, including the
Company's level of research and development and sales and marketing
activities, announcements by the Company and its competitors, volume and
timing of orders received, if any, during the period, the timing of commercial
introduction of future products and enhancements or competitive products and
the impact of price competition on the Company's average selling prices.
Almost all of these factors are beyond the Company's control.
Notwithstanding the difficulty in forecasting future sales, the Company
generally must undertake its research and development and sales and marketing
activities and other commitments months or years in advance. Accordingly, any
shortfall in product revenues in a given quarter may materially adversely
affect the Company's financial condition and results of operations due to the
inability to adjust expenses during the quarter to match the level of product
revenues, if any, for the quarter. Due to these and other factors, the Company
believes that quarter to quarter comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indications of the
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SHARES AVAILABLE FOR FUTURE SALE; REGISTRATION RIGHTS
Future sales of Common Stock by existing shareholders pursuant to Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to the Concurrent Securities Offering or otherwise, could have an adverse
effect on the price of the Company's securities. Pursuant to the Concurrent
Securities Offering, 425,000 Selling Securityholders' Class A 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 Securityholders' Class A Warrants
for at least 90 days from the closing of the Offering and, during the period
from 91 to 270 days after the closing of the Offering, only sell specified
percentages of such Selling Securityholders' Class A Warrants. In addition,
upon the sale of the 1,400,000 Units offered hereby, the Company will have
outstanding 3,374,936 shares of Common Stock, 1,400,000 Class A Warrants,
1,400,000 Class B Warrants and other warrants to purchase 185,064 shares of
Common Stock (3,584,936 shares of Common Stock, 1,610,000 Class A Warrants and
1,610,000 Class B Warrants if the Underwriter's over-allotment option is
exercised in full). The shares of Common Stock, Class A Warrants and Class B
Warrants sold in the Offering will be freely tradeable without restriction
under the Securities Act, unless acquired by "affiliates" of the Company as
that term is defined in the Securities Act. The remaining 2,160,000
outstanding shares of Common Stock and options and warrants to purchase Common
Stock are "restricted securities" within the meaning of Rule 144 under the
Securities Act. Pursuant to Rule 144, substantially all of these restricted
shares
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will be eligible for resale either immediately or commencing 90 days following
the date of this Prospectus subject to the restrictions on transferability
relating to the Escrow Shares. However, all the holders of the shares of
Common Stock outstanding prior to the Offering and all the holders of options
or warrants to purchase shares of Common Stock have agreed not to sell or
otherwise dispose of any securities of the Company for a period of 13 months
from the date of this Prospectus without the prior written consent of the
Underwriter. The holder of the Unit Purchase Option has certain demand and
"piggy-back" registration rights covering their securities. The exercise of
such rights could involve substantial expense to the Company. 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
Securities Offering," "Description of Securities," "Shares Eligible for Future
Sale" and "Underwriting".
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS
Upon sale of the 1,400,000 Units offered hereby, the Company will have
outstanding 1,400,000 Class A Warrants to purchase 1,400,000 shares of Common
Stock and 1,400,000 Class B Warrants for $6.50 per share (subject to
adjustment in certain circumstances) and 1,400,000 Class B Warrants to
purchase 1,400,000 shares of Common Stock at $8.75 per share (subject to
adjustment in certain circumstances) (or 1,610,000 Class A Warrants and
1,610,000 Class B Warrants if the Underwriter's over-allotment option is
exercised in full). In addition, the Company will have outstanding 425,000
Selling Securityholders' Class A Warrants to purchase 425,000 shares of Common
Stock and 425,000 Class B Warrants (which are exercisable for 425,000 shares
of Common Stock), the Unit Purchase Option to purchase an aggregate of 560,000
shares of Common Stock assuming exercise of the underlying Warrants,
additional warrants to purchase 185,064 shares of Common Stock and 200,000
shares of Common Stock reserved for issuance under the Option Plan, under
which no options are currently outstanding. Holders of such options and
warrants may exercise them at a time when the Company would otherwise be able
to obtain additional equity capital on terms more favorable to the Company.
Moreover, while these options are outstanding, the Company's ability to obtain
financing on favorable terms may be adversely affected. See "Management" and
"Description of Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Units offered hereby will incur immediate and substantial
dilution in the net tangible book value of the Common Stock included in the
Units, estimated to be approximately $3.42 per share or approximately 68% of
the public offering price per share (allocating no value to the Warrants).
Additional dilution to public investors, if any, may result to the extent that
the Warrants, the Unit Purchase Option or outstanding options and warrants are
exercised at a time when the net tangible book value per share of Common Stock
exceeds the exercise price of any such securities. See "Dilution."
ARBITRARY DETERMINATION OF OFFERING PRICE; ABSENCE OF PUBLIC MARKET AND
POSSIBLE VOLATILITY OF STOCK PRICE
The initial public offering price of the Units and the exercise prices and
other terms of the Warrants have been arbitrarily determined by negotiation
between the Company and the Underwriter and do not necessarily bear any
relationship to the Company's assets, net worth or other established criteria
of value. The exercise and redemption prices of the Warrants should not be
construed to imply or predict any increase in the market price of the Common
Stock. See "Underwriting." No public market for the securities has existed
prior to the Offering. No assurance can be given that an active trading market
in the Company's securities will develop after completion of the Offering or,
if developed, that it will be sustained. No assurance can be given that the
market price of the Company's securities will not fall below the initial
public offering price. The Company believes factors such as quarterly
fluctuations in financial results and announcements of new technology or
products or regulatory developments in the telephone industry may cause the
market price of the Company's securities to fluctuate, perhaps substantially.
These fluctuations, as well as general economic conditions, such as recessions
or high interest rates, may adversely affect the market price of the
securities.
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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. With respect to continued listing, such new requirements
are (i) either at least $2,000,000 in tangible assets, a $35,000,000 market
capitalization or net income of at least $500,000 in two of the three prior
years, (ii) at least 500,000 shares in the public float valued at $1,000,000
or more, (iii) a minimum Common Stock bid price of $1.00, (iv) at least two
active market makers, and (v) at least 300 holders of the Common Stock. 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.
RISK OF LOW-PRICE STOCKS
If the Company's securities were to be delisted from Nasdaq, they could
become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as
amended (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 a net worth in excess of $1,000,000 or annual incomes exceeding $200,000,
or $300,000 together with their spouses). For transactions covered by this
rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may adversely affect the ability of
broker-dealers to sell the Company's securities and may adversely affect the
ability of purchasers in the Offering to sell any of the securities acquired
hereby in the secondary market.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny
stock market. Disclosure is also required to be made about commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
The foregoing 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 if the
Company meets 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
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the Company's securities were subject to the rules on penny stocks, the market
liquidity for the Company's securities could be severely adversely affected.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS
The Warrants included in the Units offered hereby will be immediately
detachable and separately tradeable. Although the Units will not knowingly be
sold to purchasers in jurisdictions in which the Units are not registered or
otherwise qualified for sale, purchasers who reside in or move to
jurisdictions in which the securities underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable
may buy Units (or the Warrants included therein) in the aftermarket. In this
event, the Company would be unable to issue securities to those persons
desiring to exercise their Warrants unless and until the underlying securities
could be registered or qualified for sale in the jurisdictions in which such
purchasers reside, or unless an exemption from such qualification exists in
such jurisdictions. No assurance can be given that the Company will be able to
effect any such required registration or qualification.
Additionally, purchasers of the Units will be able to exercise the Warrants
included therein only if a current prospectus relating to the securities
underlying the Warrants is then in effect under the Securities Act and such
securities are qualified for sale or exempt from qualification under the
applicable securities or "blue sky" laws of the states in which the various
holders of the Warrants then reside. Although the Company has undertaken to
use reasonable efforts to maintain the effectiveness of a current prospectus
covering the securities underlying the Warrants, no assurance can be given
that the Company will be able to do so. The value of the Warrants may be
greatly reduced if a current prospectus covering the securities issuable upon
the exercise of the Warrants is not kept effective or if such securities are
not qualified or exempt from qualification in the states in which the holders
of the Warrants then reside.
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS
The Warrants are subject to redemption by the Company commencing one year
from the date of this Prospectus, on at least 30 days' prior written notice,
if the average closing bid price of the Common Stock for 30 consecutive
trading days ending within 15 days of the date on which the notice of
redemption is given exceeds $9.10 per share with respect to the Class A
Warrants and $12.10 per share with respect to the Class B Warrants. If the
Warrants are redeemed, holders of Warrants will lose their right to exercise
the Warrants, except during such 30-day notice of redemption period. Upon the
receipt of a notice of redemption of the Warrants, the holders thereof would
be required to: (i) exercise the Warrants and pay the exercise price at a time
when it may be disadvantageous for them to do so, (ii) sell the Warrants at
the then current market price (if any) when they might otherwise wish to hold
the Warrants, or (iii) accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities--Redeemable Warrants."
POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO
INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION OF THE UNDERWRITER AND
D.H. BLAIR & CO.
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 that 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 &
14
<PAGE>
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 THE COMPANY'S SECURITIES
The Underwriter has advised the Company that Blair & Co. intends to make a
market in the Company's securities. Regulation M, which was recently adopted
to replace Rule 10b-6 and certain other rules promulgated under the Securities
Act of 1934, as amended (the "Exchange Act"), may restrict Blair & Co.'s
ability to engage in market-making activities with regard to the Company's
securities for the period from five business days (or such other applicable
period as Regulation M may provide) prior to any solicitation by the
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, Regulation M restricts the ability
of any person engaged in the distribution of the Selling Securityholder
Warrant to engage in market-making activities with respect to any securities
of the Company for the applicable "cooling off" period prior to the
commencement of such distribution. Accordingly, in the event the Underwriter
or Blair & Co. is engaged in a distribution of the Selling Securityholder
Warrants, their ability to make a market in the Company's securities during
the applicable restrictive period will be restricted. Any temporary cessation
or limitation of such market-making activities could have an adverse effect on
the market price of the Company's securities. See "Underwriting."
NO DIVIDENDS
The Company has paid no dividends to its shareholders since its inception
and does not plan to pay dividends in the foreseeable future. The Company
intends to reinvest earnings, if any, in the development and expansion of its
business. See "Dividend Policy."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Company's Board of Directors has authority to issue up to 5,000,000
shares of Preferred Stock and determine the price, rights, preferences,
privileges and restrictions, including voting rights of such shares, without
any further vote or action by the Company's shareholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisition and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no current
plans to issue shares of Preferred Stock. See "Description of Securities--
Preferred Stock."
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SECURITIES
In the event any Escrow Securities owned by securityholders of the Company
who are officers, directors, consultants or employees of the Company are
released from escrow, compensation expense will be recorded for financial
reporting purposes. Therefore, in the event the Company attains any of the
earnings or stock price thresholds required for the release of the Escrow
Securities, the release will be treated, for financial reporting purposes, as
compensation expense of the Company. Accordingly, the Company will, in the
event of the release of the Escrow Securities, recognize during the period
that the earnings or stock price thresholds are met a substantial noncash
charge to earnings that would increase the Company's loss or reduce or
eliminate earnings, if any, at such time. The amount of this charge will be
equal to the aggregate market price of such Escrow Securities at the time of
release from escrow. Although the amount of compensation expense recognized by
the Company will not affect the Company's total shareholders' equity or cash
flow, it may have a depressive effect
15
<PAGE>
on the market price of the Company's securities. See "Principal Shareholders--
Escrow Securities" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Release of Escrow Securities".
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation eliminate in certain circumstances
the liability of directors of the Company for monetary damages for breach of
their fiduciary duty as directors. The Company has also entered into
indemnification agreements ("Indemnification Agreement(s)") with each of its
directors and officers. 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 them in connection with any
civil or criminal action or administrative proceeding arising out of their
performance of duties as a director or officer, other than an action
instituted by the director or officer. The Indemnification Agreements will
also require 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 of amounts due under the Indemnification Agreement and
to recover the expenses of such a suit if they are successful. See
"Management--Indemnification of Officers and Directors and Related Matters."
16
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 1,400,000 Units to be sold in the
Offering, after deducting the underwriters discount and commissions and other
estimated expenses of the Offering, are anticipated to be approximately $
($ if the over-allotment option is exercised in full). The Company expects
the net proceeds to be utilized as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT OF PERCENTAGE OF
ANTICIPATED APPLICATION NET PROCEEDS NET PROCEEDS
- ----------------------- ------------ -------------
<S> <C> <C>
Repayment of indebtedness(1)......................... $1,120,000
Product development(2)............................... $1,000,000
Sales and marketing(3)............................... $1,000,000
Additional inventory(4).............................. $ 500,000
Fixed assets(5)...................................... $ 250,000
Working capital and general corporate purposes(6).... $
---------- ---
Total.............................................. $
========== ===
</TABLE>
- --------
(1) Represents (i) the $850,000 principal amount of Bridge Notes issued in the
Bridge Financing completed by the Company in March 1997, together with
estimated interest through April 30, 1997, (ii) the $200,000 principal
amount of Outstanding Convertible Shareholder Notes together with
estimated interest through April 30, 1997 and (iii) $25,000 principal
amount of a note issued to Mr. Paul DePond, President and Chief Executive
Officer of the Company (the "DePond Note") together with estimated
interest through April 30, 1997.
(2) Represents costs for research and development of new products and
enhancements of current products.
(3) Represents funds required for the implementation of marketing programs,
sales materials, advertising, trade shows and the hiring, training and
employment of additional sales, marketing, and support personnel.
(4) Represents the cost of establishing manufacturing inventories for
projected sales of current products.
(5) Represents fixed asset requirements that are anticipated to support new
product development and to establish and maintain an adequate customer
service and warranty tracking system.
(6) Represents funds that are to be used for working capital and general
corporate purposes, including $420,000 for salaries for executive
officers, office expenses and other general overhead expenses.
The proposed use of the net offering proceeds described herein represents
the Company's anticipated use of the proceeds based upon current operating
plans and certain assumptions, including those relating to the Company's
future revenue levels and expenditures, and assumptions regarding industry and
general economic conditions and other conditions. Future events, including
problems, delays, expenses and complications frequently encountered by early
stage companies, as well as changes in competitive conditions affecting the
Company's business and the success or lack thereof of the Company's research
and development or marketing and sales efforts, may make it necessary or
advisable for the Company to reallocate the net proceeds among the above uses
or use portions of the net proceeds for other purposes. Any such shifts will
be at the discretion on the Company.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the net proceeds of the Offering, together
with projected cash flow from operations, will be sufficient to satisfy the
Company's contemplated cash requirements for the next 12 months. If the
Company's estimates prove incorrect, the Company will have to seek alternative
sources of financing during such period, including debt and equity financing
and the reduction of operating costs and projected growth plans. No assurance
can be given that such financing could be obtained by the Company on favorable
terms, if at all, and if the Company is unable to obtain needed financing, the
Company's business would be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
17
<PAGE>
Pending application, the net proceeds of the Offering will be invested in
short-term, high grade interest-bearing savings accounts, certificates of
deposit, United States government obligations, money market accounts or short-
term interest bearing obligations. Any proceeds received upon exercise of the
Underwriters over-allotment option, the Warrants, the Underwriter's Unit
Purchase Option, as well as income from investments, are currently intended to
be used for general corporate purposes.
DIVIDEND POLICY
The Company has never paid any cash dividends on its stock and anticipates
that, for the foreseeable future, it will continue to retain any earnings for
use in the operation of its business. Payment of cash dividends in the future
will depend upon the Company's earnings, financial condition, any contractual
restrictions, restrictions imposed by applicable law, capital requirements and
other factors deemed relevant by the Company's Board of Directors.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
December 31, 1996 (after giving retroactive effect to a 1-for-5.05 reverse
stock split effected in February 1997); (ii) pro forma as of December 31, 1996
to reflect (a) the sale of the Bridge Notes and Bridge Warrants subsequent to
such date, (b) the conversion of certain of the Convertible Shareholder Notes
into equity in January 1997 and (c) the conversion of the Outstanding
Preferred Stock into Common Stock upon completion of the Offering; and (iii)
as adjusted to reflect the sale of the Units offered hereby and the
application of a portion of the net proceeds therefrom to repay the Bridge
Notes, the Outstanding Convertible Shareholder Notes and the DePond Note. This
table should be read in conjunction with the Financial Statements and the
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Bridge Notes, net of discount(1)......... $ -- $ 618,750 $
De Pond Note(2).......................... 25,000 25,000
Convertible Shareholder Notes(2)......... 932,125 200,000
Shareholders' equity (net capital
deficiency):
Convertible Preferred Stock, $.001 par
value, 4,500,000 shares authorized,
issued and outstanding at December 31,
1996, aggregate liquidation preference
of $1,850,000; none outstanding, pro
forma; 5,000,000 shares authorized,
none outstanding, as adjusted(3)...... 1,850,000 --
Common Stock, $.001 par value,
12,100,000 shares authorized, 918,182
shares issued and outstanding, at
December 31, 1996; 1,974,936 shares
outstanding, pro forma; 3,374,936
shares outstanding, as adjusted(4)(5). 70,819 2,759,194
Additional paid-in capital............. -- --
Notes receivable from shareholders..... (26,525) (26,525)
Accumulated deficit(6)................. (2,499,250) (2,499,250)
----------- ----------- ----
Total shareholders' equity (net capital
deficiency)........................... (604,956) 233,419
----------- ----------- ----
Total capitalization................. $ 352,169 $ 1,077,169
=========== =========== ====
</TABLE>
- --------
(1) The Bridge Notes are payable on the earlier of March 11, 1998 or the
completion of the Offering. See "Use of Proceeds."
(2) The De Pond Note is due on demand or the completion of the Offering and
the Convertible Shareholder Notes outstanding as of the date of this
Prospectus are payable on the earlier of April 30, 1997 or the completion
of the Offering. See "Use of Proceeds."
(3) As adjusted authorized amounts give effect to an amendment to the
Company's Certificate of Incorporation. As adjusted par value of $.001
gives effect to Restated Articles of Incorporation which will be filed
upon the close of the Offering.
(4) Excludes (i) up to 840,000 shares of Common Stock issuable upon exercise
of the Underwriter's over-allotment option and the underlying warrants;
(ii) 4,200,000 shares of Common Stock issuable upon exercise of the
Warrants included in or underlying the Units offered hereby; (iii) 850,000
shares of Common Stock issuable upon exercise of the Selling
Securityholder Warrants and the underlying warrants; (iv) 560,000 shares
of Common Stock issuable upon exercise of the Unit Purchase Option and the
Warrants included in or underlying such option; (v) 200,000 shares of
Common Stock reserved for issuance under the Stock Option Plan, (vi)
185,064 shares of Common Stock issuable upon exercise of outstanding
warrants. See "Management--Stock Option Plan," "Certain Relationships and
Related Transactions," "Description of Securities" and "Concurrent
Securities Offering."
(5) Includes the 1,263,537 Escrow Shares. See "Principal Shareholders--Escrow
Securities."
19
<PAGE>
(6) As adjusted accumulated deficit gives effect to the recognition of
$246,250 of expense upon the closing of the Offering representing debt
discount, debt issuance costs and interest expense of approximately
$15,000 relating to the Bridge Financing and repayment of the Bridge
Notes. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RESTRUCTURING
As of December 31, 1996, the Company had issued and sold to certain of its
shareholders and other investors an aggregate of $932,125 principal amount of
convertible promissory notes (the "Convertible Shareholder Notes") and
warrants to purchase that number of shares of Common Stock of the Company
equal to 20% of the principal amount of the Convertible Shareholder Notes
divided by the price per share of the Company's next equity financing (the
"Shareholder Warrants"). The Convertible Shareholder Notes bore an interest
rate of 8% per annum and were convertible into equity of the Company at a
price equal to the price per share of the Company's next equity financing.
Subsequent to December 31, 1996, the Company completed a restructuring of the
Convertible Shareholder Notes and Shareholder Warrants (the "Restructuring").
Holders of an aggregate of $732,125 in principal amount of the Convertible
Shareholder Notes converted their notes into Common Stock of the Company at a
price per share of $4.55 and exchanged their accompanying Shareholder Warrants
for warrants to purchase an aggregate of 48,272 shares of the Company's Common
Stock at a price of $0.25 per share. Holders of the remaining $200,000
principal amount of Convertible Shareholder Notes (the "Outstanding
Convertible Shareholder Notes") agreed to defer repayment of the notes until
the earlier of the closing of the Offering or until April 30, 1997 and
exchanged their Shareholder Warrants for warrants to purchase an aggregate of
7,920 shares of Common Stock at an exercise price of $5.05 per share.
BRIDGE FINANCING
In March 1997, the Company completed a financing (the "Bridge Financing") in
which it issued an aggregate of $850,000 principal amount of Bridge Notes and
425,000 Bridge Warrants and received net proceeds of approximately $725,000
(after expenses of such offering). The Bridge Notes are payable, together with
interest at the rate of 10% per annum, on the earlier of one year from the
issuance of the Bridge Notes or the closing of the Offering. See "Use of
Proceeds." The Bridge Warrants entitle the holders thereof to purchase one
share of Common Stock commencing one year from the date of their issuance but
will be exchanged automatically on the closing of the Offering for the Selling
Securityholders' Warrants, each of which will be identical to the Class A
Warrants included in the Units offered hereby. The Selling Securityholders'
Warrants 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
Securityholders' Warrants for a period of one year from the closing of the
Offering and not to sell the Securityholders' Warrants except after specified
periods. See "Concurrent Securities Offering."
Upon repayment of the Bridge Notes, the unamortized balance of $106,250 of
debt discount attributable to the Bridge Warrants as well as debt issuance
costs of approximately $125,000 will be charged to the Company's operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
20
<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
per share paid by the purchasers in the Offering and the net tangible book
value per share immediately after completion of the Offering. Pro forma net
tangible book value per share represents the net tangible assets of the
Company (total assets less total liabilities and intangible assets), divided
by the number of shares of Common Stock outstanding. The pro forma net
tangible book value gives effect to (i) the issuance in March 1997 of the
Bridge Notes, net of debt discount, (ii) the conversion in January 1997 of
certain Convertible Shareholder Notes into Common Stock, and (iii) the
conversion of the Outstanding Preferred Stock into Common Stock upon the
closing of the Offering. At December 31, 1996, the Company had a pro forma net
tangible book value of $233,419, or approximately $.11 per share ($.30 per
share if the Escrow Securities are excluded). After giving effect to the
issuance of the 1,400,000 Units offered hereby at a public offering price of
$5.00 per Unit, and the Company's receipt of the estimated net proceeds
therefrom after deduction of expenses aggregating approximately $675,000 and
the use of a portion of the net proceeds to repay the Bridge Notes, the
Outstanding Convertible Shareholder Notes and the DePond Note, the pro forma
net tangible book value per share of the Company, as adjusted at December 31,
1996 would have been $5,612,169, or approximately $1.58 per share ($2.57 per
share if the Escrow Securities were excluded). This would result in an
immediate dilution to investors in the Offering of $3.42, or 68%, per share
($2.43 or 49%, per share if the Escrow Securities were excluded), and the
aggregate increase in the pro forma net tangible book value to present
shareholders would be $1.47 per share ($2.27 per share if Escrow Securities
are excluded), as illustrated by the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per Unit....................... $5.00
Pro forma net tangible book value per share before
Offering.................................................... $ .11
Increase per share attributable to new investors in the
Units....................................................... 1.47
-----
Pro forma net tangible book value per share after the
Offering.................................................... 1.58
-----
Dilution per share to investors(1)........................... $3.42
=====
</TABLE>
- --------
(1) If the over-allotment option is exercised in full, the pro forma net
tangible book value per share after the Offering would be approximately
$1.73, resulting in dilution to new investors in the Offering of $3.27, or
65% per share.
The following table sets forth on a pro forma basis the differences between
existing shareholders and new investors in the Offering with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing shareholders and by new investors at an estimated initial public
offering price of $5.00 per Unit:
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF OF TOTAL AVERAGE
OUTSTANDING CONSIDERATION CONSIDERATION PRICE PER
NUMBER SHARES PAID(1) PAID SHARE
--------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Existing
Shareholders(2)........ 1,974,936 58.5% $2,652,944 % $1.34
New Investors........... 1,400,000 41.5 $
--------- ----- ---------- -----
Total................... 3,374,936 100.0% $ 100.0%
========= ===== ========== =====
</TABLE>
- --------
(1) Prior to the deduction of costs of issuance.
(2) Includes the 1,263,537 Escrow Shares. See "Principal Shareholders--Escrow
Securities."
As of the date of this Prospectus, there were outstanding warrants to
purchase 185,064 shares of Common Stock exercisable at prices ranging from
$0.25 to $5.05 per share. To the extent that such outstanding options are
exercised in the future, there may be additional dilution to existing
shareholders.
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The statement of operations
data for the two years in the period ended September 30, 1996 are derived from
the audited financial statements of the Company included elsewhere in this
Prospectus. The report of Ernst & Young LLP which also appears herein contains
an explanatory paragraph relating to uncertainty as to the ability of the
Company to continue as a going concern. The selected financial data as of
December 31, 1996 and for the three months ended December 31, 1995 and 1996
have been derived from the Company's unaudited financial statements which, in
the opinion of Management, reflect all adjustments which are of a normal
recurring nature necessary for a fair presentation of the results of
operations for such periods. The results of the interim periods are not
necessarily indicative of the results of a full year.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- --------------------
1995 1996 1995 1996
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product sales.................... $ 9,333 $ 308,067 $ 4,903 $ 396,294
Cost of sales.................... 7,929 428,112 2,775 351,079
--------- ----------- --------- ---------
Gross profit (loss).............. 1,404 (120,045) 2,128 45,215
Operating expenses:
Research and development....... 159,163 537,902 147,272 149,415
Sales and marketing............ 122,884 549,916 116,672 153,399
General and administrative..... 146,756 440,089 84,194 138,787
--------- ----------- --------- ---------
Total operating expenses......... 428,803 1,527,907 348,138 441,601
--------- ----------- --------- ---------
Loss from operations............. (427,399) (1,647,952) (346,010) (396,386)
Interest expense, net............ 1,337 (9,267) 6,806 (19,583)
--------- ----------- --------- ---------
Net loss......................... $(426,062) $(1,657,219) $(339,204) $(415.969)
========= =========== ========= =========
Net loss per share............... $ (.84) $ (3.17) $ (.65) $ (.80)
========= =========== ========= =========
Weighted average shares
outstanding..................... 509,564 522,550 525,700 517,480
========= =========== ========= =========
Pro forma net loss per share..... $ (1.89) $ (.47)
=========== =========
Weighted average shares used in
computing
pro forma net loss per share.... 875,092 882,787
=========== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
ACTUAL PRO FORMA(1)
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................. $ (706,643) $ 131,732
Total assets........................................... 738,633 1,463,633
Total liabilities...................................... 1,343,589 1,230,214
Total shareholders' equity (net capital deficiency).... (604,956) 233,419
</TABLE>
- --------
(1) Gives pro forma effect to (i) the sale of the Bridge Notes and Bridge
Warrants subsequent to December 31, 1996, (ii) the conversion of certain
of the Convertible Shareholder Notes into equity in connection with a
restructuring effected by the Company in January 1997 and (iii) the
conversion of the Outstanding Preferred Stock into Common Stock upon
completion of the Offering. See "Capitalization--Bridge Financing," "--
Restructuring," "Certain Relationships and Related Transactions," and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Prospectus contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this Prospectus. The
following discussion should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
The Company was founded in August 1994 to develop, manufacture, market and
sell computer telephony products for the business, SOHO and residential
markets. From inception until January 1996, the Company was engaged primarily
in research and development. In January 1996, the Company shipped the first
version of its MessageAlert product and in December 1996 shipped its first
Centrex Auto Attendant product. Substantially all of the Company's revenue has
been derived from sales of its MessageAlert product.
To date, the Company's working capital requirements have been met through
the sale of equity and debt securities and, to a lesser extent, product
revenue and the Company's line of credit. The Company has sustained
significant operating losses in every fiscal period since inception and
expects to incur substantial quarterly operating losses in the future. The
Company's limited operating history makes the prediction of future operating
results difficult if not impossible. Accordingly, although the Company
experienced significant growth in revenue in the three-month period ended
December 31, 1996, such growth should not be considered to be indicative of
future revenue growth. Future operating results will depend on many factors,
including the demand for the Company's products, the level of product and
price competition, the ability of the Company to expand its existing and to
create new distribution channels, and the ability of the Company to develop
and market new products and control costs. There can be no assurance that the
Company's revenue will grow or be sustained in future periods or that the
Company will ever achieve profitability.
RESULTS OF OPERATIONS
Revenue
To date, substantially all of the Company's revenue has been derived from
the sale of its MessageAlert products. Revenue consists of gross revenue less
product returns. Revenue for the fiscal year ended September 30, 1996
increased to $308,067 from $9,333 for the fiscal year ended September 30,
1995. Revenue for the quarter ended December 31, 1996 increased to $396,294
from $4,903 for the quarter year ended December 31, 1995. Sales to RBOCs and
LECs constituted 69% and 78% of revenue for the fiscal year ended September
30, 1996 and the quarter ended December 31, 1996, respectively. In addition,
three customers accounted for 30%, 18% and 16% of sales in fiscal 1996, and
31%, 19% and 13% of sales in the quarter ended December 31, 1996.
Cost of Sales
Cost of sales consists primarily of the cost to manufacture the Company's
products. Cost of sales increased to $428,112 in the fiscal year ended
September 30, 1996 from $7,929 in the fiscal year ended September 30, 1995 and
to $351,079 for the quarter ended December 31, 1996 from $2,775 for the
quarter ended December 31, 1995. These increases were the result of increased
sales of the Company's products.
Research and Development
Research and development expense consists principally of personnel costs,
supply expenses and equipment depreciation. Research and development expense
increased to $537,902 for the year ended September 30, 1996 from $159,163 for
the year ended September 30, 1995. This increase was primarily the result of
hiring additional engineers and outside consultants for product development.
Research and development expense for the three-
23
<PAGE>
month period ended December 31, 1996 was $149,415, relatively unchanged from
the three-month period ended December 31, 1995.
The Company expects that research and development expenses will increase
significantly in future quarters as the Company attempts to develop new
products and enhance its current products. See "Use of Proceeds" and
"Business--Research and Development."
Sales and Marketing
Sales and marketing expense consists primarily of personnel, consulting and
travel costs and sales commissions related to the Company's sales and
marketing efforts. Sales and marketing expenses increased to $549,916 for the
year ended September 30, 1996 from $122,884 for the year ended September 30,
1995 and to $153,399 for the three-month period ended December 31, 1996 from
$116,672 for the three-month period ended December 31, 1995. These increases
were attributable primarily to the addition of sales and marketing personnel.
The Company anticipates that sales and marketing expenses will increase
significantly in future quarters as the Company hires additional sales
personnel and attempts to expand its existing and create new distribution
channels. See "Use of Proceeds" and "Business-Sales, Marketing and
Distribution."
General and Administrative
General and administrative expense consists of general management and
finance personnel costs, rent, telephone and legal expenses for the Company.
General and administrative expenses increased to $440,089 for the year ended
September 30, 1996 from $146,756 for the year ended September 30, 1995 and to
$138,787 for the three-month period ended December 31, 1996 from $84,194 for
the three-month period ended December 31, 1995. These increases were primarily
the result of hiring additional personnel and the commencement of salary
payments to certain founders who previously had not been paid salaries. The
Company expects that it will need to hire additional accounting and financial
personnel in order to support anticipated growth and comply with the reporting
and investor relations obligations of a public company.
Income Taxes
There was no provision for federal or state income taxes in fiscal 1995 or
1996 or in the three month periods ended December 31, 1995 and 1996, as the
Company incurred net operating losses. The Company expects to incur a net
operating loss in future quarters and years. As of September 30, 1996, the
Company had federal and state net operating loss carryforwards of
approximately $1,800,000. The net loss carryforwards and credit forwards will
expire in tax years 2003 and 2011, if not utilized. Utilization of the net
operating losses and credits may be subject to a substantial annual limitation
due to ownership change limitations provided by the Internal Revenue Code of
1986, as amended (the "Code"), and similar state provisions. This Offering may
result in such an ownership change for purposes of Section 382 of the Code. If
an ownership change were to occur, net operating losses and credits could
expire before utilization. For financial reporting purposes, deferred tax
assets primarily related to the net operating carryforwards recognized under
Financial Accounting Standard No. 109, "Accounting for Income Taxes," have
been fully offset by a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed it operations to date primarily through private
sales of equity and debt securities and a now expired bank line of credit for
working capital. In the fiscal year ended September 30, 1996 and three-month
period ended December 31, 1996, the Company's net cash used in operating
activities equaled $2,034,658 and $325,754, respectively. The Company
anticipates that it will have a negative cash flow from operating activities
in future quarters and years.
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<PAGE>
In March 1996, the Company completed the Bridge Financing which consisted of
the sale of $850,000 principal amount of Bridge Notes bearing interest at an
annual rate of 10% and warrants to purchase an aggregate of 425,000 shares of
Common Stock. See "Capitalization--Bridge Financing." The net proceeds of the
Bridge Financing of approximately $725,000 have been utilized by the Company
to repay certain indebtedness and for working capital purposes including
general and administrative expense 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." The Company
will recognize a non-recurring charge of $231,000 representing the aggregate
debt discount and debt issuance costs associated with the Bridge Financing at
the time of repayment. See Note 7 of Notes to Financial Statements.
From time to time, Mr. Paul F. DePond, President and Chief Executive Officer
of the Company, has funded the Company's working capital requirements. In
fiscal 1995, Mr. DePond made capital advances in the aggregate principal
amount of $75,000 of which $50,000 in principal amount, but not the accrued
interest thereon, was repaid through December 31, 1996 and the remaining
$25,000 in principal amount and the remaining accrued interest thereon will be
repaid upon the closing of the Offering. In February 1997, Mr. DePond advanced
the Company $65,000 which amount, including accrued interest, was repaid upon
the closing of the Bridge Financing. See "Use of Proceeds" and "Certain
Relationships and Related Transactions."
During the 12-month period following the Offering, the Company is committed
to pay approximately $420,000 in compensation to its current executive
officers. See "Management--Employment Contracts."
The Company believes that the proceeds from the sale by the Company of the
Units together with existing sources of liquidity will satisfy the Company's
anticipated cash needs through at least the next 12 months. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
liquidity requirements, the Company may attempt to sell additional equity or
convertible debt securities or obtain credit facilities. The sale of
additional equity or convertible debt securities would result in additional
dilution the Company's shareholders. 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 funds it requires, it
may be necessary for the Company to significantly curtail its activities or
cease operations.
RELEASE OF ESCROW SECURITIES
In the event any Escrow Securities owned by securityholders of the Company
who are officers, directors, consultants or employees of the Company are
released from escrow, compensation expense will be recorded for financial
reporting purposes. Therefore, in the event the Company attains any of the
earnings or stock price thresholds required for the release of the Escrow
Securities, the release will be treated, for financial reporting purposes, as
compensation expense of the Company. Accordingly, the Company will, in the
event of the release of the Escrow Securities, recognize during the period
that the earnings or stock price thresholds are met a substantial noncash
charge to earnings that would increase the Company's loss or reduce or
eliminate earnings, if any, at such time. The amount of this charge will be
equal to the aggregate market price of such Escrow Securities at the time of
release from escrow. Although the amount of compensation expense recognized by
the Company will not affect the Company's total shareholders' equity or cash
flow, it may have a depressive effect on the market price of the Company's
securities. See "Principal Shareholders--Escrow Securities."
25
<PAGE>
BUSINESS
The Company is engaged in the development, manufacture, marketing and sale
of computer telephony products for the business, Small Office Home Office
("SOHO") and residential marketplaces. In recent years, the number of
individuals and businesses relying on their telephone company service provider
to provide them with services such as voice mail and CENTREX, a business-
oriented service which eliminates the need for on-premise telephone switching
equipment, has increased dramatically. The Company's products are designed to
enhance the convenience and utility of these services by providing customers
with features which are either not available or not included in standard
service packages. The Company's MessageAlert product increases the timeliness
and ease of message retrieval for voice mail subscribers by providing a visual
indication that a message has been received. The Company's Centrex Auto
Attendant product gives business and SOHO customers a cost-effective means of
ensuring that incoming calls are properly routed even when a human attendant
is not available.
INDUSTRY BACKGROUND
Voice Mail
In 1995, approximately 14 million residential and business customers
received voice mail services from their telephone service provider. The number
of customers subscribing to voice mail has increased at an annual rate of
almost 20% since 1990. Residential voice mail subscribers typically pay their
telephone service provider a monthly fee of $6 to $7 for voice mail services
whereas business voice mail subscribers generally pay from $15 to $20. Because
of its message management capabilities, reliability and remote access
features, voice mail is a significant improvement over traditional telephone
answering machines. However, voice mail subscribers know they have a message
waiting only if they remember to pick up their telephone and listen for the
distinctive stutter dial tone which indicates that a message has been
received. As a result, messages are often received substantially later than if
the blinking light of the traditional answering machine had been available.
Telephone company voice mail product managers believe that the lack of a
visual message waiting indicator is one of the major reasons that voice mail
subscribers cancel their service. In a survey conducted by Pacific Bell, 83%
of respondents stated that a voice mail indicator light either "enhanced" or
"greatly enhanced" their voice mail service.
Development of a visual indicator for telephone company provided voice mail
was impeded by governmental regulation and shifting telephony standards. For
many years, the Federal Communications Commission ("FCC") prohibited the use
of any device which would take a telephone line "off-hook" for a purpose other
than making a telephone call. As a result, it was illegal to sell a device
which would sample a telephone line to determine if the stutter dial tone was
present. In response to this restriction, the major domestic telephone
companies in 1992 and 1993 adopted a signaling standard (known as "CLASS")
which enabled a device which was attached to a telephone line to be alerted to
the presence of a voice mail message without taking the line off-hook. In
addition, in September 1995, the FCC issued a waiver to allow stutter tone
detection devices to be attached to telephone lines. See "Business--
Governmental Regulation and Industry Standards." Despite these changes, the
vast majority of subscribers to telephone company provided voice mail still do
not receive a visual indication that they have a message waiting.
The Notify Solution
The Company's MessageAlert product remedies this deficiency in voice mail
services by providing subscribers with a visual indication that a message has
been received. The MessageAlert is a small, battery-operated Visual Message
Waiting Indicator ("VMWI") which connects to a voice mail subscriber's
telephone line between the telephone jack and the telephone. The MessageAlert
is designed to work with either one or both of the signaling standards used by
telephone companies to indicate that voice mail has been received. When the
MessageAlert senses that a message has been received, its indicator light
begins to blink. Once the message has been retrieved, the light turns off. The
Company's believes the MessageAlert is the only battery operated VMWI
compatible with both stutter and CLASS signaling on the market today.
26
<PAGE>
Stutter dial tone, a normal dial tone turned on and off intermittently, is
still the most common signaling standard. This signal is initiated by a
communication from the voice mail platform to the central office switch. If a
subscriber has a message, the stutter dial tone is present; if there are no
messages, the dial tone is normal. Stutter compatible VMWIs work by checking
the telephone line whenever the customer completes a call and whenever a call
is placed to the customer's number but not picked up. The VMWI turns its
indicator light on or off based on the presence or absence of a stutter dial
tone when it checks the line.
CLASS signaling is emerging as a complement to, rather than a replacement
for, stutter signaling. CLASS signals are low speed signals transmitted over
the telephone line while the telephone is on hook. CLASS signals are used to
support Caller-ID as well as voice mail. With CLASS signaling, the voice mail
platform instructs the central office switch to notify the subscriber that
they have a message. If the subscriber's telephone line is not in use, the
CLASS signal is transmitted and picked up by the VMWI and the indicator light
on the VMWI begins to blink. When the subscriber retrieves his messages,
another CLASS signal is sent which causes the VMWI to cease blinking.
Both stutter signaling and CLASS signaling have limitations. Implementing
CLASS signaling often requires telephone companies to upgrade their switches
and other elements of their network. In addition, a CLASS signal cannot be
sent while the subscriber's phone is in use. If an attempt to transmit the
CLASS signal to the subscriber's VMWI is unsuccessful because the subscriber's
phone is in use, then the switch does not attempt to re-send the CLASS signal
again for a period of time, often from two to four hours. As a result, a
subscriber may not receive timely notification of messages received while they
are on the phone.
The stutter signal is deficient in two instances. First, if a subscriber
picks up his messages remotely, the stutter signal will turn off but the
VMWI's indicator light will stay on. Second, if a subscriber forwards a
message to another subscriber, a common occurrence in the office context, the
stutter signal will be implemented but the indicator light will not come on.
Both these failures occur because the VMWI samples the line only after
specified events; events which occur without the use of the subscriber's
telephone do not trigger a sampling of the line. FCC regulations prohibit the
sale or use of VMWIs which sample the line other than after the specific
events described above.
In order to overcome the deficiencies of stutter and CLASS signaling, the
Company developed its MessageAlert product, a VMWI which is compatible with
both standards. Combining stutter and CLASS signaling provides the advantages
of both methods and eliminates the disadvantages of each. The stutter is
immediate and never delayed, and CLASS signaling is not event driven. As a
result, subscribers are ensured of timely notification of new messages. Notify
believes it is the only company currently producing a battery-operated VMWI
which is compatible with both stutter and CLASS signaling. The Company has
filed a patent application covering the "MultiSense" technology which provides
dual signalling capability to its MessageAlert product.
The Company is working with certain Regional Bell Operating Companies
("RBOCs") and large Local Exchange Carriers ("LECs") to encourage the adoption
of dual signaling as the standard for voice mail services. The Company
estimates that currently 20% of voice mail subscribers are on systems which
support both stutter and CLASS signaling with the remaining 80% on systems
which support only stutter signaling. The Company expects that eventually all
telephone companies will offer both CLASS and stutter signaling throughout
their networks but that the migration to dual signaling will be slow because
of the expense of upgrading switches to handle CLASS signaling.
Nevertheless, the Company believes that products which support dual-
signaling will have a significant competitive advantage even in telephone
systems with limited or no support for CLASS signaling. Almost all RBOCs and
large LECs have announced their intention to implement CLASS signaling. Most
will do so on a
27
<PAGE>
piecemeal basis over a number of years. During that transition period,
tracking which customers have dual signaling and which only have stutter
signaling will be difficult for the telephone companies from both an
administrative and a technical standpoint. Distributing dual signal VMWIs to
all customers regardless of which signaling standard they are currently
receiving would eliminate the need for such tracking as well as the need to
upgrade customers' VMWIs when their switching is upgraded. The Company
believes that when marketing to the RBOCs and LECs the ability to support dual
signaling is a significant competitive advantage.
The Company also believes the type of power source a VMWI uses is an
important competitive feature. All of the Company's MessageAlert products are
powered by batteries and can operate for over a year on one set of four "AA"
batteries under normal operating conditions. Certain of the Company's
competitors products require an AC power adapter. This approach is
disadvantageous because telephones are often not located near power outlets
and because the VMWI will cease to operate in the event of a power outage.
Other competitors' products are powered by the current in the telephone line.
While convenient, most large telephone companies disfavor this approach
because such devices may adversely affect telephone service when they go off-
hook to recharge their visual indicator circuit. In addition, a device
connected to the public telephone network is not allowed under current FCC
regulations to go off hook periodically for any reason other than to dial a
number and use the network services.
CENTREX
Many businesses today rely on telephone company provided CENTREX services to
handle their call processing needs rather than owning and maintaining their
own telephone switches. CENTREX provides companies with most of the benefits
of an internal system, such as call transferring, extension dialing,
conference call capability and voice mail without the burdens of hardware
ownership. There are currently over 10 million CENTREX lines in service in the
United States approximately 35% of which are in small businesses.
A major deficiency of CENTREX services for small businesses is that calls to
a business' main or 800 number generally must be answered by a human attendant
or they will go unanswered or be transferred into the business' general voice
mail mailbox. For many small businesses, their main and 800 number are
critical components of their operations yet they cannot afford to have a human
attendant available at all times. These businesses need some way to ensure
that all incoming calls are answered and properly routed. Some telephone
companies have attempted to add auto-attendant features to their CENTREX
services; such services have generally been expensive to purchase and
cumbersome to install and maintain and, as result, have not been widely
accepted. In addition, a number of companies offer computer-based systems;
these also are expensive because of the need to dedicate a personal computer
to answering the main or 800 number, and complicated to install and maintain.
The Notify Solution
The Company's Centrex Auto Attendant product responds to the needs of small
businesses or work groups which require an automated method of ensuring that
incoming calls are answered and properly routed. The Centrex Auto Attendant is
attached to the business' main or 800 number line and functions as an
automated substitute for a human receptionist. Incoming calls are answered by
the Centrex Auto Attendant which plays a greeting and provides the caller with
a set of options. These options can include transferring the caller to a
particular department, extension or person, providing the caller with pre-
recorded information (such as directions to the business), or providing the
caller with another set of menu options. The caller responds to the Centrex
Auto Attendant by pressing the buttons on his touch-tone phone. If the caller
chooses to be transferred to a specific extension or person, the Centrex Auto
Attendant works in conjunction with the business' CENTREX service to ensure
that the call is properly transferred.
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<PAGE>
The Centrex Auto Attendant was designed to give businesses a robust set of
features typically found on more expensive PC-based systems without the
complicated installation and configuration procedures typically associated
with such systems. The Centrex Auto Attendant can answer a business' phone,
play a greeting, provide a series of options to the caller, transfer the call
to a specified extension and transfer the call to another set of menu options.
Other features include multiple greetings for business hours and off business
hours, a name directory, and extension dialing. The Centrex Auto Attendant
also tracks a variety of call statistics, such as number of calls processed at
different times of the day. A non-technical user can configure the Centrex
Auto Attendant by simply responding to the interactive voice prompts which are
imbedded in the system. Installation requires nothing more than plugging
standard telephone lines into the product. The Company believes the Centrex
Auto Attendant's suggested retail price of under $2,000 makes it a cost-
effective solution to the call-processing needs of small business CENTREX
users.
The Company believes that its current Centrex Auto Attendant which has a
port for one incoming telephone line can address the needs of most businesses
with 2 to 19 telephone lines. In addition, the Company is developing models of
the Centrex Auto Attendant with ports for two and four incoming lines to
address the needs of businesses with up to 50 lines. See "Business--Research
and Development."
BUSINESS STRATEGY
The Company's goal is to become a leading supplier of computer telephony
products to the business, SOHO, and residential marketplace. The Company's
strategy for achieving this objective includes the following key elements:
Position the MessageAlert as a "Bundled" Product
The Company intends to encourage RBOCs and LECs to provide the Company's
MessageAlert product to their customer as part of their voice mail service at
no additional charge. The Company believes that recent reductions in its cost
to manufacture its MessageAlert products will allow it to offer the products
to RBOCs and LECs at price where the expected revenues from an increased
retention rate for voice mail subscribers will be sufficient to justify
bundling it with their voice mail services.
Incorporate Proprietary Technology in New Products
The Company believes the proprietary technology in its MessageAlert and
Centrex Auto Attendant products can be leveraged to provide new and enhanced
telephony products for the business and SOHO market. For example, the
technology in the MessageAlert can be used to provide Caller-ID and call
waiting Caller-ID and the architecture of the Centrex Auto Attendant can be
expanded to support two or four incoming lines. The Company is also developing
a product that will provide remote e-mail access via the telephone. See
"Business--Research and Development."
Develop Telephone Company and Related Distribution Channels
The Company has established and is in the process of establishing OEM and
joint marketing relationships with the RBOCs and large LECs for its
MessageAlert product line. In addition, the Company believes that many of the
RBOCs' and LECs' authorized resellers would also be appropriate resellers of
its products. Though establishing these channels requires a substantial amount
of up front time and effort, the Company believes that, if it is able to
develop credibility in these channels, it will be able to use them to sell all
of its products including its Centrex Auto Attendant and any future products.
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<PAGE>
Expand into International Markets
The Company believes there is a significant market for its products in
European and Pacific Rim countries. Many of the telephone companies in these
countries are just now introducing voice mail to their residential customers.
By working with telephone companies as they begin implementation, the Company
believes it can increase the possibility that its products will become a
standard part of voice mail service in those countries. In addition, in those
countries where CENTREX service is available or planned, the Company intends
to use the telephone company, as well as other distributors, as a channel for
its Centrex Auto Attendant product.
The Company's strategy includes plans for substantial growth in 1997, which
could place a significant strain on its limited personnel, financial,
management and other resources. In order to manage its planned growth, the
Company will need to significantly expand its product development and sales
and marketing capabilities and personnel. In addition, the Company will need
to adapt its financial planning, accounting systems and management structure
to accommodate such growth if it occurs. A failure by the Company to properly
anticipate or manage its growth, if any, could adversely affect its business,
operating results and financial conditions. In the last quarter of fiscal
1996, the Company over-estimated its growth rate and, as a result, built-up
excessive inventories of certain products and components. There can be no
assurance that the Company will not experience similar or more severe
difficulties in the future.
PRODUCTS
MessageAlert
Introduced in January 1996, the MessageAlert is the only battery powered
stutter and CLASS compatible VMWI on the market. The Company has applied for a
patent on the MultiSense Technology incorporated in it which enables it to
work with both signaling standards. In addition the MessageAlert is the first
VMWI to include Autosensing Line Voltage Calibration (ALVC). ALVC allows the
MessageAlert to perform in a wide range of consumer environments by causing it
to calibrate itself automatically to whatever voltage is present on the
telephone line. This adaptability reduces the likelihood that a customer will
need telephone company support to install the product. The MessageAlert is
marketed by the Company and certain telephone companies under the name
"MessageAlert" and by certain other telephone companies under their own names.
In addition, the Company markets a version of the MessageAlert, "MessageAlert
PBX," which is specifically adapted for PBX environments.
Below is a table listing certain features of the MessageAlert and the
benefits the Company believes those features bring to customers and telephone
companies:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FEATURES CUSTOMER BENEFIT TELEPHONE COMPANY BENEFIT
- --------------------------------------------------------------------------------------
MultiSense Reliable indication of messages Customers use service more
Detection
- --------------------------------------------------------------------------------------
Autosense Reliability Works in almost all environments
line
voltage
- --------------------------------------------------------------------------------------
Battery No AC adapter--no need for an outlet Easy acceptance by the customer
Power Less desktop cabling mess
- --------------------------------------------------------------------------------------
Low Cost Easily affordable Quicker, broader market penetration
- --------------------------------------------------------------------------------------
Attractive Pleasing to have in living or work Provides a physical presence
Design areas including "brand" name
- --------------------------------------------------------------------------------------
Post-it(R) Added functionality Opportunities for pad-based
Notes promotions
Holder
- --------------------------------------------------------------------------------------
</TABLE>
Centrex Auto Attendant
The Centrex Auto Attendant is a stand-alone unit which provides the CENTREX
customer with automatic call answer and transfer capability 24 hours a day.
The Centrex Auto Attendant provides nine minutes of
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recorded announcement time, special after hours or holiday announcements, and
nine main menu items. Each main menu item supports nine selections which can
be either a transfer to telephone number or announcement. The Centrex Auto
Attendant also provides extension dialing, name directory services, call
statistics and operator assistance. The unit has a battery back-up that will
last up to three days. The Centrex Auto Attendant is programmable by a local
or remote touch tone telephone and has password protection for all
administrative programming. The current Centrex Auto Attendant model supports
one incoming CENTREX line. Multiple units may be used for multiple inbound
lines. Future models of the Centrex Auto Attendant will support two and four
lines.
Below is a table listing certain features of the Centrex Auto Attendant and
the benefits the Company believes those features bring to customers and
telephone companies.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FEATURES CUSTOMER BENEFIT TELEPHONE COMPANY BENEFIT
- -----------------------------------------------------------------------------------------
Works in a Enhances their CENTREX service Increased CENTREX customer
CENTREX retention
Environment
- -----------------------------------------------------------------------------------------
Two Levels More efficient call routing Works for different size businesses
of Menus
- -----------------------------------------------------------------------------------------
Name More flexible call processing Competitive feature for CENTREX
Director & competing against PBX
Extension
Dialing
- -----------------------------------------------------------------------------------------
Daily Call Allows tracking of call volumes, types Statistics can be used to justify
Statistics of calls, etc. additional CENTREX trunk lines
- -----------------------------------------------------------------------------------------
Voice Easy to configure Reduces customer support
Prompts
for Set-up
- -----------------------------------------------------------------------------------------
Large Allows for 9 minutes of recording Provides solution for a range of
Memory time of information business applications
Capacity
- -----------------------------------------------------------------------------------------
72 Hour Saves all configuration info during Reduces customer support and
Battery power failure enhances CENTREX reliability
Back-up
- -----------------------------------------------------------------------------------------
System Simple disaster recovery or Reduces customer support and
Copy/Back- duplication of system enhances CENTREX reliability
up
(optional)
- -----------------------------------------------------------------------------------------
</TABLE>
To date, the Company has received only limited revenue from the sale of its
products. While the Company believes that its products are commercially
viable, developing products for the consumer and business marketplaces is
inherently difficult and uncertain. The Company does not believe its sales to
date are sufficient to determine whether or not there is meaningful consumer
or business demand for its products. The Company intends to devote a
significant portion of the proceeds of the Offering to its sales and marketing
efforts and to promote consumer and business interest in its products. There
can be no assurance that such efforts will be successful or that significant
market demand for the Company's products will ever develop.
In order to reduce the manufacturing costs, limit the power consumption and
otherwise enhance the operation of its products, the Company has from time to
time redesigned its products. The Company expects that in the future it will
engage in similar redesigns of its products. In addition, the Company is in
the process of developing new, similarly complex products. Though the Company
extensively tests its products before marketing them, any new, redesigned or
current product may contain a design flaw which is undetected by the Company's
testing procedures. For example, in August 1996, the Company recalled 6,500 of
an earlier version of its MessageAlert product as a result of a design flaw
and, in November 1996, the Company recalled 14,000 of its MessageAlert product
also as a result of a design flaw. The direct cost to re-work and repair the
defective products in these instances was approximately $29,000 and $13,000,
respectively. In addition, the Company relies on subcontractors to manufacture
and assemble its products. Though the Company has quality control procedures
designed to detect manufacturing errors, there can be no assurance that the
Company will identify all defective products. The Company believes that
reliable operation will be an important purchase consideration for both its
consumer and business customers. A failure by the Company to detect and
prevent a
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<PAGE>
design flaw or a widespread product defect could materially adversely affect
the sales of the affected product and the Company's other products and
materially adversely affect the Company's business, financial condition and
operating results.
SALES, MARKETING AND DISTRIBUTION
The Company's domestic and international marketing and sales activities for
the MessageAlert to date have been focused on direct sales to large telephone
companies. The MessageAlert is being either private labeled or joint marketed
by GTE Communication Systems Corporation, Pacific Bell, BellSouth Corporation,
Century Telephone Enterprises Inc., Commonwealth Telephone Company, Puerto
Rico Telephone Company, Standard Telephone Company and Aliant Communications,
Inc. Except with respect to Pacific Bell, the Company's relationship with
these companies has not been reduced to a formal agreement or contract and
none of these companies is obligated to purchase any product from the Company.
The Company manufactures product based on purchase orders and forecasts of
purchases received from RBOCs and LECs. The Company believes large telephone
companies typically do business in this manner and does not intend to seek
long-term contractual commitments from its telephone company customers.
Qualifying its product and developing the marketing relationships necessary
to enter into the foregoing relationships took substantially longer than the
Company originally anticipated. RBOCs and LECs tend to be hierarchical
organizations characterized by distributed decision-making authority and an
institutional reluctance to take risks. As a result, selling a product to or
entering into a marketing relationship with an RBOC or LEC is generally a
lengthy process. The Company believes its success, if any, will be largely
dependent on its ability to either sell its products to or enter into joint
marketing arrangements with the RBOCs and LECs. In particular, the Company
believes that its MessageAlert product can be sold profitably only if it is
sold to or in conjunction with the RBOCs and LECs. A failure by the Company to
develop significantly enhanced relationships with the RBOCs and LECs would
have a materially adverse effect on the Company's business and operating
results.
The Company is marketing the Centrex Auto Attendant to the same group of
large telephone companies it has targeted for the MessageAlert product. The
Company believes that having established itself as a qualified supplier or
joint marketing partner with respect to the MessageAlert product will help
shorten the sales cycle with respect to the Centrex Auto Attendant. In
particular, the Company believes the Centrex Auto Attendant and the
MessageAlert product can be marketed together by the telephone companies to
the business and SOHO market.
The Company is also in the process of establishing an authorized reseller
program for the Centrex Auto Attendant and MessageAlert products. Throughout
the United States, there are several hundred authorized resellers of the
RBOCs' and LECs' products and services. The Company intends to select those
authorized resellers which are focused on selling CENTREX services and recruit
them as the Company's authorized resellers. The Company expects to use a
portion of the proceeds of the Offering to hire regional sales managers to
recruit and manage these authorized resellers. Because the Company's marketing
efforts have been largely focused on the RBOCs and LECs, its management has
had only limited experience in selling the Company's products through other
channels. There can be no assurance that the Company will be able to implement
its marketing and distribution program or that any marketing efforts
undertaken by or on behalf of the Company will be successful.
The Company is marketing its products outside North America by using sales
representatives from various countries. The Company has entered into a sales
representative agreement covering France and another covering the United
Kingdom, Germany, Netherlands, Spain, Sweden, and Switzerland.
TECHNICAL AND MARKETING SUPPORT
The Company has developed product collateral and marketing programs for the
Centrex Auto Attendant and MessageAlert products. The Company intends to use a
portion of the proceeds of the Offering to expand its
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<PAGE>
ongoing marketing programs. These marketing programs will include augmentation
of collateral material, advertising and trade shows, supplemented with public
relations campaigns. The Company intends to establish channel marketing
programs consisting of collateral material, training and incentive programs
for the reseller sales force.
The Company provides back-up technical support to large telephone companies
and resellers. All technical support is performed by the Company's support
personnel. In the future, the Company's support organization will provide both
sales and technical support. Sales support consists of sales and marketing
training at the Company's home office training facility for its own sales
force and those of authorized resellers.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has devoted substantial resources to
research and product development. The Company has had limited internal
engineering resources and uses contract engineering resources for a
significant portion of its research and development. The Company believes that
its future depends significantly on its ability to continue to enhance its
existing products and to develop new products, and the Company intends to use
a substantial portion of the proceeds of the Offering for research and
development. The Company's research and development efforts will be focused in
four areas: cost reduction and feature enhancement of the MessageAlert
product; the enhancement of the Centrex Auto Attendant platform to handle two-
and four-port trunk line connections; expansion of the MessageAlert
architecture to create a combination Caller-ID/visual message waiting
indicator product; and completion of a remote telephone access to e-mail
product. See "Use of Proceeds."
MANUFACTURING
The Company primarily uses domestic contract manufacturing to minimize
resources devoted to manufacturing and to maximum flexibility and response
time. At times, the Company uses offshore turnkey manufacturing when
production volume makes it a cost-effective alternative. To the extent
possible, the Company uses standards parts and components for its products
although certain components are custom designed and/ or are available only
from a single source or limited sources.
The Company currently tests 100% of its products before shipping. It expects
to implement a sample testing program once a statistically sufficient history
has been established with respect to each of its manufacturing sources. The
MessageAlert and Centrex Auto Attendant products each have one-year
replacement warranties.
Certain key components used in the Company's products are currently
available only from single or limited sources. The Company does not have long
term supply contracts with these or any other component vendors and purchases
all of its components on a purchase order basis. No assurance can be given
that component shortages will not occur or that the Company will be able to
obtain the components it needs in a timely manner and on a commercially
reasonable basis. In particular, the application specific integrated circuit
(ASIC) which forms the core of the Company's MessageAlert product is
manufactured only by Microchip Technology, Inc. From time to time, the
semiconductor industry has experienced extreme supply constraints. An
inability of the Company to obtain sufficient quantities of ASICs from
Microchip Technology, Inc. would have a materially adverse effect on the
Company's business and operating results.
The Company subcontracts the manufacture of its board level assemblies to
third parties, and there can be no assurance that these subcontractors will be
able to support the manufacturing requirements of the Company. An inability to
obtain sufficient quantities of source components or subassemblies, or to
develop alternative sources as required in the future, could result in delays
or reductions in product shipments or could force the Company to redesign its
products, either of which could materially adversely effect the Company's
business and operating results.
33
<PAGE>
GOVERNMENTAL REGULATION AND INDUSTRY STANDARDS
The Company's products must comply with a variety of regulations and
standards including regulations and standards set by the Federal
Communications Commission, Underwriters Laboratories, National Registered
Testing Laboratories, and Bell Communications Research. As the Company enters
international markets it will be required to comply with whatever governmental
regulations and industry standards exist in those markets. In addition, the
U.S. telecommunications market is evolving rapidly in part due to recently
enacted laws revamping the telecommunications regulatory structure. Additional
legislative or regulatory changes are possible. A failure by the Company to
comply with existing regulations and standards or to adapt to new regulations
and standards could have a material adverse effect on the Company's business
and operating results.
COMPETITION
The Company currently has several direct competitors in the market for
VMWIs. Voicewaves, Inc. produces VoiceLite, a line-powered, stutter tone only
VMWI. The Company believes that the product does not have FCC approval and is
not marketed or resold by any large telephone company. Consumerware, Inc.
produces VoiceMail Lite, a battery powered, stutter tone only VMWI. The
Company believes the retail store unit of Southwestern Bell Communications is
the only telephone company which markets the VoiceMail Lite. SNI Innovation,
Inc. produces VisuAlert, a dual standard VMWI which requires an AC adapter.
The Company believes that no large telephone company is reselling or marketing
the VisuAlert product. AASTRA TELECOM of Canada produces Call Answer Lite, a
dual standard VMWI which requires an AC Adapter. The Company believes that no
domestic large telephone company is reselling or marketing the Call Answer
Lite product but that Aastra does have a marketing agreement with Bell Canada.
The Company believes competition in the VMWI market is based on support of
signaling standards, type of power source, other features, price and quality.
The Company believes it competes favorably with respect to all of these
factors.
Certain manufacturers of competing VMWI products have greater financial,
technical and marketing resources than the Company. In addition, there are
several companies with substantially greater technical, financial and
marketing resources than the Company which could produce competing products.
These companies include telephone equipment manufacturers such as CIDCO
Incorporated, Intelidata, Inc., Northern Telecom Limited, and Lucent
Technologies Inc.
The Company has two known direct competitors in the market for auto-
attendant products. Both Bogen Communications and Cobotyx Corporation, Inc.
produce auto-attendant products which have basic call answering and call
routing features but are missing features such as multiple levels of menus,
pre-recorded system prompts, interactive voice response for configuration,
name directory functionality and call statistics. The Company believes
competition in the autoattendant market is based on features (including ease
of use, availability of a name directory, amount of recording time and number
of menu levels), price and quality. The Company believes it competes favorably
with respect to all of these factors.
The Company also faces indirect competition from manufacturers of PC-based
call management systems. These systems are designed to provide voice mail
capability, auto-attendant features, and CENTREX-style functionality on a PC
platform. Such systems are typically significantly more expensive than the
Centrex Auto Attendant with prices ranging from $5,000 and up. The cost of
such systems is based on the price of the PC and whatever additional hardware
and software is required. There are many companies that provide PC-based call
management systems including Active Voice Corporation, Altigen Communications,
and Voice Systems Research, Inc. The Company believes that by combining its
Centrex Auto Attendant with a purchase of CENTREX services, a business can
achieve similar or better call management services than from a PC-based system
at a substantially lower upfront cost.
The Company expects that to the extent that the market for either of its
products develops, competition will intensify and new competitors will enter
the market. There can be no assurance that the Company will be able to compete
successfully against existing and new competitors as the market for its
products evolves and the level of competition increases. A failure to compete
successfully against existing and new competitors would have a materially
adverse effect upon the Company's business and results of operations.
34
<PAGE>
PROPRIETARY RIGHTS
The Company relies on a combination of patent, trade secret, copyright and
trademark law, nondisclosure agreements and technical measures to establish
and protect its proprietary right in its products. The Company has a design
patent issued on the MessageAlert design. The MessageAlert design is unique in
that it provides a visual message waiting indicator light packaged in the form
of a 3M Post-it(R) Note holder. In addition, the Company filed a patent
application in July 1996 relating to the MultiSense technology used in the
MessageAlert product. The Company's MultiSense technology automatically
detects and reacts to either stutter or CLASS signaling. The Company intends
to continue to apply for patents, as appropriate, for its future technologies
and products.
There are few barriers to entry into the market for the Company's products,
and there can be no assurance that any patents applied for by the Company will
be granted or that the scope of the Company's patent or any patents granted in
the future will be broad enough to protect against the use of similar
technologies by the Company's competitors. There can be no assurance,
therefore, that any of the Company's competitors, some of whom have far
greater resources than the Company, will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Further, the Company intends to distribute its products in a
number of foreign countries. The laws of those countries may not protect the
Company's proprietary rights to the same extent as the laws of the United
States.
The Company may be involved from time to time in litigation to determine the
enforceability, scope and validity of any proprietary rights of the Company or
of third parties asserting infringement claims against the Company. Any such
litigation could result in substantial costs to the Company and diversion of
efforts by the Company's management and technical personnel. In particular,
the Company is aware that a manufacturer of computer telephony products has
filed a patent application purporting to cover any device which electronically
detects stutter dial tone signaling. The Company expects that the patent will
be issued and believes that the manufacturer may assert that the Company's
MessageAlert product infringes upon the patent. If the patent is issued and
such an assertion is made, the Company intends to challenge either the
validity of the patent or its application to the MessageAlert product or enter
into a licensing agreement with the patent holder. There can be no assurance
that the Company will be able to challenge the patent successfully or enter
into a licensing arrangement on commercially reasonable terms. A failure of
the Company to challenge the patent successfully or enter into a licensing
arrangement, would, in all probability, force the Company to cease selling the
MessageAlert product and would have a materially adverse affect on the
Company's business, financial condition and results of operation. In addition,
the expense associated even with a successful challenge to the patent or a
licensing arrangement could have a materially adverse affect on the Company's
business, financial condition and results of operations.
EMPLOYEES
As of March 1, 1997, the Company employed 12 persons of whom two were
engaged in research and development, two in manufacturing, five in sales,
marketing, and customer support, and three in general administration and
finance. During the first year following completion of the Offering, the
Company contemplates increasing its staff at a pace consistent with the
Company's business and growth. None of the Company's employees are currently
represented by a labor union. The Company considers its relations with its
employees to be good.
The Company's success, if any, will be dependent on its ability to attract
and retain highly skilled technical personnel as well as marketing and sales
personnel. If the Company is unable to hire the necessary personnel, the
development of new products and enhancements to current products would likely
be delayed or prevented. Competition for highly-skilled technical, managerial,
sales, and marketing personnel is intense. There can be no assurance that the
Company will be successful in retaining its key personnel and in attracting
and retaining the personnel it requires for expansion.
35
<PAGE>
FACILITIES
The Company's principal executive offices are located at 1054 South DeAnza
Boulevard, Suite 105, San Jose, California 95129. The facilities consist of
approximately 3,500 square feet of office space pursuant to a lease that
expires March 31, 1999. The Company will either renew its lease and acquire
more space if available or enter into a lease for new premises in the local
area.
LEGAL PROCEEDINGS
The Company is not a party to any litigation.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
March 1, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul F. DePond(1)....... 43 President, Chief Executive Officer and Chairman of the Board of Directors
Gaylan I. Larson........ 56 Vice President of Operations and Director
Gerald W. Rice.......... 49 Chief Financial Officer and Secretary
David P. Yewell......... 51 Vice President of Sales and Marketing
Michael Ballard(1)(2)... 42 Director
Barry Bellue(1)......... 54 Director
Michael Smith(2)........ 50 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
PAUL F. DEPOND, founder of the Company, has served as its President, Chief
Executive Officer and Chairman of the Board of Directors since the Company's
inception in August 1994. From September 1992 through May 1994, Mr. DePond
served as Vice President--Corporate Marketing of Telebit Corporation, a
supplier of high speed modems and dialup remote access products. From January
1991 through September 1992, Mr. DePond served as Vice President, Marketing,
of Alantec Corporation, a manufacturer of networking products. Mr. DePond
received a B.S. in Electrical Engineering and Computer Engineering in 1979,
and an M.A. in Computer Science in 1980, each from the University of Michigan
at Ann Arbor.
GERALD W. RICE has served as Chief Financial Officer and Secretary of the
Company since August 1994. From November 1993 to June 1996, he owned
Comprehensive Business Services, a financial services company franchise. From
April 1992 to April 1993, Mr. Rice served as Controller at Surface Science
Instruments, a manufacturer of capital equipment for surface chemical
analysis. From June 1990 to April 1992 Mr. Rice was Vice President of Finance
and Secretary of Applied Dielectrics, a manufacturer of microwave circuit
boards. Mr. Rice received an A.A. from Ohlone Community College in 1969 and a
B.A. in Accounting from California State College of Stanislaus in 1971.
GAYLAN I. LARSON has served as Vice President of Operations and as a
Director of the Company since August 1994. From January 1991 to August 1994,
Mr. Larson was Chief Operating Officer of SportSense, Inc., a manufacturer of
golf training equipment. Prior to SportSense, Mr. Larson served as General
Manager of the Data Systems Division of Hewlett-Packard Company, a company
with which he had an 18 year relationship. Mr. Larson received an A.A. from
Sacramento Junior College in 1959, a B.S. in Electrical Engineering from
University of California, Berkeley in 1961, and a M.S.E.E. in Engineering from
Newark College of Engineering in 1965.
DAVID P. YEWELL has served as Vice President of Sales and Marketing of the
Company since January 1996. From April 1994 through May 1994, Mr. Yewell was
Vice President of Marketing at PictureTel, a video conferencing company. From
July 1968 through June 1993, Mr. Yewell served in several capacities at
Hewlett-Packard Company, most recently as Director of Financial Services
Marketing. Mr. Yewell received a B.S. in Electrical Engineering in 1967 and a
M.A. in Electrical Engineering in 1968, both from Cornell University.
BARRY BELLUE has served as a director of the Company since August 1995.
Since January 1996, Mr. Bellue has been the Chief Executive Officer of
Thinkstream, Inc., an imaging software company. From October 1993 to January
1995, Mr. Bellue served as Vice President of Symantec Corporation. From
December 1986 to October 1993, Mr. Bellue served as Chief Executive Officer of
Fifth Generation Systems, a security and data management software company. Mr.
Bellue received his B.S. in Accounting in 1965 from Southeastern University,
and his M.A. of Divinity from Southern Seminary in 1978.
37
<PAGE>
MICHAEL BALLARD has served as a director of the Company since January 1996.
From May 1995 to October 1996, Mr. Ballard served as Executive Vice
President--Marketing of Telebit Corporation. From June 1993 to September 1994,
Mr. Ballard served as Chief of Operations of UUNet, Inc., an internet service
provider. From January 1986 to May 1993, Mr. Ballard served as Chief Executive
Officer of Telebit Corporation. Mr. Ballard has also been a product director
of Cisco Systems since October 1996. Mr. Ballard received his B.F.A. in 1978
from the University of Utah.
MICHAEL SMITH has served as a director of the Company since February 1996.
Since 1970, Mr. Smith has been the President and owner of COMAC, a literature
and product fulfillment company. Mr. Smith attended San Jose State University
from 1964 through 1969.
All directors are elected annually and serve until the next annual meeting
of shareholders or until the election and qualification of their successors.
All executive officers serve at the discretion of the Board of Directors.
There are no family relationships between any of the directors or executive
officers of the Company.
The Company's success, if any, will be dependent to a significant extent
upon certain key management employees, including Messrs. DePond and Larson.
The Company has applied for 3-year key-man term life insurance on each of
Messrs. DePond and Larson in the amount of $2 million and has entered into
employment agreements with them and with Messrs. Rice and Yewell. See
"Employment Contracts."
DIRECTOR COMPENSATION
Members of the Company's Board of Directors do not receive compensation for
their services as directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
awarded to, earned by, or paid for services rendered to the Company in all
capacities during the fiscal year ended September 30, 1996, by (i) the
Company's Chief Executive Officer and (ii) the Company's most highly
compensated executive officers whose salary and bonus for such year exceeded
$100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
FISCAL 1996
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS ($) OPTIONS (#) COMPENSATION(1)
- --------------------------- ----------- ----------------------- ---------------
<S> <C> <C> <C> <C>
Paul F. DePond........... 100,385 -- -- $7,146
President and Chief
Executive Officer
David P. Yewell.......... 101,345(2) -- -- 1,987
Vice President of Sales
and Marketing
</TABLE>
- --------
(1) Consists of health insurance premiums paid by the Company.
(2) Includes amounts paid as consulting fees.
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Stock Option Plan") provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights ("SPRs"). The Stock
Option Plan was approved by the Board of Directors and the shareholders in
January 1997. Unless terminated sooner, the Stock Option Plan will terminate
automatically in January 2007. A total of 200,000 shares of Common Stock are
currently reserved for issuance pursuant to the Stock Option Plan.
38
<PAGE>
The Stock Option Plan may be administered by the Board of Directors or a
committee of the Board (the "Committee"), which Committee shall, in the case
of options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The exercise
price of incentive stock options must be at least equal to the fair market
value of the Company's Common Stock on the date of grant. The exercise price
of nonstatutory stock options and SPRs granted under the Stock Option Plan is
determined by the Committee, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, the exercise price must at least be equal to the
fair market value of the Common Stock on the date of grant. With respect to
any participant who owns stock possessing more than 10% of the voting power of
all classes of the Company's outstanding capital stock, the exercise price of
any incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of all other options granted under the Stock
Option Plan may not exceed ten years.
The Stock Option Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Committee shall provide for the Optionee to have the
right to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the Administrator
makes an option or SPR exercisable in full in the event of a merger or sale of
assets, the Administrator shall notify the optionee that the option or SPR
shall be fully exercisable for a period of fifteen (15) days from the date of
such notice, and the option or SPR will terminate upon the expiration of such
period.
EMPLOYMENT CONTRACTS
In December 1996, the Company entered into an employment agreement with Paul
DePond, the Company's President and Chief Executive Officer. The agreement
automatically terminates on December 31, 1998, unless the Company undergoes a
change of control, in which case the agreement is extended until 24 months
after such change in control. The agreement provides for a base salary of
$120,000, which increases to $150,000 thirteen months following the Offering,
and a $50,000 bonus contingent on the Company's attainment of certain
performance milestones.
In the event that the Company terminates Mr. DePond without cause following
a change in control, Mr. DePond is entitled to receive severance compensation
equal to a continuation of his salary for a period of eighteen (18) months. In
the event that the Company terminates Mr. DePond without cause apart from a
change of control, Mr. DePond is entitled to receive severance compensation
equal to a continuation of his salary for a period of twelve (12) months. Mr.
DePond is not entitled to severance compensation in the event of a termination
for cause or voluntary resignation. In the event of a termination due to
disability, Mr. DePond is entitled to receive only those severance or
disability benefits as are established under the Company's then existing
severance and benefits plans and policies.
In December 1996, the Company entered into employment agreements with Mr.
Larson, the Company's Vice President of Operations and Mr. Rice, the Company's
Chief Financial Officer. The agreements automatically terminate on December
31, 1998, unless the Company undergoes a change of control, in which case the
agreements are extended until twenty-four (24) months after such change in
control. The agreements provide for base salaries of $115,000 and $95,000 for
Messrs. Larson and Rice, respectively. Under the agreements, Messrs. Larson
and Rice are eligible to receive annual bonuses based on an earnings target
approved by the board of directors of the Company.
In the event that the Company terminates Messrs. Larson or Rice without
cause following a change in control, the terminated officer is entitled to
receive severance compensation equal to a continuation of his salary for a
period of twelve (12) months. In the event that the Company terminates Messrs.
Larson or Rice without
39
<PAGE>
cause apart from a change of control, the terminated officer is entitled to
receive severance compensation equal to a continuation of his salary for a
period of six (6) months. Messrs Larson and Rice are not entitled to severance
compensation in the event of a termination for cause or voluntary resignation.
In the event of a termination due to disability, the terminated officer is
entitled to receive only those severance or disability benefits as are
established under the Company's then existing severance and benefits plans and
policies.
In December 1996, the Company entered into an employment agreement with Mr.
Yewell, the Company's Vice President of Sales and Marketing. The agreement
automatically terminates on December 31, 1997, unless the Company undergoes a
change of control, in which case the agreement is extended until twenty-four
(24) months after such change in control. The agreement provides for a base
salary of $90,000. Under the agreement, Mr. Yewell is eligible to receive a
commission based on a fixed percentage of quarterly sales figures in the event
of the achievement of certain sales milestones.
In the event that the Company terminates Mr. Yewell without cause following
a change in control, then Mr. Yewell is entitled to receive severance
compensation equal to a continuation of his salary for a period of twelve (12)
months. In the event that the Company terminates Mr. Yewell without cause
apart from a change of control, Mr. Yewell is entitled to receive severance
compensation equal to a continuation of his salary for a period of three (3)
months. Mr. Yewell is not entitled to severance compensation in the event of a
termination for cause or voluntary resignation. If Mr. Yewell is terminated
due to disability, then Mr. Yewell is entitled to receive only those severance
or disability benefits as are established under the Company's then existing
severance and benefits plans and policies.
The foregoing agreements define a "change in control" as (i) the acquisition
of more than 30% of the voting securities of the Company by any person or
group; (ii) a change in a majority of the board of directors of the Company
occurring within a two-year period; or (iii) the approval by the shareholders
of the Company of a transaction which would result in a transfer of more than
50% of the Company's voting power. The agreements define "cause" as an act of
dishonesty in connection with employment; a conviction of a felony which will
detrimentally affect the Company's reputation or business; willful and gross
misconduct injurious to the Company; and continued and willful failure to
perform duties. The agreements define "disability" as the inability to perform
duties under the agreement due to mental or physical illness determined to be
total and permanent by a physician.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS
The Company has adopted provisions in its Articles of Incorporation that
eliminate the personal liability of its directors for monetary damages arising
from a breach of their fiduciary duties in certain circumstances to the
fullest extent permitted by law and authorizes the Company to indemnify its
directors and officers to the fullest extent permitted by law. Such limitation
of liability does not affect the availability of equitable remedies such as
injunctive relief or recision.
The Company's bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by California law. The Company
has entered into indemnification agreements with its officers and directors
containing provisions which are in some respects broader than the specific
indemnification provisions contained in the California Corporations Code. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
At present, there is no pending material litigation or proceeding involving
a director or officer of the Company where indemnification may be required or
permitted. The Company is not aware of any threatened material litigation or
proceeding which may result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that it is the opinion of the Commission that such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
40
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was founded in August 1994 by Paul DePond and David Welling as
co-founders. Mr. DePond is President, Chief Executive Officer and Chairman of
the Board of Directors of the Company, and Mr. Welling is a consultant to the
Company. In August 1994, the Company issued to Mr. DePond 550,000 shares of
its Series A Preferred Stock (convertible into 108,909 shares of Common Stock)
for an aggregate purchase price of $55,000, and to Mr. Welling 450,000 shares
of its Series A Preferred Stock (convertible into 89,108 shares of Common
Stock) for an aggregate purchase price of $45,000. Also in August 1994 the
Company issued to Mr. DePond 198,019 shares of Common Stock for an aggregate
purchase price of $10,000 and to Mr. Welling 108,910 shares of Common Stock
for an aggregate purchase price of $5,500.
In November 1994, as a part of a larger sale of common stock to employees,
the Company issued to Mr. DePond 99,009 shares of Common Stock for an
aggregate purchase price of $5,000.
At various times in February and March 1995, the Company sold to Mr. DePond
convertible promissory notes with an aggregate principal amount of $75,000
bearing interest rates of 10% per annum and warrants to purchase 74,257 shares
of common stock of the Company at an exercise price of $1.01 per share for an
aggregate purchase price of $75,000. At various times between November 1995
and October 1996, the Company made payments on the notes totaling $50,000.
In October 1995, the Company issued and sold a total of 3,500,000 shares of
its Series B Preferred Stock (convertible into 693,069 shares of Common Stock)
at a purchase price of $0.50 per share. The purchasers of the Series B
Preferred Stock included three directors of the Company, Michael Ballard,
Barry Bellue and Michael Smith each of whom purchased 200,000 shares
(convertible into 39,603 shares of Common Stock).
In July 1996, pursuant to a Note Purchase Agreement, the Company issued
convertible promissory notes (the "Convertible Shareholder Notes") and
warrants to purchase shares of the Company's Common Stock for an aggregate
purchase price of $932,125. The Convertible Shareholder Notes accrued interest
at a rate of 8% per annum and were convertible into equity of the Company. Mr.
Ballard, a director of the Company, purchased a Convertible Shareholder Note
in the principal amount of $100,000 and the accompanying warrants for
aggregate consideration of $100,000. In January 1997 in connection with a
restructuring of the Convertible Shareholder Notes, Mr. Ballard converted his
note into 21,978 shares of Common Stock and exchanged his warrant for a
warrant to purchase 6,593 shares of Common Stock at a price of $0.25 per
share. See, "Capitalization--Restructuring."
In February 1997, the Company issued to Mr. DePond a 10% subordinated
promissory note with principal amount of $65,000 and warrants to purchase
11,535 shares of the Company's Common Stock at a price per share of $3.00 for
an aggregate purchase price of $65,000. The promissory note was repaid with a
portion of the proceeds from the Bridge Financing.
In March 1997, the Company issued and sold 17 bridge units ("Bridge Units")
at $50,000 per unit. Each Bridge Unit consisted of a one-year $50,000
promissory note bearing 10% interest and warrants to purchase 25,000 shares of
Common Stock at a purchase price of $3.00 per share. The warrants
automatically convert into Class A Warrants upon the closing of the Offering,
and the promissory notes become due upon the earlier of March 11, 1998 or
closing of the Offering. Paul DePond purchased one Bridge Unit in the Bridge
Financing. See "Capitalization--Bridge Financing."
The Company has an ongoing business relationship with COMAC, a literature
and product fulfillment company owned by Michael Smith, its president and a
director of the Company. In fiscal year 1996, the Company paid to COMAC $4,349
in fees. In the first quarter of fiscal year 1997, the Company paid to COMAC
$10,332 in fees.
The Company has entered into two-year employment agreements with Messrs.
DePond, Larson and Rice, the terms of which call for base salaries of
$120,000, $115,000 and $95,000 per annum, respectively. Additionally, the
Company has entered into a one-year employment agreement with Mr. Yewell, the
terms of which call for a base salary of $90,000 per annum. See "Management--
Employment Contracts."
41
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1996, and as
adjusted to reflect the sale of shares offered by this Prospectus, (i) by each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than five percent of the Company's Common Stock, (ii) by
each of the Named Executive Officers, (iii) by each of the Company's
directors, and (iv) by all directors and executive officers as a group. The
Company believes that the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
PERCENTAGE
SHARES -----------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Paul F. DePond(2)............................... 491,731 23.9 14.2
Gaylan I. Larson................................ 198,019 10.0 5.9
David Welling................................... 138,200 7.0 4.1
20 Shoshone Place
Portola Valley, CA 94028
SIPPL MacDonald Ventures, L.P.(3)............... 108,539 5.5 3.2
5 Elder Court
Menlo Park, CA 94025
Bayview Investors(4)............................ 108,154 5.5 3.2
555 California Street
San Francisco, CA 94104
David P. Yewell................................. 46,534 2.4 1.4
Michael Ballard(5).............................. 68,935 3.5 2.0
Barry Bellue.................................... 46,533 2.4 1.4
Michael Smith(6)................................ 54,269 2.7 1.6
All directors and executive officers as a group
(6 persons).................................... 906,021 48.7 29.2
</TABLE>
- --------
* Less than 1%.
(1) Applicable percentage of ownership is based on 1,974,936 shares of Common
Stock outstanding as of March 1, 1997 together with applicable options for
such shareholder. Beneficial ownership is determined in accordance with
the rules of the Securities Exchange Commission, and includes voting and
investment power with respect to shares. Shares of Common Stock subject to
warrants currently exercisable or exercisable within 60 days after March
1, 1997 are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options or warrants, but are not
deemed outstanding for computing the percentage of any other stockholder.
(2) Includes 85,792 shares issuable upon exercise of currently exercisable
warrants. Does not include 25,000 shares issuable upon exercise of Selling
Securityholder Warrants acquired in the Bridge Financing. See "Concurrent
Securities Offering," and "Capitalization--Bridge Financing."
(3) Includes 6,528 shares issuable upon exercise of currently exercisable
warrants.
(4) Includes 8,233 shares issuable upon exercise of currently exercisable
warrants.
(5) Includes 6,528 shares issuable upon exercise of currently exercisable
warrants.
(6) Includes 3,264 shares issuable upon exercise of currently exercisable
warrants.
ESCROW SECURITIES
In connection with the Offering, the holders of the Company's Common Stock
and warrants to purchase Common Stock placed 1,263,537 Escrow Shares and
Escrow Warrants to purchase 111,008 shares of Common Stock into escrow
pursuant to an escrow agreement ("Escrow Agreement") with the Company's
transfer agent, American Stock Transfer and Trust, as escrow agent. The Escrow
Securities are not assignable or transferable; however, the Escrow Shares may
be voted. Holders of any Escrow Warrants in escrow may exercise their warrants
prior to their release from escrow; however, the shares issuable upon any such
exercise will continue to be held in escrow as Escrow Shares pursuant to the
Escrow Agreement.
42
<PAGE>
The Escrow Agreement provides that one-half of the Escrow Securities (i.e.
687,273 shares of issued or issuable Common Stock) will be released from
escrow, on a pro rata basis, if, and only if, one or more of the following
conditions are met:
1. the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings as audited and determined by the
Company's independent public accountants (the "Minimum Pretax Income")
amounts to at least $1.875 million for the fiscal year ending September 30,
1997 or September 30, 1998;
2. the Minimum Pretax Income amounts to at least $3.0 million for the
fiscal year ending September 30, 1999;
3. the Minimum Pretax Income amounts to at least $4.5 million for the
fiscal year ending on September 30, 2000;
4. the Minimum Pretax Income amounts to at least $6.0 million for the
fiscal year ending on September 30, 2001;
5. the Minimum Pretax Income amounts to at least $9.0 million for the
fiscal year ending on September 30, 2002;
6. commencing on the date of this Prospectus and ending 18 months after
the date of this Prospectus, the bid price of the Company's Common Stock
averages in excess of $12.00 per share (subject to adjustment in the event
of any reverse stock splits or other similar events) for 30 consecutive
business days;
7. commencing 18 months after the date of this Prospectus and ending 36
months after the date of this Prospectus, the bid price averages in excess
of $15.00 per share (subject to adjustment in the event of any reverse
stock splits or other similar events) for 30 consecutive business days; or
8. the Company is acquired by or merged into another entity in a
transaction in which shareholders of the Company receive per share
consideration at least equal to the level set forth in (6) above.
The Escrow Agreement further provides that the remaining Escrow Securities
(i.e. 687,274 shares of issued or issuable shares of Common Stock) will be
released from escrow, on a pro rata basis, if, and only if, one or more of the
following conditions is met:
1. the Minimum Pretax Income amounts to at least $3.0 million for the
fiscal year ending September 30, 1997 or September 30, 1998;
2. the Minimum Pretax Income amounts to at least $4.5 million for the
fiscal year ending on September 30, 1999;
3. the Minimum Pretax Income amounts to at least $6.0 million for the
fiscal year ending on September 30, 2000;
4. the Minimum Pretax Income amounts to at least $7.5 million for the
fiscal year ending on September 30, 2001;
5. the Minimum Pretax Income amounts to at least $10.5 million for the
fiscal year ending on September 30, 2002;
6. commencing on the date of this Prospectus and ending 18 months after
the date of this Prospectus, the bid price of the Company's Common Stock
averages in excess of $13.30 per share (subject to adjustment in the event
of any reverse stock splits or other similar events) for 30 consecutive
business days;
43
<PAGE>
7. commencing 18 months after the date of this Prospectus and ending 36
months after the date of this Prospectus, the bid price averages in excess
of $16.75 per share (subject to adjustment in the event of any reverse
stock splits or other similar events) for 30 consecutive business days; or
8. the Company is acquired by or merged into another entity in a
transaction in which shareholders of the Company receive per share
consideration at least equal to the level set forth in (6) above.
The Minimum Pretax Income amounts set forth above (i) shall be calculated
exclusive of any extraordinary earnings, including, but not limited to, any
charge to income resulting from release of the Escrow Securities and (ii)
shall 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, reverse stock splits or
other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Securities, 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 Securities. If none of the applicable Minimum Pretax Income or bid
price levels set forth above have been met by December 31, 2002, the Escrow
Securities, as well as any dividends or other distributions made with respect
thereto, will be canceled and contributed to the capital of the Company. The
Company expects that the release of the Escrow Securities to officers,
directors, employees and consultants of the Company, if it occurs, will be
deemed compensatory and, accordingly, will result in a substantial charge to
reportable earnings, which would equal the fair market value of such shares on
the date of release. Such charge could substantially increase the loss or
reduce or eliminate the Company's net income for financial reporting purposes
for the period or periods during which such shares are, or become probable of
being, released from escrow. Although the amount of compensation expense
recognized by the Company will not affect the Company's total shareholders'
equity, it may have a negative effect on the market price of the Company's
securities.
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.
CONCURRENT SECURITIES OFFERING
An additional 425,000 redeemable Class A Warrants have been registered under
the Securities Act pursuant to the registration statement of which this
Prospectus forms a part for sale by the holders thereof (the "Selling
Securityholders"). These Class A Warrants are identical to the Class A
Warrants included in the Units offered hereby and are being issued to the
Selling Securityholders on the closing of the Offering upon the automatic
conversion of all of the Company's outstanding Bridge Warrants. All of the
Selling Securityholders' Warrants issued upon conversion of the Company's
outstanding 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 at least 90 days
after the closing of the Offering and, during the period from 91 to 270 days
after such closing, only certain specified percentages of such securities may
be sold. The Selling Securityholders have also agreed with the Company not to
exercise their Selling Securityholders' Warrants for a period of one year
following the closing of the Offering; provided, however, that purchasers of
such Selling Securityholders' Warrants are not subject to such restrictions on
exercise. After the one-year period following the closing of the Offering or
following delivery of a notice of redemption by the Company, the Selling
Securityholders may exercise the Selling Securityholders' Warrants and sell
the Common Stock issuable upon exercise of their 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
44
<PAGE>
sale of the Selling Securityholders' Warrants. Sales of Selling
Securityholders' 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. See "Shares Eligible For Future Sale."
Paul DePond, President and Chief Executive Officer of the Company, purchased
one Unit in the Bridge Financing. There are no other material relationships
between any of the Selling Securityholders and the Company, nor have any other
such material relationships existed within the past three years. The Company
has been informed by the Underwriter that there are no agreements between the
Underwriter and any Selling Securityholder regarding the distribution of the
Selling Securityholders' Warrants or 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 prevailing at the time of sale, or at negotiated prices.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase 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).
Regulation M restricts the ability of any person engaged in the distribution
of the Selling Securityholders' Warrants to engage in market making activities
with respect to any securities of the Company for the applicable "cooling off"
period prior to the commencement of such distribution. Accordingly, in the
event the Underwriter or Blair & Co. is engaged in a distribution of the
Selling Securityholders' Warrants, their ability to make a market in the
Company's securities during the applicable restrictive period will be
restricted. However, neither the Underwriter nor Blair & Co. has agreed to,
nor is either of them obligated to, act as a broker-dealer in the sale of the
Selling Securityholders' Warrants, and the Selling Securityholders may be
required, and in the event Blair & Co. is a market maker, will likely be
required, to sell such securities through another broker-dealer. In addition,
each Selling Securityholder desiring to sell Warrants will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Regulation M, which provisions may
limit the timing of the purchases and sales of shares of the Company's
securities by such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in connection
with such sales may 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.
45
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of one share of Common Stock, one Class A Warrant and one
Class B Warrant. Each Class A Warrant entitles the holder thereof to purchase
one share of Common Stock and one Class B Warrant, and each Class B Warrant
entities the holder thereof to purchase one share of Common Stock. The Common
Stock and Warrants included in the Units are immediately transferable
separately upon issuance.
COMMON STOCK
The Company has authorized 15,000,000 shares of Common Stock, par value
$.001 per share. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the shareholders.
Subject to preferences that may be applicable to any shares of Preferred Stock
issued in the future, holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds
legally available therefore. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no preemptive rights and no right to
convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are, and all shares of Common Stock to be outstanding
upon completion of the Offering will be, fully paid and nonassessable.
REDEEMABLE WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects
by reference to the actual text of the Warrant Agreement between the Company
and American Stock Transfer and Trust Company. A copy of the Warrant Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
CLASS A WARRANTS
The holder of each Class A Warrant is entitled, upon payment of the exercise
price of $6.50, to purchase one share of Common Stock and one Class B Warrant.
Unless previously redeemed, the Class A Warrants are exercisable at any time
after issuance until , 2002, provided that at such time a current
prospectus relating to the underlying Common Stock and the Class B Warrants is
in effect and the underlying Common Stock and the Class B Warrants are
qualified for sale or exempt from qualification under applicable state
securities laws. The Class A Warrants included in the Units offered hereby are
immediately transferable separately from the Common Stock and the Class B
Warrants issued with such Class A Warrants as part of the Units. The Class A
Warrants are subject to redemption, as described below.
CLASS B WARRANTS
The holder of each Class B Warrant is entitled, upon payment of the exercise
price of $8.75, to purchase one share of Common Stock. Unless previously
redeemed, the Class B Warrants are exercisable at any time after issuance
until , 2002, provided that at such time a current prospectus relating to
the underlying Common Stock is then in effect and the underlying Common Stock
is qualified for sale or exempt from qualification under applicable state
securities laws. The Class B Warrants included in the Units offered hereby are
transferable separately from the Common Stock. The Class B Warrants are
subject to redemption, as described below.
46
<PAGE>
REDEMPTION
Commencing on the first anniversary of the effective date of the
Registration Statement, of which this Prospectus is a part, the Class A
Warrants and Class B warrants are subject to redemption by the Company, upon
30 days written notice, at a price of $.05 per Warrant, if the average closing
bid price of the Common Stock for any 30 consecutive trading days ending
within 15 days of the date on which the notice of redemption is given shall
have exceeded $9.10 per share with respect to the Class A Warrants or $12.10
per share with respect to the Class B Warrants. Holders of Warrants will
automatically forfeit their rights to purchase the shares of Common Stock
issuable upon exercise of such Warrants unless the Warrants are exercised
before the close of business on the business day immediately prior to the date
set for redemption. All of the outstanding Warrants of a class, except for
those underlying the Unit Purchase Option, must be redeemed if any of that
class are redeemed. A notice of redemption shall be mailed to each of the
registered holders of the Warrants by first class mail, postage prepaid, upon
30 days' notice before the date fixed for redemption.
GENERAL
The Warrants may be exercised upon surrender of the certificate or
certificates therefor on or prior to the expiration or the redemption date (as
explained above) at the offices of the Company's warrant agent (the "Warrant
Agent") with the Subscription Form on the reverse side of the certificate or
certificates completed and executed as indicated, accompanied by payment (in
the form of a certified or cashier's check payable to the order of the
Company) of the full exercise price for the number of Warrants being
exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of
shares issuable upon exercise thereof upon the occurrence of certain events,
including issuances of Common Stock (or securities convertible, exchangeable
or exercisable into Common Stock) at less than market value, stock dividends,
stock splits, mergers, sale of substantially all of the Company's assets, and
for other extraordinary events; provided, however, that no such adjustment
shall be made upon, among other things, (i) the issuance or exercise of
options or other securities under the Stock Option Plan or other employee
benefit plans or (ii) the sale or exercise of outstanding options or warrants
or the Warrants offered hereby.
The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof will make a cash payment based upon the current market value
of such fractional shares. The holder of the Warrants will not possess any
rights as a shareholder of the Company unless and until he exercises the
Warrants.
Upon notice to the Warrantholders, the Company has the right to reduce the
exercise price or extend the expiration date of the Warrants.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS
The Warrants included in the Units offered hereby will be immediately
detachable and separately tradeable. Although the Units will not knowingly be
sold to purchasers in jurisdictions in which the Units are not registered or
otherwise qualified for sale, purchasers who reside in or move to
jurisdictions in which the securities underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable
may buy Units (or the Warrants included therein) in the aftermarket. In this
event, the Company would be unable to issue securities to those persons
desiring to exercise their Warrants unless and until the underlying securities
could be registered or qualified for sale in the jurisdictions in which such
purchasers reside, or unless an exemption from such qualification exists in
such jurisdictions. No assurance can be given that the Company will be able to
effect any such required registration or qualification.
Additionally, purchasers of the Units will be able to exercise the Warrants
included therein only if a current prospectus relating to the securities
underlying the Warrants is then in effect under the Securities Act and such
securities are qualified for sale or exempt from qualification under the
applicable securities or "blue sky" laws
47
<PAGE>
of the states in which the various holders of the Warrants then reside.
Although the Company has undertaken to use reasonable efforts to maintain the
effectiveness of a current prospectus covering the securities underlying the
Warrants, no assurance can be given that the Company will be able to do so.
The value of the Warrants may be greatly reduced if a current prospectus
covering the securities issuable upon the exercise of the Warrants is not kept
effective or if such securities are not qualified or exempt from qualification
in the states in which the holders of the Warrants then reside.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of Preferred Stock. Shares of
Preferred Stock may be issued without shareholder approval. The Board of
Directors is authorized to issue such shares in one or more series and to fix
the rights, preferences, privileges, qualifications, limitations and
restrictions thereof, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series, without any vote or action by the shareholders. No shares of Preferred
Stock will be outstanding upon the closing of the Offering and the Company has
no present intention to issue any shares of Preferred Stock. Any Preferred
Stock to be issued could rank prior to the Common Stock with respect to
dividend rights and rights on liquidation. The Board of Directors, without
shareholder approval, may issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of holders of Common
Stock and discourage, delay or prevent a change in control of the Company.
UNIT PURCHASE OPTION
Upon the closing of the Offering, the Company has agreed to grant to the
Underwriter the Unit Purchase Option to purchase up to 140,000 Units. The
Units issuable upon exercise of the Unit Purchase Option will, when so issued,
be identical to the Units offered hereby. The Unit Purchase Option cannot be
transferred, sold, assigned or hypothecated for two years, except to any
officer of the Underwriter or members of the selling group or their officers.
The Unit Purchase Option is exercisable during the three-year period
commencing two years from the date of this Prospectus at an exercise price of
$ per Unit (120% of the initial public offering price) subject to
adjustment in certain events. The holders of the Unit Purchase Option have
certain demand and piggyback registration rights. See "Underwriting."
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock. Sale of a substantial number of shares of Common Stock into the public
market following the offering could adversely affect prevailing market prices
for the Common Stock.
Following the Offering, the Company will have outstanding an aggregate of
3,374,936 shares of Common Stock, assuming no exercise of the Underwriter's
over-allotment option. In addition to the 1,400,000 shares of Common Stock
offered hereby, as of the date of this Prospectus, there will be 1,974,936
shares of Common Stock outstanding, all of which are Restricted Securities
under the Act. Approximately 1,068,656 of such shares will be eligible for
sale immediately following the Effective Date without restriction in reliance
on Rule 144(k) under the Act. Beginning 90 days after the Effective Date, an
additional 906,280 of such shares will become eligible for sale in the public
market pursuant to Rule 144, subject to the volume and other restrictions
under such rule. However, holders of all of the outstanding shares of Common
Stock of the Company have agreed not to sell or otherwise dispose of any
securities of the Company without the Underwriter's prior written consent for
a period of 13 months from the date of this Prospectus. In addition 1,263,537
of such shares are Escrow Shares subject to the Escrow Agreement. See
"Principal Shareholders--Escrow Securities."
In general under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), who has beneficially owned shares for at least one
year (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period, a number of shares that does not exceed the greater of:
(i) 1% of the then outstanding shares of Common Stock (approximately 34,000
shares immediately after this offering) or (ii) generally, the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
the sale. Sales under Rule 144 are also subject to the filing of a Form 144
with respect to such sale and certain other limitations and restrictions.
Under Rule 144(k), a person who is not deemed to have been an affiliate of the
Company at any time during the ninety (90) days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
would be entitled to sell such shares without having to comply with the manner
of sale, volume limitation or notice filing provisions described above.
Any employee of the Company who purchased his or her shares of Common Stock
pursuant to a written compensation plan or contract may be entitled to rely on
the resale provisions of Rule 701 under the Securities Act, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
current public information, holding period, volume limitation or notice
provision of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with the holding period restrictions of Rule 144.
Holders of the Class A Warrants included in the Units sold in the Offering
(assuming no exercise of the Underwriter's over-allotment option) will be
entitled to purchase an aggregate of 1,400,000 shares of Common Stock upon
exercise of the Class A Warrants and holders of the Class B Warrants offered
hereby and underlying the Class A Warrants offered hereby will be entitled to
purchase an aggregate of 2,800,000 additional shares of Common Stock upon
exercise of the Class B Warrants, in each case at any time during the five-
year period following the effective date of the Registration Statement, of
which this Prospectus is a part, provided that the Company satisfies certain
securities registration requirements with respect to the securities underlying
the Warrants.
Up to 560,000 additional shares of Common Stock may be purchased by the
Underwriter through the exercise of the Unit Purchase Option and the Class A
Warrants and Class B Warrants contained in and underlying the Unit Purchase
Option. Any and all of such shares of Common Stock will be tradeable without
restriction, provided that the Company satisfies certain securities
registration requirements in accordance with the terms of the Unit Purchase
Option. The Underwriter has demand and "piggyback" registration rights with
respect to the securities underlying the Unit Purchase Option. See
"Underwriting."
49
<PAGE>
The Company has also registered on behalf of the Selling Securityholders an
aggregate of 425,000 Selling Securityholders' Class A Warrants and the
securities underlying such Class A Warrants. See "Concurrent Securities
Offering" The Selling Securityholders have agreed not to sell their Selling
Securityholder Class A Warrants or the securities issuable on exercise thereof
except pursuant to the restrictions set forth below, provided that, if
required in connection with approval of the Company's securities for listing
on Nasdaq, the Selling Securityholders have agreed not to sell, transfer,
assign, hypothecate or otherwise dispose of their Class A Warrants for a
period of one year from the date of the Offering:
<TABLE>
<CAPTION>
PERCENTAGE
ELIGIBLE
LOCK-UP PERIOD FOR RESALE
-------------- ----------
<S> <C>
Up to 90 days after closing.................................... 0%
Between 91 and 150 days after closing.......................... 25%
Between 151 and 210 days after closing......................... 20%
Between 211 and 270 days after closing......................... 75%
After 270 days after closing................................... 100%
</TABLE>
The Selling Securityholders have also agreed with the Company not to
exercise the Selling Securityholders' Class A Warrants for a period of one
year following the closing of the Offering; provided, however, that purchasers
of such Selling Securityholders' Class A Warrants are not subject to this
restriction on exercise.
50
<PAGE>
UNDERWRITING
D.H. Blair Investment Banking Corp., the Underwriter, has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase the
1,400,000 Units offered hereby from the Company on a "firm commitment" basis,
if any are purchased. It is expected that Blair & Co. will distribute as a
selling group member substantially all of the Units offered hereby. Blair &
Co. is owned by a corporation that 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. The Underwriter may allow to selected dealers who are members of
the National Association of Securities Dealers, Inc. (the "NASD") concessions
not in excess of $ per Unit, of which not in excess of $ per Unit may
be reallowed to other dealers who are members of the NASD. After commencement
of the offering, the public offering price, 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 nonaccountable expense allowance of 3%
of the gross proceeds derived from the sale of the Units offered hereby,
including any Units purchased pursuant to the Underwriter's over-allotment
option, $40,000 of which has been paid as of the date of this Prospectus.
The Underwriter has informed the Company that it does not expect to make
sales to discretionary accounts.
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 and
commissions, up to 210,000 additional Units for the purpose of covering over-
allotments, if any.
The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 140,000
Units substantially identical to the Units being offered hereby, except that
the Warrants included therein are subject to redemption by the Company for
$.05 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 three-year period commencing two years from the date of
this Prospectus at an exercise price of $6.00 per Unit, subject to adjustment
in certain events to protect against dilution, and is not transferable for a
period of two years from the date of this Prospectus except to officers of the
Underwriter or to members of the Underwriter's selling group or the officers
of such selling group members. The Company has agreed to register the
securities issuable upon exercise thereof under the Securities Act on two
separate occasions (the first at the Company's expense and the second at the
expense of the holders of the Unit Purchase Option) during the five-year
period commencing one year from the date of this Prospectus. The Unit Purchase
Option includes a provision permitting the holder to elect a cashless exercise
of the option. The Company has also granted certain piggyback registration
rights to holders of the Unit Purchase Options.
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.
The Underwriter has advised the Company that, pursuant to Regulation M under
the Securities Act, certain persons participating in the Offering may engage
in transactions, including stabilizing bids or syndicate covering
transactions, which may have the effect of stabilizing or maintaining the
market price of the Units, Common Stock, Class A Warrants or Class B Warrants
at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of a security on behalf of the
Underwriter for the purpose of fixing or maintaining the price of the
security. A "syndicate covering transaction" is the bid for or the purchase of
a security on behalf of the Underwriter to reduce a short position incurred by
the Underwriter in connection with the Offering. The Underwriter has advised
the Company that such transactions may be effected on Nasdaq or otherwise and,
if commenced, may be discontinued at any time.
51
<PAGE>
During the five-year period from the date of this Prospectus, in the event
the Underwriter originates financing or a merger, acquisition, or transaction
to which the Company is a party, the Underwriter will be entitled to receive a
finder's fee in consideration for origination of such transaction. The fee is
based on a percentage of the consideration paid in the transaction, ranging
from 7% of the first $1,000,000 to 2 1/2% of any consideration in excess of
$9,000,000.
The Underwriter acted as placement agent in connection with the Bridge
Financing in March 1997 and received a placement agent fee of $85,000 and a
non-accountable expense allowance of $25,500. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The directors and executive officers of the Company, and holders of the
shares of the Common Stock and warrants issued prior to the Offering, have
agreed not to sell or otherwise dispose of any of their shares of Common Stock
of the Company for a period of 13 months from the date of this Prospectus
without the prior written consent of the Underwriter.
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 one year from the date of this
Prospectus, the Company will pay the Underwriter a fee of 5% of the aggregate
exercise price for Warrant exercises solicited by the Underwriter or its
representatives or agents, if (i) the market price of the Company's Common
Stock on the date the Warrant is exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrant was solicited in
writing by a member of the NASD; (iii) the Warrant is not held in a
discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the offering and at the time of exercise of the Warrants;
and (v) the solicitation of exercise of the Warrant was not in violation of
Regulation M promulgated under the Exchange Act.
The notice of redemption shall specify the redemption price, the date fixed
for redemption, the place where the Warrant certificates shall be delivered
and the redemption price to be paid, and that the right to exercise the
Warrants shall terminate at 5:00 p.m. (New York City time) on the business day
immediately preceding the date fixed for redemption. The Underwriter has
advised the Company that Blair & Co. intends to make a market in the Company's
securities. Regulation M, which was recently adopted to replace Rule 10b-6 and
certain other rules promulgated under the Securities Act of 1934, as amended
(the "Exchange Act"), may restrict Blair & Co.'s ability to engage in market-
making activities with regard to the Company's securities for the period from
five business days (or such other applicable period as Regulation M may
provide) prior to any solicitation by the 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 be restricted in their ability to engage in
market-making activities with respect to any securities of the Company for the
applicable "cooling off" period prior to the commencement of such
distribution. Accordingly, in the event the Underwriter or Blair & Co. is
engaged in a distribution of the Selling Securityholder Warrants, such firms
will be restricted in their ability to make a market in the Company's
securities during the applicable restrictive period. Any temporary cessation
or limitation of such market-making activities could have an adverse effect on
the market price of the Company's securities. See "Underwriting."
The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co. 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
52
<PAGE>
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 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.
Prior to the Offering, there has been no market for any of the securities of
the Company. Accordingly, the initial public offering price of the Units and
the exercise prices and other terms of the Warrants have been determined by
negotiations between the Company and the Underwriter and are not necessarily
related to the Company's assets net worth or other established criteria of
value. Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of, and prospects for, the
industry in which the Company competes, the Company's management, the
Company's financial condition, the Company's capital structure and such other
factors as were deemed relevant.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Securityholders by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Bachner, Tally, Polevoy &
Misher LLP, New York, New York, has acted as counsel for the Underwriters.
EXPERTS
The financial statements of Notify Corporation at September 30, 1996, and
for each of the two years in the period ended September 30, 1996, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon (which
contains an explanatory paragraph with respect to the uncertainty surrounding
the Company's ability to continue as a going concern, as discussed in Note 1
to Notes to the Financial Statements) appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, with the Securities and Exchange
Commission (the "Commission") with respect to the Common Stock offered
pursuant to this Prospectus. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information included in
the Registration Statement and amendments thereof and the exhibits thereto,
which are available for inspection without charge, and copies of which may be
obtained at prescribed rates, at the office of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at 7 World Trade Center, 13th Floor, New York, New York 10048, and
at the Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission (http://www.sec.gov).
The Company will provide, without charge, to each person who received a
Prospectus, upon written or oral request of such person to the Company at the
mailing address or telephone number listed below, a copy of any of the
information incorporated by reference. The mailing address of the Company's
principal executive offices is Notify Corporation, 1054 S. De Anza Blvd.,
Suite 105, San Jose, California 95129 and its telephone number is (408) 777-
7920.
53
<PAGE>
NOTIFY CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Audited Financial Statements
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Shareholders' Equity (Net Capital Deficiency)................. F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Notify Corporation
We have audited the accompanying balance sheet of Notify Corporation as of
September 30, 1996, and the related statements of operations, shareholders'
equity (net capital deficiency), and cash flows for each of the two years in
the period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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 referred to above present fairly, in
all material respects, the financial position of Notify Corporation at
September 30, 1996, and results of its operations and its cash flows for each
of the two years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, Notify Corporation's
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans as to these matters are also
described in Note 1. The 1996 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
San Jose, California November 15, 1996, except as to Note 7, as to which the
date is March 13, 1997
F-2
<PAGE>
NOTIFY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
UNAUDITED
SHAREHOLDERS'
SEPTEMBER 30, DECEMBER 31, EQUITY AT
1996 1996 DECEMBER 31, 1996
------------- ------------ -----------------
(UNAUDITED) (UNAUDITED)
(NOTE 7)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 260,380 $ 107,951
Accounts receivable, net of
allowance for doubtful
accounts of $2,106 and $3,812,
respectively................... 134,682 117,140
Inventories..................... 579,929 411,855
----------- -----------
Total current assets.............. 974,991 636,946
Property and equipment, net....... 92,903 83,422
Other assets...................... 8,765 18,265
----------- -----------
$ 1,076,659 $ 738,633
=========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Line of credit.................. $ 50,000 $ 100,000
Accounts payable................ 116,797 108,176
Accrued liabilities............. 265,049 178,288
Note payable to shareholder..... 30,000 25,000
Convertible notes payable....... 807,125 932,125
----------- -----------
Total current liabilities......... 1,268,971 1,343,589
Commitments
Shareholders' equity (net capital
deficiency):
Convertible preferred stock, no
par value, 4,500,000
shares authorized, issued and
outstanding;
aggregate liquidation
preference of $1,850,000; none
outstanding pro forma--
unaudited...................... 1,850,000 1,850,000 $ --
Common stock, no par value,
12,100,000 shares authorized,
885,125 and 918,182 shares
issued and outstanding at
September 30, 1996 and December
31, 1996, respectively;
1,974,936 shares issued and
outstanding pro forma--
unaudited...................... 58,619 70,819 2,652,944
Notes receivable from
shareholders................... (17,650) (26,525) (26,525)
Accumulated deficit............. (2,083,281) (2,499,250) (2,499,250)
----------- ----------- -----------
Total shareholders' equity (net
capital deficiency).............. (192,312) (604,956) $ 127,169
----------- ----------- ===========
$1,076,659 $ 738,633
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
NOTIFY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------
1995 1996 1995 1996
------------ ------------- --------- ---------
<S> <C> <C> <C> <C>
Product sales................ $ 9,333 $ 308,067 $ 4,903 $ 396,294
Cost of sales................ 7,929 428,112 2,775 351,079
----------- ------------- --------- ---------
Gross profit (loss).......... 1,404 (120,045) 2,128 45,215
Operating expenses:
Research and development... 159,163 537,902 147,272 149,415
Sales and marketing........ 122,884 549,916 116,672 153,399
General and administrative. 146,756 440,089 84,194 138,787
----------- ------------- --------- ---------
Total operating expenses..... 428,803 1,527,907 348,138 441,601
----------- ------------- --------- ---------
Loss from operations......... (427,399) (1,647,952) (346,010) (396,386)
Interest expense............. -- (32,811) -- (7,252)
Other income and expense,
net......................... 1,337 23,544 6,806 (12,331)
----------- ------------- --------- ---------
Net loss..................... $(426,062) $(1,657,219) $(339,204) $(415,969)
=========== ============= ========= =========
Net loss per share........... $ (0.84) $ (3.17) $ (0.65) $ (0.80)
=========== ============= ========= =========
Weighted average shares
outstanding................. 509,564 522,550 525,700 517,480
=========== ============= ========= =========
Pro forma net loss per share. $ (1.89) $ (0.47)
============= =========
Weighted average shares used
in computing pro forma net
loss per share.............. 875,092 882,787
============= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
NOTIFY CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
CONVERTIBLE SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK NOTES RECEIVABLE EQUITY (NET
-------------------- ---------------- FROM ACCUMULATED CAPITAL
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS DEFICIT DEFICIENCY)
--------- ---------- ------- ------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders for cash
and note receivable.... -- $ -- 789,398 $39,865 $(29,865) $ -- $ 10,000
Issuance of Series A
convertible preferred
stock.................. 1,000,000 100,000 -- -- -- -- 100,000
Issuances of common
stock in exchange for
note receivable........ -- -- 59,406 3,000 (3,000) -- --
Repayments of notes
receivable from
shareholders........... -- -- -- -- 13,065 -- 13,065
Net loss................ -- -- -- -- -- (426,062) (426,062)
--------- ---------- ------- ------- -------- ----------- -----------
Balances at September
30, 1995............... 1,000,000 100,000 848,804 42,865 (19,800) (426,062) (302,997)
Issuance of Series B
convertible preferred
stock.................. 3,500,000 1,750,000 -- -- -- -- 1,750,000
Repurchases of common
stock.................. -- -- (32,590) (1,646) 2,500 -- 854
Repayments of notes
receivable from
shareholders........... -- -- -- -- 12,800 -- 12,800
Issuances of common
stock in exchange for
notes receivable and
cash................... -- -- 68,911 17,400 (13,150) -- 4,250
Net loss................ -- -- -- -- -- (1,657,219) (1,657,219)
--------- ---------- ------- ------- -------- ----------- -----------
Balance at September 30,
1996................... 4,500,000 1,850,000 885,125 58,619 (17,650) (2,083,281) (192,312)
Repayments of notes
receivable from
shareholders
(unaudited)............ -- -- -- -- 325 -- 325
Issuances of common
stock (unaudited)...... -- -- 33,057 12,200 (9,200) -- 3,000
Net loss (unaudited).... -- -- -- -- -- (415,969) (415,969)
--------- ---------- ------- ------- -------- ----------- -----------
Balance at December 31,
1996 (unaudited)....... 4,500,000 $1,850,000 918,182 $70,819 $(26,525) $(2,499,250) $ (604,956)
========= ========== ======= ======= ======== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
NOTIFY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-
MONTH PERIOD ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- ---------------------
1995 1996 1995 1996
------------ ------------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN
OPERATING ACTIVITIES
Net loss................... $(426,062) $(1,657,219) $ (339,204) $(415,969)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 3,193 23,132 4,955 9,480
Changes in operating
assets and liabilities:
Accounts receivable...... (3,868) (130,814) 636 17,541
Inventory................ (19,849) (560,080) (26,704) 168,074
Other assets............. (5,609) (3,156) (2,700) (9,499)
Accounts payable......... 23,746 93,051 43,250 (8,621)
Accrued liabilities...... 64,621 200,428 (5,539) (86,760)
----------- ------------- ---------- ---------
Net cash used in operating
activities................ (363,828) (2,034,658) (325,306) (325,754)
----------- ------------- ---------- ---------
CASH FLOWS USED IN
INVESTING ACTIVITIES
Expenditures for property
and equipment............. (30,662) (88,566) (23,969) --
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES
Proceeds from issuance of
preferred stock........... 100,000 1,450,000 1,450,000 3,000
Proceeds from issuance of
common stock.............. 10,000 5,104 --
Proceeds from issuance of
convertible notes payable. 300,000 807,125 -- 125,000
Advances under line of
credit.................... -- 50,000 -- 50,000
Proceeds from note payable
to shareholder............ 75,000 -- -- --
Payments on note payable to
shareholder............... -- (45,000) (10,000) (5,000)
Repayments of notes
receivable from
shareholders.............. 13,065 12,800 13,425 325
----------- ------------- ---------- ---------
Net cash provided by
financing activities...... 498,065 2,280,029 1,453,425 173,325
----------- ------------- ---------- ---------
Net increase (decrease) in
cash and cash equivalents. 103,575 156,805 1,104,150 (152,429)
Cash and cash equivalents
at beginning of period.... -- 103,575 103,575 260,380
----------- ------------- ---------- ---------
Cash and cash equivalents
at end of period.......... $ 103,575 $ 260,380 $1,207,725 $ 107,951
=========== ============= ========== =========
NONCASH FINANCING
ACTIVITIES:
Common stock issued or
retired for notes
receivable
from shareholders......... $ 32,865 $ 13,150 $ 1,750 $ 9,200
=========== ============= ========== =========
Conversion of convertible
notes payable to
preferred stock........... $ -- $ 300,000 $ 300,000 $ --
=========== ============= ========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT DECEMBER 31, 1996 AND FOR THE THREE-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
ORGANIZATION AND BUSINESS
Notify Corporation (the "Company") was incorporated in the State of
California on August 12, 1994 to engage in the development and production of
phone message notification systems. As of September 30, 1995, the Company was
considered to be in the development stage and its main activities primarily
consisted of establishing its offices and research facilities, recruiting
personnel, conducting research and development, performing business and
financial planning and raising capital. This designation was no longer
applicable as of September 30, 1996 as the Company began the shipment of its
notification systems during the fiscal year. There were no operations of the
Company between August 12, 1994 (date of incorporation) and September 30,
1994.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred cumulative net losses of approximately $2.5 million and has negative
working capital as of December 31, 1996. Management expects the Company to
incur additional losses and recognizes the need for an infusion of cash during
the fiscal year 1997. The Company is actively pursuing various alternatives to
secure additional financing and believes that sufficient funding will be
available to achieve its planned business objectives (see Note 7).
INTERIM RESULTS
The accompanying balance sheet as of December 31, 1996 and the statements of
operations, stockholders' equity (net capital deficiency) and cash flows for
the three months ended December 31, 1995 and 1996 are unaudited. In the
opinion of management, the statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair statement of interim
periods. The data disclosed in these notes to the financial statement for
these periods is also unaudited.
CASH AND CASH EQUIVALENTS
The Company maintains it cash and cash equivalents in depository and money
market accounts with two financial institutions.
INVENTORIES
Inventories are stated at the lesser of actual cost, on a FIFO basis, or
fair market value and consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials........................................ $399,719 $304,320
Work-in-progress..................................... 47,166 25,125
Finished goods....................................... 133,044 82,410
-------- --------
$579,929 $411,855
======== ========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated or amortized on a
straight-line basis of the lesser of the estimated useful lives of the asset
or the lease term. The estimated useful lives range from three to five years.
F-7
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT DECEMBER 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
REVENUE RECOGNITION
Product sales are recognized upon product shipment. In fiscal 1996, three
customers accounted for 30%, 18% and 16% of sales, respectively. For the three
months ended December 31, 1996, three customers accounted for 31%, 19% and 13%
of sales, respectively.
INCOME TAXES
The Company follows Statement of Financial Accounts Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109, the
liability method is used to account for income taxes. Under this method,
deferred tax assets and liabilities are measured using enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to regional bell operating
companies and local exchange carriers in the United States. The Company
performs on-going credit evaluations and generally requires no collateral. The
Company maintains reserves for credit losses, and such losses have been within
management's expectations. As of September 30, 1996, two customers accounted
for 67% and 23% of accounts receivable, respectively. As of December 31, 1996,
three customers accounted for 28%, 24%, and 23% of accounts receivable,
respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") was issued and is
effective for the Company's fiscal 1997 year end. The Company intends to
account for employee stock options in accordance with APB Opinion No. 25 and
will make the pro forma disclosures required by SFAS 123 beginning in 1997.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common stock equivalent shares from convertible
preferred stock, convertible notes payable and warrants are not included as
the effect is antidilutive. In accordance with Securities and Exchange
Commission Staff Accounting Bulletins, common stock and common stock
equivalent shares issued by the Company at prices below the initial public
offering price during the period beginning one year prior to the initial
public offering have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method and the
estimated initial public offering price). The weighted average number of
common shares used in the net loss per share calculation was reduced by the
common stock, and common stock equivalent shares placed in escrow in
connection with the Company's initial public offering (see Note 7).
F-8
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT DECEMBER 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
Pro forma net loss per share has been computed as described above and also
gives effect, pursuant to SEC policy, to common equivalent shares from
convertible preferred stock issued more than 12 months from the initial public
offering date that will automatically convert upon completion of the offering.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Furniture and office equipment....................... $116,982 $114,367
Leasehold improvements............................... 2,246 2,246
-------- --------
119,228 116,613
Less accumulated depreciation and amortization....... (26,325) (33,191)
-------- --------
$ 92,903 $ 83,422
======== ========
</TABLE>
3. FINANCING ARRANGEMENTS
The Company had available a secured bank line of credit which allowed for
maximum borrowings and issuances of letters of credit of up to $500,000 at the
bank's prime rate plus 1.5% (9.75% at September 30, 1996) and expired in March
1997. At September 30, 1996, the Company had borrowings of $50,000 and standby
letters of credit of $20,000 outstanding under this facility. Borrowings of
$100,000 were outstanding at December 31, 1996. The Company was not in
compliance with certain covenants at September 30, 1996 and December 31, 1996.
During fiscal 1996, the Company received proceeds of $807,125 from the
issuance of convertible promissory notes including $100,000 of proceeds
received from a director. The notes accrue interest at the rate of 8% per
annum and are due and payable in June 1997 unless earlier converted. In the
event that the Company issues and sells shares of capital stock for aggregate
proceeds of at least $1,500,000, the entire unpaid principal amount of these
notes and, at the option of the lender, unpaid interest, shall be converted
into shares of the Company's securities sold in such financing. During the
three-month period ended December 31, 1996, the Company received proceeds of
$125,000 from the issuance of additional convertible promissory notes with
terms identical with those described above.
During December 1994, the Company issued a $75,000 promissory note to a
shareholder which accrues interest at the rate of 10% per annum and is due on
demand. The outstanding balance was $30,000 as of September 30, 1996 and
$25,000 as of December 31, 1996.
F-9
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT DECEMBER 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
4. COMMITMENTS
The Company currently occupies a facility under an operating lease which
expires in March 1997 and contains renewal options to extend the lease term
for one two-year period. Future minimum payments under this lease for the year
ended September 30, 1997 is $29,958.
Rent expense totaled $19,000, $44,000, $6,400 and $15,000 for the years
ended September 30, 1995 and 1996 and the three months ended December 31, 1995
and 1996, respectively.
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Authorized and outstanding convertible preferred stock and its principal
terms are as follows at September 30, 1996.
<TABLE>
<CAPTION>
LIQUIDATION
DIVIDEND PREFERENCE
DESIGNATED OUTSTANDING PER SHARE PER SHARE
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Series A........................... 1,000,000 1,000,000 $0.01 $0.10
Series B........................... 3,500,000 3,500,000 $0.05 $0.50
</TABLE>
Dividends on the convertible preferred stock are payable when and if
declared by the board of directors. The dividend requirements of the preferred
stock must be satisfied prior to payment of any dividends or distributions
with respect to the Company's common stock. Dividend, redemption and
liquidation rights for Series B are senior to Series A. No dividends have been
declared.
The Company's board of directors has five members; as long as there are at
least 1,000,000 shares of Series B preferred stock issued and outstanding,
holders of Series B preferred stock, voting separately as a class, are
entitled to elect one director. Preferred shareholders are entitled to voting
rights equivalent to the number of common shares into which their shares are
convertible. Subject to certain antidilution provisions, every 5.05 shares of
Series A and B preferred stock is convertible at any time into one common
share. All preferred shares convert automatically to common stock (891,060
shares if converted at September 30, 1996 and December 31, 1996) in the event
of a firm commitment public offering of the Company's common stock.
WARRANTS
At September 30, 1996, warrants issued in connection with various financings
were outstanding to purchase 172,944 shares of the Company's common stock
(including 96,742 warrants held by two employees who are also shareholders) at
prices ranging from $1.01 to $5.05 per share. These warrants are exercisable
at any time and expire at dates ranging from April 2000 to February 2001.
During the three-month period ended December 31, 1996 the Company issued
additional warrants in connection with convertible notes payable to purchase
8,160 shares of the Company's common stock. The Company believes that the
value of the warrants at the date of their issuance was not material, and no
value has been attributed to them in these financial statements.
In March 1996, and in conjunction with a line of credit agreement, the
Company issued a warrant that entitles the holder to purchase the number of
shares of Series C convertible preferred stock calculated by dividing $20,000
by the per share purchase price of a future Series C round of financing, or if
no such financing takes place by December 31, 1996, 3,960 shares of common
stock at an exercise price of $5.05 per share. This warrant is exercisable at
any time and expires in February 2001.
F-10
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT DECEMBER 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
The Company has issued 918,182 common shares to founders, advisors and
employees of the Company, of which certain shares are subject to repurchase
rights upon termination of service to the Company, which generally expire
ratably over four years from date of issuance. At December 31, 1996, 194,241
shares were subject to repurchase at their paid-in amounts.
6. INCOME TAXES
At September 30, 1996, the Company had a net operating loss carryforward for
federal and state tax purposes of approximately $1,800,000, which will expire
in tax years 2003 and 2011, respectively. Due to the "change of ownership"
provisions of the Tax Reform Act of 1986, utilization of the net operating
loss carryforward will be significantly limited.
The Company had deferred tax assets of approximately $737,000 at September
30, 1996, which relate primarily to the future tax benefits of net operating
loss carryforwards. Due to the Company's lack of earnings history, the
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by approximately $565,000 for the fiscal year
ended September 30, 1996.
7. SUBSEQUENT EVENTS
CONVERSION OF CONVERTIBLE PROMISSORY NOTES
Subsequent to December 31, 1996, the Company completed a restructuring of
convertible notes payable whereby holders of an aggregate of $732,125 in
principal amount of convertible notes converted their notes and accrued
interest into 165,694 shares of common stock of the Company at a price per
share of $4.55 and exchanged their warrants for new warrants to purchase an
aggregate of 48,272 shares of the Company's common stock at a price of $0.25
per share. Holders of the remaining $200,000 principal amount of notes agreed
to defer repayment of the notes until the earlier of the closing of the
Offering or until April 30, 1997 and exchange their warrants for new warrants
to purchase an aggregate of 7,920 shares of common stock at an exercise price
of $5.05 per share.
NOTE AND WARRANT PURCHASE AGREEMENT
During February 1997, the Company issued a $65,000 promissory note to a
shareholder which accrued interest at the rate of 8% and was repaid from the
proceeds of the private placement described below. The shareholder also
received a warrant to purchase up to 11,535 shares of common stock of the
Company at $3.00 per share.
PRIVATE PLACEMENT
In March 1997, the Company completed a private placement of an aggregate of
$850,000 principal amount of notes (the "Bridge Notes") and 425,000 warrants
(the "Bridge Warrants") in which it received net proceeds of approximately
$725,000 (after expenses of issuance). The Bridge Notes are payable, together
with cash interest at the rate of 10% per annum, on the earlier of one year
from the issuance of the Bridge Notes or the
F-11
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT DECEMBER 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
7. SUBSEQUENT EVENTS (CONTINUED)
PRIVATE PLACEMENT (CONTINUED)
closing of the proposed public offering discussed below. Each Bridge Warrant
will be exercisable for a period commencing one year from the date of issuance
and expiring approximately two years thereafter, and entitles the holder
thereof to purchase one share of Common Stock at an exercise price of $3.00
per share if the Company does not consummate the proposed public offering. In
the event the Company completes the proposed offering and such offering
includes warrants or Class A Warrants, each Bridge Warrant will automatically
convert on the closing date of the public offering into one warrant or Class A
Warrant (a "Public Warrant") which is identical in all respects to the Class A
Warrant sold in the public offering, except that purchasers of the Bridge
Notes acquiring the Bridge Warrants have agreed (i) not to exercise the Public
Warrants for a period of one year from the closing date of the public offering
and (ii) not to sell publicly the Public Warrants except as provided in
certain lock-up provisions which expire between 90 and 270 days after the
closing date of the public offering. In addition, the purchasers have agreed
not to sell the Public Warrants for a period of up to a year if required in
connection with the approval of the Company's securities for inclusion on
Nasdaq. The fair value of the Bridge Warrants, amounting to $106,250 together
with the cost of issuance (approximately $125,000) will be treated as
additional interest expense over the term of the Bridge Notes.
INITIAL PUBLIC OFFERING OF UNITS AND RELATED MATTERS
In January 1997, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
offering to the public units consisting of one share of common stock, one
Class A warrant and one Class B warrant. Additionally, the Company agreed to
grant an option to an underwriter to purchase up to 10% of the units sold in
the offering which is exercisable at a price of 120% of the price of the units
sold in the offering during a three-year period commencing two-years from the
date of the offering. Additionally, the Company authorized 5,000,000 shares of
Preferred Stock.
ESCROW SECURITIES
In February 1997, the holders of the Company's common and preferred stock
placed 1,263,537 of their shares into escrow. Additionally, the holders of
warrants agreed to place warrants to purchase 111,008 shares of common stock
into escrow. The securities will be released to the holders in the event
specified levels of pretax income of the Company for the years ended September
30, 1998 to 2002 are achieved, or the market price of the Company's common
stock attains specified targets during a 36-month period commencing from the
effective date of the registration statement relating to the Company's public
offering. Any securities remaining in escrow on December 31, 2002 will be
forfeited, which securities will then be contributed to the Company's capital.
The pretax income levels are subject to proportionate adjustment upon the
issuance of certain securities subsequent to the Company's initial public
offering.
In the event that the foregoing earnings or market price levels are attained
and the escrowed securities released, the Securities and Exchange Commission
has adopted the position that the release of escrowed securities to officers,
directors, employees and consultants of the Company will be compensatory and,
accordingly, will result in compensation expense for financial reporting
purposes. The expense will equal the fair market value of the escrowed
securities on the date of release and will result in a material charge to
operations.
F-12
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT DECEMBER 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
7. SUBSEQUENT EVENTS (CONTINUED)
STOCK SPLIT
In January 1997, the Board of Directors approved a reverse stock split of
one-for-5.05 of all outstanding shares of common stock and changed the
conversion ratio of preferred stock to one share of common stock for every
5.05 preferred shares. All common share and per share information included in
the accompanying financial statements has been retroactively adjusted to give
effect to the stock split as well as the change in the preferred stock
conversion ratio.
PRO FORMA UNAUDITED SHAREHOLDERS' EQUITY
Pro forma unaudited shareholders' equity at December, 1996 reflects the
assumed conversion of convertible preferred stock and convertible notes
payable described above, as set forth on the accompanying balance sheet.
1997 STOCK OPTION PLAN
In January 1997, the Company adopted the Notify Corporation 1997 Stock Plan
(the "Stock Option Plan"). A total of 200,000 shares of the Company's common
stock are reserved for issuance under the Stock Option Plan which provides for
the grant of stock options to employees, consultants and directors of the
Company.
F-13
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON 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 AND REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING THE OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO CIRCUMSTANCES SHALL THE
DELIVERY OF THIS PROSPECTUS OR ANY SALE PURSUANT TO THIS PROSPECTUS CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 21
Selected Financial Data................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 26
Management................................................................ 37
Certain Relationships and Related
Transactions............................................................. 41
Principal Shareholders.................................................... 42
Concurrent Securities Offering............................................ 44
Description of Securities................................................. 46
Shares Eligible for Future Sale........................................... 49
Underwriting.............................................................. 51
Legal Matters............................................................. 53
Experts................................................................... 53
Additional Information.................................................... 53
Index to Financial Statements............................................. F-1
Independent Auditors' Report.............................................. F-2
</TABLE>
UNTIL ,1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,400,000 UNITS
NOTIFY CORPORATION
CONSISTING OF 1,400,000 SHARES OF COMMON STOCK,
1,400,000 REDEEMABLE CLASS A WARRANTS AND
1,400,000 REDEEMABLE CLASS B WARRANTS
------------------------
PROSPECTUS
------------------------
D.H. BLAIR INVESTMENT
BANKING CORP.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION -- DATED MARCH , 1997
PROSPECTUS ALTERNATE
NOTIFY CORPORATION
425,000 REDEEMABLE CLASS A WARRANTS
425,000 REDEEMABLE CLASS B WARRANTS AND
850,000 SHARES OF COMMON STOCK
This Prospectus relates to 425,000 redeemable Class A Warrants (the "Selling
Securityholders' Warrants" or the "Class A Warrants") of Notify Corporation, a
California corporation (the "Company"), issued to certain investors upon the
conversion of warrants issued to such investors (the "Selling
Securityholders") in a private placement by the Company completed in February
1997 (the "Bridge Financing"), the 425,000 redeemable Class B Warrants (the
"Class B Warrants") issuable upon exercise of the Class A Warrants, and the
850,000 shares of Common Stock, $.001 par value, of the Company (the "Common
Stock") underlying the Class A Warrants and Class B Warrants. See "Selling
Securityholders and Plan of Distribution." 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, 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, until the fifth anniversary of the date of this Prospectus. The
Class A Warrants and the Class B Warrants are subject to redemption,
commencing one year from the date of this Prospectus, by the Company at $.05
per Warrant on 30 days' written notice if the closing bid price of the Common
Stock for 30 consecutive trading days ending within 15 days of the notice of
redemption of the Warrants averages in excess of $9.10 per share with respect
to the Class A Warrants and $12.10 per share with respect to the Class B
Warrants (subject to adjustment in each case). See "Description of
Securities."
The Selling Securityholders have agreed not to exercise the Selling
Securityholders' Warrants for a period of one year from the closing of the
Offering and not to sell the Selling Securityholders' Warrants for a period of
90 days after the closing of the offering and to sell only certain specified
percentages of such warrants during the period from 91 to 270 days after such
closing. However, purchasers of such warrants in permitted sales will be
entitled to exercise such warrants immediately.
The securities offered by this Prospectus may be sold from time to time by
the Selling Securityholders, or by their transferees. The distribution of the
securities offered hereby may be effected in one or more transactions that may
take place in 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 commission 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 Warrants are fully exercised,
the Company will receive gross proceeds of $6,481,250. See "Selling
Securityholders and Plan of Distribution."
The Company has filed a registration statement under the Securities Act with
the Securities and Exchange Commission (the "Commission") relating to a public
offering by the Company (the "Offering") of 1,400,000 Units, each Unit
consisting of one share of Common Stock, one Class A Warrant and one Class B
Warrant. The Company will receive approximately $5,625,000 in net proceeds
from the sale of the Units (assuming no exercise of the Underwriter's over-
allotment option) after payment of underwriting discounts and commissions and
estimated expenses of the Offering.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION".
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE 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>
SELLING SECURITYHOLDERS
An aggregate of up to 425,000 Class A Warrants, 425,000 shares of Common
Stock and 425,000 Class B Warrants issuable upon exercise of the Class A
Warrants, and 425,000 shares of Common Stock issuable upon exercise of the
Class B Warrants may be offered by certain securityholders who received their
Class A Warrants in connection with the Bridge Financing or by their
transferees.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering securities for
resale to the public. The Company will not receive any of the proceeds from
the sale of these securities. Except as described below, there are no material
relationships between any of the Selling Securityholders and the Company, nor
have any such material relationships existed within the past three years.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF CLASS A WARRANTS BENEFICIALLY
SELLING SECURITYHOLDER OWNED AND MAXIMUM NUMBER TO BE SOLD(1)
- ----------------------------------------------------------------------------------
<S> <C>
The Frank & Brynde Berkowitz Family
Foundation, Frank Berkowitz, President 31,250
- ----------------------------------------------------------------------------------
Abraham E. Cohen 25,000
- ----------------------------------------------------------------------------------
Paul F. DePond(2) 25,000
- ----------------------------------------------------------------------------------
Nathan Eisen & Rose Eisen, JTWROS 25,000
- ----------------------------------------------------------------------------------
Susan Gartenberg Revocable Trust,
Michael Gartenberg, Trustee 6,250
- ----------------------------------------------------------------------------------
Deborah Katzin Memorial Chesed Society,
Aryeh Merzel, Administrator 6,250
- ----------------------------------------------------------------------------------
Regina Lehrer 12,500
- ----------------------------------------------------------------------------------
Alan C. Levinson & Audrey J. Levinson,
JTWROS 6,250
- ----------------------------------------------------------------------------------
William Newman 12,500
- ----------------------------------------------------------------------------------
Schon Family Foundation, Henry A. Schon,
President 12,500
- ----------------------------------------------------------------------------------
Gary J. Strauss 12,500
- ----------------------------------------------------------------------------------
E. Donald Shapiro 50,000
- ----------------------------------------------------------------------------------
Mordecai Soloff 25,000
- ----------------------------------------------------------------------------------
South Ferry #2, L.P. 137,500
- ----------------------------------------------------------------------------------
Weingarten Family Foundation, Otto Wein-
garten President 12,500
- ----------------------------------------------------------------------------------
Joel Wolff 25,000
- ----------------------------------------------------------------------------------
</TABLE>
- --------
(1) Does not include shares of Common Stock and Class B Warrants issuable upon
exercise of the Class A Warrants and the shares of Common Stock issuable
upon exercise of the Class B Warrants. The Selling Securityholders have
agreed not to exercise the Class A Warrants offered hereby for a period of
one year after the closing of the offering.
(2) Paul F. DePond is President and Chief Executive Officer of the Company.
See "Principal Shareholders" for a description of Mr. DePond's beneficial
ownership of the Company's securities.
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, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to 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).
The Company has also registered on behalf of the Selling Securityholders an
aggregate of 425,000 Selling Securityholders' Class A Warrants and the
securities underlying such Class A Warrants. The Selling Securityholders have
agreed not to sell their selling Securityholder Class A Warrants or the
securities issuable on exercise thereof except pursuant to the restrictions
set forth below provided that, if required in connection with approval of the
Company's securities for listing on Nasdaq, the Selling Securityholders have
agreed not to sell, transfer, assign, hypothecate or otherwise dispose of
their Class A Warrants for a period of one year from the date of the Offering:
<TABLE>
<CAPTION>
PERCENTAGE
ELIGIBLE
LOCK UP PERIOD FOR RESALE
- -------------- ----------
<S> <C>
Before 90 days after the 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>
Regulation M restricts the ability of any person engaged in the distribution
of the Selling Securityholders' Warrants to engage in market making activities
with respect to any securities of the Company for the applicable "cooling off"
period prior to commencement of such distribution. Accordingly, in the event
the Underwriter or Blair & Co. is engaged in a distribution of the Selling
Securityholders' Warrants, their ability to make a market in the Company's
securities during the applicable restrictive period will be restricted.
However, neither the Underwriter nor Blair & Co. has agreed to, nor is either
of them obligated to, act as a broker-dealer in the sale of the Selling
Securityholders' Warrants, and the Selling Securityholders may be required,
and in the event Blair & Co. is a market maker, will likely be required, to
sell such securities through another broker-dealer. In addition, each Selling
Securityholder desiring to sell Warrants will be subject to the applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation Regulation M, which provisions may limit the
timing of the purchases and sales of shares of the Company's securities by
such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in connection
with such sales may 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 by them might be deemed to be
underwriting discounts and commissions under the Securities Act.
A-3
<PAGE>
CONCURRENT PUBLIC OFFERING
On the date of this Prospectus, a Registration Statement under the
Securities Act was declared effective with respect to an underwritten offering
of 1,400,000 Units by the Company (1,610,000 Units if the Underwriter's over-
allotment option is exercised in full), each Unit consisting of one share of
Common Stock, one Class A Warrant and one Class B Warrant.
A-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act"). The Company's Bylaws provide that the Company shall
indemnify its directors and officers to the fullest extent permitted by
California law, including circumstances in which indemnification is otherwise
discretionary under California law. The Company has entered into
indemnification agreements with its directors and officers containing
provisions which are in some respects broader than the specific
indemnification provisions contained in the California Corporations Code. The
indemnification agreements may require the Company, among other things, to
indemnify its directors and officers against certain liabilities that may
arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms. Article IV of the Registrant's
Articles of Incorporation (Exhibit 3.1 hereto) provides for indemnification of
its directors and officers to the maximum extent permitted by the California
Corporations Code and Article IV of the Registrant's Bylaws (Exhibit 3.3
hereto) provides for indemnification of its directors, officers, employees and
other agents to the maximum extent permitted by the California Corporation
Code. Reference is also made to Section of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
the Common Stock being registered hereby. All amounts are estimates, except
the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- --------
<S> <C>
SEC registration fee.................................................. $ 17,389
NASD filing fee....................................................... 5,589
Nasdaq listing fee.................................................... 10,000
Blue Sky fees and expenses............................................ 55,000
Printing and engraving expenses....................................... 75,000
Legal fees and expenses............................................... 140,000
Auditors' accounting fees and expenses................................ 150,000
Transfer Agent and Registrar fees..................................... 5,000
Underwriter's nonaccountable expense allowance........................ 210,000
Miscellaneous expenses................................................ 7,022
--------
Total................................................................. $675,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of the transactions by Registrant during the last
three years involving sales of Registrant's securities that were not
registered under the Securities Act of 1933, as amended (the "Securities
Act"):
(1) In August 1994, the Company issued and sold 1,000,000 shares of its
Series A Preferred Stock and 1,550,000 shares of its Common stock to its two
co-founders at purchase prices of $0.10 and $0.01 per share, respectively, for
an aggregate purchase price of $115,500.
II-1
<PAGE>
(2) In November 1994, the Company issued and sold 3,000,000 shares of its
Common Stock to seven of its employees pursuant to restricted stock purchase
agreements at a purchase price of $0.01 per share for an aggregate purchase
price of $30,000.
(3) At various times in February and March 1995, the Company sold its Chief
Executive Officer convertible promissory notes with an aggregate principal
amount of $75,000 bearing interest rates of 10% per annum and warrants to
purchase 375,000 shares of common stock of the Company at an exercise price of
$0.20 per share for an aggregate purchase price of $75,000.
(4) From February 1995, to December 1996, the Company issued and sold to
fourteen of its employees or consultants 805,000 shares of its Common Stock
pursuant to restricted stock purchase agreements at prices varying from $.01
per share to $.10 per share.
(5) In October 1995, the Company issued and sold a total of 3,500,000 shares
of its Series B Preferred Stock at a purchase price of $0.50 per share for an
aggregate consideration of $1,750,000 to thirty-four investors. In connection
with the financing, the Company issued warrants to purchase 200,000 shares of
its Common Stock at an exercise price of $1.00 per share to certain of the
participants in the financing.
(6) In March 1996, the Company issued and sold a warrant to purchase 20,000
shares of its Common Stock at an exercise price of $1.00 per share to a
financial institution in connection with a loan and security agreement.
(7) In June 1996, the Company issued and sold to certain of its shareholders
and other investors an aggregate of $932,125 principal amount of convertible
promissory notes (the "Convertible Shareholder Notes") and warrants to
purchase that number of shares of Common Stock of the Company equal to 20% of
the principal amount of the Convertible Shareholder Notes divided by the price
per share of the Company's next equity financing at a price per share equal to
the price per share of the Company's next equity financing (the "Shareholder
Warrants"). The Convertible Shareholder Notes bore an interest rate of 8% per
annum and were convertible into equity of the Company at a price equal to the
price per share of the Company's next equity financing. The participants in
this financing consisted entirely of "accredited investors" as that term is
defined under Regulation D of the Securities Act.
(8) In January 1997, the Company completed a restructuring of the
Convertible Shareholder Notes and Shareholder Warrants. Holders of an
aggregate of $732,125 in principal amount of the Convertible Shareholder Notes
converted their Convertible Shareholder Notes into Common Stock of the Company
at a price per share of $4.55 and exchanged their accompanying Shareholder
Warrants for warrants to purchase an aggregate of 48,272 shares of the
Company's Common Stock at a price of $0.25 per share. Holders of the remaining
$200,000 principal amount of Convertible Shareholder Notes agreed to defer
repayment of the notes until the earlier of the closing of the Offering or
until April 30, 1997 and exchanged their Shareholder Warrants for warrants to
purchase an aggregate of 7,920 shares of Common Stock at an exercise price of
$5.05 per share.
(9) In February, 1997 the Company issued to its Chief Executive Officer a
10% subordinated promissory note with principal amount of $65,000 and warrants
to purchase 11,535 shares of the Company's Common Stock at a price per share
of $3.00 for an aggregate purchase price of $65,000.
(10) In March 1997, the Company issued and sold 17 bridge units ("Bridge
Units") at $50,000 per unit. Each Bridge Unit consisted of a one-year $50,000
promissory note bearing 10% interest and warrants to purchase 25,000 shares of
Common Stock at a purchase price of $3.00 per share. The warrants
automatically convert into Class A Warrants, and the promissory note becomes
due upon the earlier of March 1998 or the closing of the Offering. All of the
purchasers of the Bridge Units were "accredited investors" as that term is
defined in Regulation D of the Securities Act.
II-2
<PAGE>
The sale and exchange of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act or Section 3(a)(9) of the
Securities Act as transactions by an issuer not involving a public offering or
transactions pursuant to the compensatory benefit plans and contracts relating
to compensation as provided under such Rule 701 or as an exchange by the
issuer with its existing security holders where no commission or other
remuneration is paid. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were attached to the share certificates issued in such
transactions. All recipients had adequate access to information about the
Registrant.
ITEM 27. EXHIBITS.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of Registrant, as amended to date.
3.2 Restated Articles of Incorporation of Registrant to become effective
upon the closing of the Offering.
3.3 Bylaws of Registrant, as amended to date.
4.1 Form of Warrant Agreement.
4.2 Form of Underwriter's Unit Purchase Option.
*5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
Employment Agreement dated as of March 1, 1997 between the Company and
10.1 Paul DePond.
Employment Agreement dated as of March 1, 1997 between the Company and
10.2 Gaylan Larson.
Employment Agreement dated as of March 1, 1997 between the Company and
10.3 Gerald Rice.
Employment Agreement dated as of March 1, 1997 between the Company and
*10.4 David Yewell.
10.5 Form of Indemnification Agreement.
10.6 Escrow Agreement by and between Registrant, the American Stock
Transfer & Trust Company and certain security holders of the
Registrant.
10.7 Registrant's 1997 Stock Plan.
*10.8 Lease between Registrant and C.C. Poon.
11.1 Statement Regarding the Computation Per Share Loss (see page II-6).
23.1 Consent of Independent Auditors (see page II-7).
Consent of Wilson Sonsini Goodrich & Rosati, P.C. (to be included as
*23.2 part of Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27 Financial Data Schedule.
</TABLE>
--------
(*)To be filed by amendment.
(b) All schedules are omitted, since the required information is not present
in amounts sufficient to require submission of schedules or because the
information required is included in Registrant's financial statements and
notes thereto.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the provisions described in Item 24, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer of controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
For purposes of determining any liability under the Securities Act, the
Registrant will treat the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declares it effective.
For purposes of determining any liability under the Securities Act, the
Registrant will treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in this
registration statement, and that offering of the securities at that time as
the initial bona fide offering of those securities.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of
the subscription offer, the transactions by the underwriters during the
subscription period, the amount of un-subscribed securities to be purchased by
the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from
those set forth on the cover page of the prospectus, a post-effective
amendment will be filed to set forth the terms of such offering.
II-4
<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 of filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of San Jose, California, on the 6th day of March, 1997.
NOTIFY CORPORATION
By: /s/ Paul DePond
--------------------------------
Paul DePond
President, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Paul F. DePond, Gerald W. Rice and Henry P.
Massey, Jr. and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement, and any and all Registration
Statements to be filed pursuant to Rule 462 under the Securities Act of 1933,
as amended, in connection with or related to the offering contemplated by the
Registration Statement, if any, 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, and
each of them, 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 to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either
of them, or their 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 was signed by the following persons in the capacities
indicated below and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Paul DePond President, Chief Executive Officer and March 6, 1997
- ----------------------------- Chairman (Principal Executive Officer)
Paul DePond
/s/ Gerald Rice Chief Financial Officer (Principal March 6, 1997
- ----------------------------- Financial and Accounting Officer)
Gerald Rice
/s/ Gaylan Larson Vice President, Operations and Director March 6, 1997
- -----------------------------
Gaylan Larson
/s/ Michael Ballard Director March 7, 1997
- -----------------------------
Michael Ballard
/s/ Barry Bellue Director March 7, 1997
- -----------------------------
Barry Bellue
/s/ Michael Smith Director March 7, 1997
- -----------------------------
Michael Smith
</TABLE>
II-5
<PAGE>
EXHIBIT 11.1
NOTIFY CORPORATION
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------------
1995 1996 1995 1996
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss................ $(426,062) $(1,657,219) $(339,204) $(415,969)
=========== ============= ============ ============
Weighted average common
shares outstanding (1). 205,998 218,984 222,134 213,914
Common equivalent shares
from issuances of
warrants and common
stock during the twelve
month period prior to
the Company's proposed
initial public offering
(1).................... 303,566 303,566 303,566 303,566
----------- ------------- ------------ ------------
Shares used in computing
net loss per share..... 509,564 522,550 525,700 517,480
=========== ============= ============ ============
Net loss per share...... $ (.84) $ (3.17) $ (.65) $ (.80)
=========== ============= ============ ============
Convertible preferred
stock issued more than
twelve months prior to
the proposed initial
public offering (1).... 352,542 365,307
============= ============
Pro forma weighted
average shares
outstanding............ 875,092 882,787
============= ============
Pro forma net loss per
share.................. $ (1.89) $ (.47)
============= ============
</TABLE>
- --------
(1) Excludes shares to be placed into escrow according to the "Escrow
Agreement."
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated November 15,
1996, except for Note 7, as to which the date is March 13, 1997 in the
Registration Statement (Form SB-2) and the related Prospectus of Notify
Corporation for the registration of (i) 1,610,000 units consisting of
1,610,000 shares of common stock, 1,610,000 redeemable Class A warrants,
1,610,000 redeemable Class B warrants and the 3,220,000 shares of Common Stock
underlying the Class A and Class B warrants, (ii) the Underwriters' option to
purchase 140,000 Units and the securities underlying the option and (iii)
425,000 redeemable Class A warrants, 425,000 redeemable Class B warrants and
the 850,000 shares of common stock underlying the Class A and Class B
warrants.
ERNST & YOUNG LLP
San Jose, California
March 13, 1997
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of Registrant, as amended to
date.
3.2 Restated Articles of Incorporation of Registrant to
become effective upon the closing of the Offering.
3.3 Bylaws of Registrant, as amended to date.
4.1 Form of Warrant Agreement.
4.2 Form of Underwriter's Unit Purchase Option.
*5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1 Employment Agreement dated as of March 1, 1997 between
the Company and Paul DePond.
10.2 Employment Agreement dated as of March 1, 1997 between
the Company and Gaylan Larson.
10.3 Employment Agreement dated as of March 1, 1997 between
the Company and Gerald Rice.
*10.4 Employment Agreement dated as of March 1, 1997 between
the Company and David Yewell.
10.5 Form of Indemnification Agreement.
10.6 Escrow Agreement by and between Registrant, the
American Stock Transfer & Trust Company and certain
security holders of the Registrant.
10.7 Registrant's 1997 Stock Plan.
*10.8 Lease between Registrant and C.C. Poon.
11.1 Statement Regarding the Computation Per Share Loss (see
page II-6).
23.1 Consent of Independent Auditors (see page II-7).
*23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (to
be included as part of Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27 Financial Data Schedule
</TABLE>
- --------
(*)To be filed by amendment.
<PAGE>
EXHIBIT 1.1
1,400,000 Units
NOTIFY CORPORATION
UNDERWRITING AGREEMENT
----------------------
D. H. Blair Investment Banking Corp. ____________, 1997
44 Wall Street
New York, New York 10005
NOTIFY CORPORATION, a California corporation (the "Company"), proposes
to issue and sell to you, as underwriter (the "Underwriter"), pursuant to this
Underwriting Agreement (the "Agreement"), an aggregate of 1,400,000 Units, each
Unit being hereinafter referred to as a "Unit" and consisting of (i) one share
of Common Stock, par value $.001 per share, ("Shares"), (ii) one redeemable
class A warrant ("Class A Warrants") to purchase one share of Common Stock and
redeemable class B warrant ("Class B Warrants") at a price of $6.50 from
_______, 1997 to_______, 2002 and (iii) one Class B Warrant to purchase one
share of Common Stock 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 210,000 additional Units. Unless
the context otherwise indicates, the term "Units" shall include the 210,000
additional Units referred to above.
The aggregate of 1,400,000 Units to be sold by the Company, together
with all or any part of the 210,000 Units which the Underwriters have the option
to purchase, and the Shares and the Warrants comprising such Units, are herein
called the "Units." The 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
Underwriters have 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 the Underwriter, as follows:
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, the Underwriter that:
(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
<PAGE>
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission under the Act and one or more amendments to such registration
statement may have been so filed. After the execution of this Agreement, the
Company will file with the Commission either (i) if such registration statement,
as it may have been amended, has been declared by the Commission to be effective
under the Act, either (A) if the Company relies on Rule 434 under the Act, a
Term Sheet (as hereinafter defined) relating to the Units that shall identify
the Preliminary Prospectus (as hereinafter defined) that it supplements
containing such information as is required or permitted by Rules 434, 430A and
424(b) under the Act or (B) if the Company does not rely on Rule 434 under the
Act a prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by Rule
430A under the Act or permitted by Rule 424(b) under the Act and in the case of
either clause (i)(A) or (i)(B) of this sentence, as have been provided to and
approved by the Underwriter prior to the execution of this Agreement, or (ii) if
such registration statement, as it may have been amended, has not been declared
by the Commission to be effective under the Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Underwriter prior to the
execution of this Agreement.
As used in this Agreement, the term "Registration Statement" means
such registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and including
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means (A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Units that is first filed pursuant to Rule 424(b)(7) under
the Act, together with the Preliminary Prospectus identified therein that such
Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act or (C) if the Company does not rely on Rule 434 under the Act and
if no prospectus is required to be filed pursuant to said Rule 424(b), such term
means the prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be; and the term "Term Sheet" means
any term sheet that satisfies the requirements of Rule 434 under the Act. Any
reference to the "date" of a Prospectus that includes a Term Sheet shall mean
the date of such Term Sheet.
(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
-2-
<PAGE>
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 headings "Risk Factors - 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" and "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 December 31, 1996 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued and are
fully paid and non-assessable; except as set forth in the Prospectus, no
options, warrants, or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company have been granted or entered into by the
Company; and the capital stock conforms to all statements relating thereto
contained in the Registration Statement and Prospectus.
(e) The Units and the Shares are duly authorized, and when
issued and delivered pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. Neither the filing of the Registration
Statement nor the offering or sale of the Units as contemplated in this
Agreement gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common Stock,
except as described in the Registration Statement.
The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid 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
-3-
<PAGE>
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 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
-4-
<PAGE>
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) Ernst & Young 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 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
-5-
<PAGE>
in any material adverse change in the condition (financial or other), business
prospects, net worth, or properties of the Company, nor are there any actions,
suits or proceedings related to environmental matters or related to
discrimination on the basis of age, sex, religion or race; and no labor disputes
involving the employees of the Company exist or are imminent which might be
expected to adversely affect the conduct of the business, property or operations
or the financial condition or results of operations of the Company.
(m) Except as disclosed in the Prospectus, the Company has
filed all necessary federal, state and foreign income and franchise tax returns
and has paid all taxes shown as due thereon; and there is no tax deficiency
which has been or to the knowledge of the Company might be asserted against the
Company.
(n) The Company has sufficient licenses, permits and other
governmental authorizations currently required for the conduct of its business
or the ownership of its properties as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, service marks, trade-
names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of such business and had not received any
notice of conflict with the asserted rights of others in respect thereof. To
the best knowledge of the Company, none of the activities or business of the
Company are in violation of, or cause the Company to violate, any law, rule,
regulation or order of the United States, any state, county or locality, or of
any agency or body of the United States or of any state, county or locality, the
violation of which would have a material adverse impact upon the condition
(financial or otherwise), business, property, prospective results of operations,
or net worth of the Company.
(o) The Company has not, directly or indirectly, at any time
(i) made any contributions to any candidate for political office, or failed to
disclose fully any such contribution in violation of law or (ii) made any
payment to any state, federal or foreign governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or
other taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Units to the Underwriter hereunder
will have been fully paid or provided for by the Company and all laws imposing
such taxes will have been fully complied with.
(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
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<PAGE>
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 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 the
Underwriter agrees to buy from the Company at $_______ per Unit, at the place
and time hereinafter specified, 1,400,000 (the "First Units").
Delivery of the First Units against payment therefor shall take
place at the offices of D. H. Blair Investment Banking Corp., 44 Wall Street,
New York, NY 10005(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
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<PAGE>
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 210,000 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 30 days after the effective date of the Registration Statement
upon notice by the Underwriter to the Company advising as to the amount of
Option Units as to which the option is being exercised, the names and
denominations in which the certificates for such Option Units are to be
registered and the time and date when such certificates are to be delivered.
Such time and date shall be determined by the Underwriter but shall not be
earlier than four nor later than ten full business days after the exercise of
said option, nor in any event prior to the First Closing Date, and such time and
date is referred to herein as the "Option Closing Date." Delivery of the Option
Units against payment therefor shall take place at the offices of D. H. Blair
Investment Banking Corp., 44 Wall Street, New York, NY 10005. The Option
granted hereunder may be exercised only to cover overallotments in the sale by
the Underwriters of First Units referred to in subsection (a) above. In the
event the Company declares or pays a dividend or distribution on its Common
Stock, whether in the form of cash, shares of Common Stock or any other
consideration, prior to the Option Closing Date, such dividend or distribution
shall also be paid on the Option Units on the Option Closing Date.
(c) The Company will make the certificates for the securities
comprising the Units to be purchased by the Underwriters hereunder available to
you for checking at least two full business days prior to the First Closing Date
or the Option Closing Date (which are collectively referred to herein as the
"Closing Dates"). The certificates shall be in such names and denominations as
you may request, at least two full business days prior to the Closing Dates.
Time shall be of the essence and delivery at the time and place specified in
this Agreement is a further condition to the obligations of 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 the Underwriter, 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 D. H. Blair Investment Banking
Corp., 44 Wall Street,, 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.
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<PAGE>
It is understood that the Underwriter proposes to offer the Units to
be purchased hereunder to the public upon the terms and conditions set forth in
the Registration Statement, after the Registration Statement becomes effective.
3. Covenants of the Company. The Company covenants and agrees with
------------------------
the Underwriter that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective as promptly as possible. If required,
the Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. Upon notification from the Commission that the Registration Statement has
become effective, the Company will so advise you and will not at any time,
whether before or after the effective date, file the Prospectus, Term Sheet or
any amendment to the Registration Statement or supplement to the Prospectus of
which you shall not previously have been advised and furnished with a copy or to
which you or your counsel shall have objected in writing or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to the
later of (A) the completion by the Underwriter of the distribution of the Units
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement shall have become or been declared effective)
and (B) 25 days after the date on which the Registration Statement shall have
become or been declared effective, the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus which, in your opinion, may be necessary or
advisable in connection with the distribution of the Units.
As soon as the Company is advised thereof, the Company will
advise you, and confirm the advice in writing, of the receipt of any comments of
the Commission, of the effectiveness of any post-effective amendment to the
Registration Statement, of the filing of any supplement to the Prospectus or any
amended Prospectus, of any request made by the Commission for amendment of the
Registration Statement or for supplementing of the Prospectus or for additional
information with respect thereto, of the issuance by the Commission or any state
or regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Units for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its 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
several Underwriters the use thereof is required to comply with the applicable
provisions of the Act and the Rules and Regulations. In case of the happening,
at any time within such period as a Prospectus is required under the Act to be
delivered in connection with sales by an underwriter or dealer of any event of
which the Company has knowledge and
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<PAGE>
which materially affects the Company or the securities of the Company, or which
in the opinion of counsel for the Company or counsel for the Underwriter should
be set forth in an amendment of the Registration Statement or a supplement to
the Prospectus in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Units or in case it shall be necessary to amend
or supplement the Prospectus to comply with law or with the Rules and
Regulations, the Company will notify you promptly and forthwith prepare and
furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as you may reasonably request, in
order that the Prospectus, as so amended or supplemented, will not contain any
untrue statement of a material fact or omit to state any material facts
necessary in order to make the statements in the Prospectus, in the light of the
circumstances under which they are made, not misleading. The preparation and
furnishing of any such amendment or supplement to the Registration Statement or
amended Prospectus or supplement to be attached to the Prospectus shall be
without expense to the Underwriter, except that in case the Underwriter is
required, in connection with the sale of the Units, to deliver a Prospectus nine
months or more after the effective date of the Registration Statement, the
Company will upon request of and at the expense of the Underwriter, amend or
supplement the Registration Statement and Prospectus and furnish the Underwriter
with reasonable quantities of prospectuses complying with Section 10(a)(3) of
the Act.
The Company will comply with the Act, the Rules and Regulations
and the Securities Exchange Act of 1934 and the rules and regulations thereunder
in connection with the offering and issuance of the Units.
(b) The Company will use its best efforts to qualify to
register the Units for sale under the securities or "blue sky" laws of such
jurisdictions as the Underwriter may designate and will make such applications
and furnish such information as may be required for that purpose and to comply
with such laws, provided the Company shall not be required to qualify as a
foreign corporation or a dealer in securities or to execute a general consent of
service of process in any jurisdiction in any action other than one arising out
of the offering or sale of the Units. The Company will, from time to time,
prepare and file such statements and reports as are or may be required to
continue such qualification in effect for so long a period as the Underwriters
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 the Underwriter, to obtain a listing on the
Pacific Stock Exchange and to obtain and keep current a listing in the Standard
& Poors or Moody's Industrial OTC Manual.
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<PAGE>
(e) For so long as the Company is a reporting company under
either Section 12(g) or 15(d) of the Securities Exchange Act of 1934, the
Company, at its expense, will furnish to its stockholders an annual report
(including financial statements audited by independent public accountants), in
reasonable detail and at its expense, will furnish to you during the period
ending five (5) years from the date hereof, (i) as soon as practicable after the
end of each fiscal year, a balance sheet of the Company and any of its
subsidiaries as at the end of such fiscal year, together with statements of
income, surplus and cash flow of the Company and any subsidiaries for such
fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal quarters of each
fiscal year, consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iv) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission or any securities exchange or
automated quotation system on which any class of securities of the Company is
listed; and (v) such other information as you may from time to time reasonably
request.
(f) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e) above will
be on a consolidated basis to the extent the accounts of the Company and its
subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
(g) The Company will deliver to 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 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
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<PAGE>
consecutive months beginning after the effective date of the Registration
Statement, which shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of
the Units for the purposes set forth under "Use of Proceeds" in the Prospectus,
and will file such reports with the Commission with respect to the sale of the
Units and the application of the proceeds therefrom as may be required pursuant
to Rule 463 under the Act.
(j) The Company will, promptly upon your request, prepare and
file with the Commission any amendments or supplements to the Registration
Statement, Preliminary Prospectus or Prospectus and take any other action, which
in the reasonable opinion of Bachner, Tally, Polevoy & Misher LLP, counsel to
the Underwriter, may be reasonably necessary or advisable in connection with the
distribution of the Units, and will use its best efforts to cause the same to
become effective as promptly as possible.
(k) The Company will reserve and keep available that maximum
number of its authorized but unissued securities which are issuable upon
exercise of the Unit Purchase Option outstanding from time to time.
(l) For a period of 13 months from the First Closing Date, no
officer, director or 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 persons 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 officer, director and beneficial
holder of five percent or more of the Company's outstanding Common Stock (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
Underwriter's 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
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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 which are exercisable sooner than 13 months from the First
Closing Date; or (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).
(q) Paul DePond shall be President of the Company on the Closing
Dates. The Company has obtained key person life insurance on the life of Mr.
DePond in an amount of not less than $2 million 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 or prior to the Closing Date, 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 each 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 Representative 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 D. H. Blair Investment Banking Corp. a fee of 5% of
the aggregate exercise price of the Warrants, of which a portion may be
reallowed to the dealer who solicited the exercise (which may also be D. H.
Blair Investment Banking Corp.) 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 Regulation M promulgated under the Securities Exchange
Act of
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<PAGE>
1934, as amended. The Company agrees not to solicit the exercise of any Warrants
other than through D. H. Blair Investment Banking Corp. and will not authorize
any other dealer to engage in such solicitation without the prior written
consent of D. H. Blair Investment Banking Corp.
(u) For a period of five 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.
(y) On or prior to the Effective Date, the Company shall have
obtained officers and directors insurance and property and casualty insurance in
appropriate amounts and shall maintain such insurance coverage for a period of
five years from the Effective Date.
4. Conditions of Underwriter's Obligation. The obligation of the
--------------------------------------
Underwriter to purchase and pay for the Units is 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
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constitutes a part thereof and any amendment or supplement thereto shall
have been filed with the Commission in the manner and within the time
period required by Rule 434 and 424(b) under the Act; on or prior to the
Closing Dates no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
or a similar purpose shall have been instituted or shall be pending or, to
your knowledge or to the knowledge of the Company, shall be contemplated by
the Commission; any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Bachner, Tally, Polevoy & Misher 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 Wilson Sonsini Goodrich &
Rosati Professional Corporation, 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 California, 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 each other
jurisdiction in which the ownership or leasing of its properties or
conduct of its business requires such qualification, except where the
failure to be so licensed or qualified would not have a material
adverse effect on the business or condition (financial or otherwise) of
the Company;
(ii) to the best knowledge of such counsel, (a) the Company
has obtained, or is in the process of obtaining, all licenses, permits
and other governmental authorizations necessary to the conduct of its
business as described in the Prospectus, (b) such licenses, permits and
other governmental authorizations obtained are in full force and
effect, and (c) the Company is in all material respects complying
therewith;
(iii) the authorized capitalization of the Company as of
December 31, 1996 is as set forth under "Capitalization" in the
Prospectus; all shares of the Company's outstanding stock requiring
authorization for issuance by the Company's board of directors have
been duly authorized, validly issued, are fully paid and non-assessable
and conform to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock of the Company have not been issued
in violation of the preemptive rights of any shareholder and the
shareholders of the Company do not have any preemptive rights or other
rights to subscribe for or to purchase, nor are there any restrictions
upon the voting or transfer of any of the Stock; the Common Stock, the
Warrants, the Unit Purchase Option and the Warrant Agreement conform
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to the respective descriptions thereof contained in the Prospectus; the
Shares have been, and the shares of Common Stock to be issued upon
exercise of the Warrants and the Unit Purchase Option, upon issuance in
accordance with the terms of such Warrants, the Warrant Agreement and
Unit Purchase Option have been duly authorized and, when issued and
delivered, will be 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;
(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
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<PAGE>
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 known to such counsel to which the Company is a party or by
which it or any of its properties may be bound or in violation of any
material order, rule, regulation, writ, injunction, or decree of any
government, governmental instrumentality or court, domestic or foreign;
(viii) the Registration Statement has become effective
under the Act, and to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have been instituted or are
pending before, or threatened by, the Commission; the Registration
Statement and the Prospectus (except for the financial statements and
other financial data contained therein, or omitted therefrom, as to
which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Rules and Regulations;
(ix) such counsel has participated in the preparation of the
Registration Statement and the Prospectus and nothing has come to the
attention of such counsel to cause such counsel to have reason to
believe that the Registration Statement or any amendment thereto at the
time it became effective or as of the Closing Dates contained any
untrue statement of a material fact required to be stated therein or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus or any supplement thereto contains any untrue statement of a
material fact or omits to state a material fact necessary in order to
make statements therein, in light of the
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<PAGE>
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) such counsel has received notification that the
Units, the Common Stock and the Warrants have been duly authorized for
quotation on the Nasdaq SmallCap Market; and
(xiv) to such counsel's knowledge, there are no business
relationships or related-party transactions of the nature described in
Item 404 of Regulation S-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.
(c) At the First Closing Date, you shall have received the
opinion, addressed to the Underwriter, dated as of the First Closing Date,
of
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_______, patent counsel to the Company, in form and substance satisfactory
to counsel for the Underwriter, to the effect that:
(i) we have carefully read and analyzed the material set
forth in the Prospectus under "Risk Factors - Risks of Limited
Protection for the Company's Intellectual Property and Proprietary
Rights and Infringement of Third of Parties Rights" and "Business-
Proprietary Rights" and, in our opinion, such material accurately and
adequately discloses the Company's patent position and did not, at the
time the Registration Statement became effective and does not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(ii) the patent applications referred to in the Prospectus
were properly filed and the Patent and Trademark Office has not taken
substantive action with respect thereto; there has not been any public
use or sale by the Company prior to the filing of any of the patents or
patent applications which would affect their validity and, in such
counsel's opinion, the claims contained in the applications represent
valid patent claims; such counsel has no reason to believe that patents
will not issue with respect thereto or that the claims contained in the
applications conflict with the rights of others;
(iii) There are no facts which would preclude the
Company from having clear title to the United States patents and United
States patent applications owned by the Company;
(iv) Neither the Company nor its subsidiaries has received
any notice challenging the validity or enforceability of any of the
United States patents owned by, or licensed to, the Company;
(v) The Company does not lack or will not be unable to
obtain any rights or licenses to use United States patents necessary to
their respective businesses as currently conducted;
(vi) There are no material legal or governmental proceedings
pending or threatened with respect to any patents of the Company; and
(vii) there have been no claims asserted against the
Company relating to the potential infringement of or conflict with any
patents, trademarks, copyrights or trade secrets of others; such
counsel has conducted a search for existing United States patents with
claims that might cover the Company's technology and, in such counsel's
opinion, the Company's technology does not infringe any United States
patents.
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<PAGE>
Such opinions 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 California upon opinions of counsel
satisfactory to you, in which case the opinion shall state that they have no
reason to believe that you and they are not entitled to so rely.
(d) All corporate proceedings and other legal matters relating to
this Agreement, the Registration Statement, the Prospectus and other related
matters shall be satisfactory to or approved by Bachner, Tally, Polevoy & Misher
LLP, counsel to the 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.
(e) You shall have received a letter prior to the effective date of
the Registration Statement and again on and as of the First Closing Date from
Ernst & Young LLP, independent public accountants for the Company, substantially
in the form approved by you, and including estimates of the Company's revenues
and results of operations for the period ending at the end of the month
immediately preceding the effective date and results of the comparable period
during the prior fiscal year.
(f) At the Closing Dates, (i) the representations and warranties of
the Company contained in this Agreement shall be true and correct with the same
effect as if made on and as of the Closing Dates and the Company shall have
performed all of its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to such Closing Date; (ii) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and shall in all material respects
conform to the requirements thereof, and neither the Registration Statement nor
the Prospectus nor any amendment or supplement thereto shall contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading; (iii)
there shall have been, since the respective dates as of which information is
given, no material adverse change, or any development involving a prospective
material adverse change, in the business, properties, condition (financial or
otherwise), results of operations, capital stock, long-term or short-term debt
or general affairs of the Company from that set forth in the Registration
Statement and the Prospectus, except changes which the Registration Statement
and Prospectus indicate might occur after the effective date of the Registration
Statement, and the Company shall not have incurred any material liabilities or
entered into any agreement not in the ordinary course of business other than as
referred to in the Registration Statement and Prospectus; and (iv) except as set
forth in the Prospectus, no action, suit or proceeding at law or in equity shall
be pending or threatened against the Company which would
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<PAGE>
be required to be set forth in the Registration Statement, and no proceedings
shall be pending or threatened against the Company before or by any commission,
board or administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would materially and adversely affect
the business, property, condition (financial or otherwise), results of
operations or general affairs of the Company, and (v) you shall have received,
at the First Closing Date, a certificate signed by each of the Chairman of the
Board or the President and the principal financial or accounting officer of the
Company, dated as of the First Closing Date, evidencing compliance with the
provisions of this subsection (f).
(g) Upon exercise of the option provided for in Section 2(b) hereof,
the obligation of the Underwriter to purchase and pay for the Option Units
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending, or, to your knowledge or the knowledge of
the Company, shall be contemplated by the Commission, and any reasonable
request on the part of the Commission for additional information shall have
been complied with to the satisfaction of Bachner, Tally, Polevoy & Misher
LLP, counsel to the Underwriter.
(ii) At the Option Closing Date there shall have been delivered
to you the signed opinion of Wilson Sonsini Goodrich & Rosati Professional
Corporation, counsel for the Company, dated as of the Option Closing Date,
in form and substance satisfactory to Bachner, Tally, Polevoy & Misher LLP,
counsel to the Underwriter, which opinion shall be substantially the same
in scope and substance as the opinion furnished to you at the First Closing
Date pursuant to Section 4(b) hereof, except that such opinion, where
appropriate, shall cover the Option Units.
(iii) At the Option Closing Date there shall have been
delivered to you a certificate of the Chairman of the Board or the
President and the principal financial or accounting officer of the Company,
dated the Option Closing Date, in form and substance satisfactory to
Bachner, Tally, Polevoy & Misher LLP, counsel to the Underwriter,
substantially the same in scope and substance as the certificate furnished
to you at the First Closing Date pursuant to Section 4(f) hereof.
(iv) At the Option Closing Date there shall have been delivered
to you a letter in form and substance satisfactory to you from Ernst &
Young LLP, dated the Option Closing Date and addressed to the Underwriter
confirming the information in their letter referred to in Section 4(e)
hereof and stating that nothing has come to their attention during the
period from the ending date of their review referred to in said
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<PAGE>
letter to a date not more than five business days prior to the Option
Closing Date, which would require any change in said letter if it were
required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing
Date in connection with the sale and issuance of the Option Units shall be
satisfactory in form and substance to you, and you and Bachner, Tally,
Polevoy & Misher LLP, counsel to the Underwriter, shall have been furnished
with all such documents, certificates, and opinions as you may request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties or statements of the
Company or its compliance with any of the covenants or conditions contained
herein.
(h) No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Units, 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.
(i) The estimated revenues and earnings of the Company for the six
months ending March 31, 1997 will be greater than those of the six months ended
March 31, 1996.
(j) If any of the conditions herein provided for in this Section
shall not have been fulfilled as of the date indicated, this Agreement and all
obligations of the Underwriter under this Agreement may be cancelled at, or at
any time prior to, each Closing Date by the Underwriter. Any such cancellation
shall be without liability of the Underwriter to the Company.
5. Conditions of the Obligations of the Company. The obligation of
--------------------------------------------
the Company to sell and deliver the Units is subject to the condition that at
the Closing Dates, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued under the Act or any proceedings
therefor initiated or threatened by the Commission.
If the condition to the obligations of the Company provided for in
this Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Units on exercise of the
option provided for in Section 2(b) hereof shall be affected.
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<PAGE>
6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which the Underwriter or such controlling person may become subject,
under the Act or otherwise, and will reimburse, as incurred, the Underwriter and
such controlling persons for any legal or other expenses reasonably incurred in
connection with investigating, defending against or appearing as a third party
witness in connection with any losses, claims, damages or liabilities, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
(B) any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by the
Company filed in any state or other jurisdiction in order to qualify any or all
of the Units under the securities laws thereof (any such application, document
or information being hereinafter called a "Blue Sky Application"), or arise out
of or are based upon the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment
or supplement thereto, or in any Blue Sky Application, a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) The Underwriter will indemnify and hold harmless the
Company, each of its directors, each nominee (if any) for director named in the
Prospectus, each of its officers who have signed the Registration Statement, and
each person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
director, nominee, officer or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
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supplement thereto (i) in reliance upon and in conformity with written
information furnished to the Company by the Underwriter 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 the Underwriter within the meaning of the Act, the fees
and expenses of such counsel shall be at the expense of the indemnifying party
if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the Underwriter or such
controlling person and the indemnifying party and in the judgment of the
Underwriter, it is advisable for the Underwriter or controlling persons to be
represented by separate counsel (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of the Underwriter
or such controlling person, it being understood, however, that the indemnifying
party shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of more than one separate firm of attorneys for the Underwriter and
controlling persons, which firm shall be designated in writing by you). No
settlement of any action against an indemnified party shall be made without the
consent of the indemnifying party, which shall not be unreasonably withheld in
light of all factors of importance to such indemnifying party.
7. Contribution.
------------
In order to provide for just and equitable contribution under
the Act in any case in which (i) the Underwriter makes claim for indemnification
pursuant to Section 6 hereof but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
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indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of the Underwriter,
then the Company and each person who controls the Company, in the aggregate, and
the Underwriter shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either such case (after
contribution from others) in such proportions that the Underwriter is
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount per
Unit appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon, and the Company shall be responsible for the remaining
portion, provided, however, that 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
Underwriters 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. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. As used in this
paragraph, the word "Company" includes any officer, director, or person who
controls the Company within the meaning of Section 15 of the Act. If the full
amount of the contribution specified in this paragraph is not permitted by law,
then the Underwriter and each person who controls the Underwriter shall be
entitled to contribution from the Company, its officers, directors and
controlling persons to the full extent permitted by law. The foregoing
contribution agreement shall in no way affect the contribution liabilities of
any persons having liability under Section 11 of the Act other than the Company
and the Underwriter. No contribution shall be requested with regard to the
settlement of any matter from any party who did not consent to the settlement;
provided, however, that such consent shall not be unreasonably withheld in light
of all factors of importance to such party.
8. Costs and Expenses.
------------------
(a) Whether or not this Agreement becomes effective or the
sale of the Units to the Underwriters is consummated, the Company will pay all
costs and expenses incident to the performance of this Agreement by the Company
including, but not limited to, the fees and expenses of counsel to the Company
(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
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required by the NASD relating to the offering of the Units contemplated hereby;
all expenses, including reasonable fees and disbursements of counsel to the
Underwriters, in connection with the qualification of the Units under the state
securities or blue sky laws which the Representative shall designate; the cost
of printing and furnishing to the several Underwriters copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Agreement Among Underwriters, Selling Agreement, Underwriters'
Questionnaire, Underwriters' Power of Attorney and the Blue Sky Memorandum, any
fees relating to the listing of the Units, 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 Underwriters' request. The Company shall pay
any and all taxes (including any transfer, franchise, capital stock or other tax
imposed by any jurisdiction) on sales to the Underwriters hereunder. The Company
will also pay all costs and expenses incident to the furnishing of any amended
Prospectus or of any supplement to be attached to the Prospectus as called for
in Section 3(a) of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at the
First Closing Date pay to the Underwriter a non-accountable expense allowance of
$_______ of which $_______ 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,
out-of-pocket expenses of the Underwriter, including legal fees up to a maximum
of $_______. In the event the transactions contemplated hereby are not
consummated by reason of any action of the Company or because of a breach by the
Company of any covenant, representation or warranty herein, the Company shall be
liable for the accountable, out-of-pocket expenses of the Underwriter, including
legal fees, up to a maximum of $_______.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from the Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless the Underwriter against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Underwriter or person may
become subject insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the claim of any
person (other than an employee of the party claiming indemnity) or entity that
he or it is entitled to a finder's fee in connection with the proposed offering
by reason of such person's or entity's influence or prior contact with the
indemnifying party.
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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 Underwriters for the resale of the Units agreed to be purchased hereunder by
reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree; (ii)
trading in securities on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq SmallCap Market or the Nasdaq National Market having been
suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the date
hereof); (iv) a banking moratorium having been declared by federal or New York
state authorities; (v) an outbreak of international hostilities or other
national or international calamity or crisis or change in economic or political
conditions having occurred; (vi) a pending or threatened legal or governmental
proceeding or action relating generally to the Company's business, or a
notification having been received by the Company of the threat of any such
proceeding or action, which could materially adversely affect the Company; (vii)
except as contemplated by the Prospectus, the Company is merged or consolidated
into or acquired by another company or group or there exists a binding legal
commitment for the foregoing or any other material change of ownership or
control occurs; (viii) the passage by the Congress of the United States or by
any state legislative body or federal or state agency or other authority of any
act, rule or regulation, measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is reasonably believed likely by
the Representative to have a material impact on the business, financial
condition or financial statements of the Company or the market for the
securities offered pursuant to the Prospectus; (ix) any adverse change in the
financial or securities markets beyond normal market fluctuations having
occurred since the date of this Agreement, or (x) any material adverse change
having occurred, since the respective dates of which information is given in the
Registration Statement and Prospectus, in the earnings, business prospects or
general condition of the Company, financial or otherwise, whether or not arising
in the ordinary course of business.
-27-
<PAGE>
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 11 or in Section 10, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
11. Unit Purchase Option.
--------------------
At or before the First Closing Date, the Company will sell to the
Underwriter or its designees, for a consideration of $140, 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 140,000 Units. In the event of conflict in the terms of this
Agreement and the Unit Purchase Option, the language of the Unit Purchase Option
shall control.
12. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
The respective indemnities, agreements, representations,
warranties and other statements of the Company or its Principal Stockholders,
where appropriate, and the undertakings set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriter, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Units and the termination of this Agreement.
13. Notice.
------
Any communications specifically required hereunder to be in
writing, if sent to the Underwriters, will be mailed, delivered and confirmed to
them at D.H. Blair Investment Banking Corp., 44 Wall Street, New York, New York
10005, with a copy sent to Bachner, Tally, Polevoy & Misher LLP, 380 Madison
Avenue, New York, New York 10017, or if sent to the Company, will be mailed,
delivered and confirmed to it at 1054 S. DeAnza Blvd., San Jose, California
95129.
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.
-28-
<PAGE>
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,
NOTIFY CORPORATION
By:
____________________________________
Paul F. DePond, President
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
D.H. BLAIR INVESTMENT BANKING CORP.
By:
____________________________________
Martin A. Bell, Vice Chairman and
General Counsel
We hereby agree to be bound by the provisions of Sections 3(l) and (n)
and 13 hereof.
______________________________
______________________________
______________________________
-29-
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT OF THE
ARTICLES OF INCORPORATION OF
NOTIFY CORPORATION
Paul DePond and Gerald W. Rice hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of Notify Corporation, a California corporation (the "Corporation"
or the "Company").
TWO: That the first paragraph of Article III of the Company's Amended and
Restated Articles of Incorporation is amended to read in its entirety as
follows:
The Corporation is authorized to issue two classes of stock to be
designated respectively "Preferred Stock" and "Common Stock." The total number
of shares of Preferred Stock authorized is 4,500,000. The total number of
shares of Common Stock authorized is 12,100,000. All the shares of Common Stock
and Preferred Stock shall be without par value. Upon the filing of this
Certificate of Amendment, each share of Common Stock shall be reverse split and
converted into .19802 shares of Common Stock. In lieu of any fractional shares
to which the holder of Common Stock would otherwise be entitled, the corporation
shall pay cash equal to such fraction multiplied by the fair market value of one
share of Common Stock (post-reverse-split) as determined by the Board of
Directors of the Corporation.
THREE: That Article III Section 4(b) of the Company's Amended and Restated
Articles of Incorporation is amended to read in its entirety as follows:
Each share of Preferred Stock shall automatically be converted into
shares of Common Stock at the Conversion Price then in effect upon the closing
of a firm commit ment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended. In the
event of the automatic conversion of the Preferred Stock as set forth herein,
the person(s) entitled to receive the Common Stock issuable upon such conversion
shall not be deemed to have converted such shares until immediately prior to the
closing of such sale of securities.
FOUR: The foregoing amendments of the articles of incorporation have been
duly approved by the Board of Directors of this Company.
FIVE: The foregoing amendments of the articles of incorporation have been
duly approved by the required vote of shareholders in accordance with Section
902 and 903 of the California Corporations Code. The total number of
outstanding shares of each class entitled to vote with respect to the foregoing
amendment was 4,636,881 shares of Common Stock, 1,000,000 shares of Series A
Preferred Stock, and 3,500,000 shares of Series B Preferred Stock. The number
of shares voting in favor of the amendment equaled or exceeded the vote
required. The percentage vote required was (i) a majority of the outstanding
shares of Common Stock, (ii) a majority of the outstand-
<PAGE>
ing shares of Series A Preferred Stock and Series B Preferred Stock, voting
together as a class, and (iii) a majority of all outstanding stock voting
together as a single class.
<PAGE>
We further declare under penalty of perjury that the matters set forth in
the foregoing certificate are true and correct of our own knowledge.
Executed at San Jose, California, on February 18, 1997.
Paul De Pond, President
Gerald W. Rice, Secretary
AMENDED AND RESTATED
--------------------
ARTICLES OF INCORPORATION
-------------------------
OF
--
PRACTICAL TELEPHONY CORPORATION
-------------------------------
The undersigned, Paul F. DePond and Gaylan I. Larson, hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Practical Telephony Corporation, a California corporation (the
"Corporation").
2. The Articles of Incorporation of the Corporation are amended and
restated in their entirety as in Appendix I attached hereto.
3. The amendments and restatements herein set forth have been duly
approved by the Board of Directors of the Corporation.
4. The amendments herein set forth have been duly approved by the
required vote of the shareholders of the Corporation in accordance with Sections
902 and 903 of the California Corporations Code. The total number of shares of
Common Stock entitled to vote is 4,286,458, the total number of shares of Series
A Preferred Stock entitled to vote is 1,000,000 and the total number of shares
of Series B Preferred Stock entitled to vote is 2,314,000. The number of
shares voting in favor of the amendments equalled or exceeded the vote required.
The percentage vote required was more than 50% of the outstanding shares of
Common Stock, 50% of the outstanding shares of Common Stock, Series A Preferred
Stock and
<PAGE>
Series B Preferred Stock voting together as a single class, 50% of the
outstanding shares of Series A Preferred Stock and 50% of the outstanding shares
of Series B Preferred Stock.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Executed on October __, 1995.
------------------------------
Paul DePond, President
------------------------------
Gaylan I. Larson, Secretary
<PAGE>
APPENDIX I
ARTICLE I
NAME
----
The name of the Corporation is Practical Telephony Corporation.
ARTICLE II
PURPOSES
--------
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be orga nized under the General
Corporation Law of California other than the banking business, the trust company
business or the practice of a profession permitted to be incorporated by the
California Corporations Code.
ARTICLE III
STOCK
-----
The Corporation is authorized to issue two classes of stock to be
designated respectively "Preferred Stock" and "Common Stock." The total number
of shares of Preferred Stock authorized is 4,500,000. The total number of
shares of Common Stock authorized is 12,100,000. All the shares of Common Stock
and Preferred Stock shall be without par value.
Subject to the rights of any outstanding series of Preferred Stock, the
Preferred Stock authorized by these Articles of Incorporation may be issued from
time to time in one or more series. The Board of Directors is authorized to
determine or alter any or all of the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of the
Preferred Stock, and to fix or alter the number of shares comprising any such
series and the designation thereof, or any of them, to increase or decrease (but
not below the number of shares of any such series then outstanding) the number
of shares of any such series subsequent to the issue of shares of that series,
and to provide for rights and terms of redemption or conversion of the shares of
any such series.
1. Designation. The first series of Preferred Stock shall consist of
-----------
1,000,000 shares of Series A Preferred Stock ("Series A Preferred"). The second
series of Preferred
<PAGE>
Stock shall consist of 3,500,000 shares of Series B Preferred Stock ("Series B
Preferred"). The relative rights, preferences, restrictions and other matters
relating to the Series A Preferred and Series B Preferred are as follows:
2. Dividends.
---------
(a) The holders of the Series B Preferred shall be entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available therefor, dividends at an annual rate of $0.05 per share of Series B
Preferred Stock (the "Series B Dividend Rate"), payable in preference and
priority to any payment of any dividend on Series A Preferred Stock or Common
Stock of the Corporation. Such dividends shall not be cumulative and no right
to such dividends shall accrue to holders of Series B Preferred Stock unless
declared by the Board of Directors.
(b) After the holders of Series B Preferred have received in any
fiscal year dividends at the Series B Dividend Rate, the holders of the Series A
Preferred shall be entitled to receive, when and as declared by the Board of
Directors, out of funds legally available therefor, dividends at an annual rate
of $0.01 per share of Series A Preferred Stock (the "Series A Dividend Rate"),
payable in preference and priority to any payment of any dividend on Common
Stock of the Corporation. Such dividends shall not be cumulative and no right
to such dividends shall accrue to holders of Series A Preferred Stock unless
declared by the Board of Directors.
(c) If any cash dividend or other distribution is declared by the
Corporation after payment of the preferential dividends set forth above, the
holders of Preferred Stock shall participate with holders of Common Stock in the
payment of dividends in excess of the dividends to be first paid on Preferred
Stock ratably on an as-if-converted to Common Stock basis.
(d) Definition of Distribution. For purposes of this Section 2, unless
--------------------------
the context otherwise requires, a "distribution" shall mean the transfer of cash
or other property without consideration whether by way of dividend or
otherwise, payable other than in Common Stock, or the purchase or redemption of
shares of the Corporation (other than repurchases at cost of Common Stock
issued to or held by employees, officers, directors or consultants of the
Corporation or its subsidiaries upon termination of their employment or services
pursuant to agreements providing for the right of said repurchase) for cash or
property.
<PAGE>
(e) Certain Repurchases not Distributions. As authorized by Section
-------------------------------------
402.5(c) of the California Corporations Code, the provisions of Sections 502 and
503 of the California Corporations Code shall not apply with respect to
repurchases by the Corporation at cost of shares of Common Stock issued to or
held by employees, officers, directors of consultants of the Corporation or its
subsidiaries upon termination of their employment or services pursuant to
agreements providing for the right of said repurchase.
3. Liquidation Preference.
----------------------
In the event of any liquidation, dissolution, or winding up of the
Corporation, either voluntary or involuntary, distributions to the
shareholders of the Corporation shall be made in the following manner:
(a) The holders of Series B Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any assets or surplus
funds of the Corporation to the holders of Series A Preferred or the Common
Stock by reason of their ownership of such stock, the amount of $0.50 per share
for each share of Series B Preferred then held by them, plus any declared but
unpaid dividends on the Series B Preferred, adjusted for any stock splits,
combinations, consolidations, or stock distributions or dividends with respect
to such shares. If the assets and funds available for distribution among the
holders of the Series B Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amount, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Series B Preferred.
(b) After payment has been made to the holders of the Series B
Preferred Stock of the full amount to which they shall be entitled, the holders
of Series A Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any assets or surplus funds of the Corporation
to the holders of the Common Stock by reason of their ownership of such stock,
the amount of $0.10 per share for each share of Series A Preferred then held by
them, plus any declared but unpaid dividends on the Series A Preferred, adjusted
for any stock splits, combinations, consolidations, or stock distributions or
dividends with respect to such shares. If the assets and funds available for
distribution among the holders of the Series A Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amount, then the entire assets and funds of the Corporation legally
available for distribution
<PAGE>
shall be distributed ratably among the holders of the Series A Preferred.
(c) Distribution of Remaining Assets. After payment has been made to
--------------------------------
the holders of the Preferred Stock of the full amounts to which they shall be
entitled as set forth in Section 3(a) and Section 3(b) above, then the entire
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed ratably among the holders of the
Common Stock and Preferred Stock based upon the number of shares of Common Stock
then held by each holder of Common Stock or issuable upon conversion of the
shares of Preferred Stock held by a holder of Preferred Stock.
(d) Deemed Liquidations. For purposes of this Section 3, a merger or
-------------------
consolidation of the Corporation with or into any other corporation or
corporations, or the merger of any other corporation or corporations into the
Corporation, in which consolidation or merger the shareholders of the
Corporation receive distributions in cash or securities of another corporation
or corporations as a result of such consolidation or merger and in which the
shareholders of the Corporation do not own at least 50% of the voting power of
the surviving corporation after the consolidation or merger, or a sale of all or
substantially all of the assets of the Corporation, shall be treated as a
liquidation, dissolution or winding up of the Corporation.
4. Conversion.
----------
The holders of Preferred Stock shall have conversion rights as follows:
(the "Conversion Rights"):
(a) Right to Convert. Each share of Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share and on or prior to the day prior to such Redemption Date
as may have been fixed in any applicable Redemption Notice, at the office of the
Corporation or any transfer agent for the Preferred Stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined in the case
of the Series A Preferred by dividing $0.10 by the Series A Conversion Price, as
determined as hereinafter provided and in the case of the Series B Preferred by
dividing $0.50 by the Series B Conversion Price, as determined as hereinafter
provided. The price at which shares of Common Stock shall be deliverable upon
conversion of Preferred Stock shall initially be in the case of the Series A
Preferred, $0.10 per share of Common Stock (the "Series A Conversion Price") and
in the case of the Series B Preferred, $0.50 per share of Common Stock (the
<PAGE>
"Series B Conversion Price"). The term "Conversion Price", as used herein, shall
refer to the respective conversion prices for each series of Preferred Stock.
Such initial Conversion Prices shall be subject to adjustment as provided
herein.
(b) Automatic Conversion.
--------------------
(i) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock at the Conversion Price then in effect
upon the closing of a firm commitment underwritten public offering pursuant to
an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Corporation to the public at a price per share (before deduction of underwriter
discounts and commissions and offering expenses) of not less than $3.00
(appropriately adjusted for any stock splits, combinations, consolidations, or
stock distributions or dividends with respect to such shares) and an aggregate
offering price to the public of not less than $7,500,000. In the event of the
automatic conversion of the Preferred Stock as set forth herein, the person(s)
entitled to receive the Common Stock issuable upon such conversion shall not be
deemed to have converted such shares until immediately prior to the closing of
such sale of securities.
(c) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then current fair value of the
Common Stock, as determined in good faith by the Board of Directors. Before any
holder of Preferred Stock shall be entitled to convert the same into full shares
of Common Stock and to receive certificates therefor, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Preferred Stock, and shall give
written notice to the Corporation at such office that he elects to convert the
same; provided, however, that in the event of an automatic conversion pursuant
to Section 4(b), the outstanding shares of Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent, and provided further that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificates evidencing
such shares of Preferred Stock are either delivered to the Corporation or its
transfer agent as provided above, or the holder
<PAGE>
notifies the Corporation or its transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall, as soon as practicable
after such delivery, or such agreement and indemnification in the case or a lost
certificate, issue and deliver at such office to such holder of Preferred Stock,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid and a check payable to the holder in
the amount of any cash amounts payable as the result of a conversion into
fractional shares of Common Stock. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Preferred Stock to be converted, or in the case of automatic
conversion on the date of closing of the offering or the vote, as the case may
be, and the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date.
(d) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this Section 4(d), the
-------------------
following definitions shall apply:
(A) "Options" shall mean rights, options or warrants to
-------
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(B) "Original Issue Date" shall mean the date on which the
-------------------
first share of Series A Preferred or Series B Preferred, as the case may be, was
issued.
(C) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, Preferred Stock (other than the Series A Preferred Stock or Series
B Preferred Stock) or other securities convertible into or exchangeable for
Common Stock.
(D) "Additional Shares of Common" shall mean all shares of
---------------------------
Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be issued) by
the Corporation after the Original Issue Date, other than the following:
(1) shares of Common Stock issued or issuable upon
conversion of shares of Series A or Series B Preferred Stock;
<PAGE>
(2) shares of Common Stock issued or issuable up to
1,500,000 shares of Common Stock issued after September 1, 1995 to officers,
directors or employees of, or consultants to, the Corporation pursuant to a
stock grant, stock option plan or stock purchase plan or other stock incentive
agreement or arrangement approved by the Board of Directors;
(3) shares of Common Stock issued or issuable as a
dividend or distribution on Preferred Stock;
(4) shares of Common Stock issued or issuable in
connection with any transaction for which adjustment is made pursuant to
Section 4(e) hereof; and
(5) any shares of Common Stock issued, issuable or,
pursuant to Section 4(d)(iii), deemed to be issued, if the holders of a majority
the Series B Preferred agree in writing that such shares shall not constitute
Additional Shares of Common.
(ii) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
Conversion Price of a particular share of Preferred Stock shall be made in
respect of the issuance of Additional Shares of Common unless the consideration
per share for an Additional Share of Common issued or deemed to be issued by the
Corporation is less than the Conversion Price in effect on the date of, and
immediately prior to, such issue for such share of Preferred Stock.
(iii) Options and Convertible Securities. In the event the
----------------------------------
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number, including
provisions designed to protect against dilution) of Common Stock issuable upon
the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities,
shall be deemed to be Additional Shares of Common issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common shall
not be deemed to have been issued unless the consideration per share (determined
pursuant to Section 4(d)(v) hereof) of such Additional Shares of Common would be
less than the Conversion Price in effect on the date of, and immediately prior
to, such issue, or such record date, as the case may be, and provided further
that in any such case in which Additional Shares of Common are deemed to be
issued:
<PAGE>
(A) no further adjustment in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by their terms
provide, with the passage of time, by reason of antidilution provisions or
otherwise, for any change in the consideration payable to the Corporation, or
change in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such change
becoming effective, be recomputed to reflect an appropriate increase or decrease
reflecting such change insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities; provided, however,
that no such adjustment of the Conversion Price shall affect Common Stock
previously issued upon conversion of the Preferred Stock; and
(C) upon the expiration or cancellation of any such Options
or any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon such expiration or
cancellation, be recomputed as if
(1) in the case of Convertible Securities or Options for
Common Stock, the only Additional Shares of Common issued were shares of Common
Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(2) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the consideration
received
<PAGE>
by the Corporation for the Additional Shares of Common deemed to have been then
issued was the consideration actually received the Corporation for the issue of
all such Options, whether or not exercised, plus the consideration deemed to
have been received by the Corporation upon the issue of the Convertible
Securities with respect to which such Options were actually exercised;
(D) no readjustment pursuant to clause (B) or (C) above shall
have the effect of increasing the Conversion Price to an amount which exceeds
the lower of the Conversion Price on the original adjustment date, or the
Conversion Price that would have resulted from any issuance of Additional Shares
of Common between the original adjustment date and such readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common. In the event this Corporation shall issue Additional Shares of
- ----------------
Common (including Additional Shares of Common deemed to be issued pursuant to
Section 4(d)(iii)) without consideration or for a consideration per share less
than the Series A Conversion Price or less than the Series B Conversion Price in
effect on the date of and immediately prior to such issue, then and in such
event, each applicable Conversion Price shall be reduced, concurrently with such
issue, to a price (calculated to the nearest cent) determined by multiplying
such Conversion Price by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the total number of Additional Shares of Common so issued
would purchase at such Conversion Price; and the denominator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issue plus the number of such Additional Shares of Common so issued; and
provided further that, for the purposes of this Section 4(d)(iv), all shares of
Common Stock issuable upon conversion of outstanding Options and Convertible
Securities (including the Series A Preferred and Series B Preferred) shall be
deemed to be outstanding, and immediately after any Additional Shares of Common
are deemed issued pursuant to Section 4(d)(iii), such Additional Shares of
Common shall be deemed to be outstanding.
(v) Determination of Consideration. For purposes of this Section
------------------------------
4(d), the consideration received by the Corporation for the issue of any
Additional Shares of Common shall be computed as follows:
<PAGE>
(A) Cash and Property. Such consideration shall:
-----------------
(1) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(2) insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of such issue, as determined
in good faith by the Board of Directors of the Corporation; and
(3) in the event Additional Shares of Common are issued
together with other shares or securities or other assets of the Corporation for
consideration which covers both, be the proportion of such consideration so
received, computed as provided in clauses (1) and (2) above, as determined in
good faith by the Board of Directors of the Corporation.
(B) Options and Convertible Securities.
----------------------------------
(1) The consideration per share received by the
Corporation for Additional Shares of Common deemed to have been issued pursuant
to Section 4(d)(iii) shall be the sum of (x) the total amount, if any, received
or receivable by the Corporation as consideration for the issue of such Options
or Convertible Securities plus (y) the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration, including any provisions designed to protect against dilution)
payable to the Corporation upon the exercise of such Options or the conversion
or exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities.
(2) The number of Additional Shares of Common deemed to
have been issued pursuant to Section 4(d)(iii) shall be the maximum number of
shares of Common Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such number, including any provisions designed to protect against dilution)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(e) Adjustments to Conversion Price for Stock Splits, Distributions
---------------------------------------------------------------
and Recapitalizations.
- ---------------------
<PAGE>
(i) Adjustments for Subdivision, Combination or Consolidation of
------------------------------------------------------------
Common Stock. In the event the outstanding shares of Common Stock shall be
- ------------
subdivided (by stock split, by stock dividend or otherwise), into a greater
number of shares of Common Stock, the Series A Conversion Price and Series B
Conversion Price in effect immediately prior to such subdivision shall,
concurrently with the effectiveness of such subdivision, be proportionately
decreased. In the event the outstanding shares of Common Stock shall be combined
or consolidated (by reclassification or otherwise) into a lesser number of
shares of Common Stock, the Series A Conversion Price and Series B Conversion
Price in effect immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
(ii) Adjustments for Other Distributions. In the event the
-----------------------------------
Corporation at any time or from time to time makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 4 or as
otherwise provided in Section 2, then, and in each such event, provision shall
be made so that the holders of Series A Preferred and Series B Preferred shall
receive upon conversion thereof, in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the Corporation which
they would have received had their Series A Preferred and Series B Preferred
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
date of conversion, retained such securities receivable by them as aforesaid
during such period, subject to all other adjustments called for during such
period under this Section 4 with respect to the rights of the holders of the
Series A Preferred and Series B Preferred.
(iii) Adjustments for Reclassification, Exchange, and
-----------------------------------------------
Substitution. If the Common Stock issuable upon conversion of the Series A
- ------------
Preferred and Series B Preferred shall be changed into the same or a different
number of shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the Series A Conversion Price then in
effect for the Series A Preferred and the Series B Conversion Price then in
effect for the Series B Preferred shall, concurrently with the effectiveness of
such reorganization or reclassification, be proportionately adjusted such that
the Series A Preferred and Series B Preferred shall be convertible into, in lieu
of the number of shares of Common Stock which the holders would otherwise have
been entitled to receive, a number of shares of such other class or classes of
stock equivalent to the number of
<PAGE>
shares of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series A Preferred and Series B Preferred immediately
before that change.
(f) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Series A Conversion Price and Series B
Preferred pursuant to this Section 4, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of Series A Preferred and Series B Preferred a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series A Preferred
or Series B Preferred, furnish or cause to be furnished to such holder a like
certificate setting forth such adjustments and readjustments, the applicable
Conversion Price at the time in effect and the number of shares of Common Stock
and the amount, if any, of other property which at the time would be received
upon the conversion of such Series A Preferred or Series B Preferred.
(g) Notices of Record Date. In the event that this Corporation shall
----------------------
propose at any time:
(i) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other corporation,
or sell, lease or convey all or substantially all its property or business, or
to liquidate, dissolve or wind up;
then, in connection with each such event, this Corporation shall send to the
holders of the Preferred Stock:
(A) at least 20 days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote in respect of the matters
referred to in (iii) and (iv) above; and
<PAGE>
(B) in the case of the matters referred to in (iii) and (iv)
above, at least 20 days' prior written notice of the date when the same shall
take place (and specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of Preferred Stock at the address for each
such holder as shown on the books of this Corporation.
5. Voting Rights.
-------------
(a) General Except as otherwise required by law or by Section 6
-------
hereof, the holders of Preferred Stock and the holders of Common Stock shall be
entitled to notice of any shareholders meeting and to vote together as a class
upon any matter submitted to shareholders for a vote. In any matter submitted
to shareholders for a vote, each share of Common Stock issued and outstanding
shall have one vote and each holder of shares of Series A Preferred or Series B
Preferred shall be entitled to the number of votes equal to the number of shares
of Common Stock into which such holder's Series A Preferred and/or Series B
Preferred is convertible, as adjusted from time to time pursuant to Section 4
hereof, at the record date for determination of the shareholders entitled to
vote on such matters, or, if no such record date is established, at the date
such vote is taken or any written consent of shareholders is solicited.
(b) Board of Directors. The authorized number of directors shall be
------------------
set forth in the Bylaws of the Corporation and may be increased or decreased by
an amendment to such Bylaws in accordance with their provisions. As long as
there are at least 1,000,000 shares of Series B Preferred Stock issued and
outstanding, of the authorized number of members of the Corporation's Board of
Directors the holders of Series B Preferred Stock voting separately as a class
shall be entitled to elect one (1) director (and to fill any vacancies with
respect thereto), with each holder of Series B Preferred Stock entitled to the
number of votes determined as provided in Section 5(a) above.
Subject to Section 302 and Section 303 of the California Corporations Code, any
director who shall have been elected by a specified group of shareholders may be
removed during the aforesaid term of office, either for or without cause, by and
only by, the affirmative vote of the holders of a majority of the shares of such
specified group, given at a special meeting of such shareholders duly called or
by an action by written consent for that purpose.
<PAGE>
6. Covenants.
---------
(a) Series A Preferred. In addition to any other rights provided
by law, so long as at least 15,000 shares of Series A Preferred shall be
outstanding, this Corporation shall not, without first obtaining the affirmative
vote or written consent of the holders of a majority of the outstanding shares
of the Series A Preferred:
(i) amend or repeal any provision of, or add any provision
to, this Corporation's Articles of Incorporation or bylaws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series A Preferred or Preferred
Stock in a material and adverse manner;
(ii) authorize, issue, or obligate itself to issue shares of
any class of stock or options to purchase or securities convertible into or
exchangeable for shares of any class of stock having any preference or priority
as to dividends, redemption rights, liquidation preferences, conversion rights,
voting rights or rights otherwise superior to or on a parity with any such
preference or priority of the Series A Preferred;
(iii) reclassify any Common Stock into shares having any
preference or priority as to dividends, redemption rights, liquidation
preferences, conversion rights, voting rights or rights otherwise superior to or
on a parity with any such preference or priority of the Series A Preferred; or
(iv) increase the authorized number of shares of Series A
Preferred or Preferred Stock.
(b) Series B Preferred. In addition to any other rights provided
------------------
by law, so long as at least 100,000 shares of Series B Preferred shall be
outstanding, this Corporation shall not, without first obtaining the affirmative
vote or written consent of the holders of a majority of the outstanding shares
of the Series B Preferred:
(i) amend or repeal any provision of, or add any provision
to, this Corporation's Articles of Incorporation or bylaws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series B Preferred or Preferred
Stock in a material and adverse manner;
(ii) authorize, issue, or obligate itself to issue shares of
any class of stock or options to purchase or securities convertible into or
exchangeable for shares of any class of stock having any preference or priority
as to
<PAGE>
dividends, redemption rights, liquidation preferences, conversion rights, voting
rights or rights otherwise superior to or on a parity with any such preference
or priority of the Series B Preferred;
(iii) reclassify any Common Stock into shares having any
preference or priority as to dividends, redemption rights, liquidation
preferences, conversion rights, voting rights or rights otherwise superior to or
on a parity with any such preference or priority of the Series B Preferred; or
(iv) increase the authorized number of shares of Series B
Preferred or Preferred Stock.
7. Residual Rights. All rights accruing to the outstanding shares of
---------------
this Corporation not expressly provided for to the contrary herein shall be
vested in the Common Stock.
ARTICLE IV
LIMITATION OF LIABILITY
-----------------------
1. Limitation of Directors' Liability. The liability of the
----------------------------------
directors of this Corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
2. Indemnification of Corporate Agents. This Corporation is
-----------------------------------
authorized to indemnify the directors and officers of this Corporation to the
fullest extent permissible under California law.
3. Repeal or Modification. Any repeal or modification of this
----------------------
Article IV or any provision hereof shall not adversely affect any right of
indemnification or limitation of liability of any agent of this Corporation
relating to acts or omissions occurring prior to such repeal or modification.
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
NOTIFY CORPORATION
Paul F. DePond and Gerald W. Rice certify that:
1. They are the President and Secretary, respectively, of Notify
Corporation, a California corporation.
2. The Articles of Incorporation of the Corporation are amended and
restated in full to read as follows:
I
The name of the Corporation is Notify Corporation.
II
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III
The total number of shares of stock the corporation shall have authority to
issue is Twenty Million (20,000,000), which shall be divided into two classes as
follows: (a) Fifteen Million (15,000,000) shares of Common Stock, $0.001 par
value per share (hereinafter "Common Stock"), and (b) Five Million (5,000,000)
shares of Preferred Stock, $0.001 par value per share (hereinafter "Preferred
Stock").
The undesignated Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is authorized to determine the designation
of any series, to fix the number of shares of any series of the undesignated
Preferred Stock, and to determine or alter the rights, preferences, privileges,
and restrictions granted to or imposed upon any wholly unissued series of
<PAGE>
undesignated Preferred Stock, and, within the limits and restrictions stated in
any resolution or resolutions of the Board of Directors originally fixing the
number of shares constituting any series of the undesignated Preferred Stock, to
increase or decrease (but not below the number of shares of any such series
then outstanding) the number of shares of any such series subsequent to the
issue of shares of that series. In case the number of shares of any series
shall be so decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
IV
This Article IV shall become effective only upon that date when the
Corporation becomes a listed corporation within the meaning of Section 301.5 of
the California Corporations Code, which provisions refer to a corporation whose
shares are traded on the New York Stock Exchange, American Stock Exchange or
Nasdaq National Market.
There shall be no right with respect to shares of stock of the corporation
to cumulate votes in the election of directors.
V
Pursuant to Section 603(a) of the California Corporations Code, the right
of shareholders of the Corporation to act by written consent is hereby
eliminated.
VI
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law. The
Corporation is also authorized, to the fullest extent permissible under
California law, to indemnify its agents (as defined in Section 317 of the
California Corporations Code), whether by bylaw, agreement or otherwise, for
breach of duty to the Corporation and its shareholders in excess of that
expressly permitted by Section 317 and to advance defense expenses to its agents
in connection with such matters as they are incurred. If, after the effective
date of this Article, California law is amended in a manner which permits a
corporation to limit the monetary or other liability of its directors or to
authorize indemnification of, or advancement of such defense expenses to, its
directors or other persons, in any such case to a greater extent than is
permitted on such effective date, the references in this Article to "California
law" shall to that extent be deemed to refer to California law as so amended.
3. The foregoing Amended and Restated Articles of Incorporation have
been duly approved by the Board of Directors.
-2-
<PAGE>
4. The foregoing Amended and Restated Articles of Incorporation have been
duly approved by the required vote of shareholders in accordance with Section
902 of the Corporations Code. The total number of outstanding shares of each
class entitled to vote with respect to the foregoing amendment was 4,636,881
shares of Common Stock, 1,000,000 shares of Series A Preferred Stock, and
3,500,000 shares of Series B Preferred Stock. The number of shares voting in
favor of the amendment equaled or exceeded the vote required. The percentage
vote required was (i) a majority of the outstanding shares of Common Stock, (ii)
a majority of the outstanding shares of Series A Preferred Stock and Series B
Preferred Stock, voting together as a class and (iii) a majority of all
outstanding stock voting together as a single class.
-3-
<PAGE>
We further declare under penalty of perjury that the matters set forth in
the foregoing certificate are true and correct of our own knowledge.
Executed at San Jose, California, this 20th day of January, 1997.
------------------------------
Paul F. DePond
President
------------------------------
Gerald W. Rice
Secretary
-4-
<PAGE>
EXHIBIT 3.3
B Y L A W S
-----------
O F
---
P R A C T I C A L T E L E P H O N Y C O R P O R A T I O N
-------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - PRINCIPAL OFFICE............................................ 1
Section 1 Location of Principal Office...................... 1
Section 2 Other Business Offices............................ 1
ARTICLE II - MEETINGS OF SHAREHOLDERS................................... 1
Section 1 Location of Meetings.............................. 1
Section 2 Annual Meetings................................... 1
Section 3 Special Meetings.................................. 3
Section 4 Quorum............................................ 3
Section 5 Adjournment....................................... 3
Section 6 Record Date; Cumulative Voting.................... 4
Section 7 Waiver of Notice.................................. 5
Section 8 Action by Written Consent......................... 5
Section 9 Proxies........................................... 6
Section 10 Inspectors of Election............................ 7
ARTICLE III - BOARD OF DIRECTORS........................................ 8
Section 1 Powers of the Board............................... 8
Section 2 Number of Directors............................... 10
Section 3 Election of Directors............................. 10
Section 4 Vacancies; Resignation............................ 10
ARTICLE IV - MEETINGS OF DIRECTORS...................................... 11
Section 1 Location of Meetings.............................. 11
Section 2 Regular Meetings.................................. 11
Section 3 Special Meetings; Notice.......................... 12
Section 4 Quorum............................................ 12
Section 5 Waiver of Notice.................................. 13
Section 6 Action by Written Consent......................... 13
Section 7 Committees........................................ 13
Section 8 Compensation of Directors......................... 13
Section 9 Indemnification................................... 13
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
ARTICLE V - OFFICERS.................................................... 14
Section 1 Designation of Officers............................ 14
Section 2 Chairman of the Board.............................. 14
Section 3 President.......................................... 14
Section 4 Vice Presidents.................................... 15
Section 5 Secretary.......................................... 15
Section 6 Assistant Secretary................................ 15
Section 7 Treasurer.......................................... 15
Section 8 Assistant Treasurer................................ 16
ARTICLE VI - MISCELLANEOUS.............................................. 16
Section 1 Record Date........................................ 16
Section 2 Inspection of Corporate Records.................... 17
Section 3 Certificates for Shares............................ 17
Section 4 Representation of Shares of Other
Corporations....................................... 17
Section 5 Inspection of Bylaws............................... 18
Section 6 Construction and Definitions....................... 18
ARTICLE VII - AMENDMENTS................................................ 18
Section 1 Amendment by Shareholders.......................... 18
Section 2 Amendment by Board of Directors.................... 18
ARTICLE VIII - ANNUAL AND OTHER REPORTS................................. 19
Section 1 Annual Report to Shareholders...................... 19
Section 2 Request for Financial Statements................... 19
-ii-
<PAGE>
B Y - L A W S
-------------
O F
---
P R A C T I C A L T E L E P H O N Y C O R P O R A T I O N
-------------------------------------------------------------
ARTICLE I
---------
Principal Office
----------------
Section 1. Location of Principal Office. The principal executive
--------- ----------------------------
office for the transaction of the business of the corporation shall be
established and maintained by the board of directors at any place within or
without the State of California. The board of directors may change said
principal executive office from one location to another.
Section 2. Other Business Offices. The board of directors may at any
--------- ----------------------
time establish other business offices within or without the State of California.
ARTICLE II
----------
Meetings of Shareholders
------------------------
Section 1. Location of Meetings. All meetings of the shareholders
--------- --------------------
shall be held at any place within or without the State of California which may
be designated either by the board of directors or by the written consent of all
shareholders entitled to vote thereat and not present at the meeting given
either before or after the meeting and filed with the secretary of the
corporation. In the absence of any such designation, shareholders' meetings
shall be held at the principal executive office of the corporation.
Section 2. Annual Meetings. The annual meeting of the shareholders of
--------- ---------------
the corporation shall be held on such date and at such time as shall be
determined by the board of directors, not more than fifteen (15) months after
the date of the preceding annual meeting or, in the case of the first annual
meeting, not more than fifteen (15) months after the organization of the
corporation. At such meeting, directors shall be elected and any other proper
business may be transacted which is within the powers of the shareholders.
Written notice of each annual meeting shall be given to each shareholder
entitled to vote either personally or by first-class mail or other means of
written communications (which includes, without limitation and wherever used in
these bylaws, telegraphic and facsimile communication), charges prepaid,
addressed to each shareholder at the address appearing on the books of the
corporation, or given by the shareholder to the corporation for the purpose of
notice. If any notice or report addressed to the shareholder at the address of
such shareholder appearing on the
<PAGE>
books of the corporation is returned to the corporation by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver the notice or report to the shareholder at such address, all
future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available for the shareholder upon written
demand of the shareholder at the principal executive office of the corporation
for a period of one year from the date of the giving of the notice or report to
all other shareholders. If no address of a shareholder appears on the books of
the corporation or is given by the shareholder to the corporation, notice is
duly given to him if sent by mail or other means of written communication
addressed to the place where the principal executive office of the corporation
is located or if published at least once in a newspaper of general circulation
in the county in which said principal executive office is located.
All such notices shall be given to each shareholder entitled thereto
not less than ten (10) days nor more than sixty (60) days before each annual
meeting. Any such notice shall be deemed to have been given at the time when
delivered personally or deposited in the United States mail or delivered to a
common carrier for transmission to the recipient or actually transmitted by the
person giving the notice by electronic means to the recipient or sent by other
means of written communication. An affidavit of mailing of any such notice in
accordance with the foregoing provisions, executed by the secretary, assistant
secretary or transfer agent of the corporation shall be prima facie evidence of
the giving of the notice.
Such notices shall state:
(a) The place, date and hour of the meeting;
(b) Those matters which the board, at the time of the mailing of the
notice, intends to present for action by the shareholders;
(c) If directors are to be elected, the names of nominees in tended
at the time of the notice to be presented by management for election;
(d) The general nature of a proposal, if any, to take action with
respect to the approval of (i) a contract or other transaction with an
interested director, (ii) an amendment of the articles of incorporation,
(iii) a reorganization of the corporation as defined in section 181 of the
California General Corporation Law (the "General Corporation Law"), (iv) a
voluntary dissolution of the corporation, or (v) a distribution in
dissolution other than in accordance with the rights of outstanding
preferred shares, if any; and
-2-
<PAGE>
(e) Such other matters, if any, as may properly come before the
meeting or may be expressly required by statute.
Section 3. Special Meetings. Special meetings of the shareholders for
--------- ----------------
the purpose of taking any action permitted to be taken by the shareholders under
the General Corporation Law and the articles of incorporation of this
corporation, may be called by the chairman of the board or the president, or by
the board of directors, or by the holders of shares entitled to cast not less
than ten percent (10%) of the votes at the meeting. Upon request in writing
that a special meeting of shareholders be called for any proper purpose,
directed to the chairman of the board, president, vice president or secretary by
any person (other than the board of directors) entitled to call a special
meeting of shareholders, the officer forthwith shall cause notice to be given to
the shareholders entitled to vote that a meeting will be held at a time
requested by the person or persons calling the meeting, not less than thirty-
five (35) nor more than sixty (60) days after receipt of the request. Except in
special cases where other express provision is made by statute, notice of such
special meetings shall be given in the same manner and contain the same
statements as required for annual meetings of shareholders. Notice of any
special meeting shall also specify the general nature of the business to be
transacted, and no other business may be transacted at such meeting.
Section 4. Quorum. The presence in person or by proxy of the holders
--------- ------
of a majority of the shares entitled to vote at any meeting shall constitute a
quorum for the transaction of business. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 5. Adjournment. Any shareholders' meeting, annual or special,
--------- -----------
whether or not a quorum is present, may be adjourned from time to time by the
vote of a majority of the shares, the holders of which are either present in
person or represented by proxy thereat, but in the absence of a quorum no other
business may be transacted at such meeting, except as provided in Section 4
above.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken, except that notice of the adjourned meeting shall be given
to each shareholder of record entitled to vote at an adjourned meeting in
accordance with Section 2 of this Article II if a new record date for the
adjourned meeting is fixed by the board of directors, or if the adjournment is
for more than forty-five (45) days from the date set for
-3-
<PAGE>
the original meeting. At any adjourned meeting the corporation may transact any
business which might have been transacted at the original meeting.
Section 6. Record Date; Cumulative Voting. Unless a record date for
--------- ------------------------------
voting purposes be fixed as provided in Section 1 of Article VI of these bylaws,
then, subject to the provisions of sections 702 to 704, inclusive, of the
General Corporation Law, only persons in whose names shares entitled to vote
stand on the stock records of the corporation at the close of business on the
business day next preceding the day on which notice of the meeting is given or
if such notice is waived, at the close of business on the business day next
preceding the day on which the meeting of shareholders is held (except that the
record date for shareholders entitled to give consent to corporate action
without a meeting shall be determined in accordance with Section 8 of this
Article II) shall be entitled to receive notice of and to vote at such meeting,
and such day shall be the record date for such meeting. Any shareholder entitled
to vote on any matter may vote part of the shares in favor of the proposal and
refrain from voting the remaining shares or vote them against the proposal
(other than elections of directors), but if the shareholder fails to specify the
number of shares such shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares such shareholder is entitled to vote. Such vote may be viva voce or
by ballot; provided, however, that all elections for directors must be by ballot
upon demand made by a shareholder at any election and before the voting begins.
The affirmative vote of a majority of the shares represented and voting at a
duly held meeting at which a quorum is present (which shares voting
affirmatively shall constitute at least a majority of the required quorum) shall
be the act of the shareholders except as may otherwise be provided by (i)
Section 4 of this Article II, (ii) the cumulative voting provisions for the
election of directors as stated in this section below, and (iii) the General
Corporation Law or the articles of incorporation of this corporation (including
without limitation the provision that, upon the vote of the holder or holders of
shares representing fifty percent or more of the voting power of this
corporation, this corporation may elect voluntarily to wind up and dissolve).
Subject to the requirements of the next sentence, every shareholder entitled to
vote at any election for directors may cumulate his votes and give one candidate
a number of votes equal to the number of directors to be elected multiplied by
the number of votes to which his shares are normally entitled, or distribute his
votes on the same principle among as many candidates as he shall think fit. No
shareholder shall be entitled to cumulate votes unless such candidate or
candidates' names have been placed in nomination prior to the voting and the
shareholder has given notice at the meeting prior to the voting of the
shareholder's intention to cumulate his votes. If any one shareholder has given
such notice, all shareholders may cumulate their votes for candidates in
nomination. The candidates receiving the highest number of votes of shares
entitled to be voted for them, up to the number of directors to be elected,
shall be elected.
-4-
<PAGE>
Section 7. Waiver of Notice. The transactions of any meeting of
--------- ----------------
shareholders, either annual or special, however called and noticed, and wherever
held, shall be as valid as though they had been determined at a meeting duly
held after regular call and notice, if a quorum be present either in person or
by proxy, and if, either before or after the meeting, each person entitled to
vote, not present in person or by proxy, signs a written waiver of notice or a
consent to a holding of the meeting, or an approval of the minutes thereof. The
waiver of notice, consent or approval need not specify either the business to be
transacted or the purpose of any regular or special meeting of shareholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in subparagraph (d) of the third paragraph of Section 2
of this Article II, the waiver of notice, consent or approval shall state the
general nature of such proposal. All such waivers, consents or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
Attendance of a person at a meeting shall also constitute a waiver of
notice of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters required to be included in
the notice but not so included if such objection is expressly made at the
meeting.
Section 8. Action by Written Consent. Directors may be elected
--------- -------------------------
without a meeting by a consent in writing, setting forth the action so taken,
signed by all of the persons who would be entitled to vote for the election of
directors; in addition a director may be elected at any time to fill a vacancy
(other than a vacancy created by removal) not filled by the directors by the
written consent of persons holding a majority of the outstanding shares entitled
to vote for the election of directors. Notice of such election shall be given
to nonconsenting shareholders if required by this Section 8.
Any other action which, under any provision of the General Corporation
Law, may be taken at a meeting of the shareholders, may be taken without a
meeting, and without notice except as hereinafter set forth, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. All such consents shall be
filed with the secretary of the corporation and shall be maintained in the
corporate records.
Unless the consents of all shareholders entitled to vote have been
solicited in writing:
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<PAGE>
(a) Notice of any proposed shareholder approval of (i) a contract or
other transaction with an interested director; (ii) indemnification of an
agent of the corporation as authorized by Section 9 of Article IV of these
bylaws; (iii) a reorganization of the corporation as defined in section 181
of the General Corporation Law; or (iv) a distribution in dissolution other
than in accordance with the rights of outstanding preferred shares, if any,
without a meeting by less than unanimous written consent, shall be given at
least ten (10) days before the consummation of the action authorized by such
approval; and
(b) Prompt notice shall be given of the taking of any other corporate
action approved by shareholders without a meeting by less than unanimous
written consent, to those shareholders entitled to vote who have not
consented in writing. Such notices shall be given in the manner provided in
Section 2 of Article II of these bylaws.
Unless, as provided in Section 1 of Article VI of these bylaws, the
board of directors has fixed a record date for the determination of shareholders
entitled to notice of and to give such written consent, the record date for such
determination shall be (a) the day on which the first written consent is given,
when no prior action by the board of directors has been taken, or (b) the close
of business on the day the board of directors adopts the resolution relating to
such action.
Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the secretary of the corporation.
Section 9. Proxies. Every person entitled to vote shares or execute
--------- -------
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or his duly authorized
agent and delivered to the secretary of the corporation. A proxy shall be
deemed executed if the shareholder's name is placed on the proxy (whether by
manual signature, typewriting, telegraphic transmission or otherwise) by the
shareholder or the shareholder's attorney in fact. Any proxy duly executed
which does not state that it is irrevocable shall continue in full force and
effect until (i) a writing stating that the proxy is revoked is delivered to the
secretary of the corporation, (ii) a proxy bearing a later date is executed by
the person who executed the prior proxy and is presented to the meeting, (iii)
as to any meeting, by attendance at such meeting and voting in person by the
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<PAGE>
person executing the proxy or (iv) written notice of the death or incapacity of
the maker of such proxy is received by the corporation before the vote pursuant
thereto is counted; provided that no such proxy shall be valid after the
expiration of eleven (11) months from the date of its execution, unless
otherwise provided in the proxy. The revocability of a proxy which states on its
face that it is irrevocable shall be governed by the provisions of sections
705(e) and (f) of the General Corporation Law.
Section 10. Inspectors of Election. In advance of any meeting of
---------- ----------------------
shareholders, the board of directors may appoint any persons other than
nominees for office as inspectors of election to act at such meeting and any
adjournment thereof. If inspectors of election be not so appointed, the chairman
of any such meeting may, and on the request of any shareholder or his proxy
shall, make such appointment at the meeting. The number of inspectors shall be
either one or three. If appointed at a meeting on the request of one or more
shareholders or proxies, the majority of shares represented in person or by
proxy shall determine whether one or three inspectors are to be appointed. In
case any person appointed as inspector fails to appear or fails or refuses to
act, the vacancy may and on the request of any shareholder or a shareholder's
proxy shall, be filled by appointment by the board of directors in advance of
the meeting, or at the meeting by the chairman of the meeting.
The duties of such inspectors shall be as prescribed by section 707 of
the General Corporation Law and shall include: determining the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining when the polls shall close;
determining the result; and such acts as may be proper to conduct the election
or vote with fairness to all shareholders. In the determination of the validity
and effect of proxies the dates contained on the forms of proxy shall
presumptively determine the order of execution of the proxies, regardless of the
postmark dates on the envelopes in which they are mailed.
The inspectors of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspectors of election is prima
facie evidence of the facts stated therein.
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<PAGE>
ARTICLE III
-----------
Board of Directors
------------------
Section 1. Powers of the Board. Subject to the provisions of the
--------- -------------------
General Corporation Law and any limitations in the articles of incorporation and
these bylaws as to action to be authorized or approved by the shareholders, the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
Without prejudice to such general powers, but subject to the same limitations,
it is hereby expressly declared that the board of directors shall have the
following powers:
First: To conduct, manage and control the affairs and business of the
-----
corporation and to make such rules and regulations therefor, not
inconsistent with law or with the articles of incorporation or with these
bylaws, as they may deem best;
Second: To elect and remove at pleasure the officers, agents and
------
employees of the corporation, prescribe their duties and fix their
compensation;
Third: To authorize the issue of shares of stock of the corporation
-----
from time to time upon such terms as may be lawful, in consideration of
money paid, labor done, services actually rendered to the corporation or for
its benefit or in its formation or reorganization, debts or securities
canceled, and tangible or intangible property actually received, but neither
promissory notes of the purchaser (unless adequately secured by collateral
other than the shares acquired or unless permitted by section 408 of the
General Corporation Law) nor future services shall constitute payment or
part payment for the shares of the corporation;
Fourth: To borrow money and incur indebtedness for the purposes of the
------
corporation and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and securities
therefor;
Fifth: To alter, repeal or amend, from time to time, and at any time,
-----
these bylaws and any and all amendments of the same, and from time to time,
and at any time, to make and adopt such new and addi-
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<PAGE>
tional bylaws as may be necessary and proper, subject to the power of the
shareholders to adopt, amend or repeal such bylaws, or to revoke the
delegation of authority of the directors, as provided by law or by Article
VIII of these bylaws; and
Sixth: By resolution adopted by a majority of the authorized number of
-----
directors, to designate an executive and/or other committees, each
consisting of two or more directors, to serve at the pleasure of the board,
and to prescribe the manner in which proceedings of such committee shall be
conducted. The appointment of members or alternate members (who may replace
any absent member at any meeting of the committee) of a committee requires
the vote of a majority of the authorized number of directors. Any such
committee, to the extent provided in a resolution of the board, shall have
all of the authority of the board, except with respect to:
(i) The approval of any action for which the General
Corporation Law or the articles of incorporation also require shareholder
approval;
(ii) The filling of vacancies on the board or in any committee;
(iii) The fixing of compensation of the directors for serving
on the board or on any committee;
(iv) The adoption, amendment or repeal of bylaws;
(v) The amendment or repeal of any resolution of the board
which by its express terms is not so amendable or repealable;
(vi) Any distribution to the shareholders, except at a rate
or in a periodic amount or within a price range determined by the board;
and
(vii) The appointment of other committees of the board or the
members thereof.
Section 2. Number of Directors. The number of directors of the
--------- -------------------
corporation shall be not less than three (3) nor more than five (5). The exact
number of directors shall be five (5) until changed, within the limits specified
above, by a bylaw
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<PAGE>
amending this Section 3.2, duly adopted by the board of directors or by the
share holders. The indefinite number of directors may be changed, or a definite
number may be fixed without provision for an indefinite number, by a duly
adopted amendment to the articles of incorporation or by an amendment to this
bylaw duly adopted by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote; provided, however, that an amendment
reducing the fixed number or the minimum number of directors to a number less
than five (5) cannot be adopted if the votes cast against its adoption at a
meeting, or the shares not consenting in the case of an action by written
consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the
outstanding shares entitled to vote thereon. No amendment may change the stated
maximum number of authorized directors to a number greater than two (2) times
the stated minimum number of directors minus one (1).
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
Section 3. Election of Directors. The directors shall be elected at
--------- ---------------------
each annual meeting of shareholders, but if any such annual meeting is not held
or the directors are not elected thereat, the directors may be elected at any
special meeting of shareholders held for that purpose. Each director, including
a director elected to fill a vacancy, shall hold office until his successor is
elected, except as otherwise provided by statute.
Section 4. Vacancies; Resignation. A vacancy in the board of
--------- ----------------------
directors shall be deemed to exist in case of the death, resignation or removal
of any director, if the authorized number of directors be increased, or if the
shareholders fail, at any annual or special meeting of shareholders at which any
director or directors are elected, to elect the full authorized number of
directors to be voted for at that meeting. The board of directors may declare
vacant the office of a director who has been declared of unsound mind by an
order of court or has been convicted of a felony.
Vacancies in the board of directors, except for a vacancy created by
the removal of a director, may be filled by a majority of the directors then in
office, whether or not less than a quorum, or by a sole remaining director, and
each director so elected shall hold office until his successor is elected at an
annual or a special meeting of the shareholders. A vacancy in the board of
directors created by the removal of a director may only be filled by the vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute at least
a majority of the required quorum), or by the written consent of the holders of
all of the outstanding shares.
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<PAGE>
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors. Any such election by
written consent other than to fill a vacancy created by removal shall require
the consent of holders of a majority of the outstanding shares entitled to vote.
Any director may resign effective upon giving written notice to the
chairman of the board, the president, the secretary or the board of directors of
the corporation, unless the notice specifies a later time for the effectiveness
of such resignation. If the board of directors accepts the resignation of a
director tendered to take effect at a future time, the board or the shareholders
shall have power to elect a successor to take office when the resignation is to
become effective.
No reduction of the authorized number of the directors shall have the
effect of removing any director prior to the expiration of his term of office.
ARTICLE IV
----------
Meetings of Directors
---------------------
Section 1. Location of Meetings. Regular meetings of the board of
--------- --------------------
directors shall be held at any place within or without the State of California
that has been designated from time to time by the board of directors. In the
absence of such designation, regular meetings shall be held at the principal
executive office of the corporation, except as provided in Section 2. Special
meetings of the board of directors may be held at any place within or without
the State of California which has been designated in the notice of the meeting,
or, if not designated in the notice or if there is no notice, at the principal
executive office of the corporation.
Section 2. Regular Meetings. Immediately following each annual
--------- ----------------
meeting of the shareholders there shall be a regular meeting of the board of
directors of the corporation at the place of said annual meeting or at such
other place as shall have been designated by the board of directors for the
purpose of organization, election of officers and the transaction of other
business. Other regular meetings of the board of directors shall be held
without call on such date and time as may be fixed by the board of directors;
provided, however, that should any such day fall on a legal holiday, then said
meeting shall be held at the same time on the next business day thereafter
ensuing which is not a legal holiday. Notice of regular meetings of the
directors is hereby dispensed with and no notice whatever of any such meeting
need be given, provided that notice of any change in the time or place of
regular meetings shall be given to all of the directors in the same manner as
notice for special meetings of the board of directors.
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<PAGE>
Section 3. Special Meetings; Notice. Special meetings of the board of
--------- ------------------------
directors for any purpose or purposes may be called at any time by the chairman
of the board or president or, if both the chairman of the board and the
president are absent or are unable or refuse to act, by any vice president or by
any two directors. Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director, or sent by first-class
mail or telegram or facsimile transmission, charges prepaid, addressed to him at
his address as it appears upon the records of the corporation or, if it is not
so shown on the records and is not readily ascertainable, at the place at which
the meetings of the directors are regularly held. In case such notice is
mailed, it shall be deposited in the United States mail at least four (4) days
prior to the time of the holding of the meeting. In case such notice is
delivered personally, telephoned, telegraphed or sent by facsimile transmission,
it shall be delivered to the director or transmitted to the director at least
forty-eight (48) hours prior to the time of the holding of the meeting. Any
notice given personally or by telephone, telegraph or facsimile may be
communicated to either the director or to a person at the office of the director
whom the person giving the notice has reason to believe will promptly
communicate it to the director. Such deposit in the mail, delivery to a common
carrier, transmission by electronic means or delivery, personally or by
telephone, as above provided, shall be due, legal and personal notice to such
directors. The notice need not specify the place of the meeting if the meeting
is to be held at the principal executive office of the corporation, and need
not specify the purpose of the meeting.
Section 4. Quorum. Presence of a majority of the authorized number of
--------- ------
directors at a meeting of the board of directors constitutes a quorum for the
transaction of business, except as hereinafter provided. Members of the board
may participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
sections 310, 311 and 317 of the General Corporation Law. A meeting at which a
quorum is initially present may continue to transact business not withstanding
the withdrawal of directors, provided that any action taken is approved by at
least a majority of the required quorum for such meeting. A majority of the
directors present, whether or not a quorum is present, may adjourn any meeting
to another time and place. If the meeting is adjourned for more than twenty-four
(24) hours, notice of any adjournment to another time or place (other than
adjournments until the time fixed for the next regular meeting of the board of
directors, as to which no notice is required) shall be given prior to the time
of the adjourned meeting to the directors who were not present at the time of
the adjournment.
Section 5. Waiver of Notice. Notice of a meeting need not be given to
--------- ----------------
any director who signs a waiver of notice or a consent to holding the meeting or
an
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<PAGE>
approval of the minutes thereof, whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to such director. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
Section 6. Action by Written Consent. Any action required or
--------- -------------------------
permitted to be taken by the board of directors, may be taken without a meeting
if all members of the board shall individually or collectively consent in
writing to such action. Such written consent or consents shall be filed with
the minutes of the proceedings of the board. Such action by written consent
shall have the same force and effect as a unanimous vote of such directors.
Section 7. Committees. The provisions of this Article IV shall also
--------- ----------
apply, with necessary changes in points of detail, to committees of the board of
directors, if any, and to actions by such committees (except for the first
sentence of Section 2 of Article IV, which shall not apply, and except that
special meetings of a committee may also be called at any time by any two
members of the committee), unless otherwise provided by these bylaws or by the
resolution of the board of directors designating such committees. For such
purpose, references to "the board" or "the board of directors" shall be deemed
to refer to each such committee and references to "directors" and "members of
the board" shall be deemed to refer to members of the committee.
Section 8. Compensation of Directors. Directors and members of
--------- -------------------------
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by resolution of the
board.
Section 9. Indemnification. The corporation shall, to the maximum
--------- ---------------
extent permitted by the General Corporation Law, indemnify each of its agents
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was an agent of the corporation. For purposes of
this Section, an "agent" of the corporation includes any person who is or was a
director, officer, employee or other agent of the corporation, or who 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, or who was a director, officer, employee or agent of a corporation
which was a predecessor of the corporation or of another enterprise at the
request of such predecessor corporation.
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<PAGE>
ARTICLE V
---------
Officers
--------
Section 1. Designation of Officers. The officers of the corporation
--------- -----------------------
shall be a chairman of the board or a president, or both, a secretary, and a
treasurer, who shall also be the chief financial officer of the corporation.
The corporation may also have, at the discretion of the board of directors, one
or more vice presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be designated from time to
time by the board of directors. Any number of offices may be held by the same
person. The officers shall be elected by the board of directors and shall
hold office at the pleasure of such board.
Section 2. Chairman of the Board. The chairman of the board, if there
--------- ---------------------
be such officer, shall, if present, preside at all meetings of the board of
directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the board of directors or prescribed by the
bylaws. If there is not a president, the chairman of the board shall, in
addition, be the general manager and chief executive officer of the corporation
and shall have the powers and duties prescribed in Section 3 of Article V of
these bylaws.
Section 3. President. Subject to such powers and duties, if any, as
--------- ---------
may be prescribed by these bylaws or the board of directors for the chairman of
the board, if there be such officer, the president shall be the general manager
and chief executive officer of the corporation and shall, subject to the control
of the board of directors, have general supervision, direction and control of
the business and officers of the corporation. He shall preside at all
meetings of the shareholders and, in the absence of the chairman of the board,
or if there be none, at all meetings of the board of directors. He shall have
all of the powers and shall perform all of the duties which are ordinarily
inherent in the office of the president, and he shall have such further powers
and shall perform such further duties as may be prescribed for him by the board
of directors.
Section 4. Vice Presidents. In the absence or disability or refusal
--------- ---------------
to act of the president, the vice presidents in order of their rank as fixed by
the board of directors, or, if not ranked, the vice president designated by the
president or the board of directors, shall perform all of the duties of the
president and when so acting shall have all the powers of and be subject to all
the restrictions upon the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them, respectively, by the board of directors or the bylaws.
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<PAGE>
Section 5. Secretary. The secretary shall keep or cause to be kept at
--------- ---------
the principal executive office of the corporation or such other place as the
board of directors may order, a book of minutes of all proceedings of the
shareholders, the board of directors and committees of the board, with the time
and place of holding, whether regular or special, and if special how authorized,
the notice thereof given, the names of those present at directors' and committee
meetings, and the number of shares present or represented at shareholders'
meetings. The secretary shall keep or cause to be kept at the principal
executive office or at the office of the corporation's transfer agent a record
of shareholders or a duplicate record of shareholders showing the names of the
shareholders and their addresses, the number of shares and classes of shares
held by each, the number and date of certificates issued for the same and the
number and date of cancellation of every certificate surrendered for
cancellation. The secretary or an assistant secretary, or, if they are absent
or unable or refuse to act, any other officer of the corporation, shall give or
cause to be given notice of all the meetings of the shareholders, the board of
directors and committees of the board required by the bylaws or by law to be
given, and he shall keep the seal of the corporation, if any, in safe custody
and shall have such other powers and perform such other duties as may be
prescribed by the board of directors or by the bylaws.
Section 6. Assistant Secretary. It shall be the duty of the assistant
--------- -------------------
secretaries to assist the secretary in the performance of his duties and
generally to perform such other duties as may be delegated to them by the board
of directors.
Section 7. Treasurer. The treasurer shall be the chief financial
--------- ---------
officer of the corporation and shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of account of the
corporation. He shall receive and deposit all moneys and other valuables
belonging to the corporation in the name and to the credit of the corporation
and shall disburse the same only in such manner as the board of directors or the
appropriate officers of the corporation may from time to time determine, shall
render to the president and the board of directors, whenever they request it, an
account of all his transactions as treasurer and of the financial condition of
the corporation, and shall perform such further duties as the board of directors
may require.
Section 8. Assistant Treasurer. It shall be the duty of the assistant
--------- -------------------
treasurers to assist the treasurer in the performance of his duties and
generally to perform such other duties as may be delegated to them by the board
of directors.
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<PAGE>
ARTICLE VI
----------
Miscellaneous
-------------
Section 1. Record Date. The board of directors may fix a time in the
--------- -----------
future as a record date for the determination of the shareholders entitled to
notice of and to vote at any meeting of shareholders or entitled to give consent
to corporate action in writing without a meeting, to receive any report, to
receive any dividend or distribution, or any allotment of rights, or to exercise
rights in respect to any change, conversion, or exchange of shares. The record
date so fixed shall be not more than sixty (60) days nor less than ten (10) days
prior to the date of any meeting, nor more than sixty (60) days prior to any
other event for the purposes of which it is fixed. When a record date is so
fixed, only shareholders of record at the close of business on that date are
entitled to notice of and to vote at any such meeting, to give consent without a
meeting, to receive any report, to receive a dividend, distribution, or
allotment of rights, or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided by statute or in the articles of
incorporation or bylaws.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of business
on the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior
action by the board has been taken, shall be the day on which the first
written consent is given.
(c) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the board
adopts the resolution relating thereto, or the sixtieth (60th) day prior to
the date of such other action, whichever is later.
Section 2. Inspection of Corporate Records. The accounting books and
--------- -------------------------------
records, the record of shareholders, and minutes of proceedings of the
shareholders and the board and committees of the board of this corporation and
any subsidiary of this corporation shall be open to inspection upon the written
demand on the corporation
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<PAGE>
of any shareholder or holder of a voting trust certificate at any reasonable
time during usual business hours, for a purpose reasonably related to such
holder's interests as a shareholder or as the holder of such voting trust
certificate. Such inspection by a shareholder or holder of a voting trust
certificate may be made in person or by agent or attorney, and the right of
inspection includes the right to copy and make extracts.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation and its subsidiary corporations.
Such inspection by a director may be made in person or by agent or attorney and
the right of inspection includes the right to copy and make extracts.
Section 3. Certificates for Shares. Every holder of shares in the
--------- -----------------------
corporation shall be entitled to have a certificate signed in the name of the
corporation by the chairman or vice chairman of the board or the president or a
vice president and by the treasurer or an assistant treasurer or the secretary
or any assistant secretary, certifying the number of shares and the class or
series of shares owned by the shareholder. Any or all of the signatures on the
certificate may be facsimile.
Any such certificate shall contain such legend or other statement as
may be required by the California Corporate Securities Law of 1968, the Federal
securities laws, and any agreement between the corporation and the issuee
thereof.
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the board of directors or the bylaws may
provide; provided, however, that any such certificate so issued prior to full
payment shall state on the face thereof the amount remaining unpaid and the
terms of payment thereof.
Section 4. Representation of Shares of Other Corporations. The
--------- ----------------------------------------------
president or any vice president or the secretary or any assistant secretary of
this corporation is authorized to vote, represent and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted to said officers to vote or represent on behalf of this corporation any
and all shares held by this corporation in any other corporation or corporations
may be exercised either by such officers in person or by any other person
authorized so to do by proxy or power of attorney duly executed by said
officers.
Section 5. Inspection of Bylaws. The corporation shall keep in its
--------- --------------------
principal executive office in California, or if its principal executive office
is not in California, then at its principal business office in California (or
otherwise provide upon written request of any shareholder), the original or a
copy of the bylaws as amended to date,
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<PAGE>
certified by the secretary, which shall be open to inspection by the
shareholders at all reasonable times during office hours.
Section 6. Construction and Definitions. Unless the context otherwise
--------- ----------------------------
requires, the general provisions, rules of construction and definitions
contained in the General Corporation Law shall govern the construction of these
bylaws. Without limiting the generality of the foregoing, the masculine gender
includes the feminine and neuter, the singular number includes the plural and
the plural number includes the singular, and the term "person" includes a
corporation as well as a natural person.
ARTICLE VII
----------
Amendments
----------
Section 1. Amendment by Shareholders. New bylaws may be adopted or
--------- -------------------------
these bylaws may be amended or repealed by the affirmative vote or written
consent of a majority of the outstanding shares entitled to vote, except as
otherwise provided by law or by the articles of incorporation or these bylaws.
Section 2. Amendment by Board of Directors. Subject to the right of
--------- -------------------------------
shareholders as provided in Section 1 of this Article to adopt, amend or repeal
bylaws, and except as otherwise provided by law or by the articles of
incorporation, bylaws (other than a bylaw or amendment thereof changing the
authorized maximum or minimum number of directors) may be adopted, amended or
repealed by the board of directors.
ARTICLE VIII
------------
Annual and Other Reports
------------------------
Section 1. Annual Report to Shareholders.
--------- -----------------------------
(a) So long as the corporation shall have fewer than one hundred
shareholders of record (determined as provided in section 605 of the General
Corporation Law), the requirement of section 1501(a) of said law that an annual
report be sent to the shareholders is expressly waived.
(b) Notwithstanding subdivision (a) of this Section, the corporation
shall, upon the written request of any shareholder made more than one hundred
twenty (120) days after the close of a fiscal year, deliver or mail to the
person making the request,
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<PAGE>
within thirty (30) days thereafter, the financial statements required by section
1501(a) of the General Corporation Law.
Section 2. Request for Financial Statements. A shareholder or share
--------- --------------------------------
holders holding at least five percent (5%) of the outstanding shares of any
class of the corporation may make a written request to the corporation for an
income statement of the corporation for the three-month, six-month or nine-month
period of the current fiscal year ended more than thirty (30) days prior to the
date of the request and a balance sheet of the corporation as of the end of such
period and, in addition, if no annual report for the last fiscal year has been
sent to shareholders, the statements referred to in section 1501(a) of the
General Corporation Law for the last fiscal year. The corporation shall
deliver or mail the statements to the person making the request within thirty
(30) days thereafter. A copy of any such statements shall be kept on file in
the principal executive office of the corporation for twelve (12) months and
they shall be exhibited at all reasonable times to any shareholder demanding an
examination of them or a copy shall be mailed to such shareholder. The
quarterly income statements and balance sheets referred to in this Section shall
be accompanied by the report thereon, if any, of any independent accountants
engaged by the corporation or the certificate of an authorized officer of the
corporation that such financial statements were prepared without audit from the
books and records of the corporation.
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<PAGE>
CERTIFICATE OF SECRETARY
------------------------
I, the undersigned, hereby certify:
1. That I am the duly elected, acting and qualified Secretary of
Practical Telephony Corporation, a California corporation; and
2. That the foregoing Bylaws, comprising 19 pages, constitute the
Bylaws of such corporation as duly adopted by action of the sole incorporator of
the corporation duly taken on September 13, 1994, as approved by action of the
board of directors of the corporation duly taken on September ___, 1994.
Dated: ___________________, 1994
__________________________________________
Secretary
IN WITNESS WHEREOF, I have hereunto subscribed my name this ___ day
------------------
of _______________________, 1994.
__________________________________________
<PAGE>
EXHIBIT 4.1
WARRANT AGREEMENT
-----------------
AGREEMENT, dated as of this ____th day of ___________, 1997, by and among
NOTIFY CORPORATION, a California corporation ("Company"), AMERICAN STOCK
TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant Agent"), and D.H.
BLAIR INVESTMENT BANKING CORP., a New York corporation (the "Underwriter").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, in connection with a public offering of up to 1,610,000 units
("Units"), each unit consisting of one (1) share of the Company's Common Stock,
$.001 par value ("Common Stock"), one (1) redeemable Class A Warrant ("Class A
Warrants") and one (1) redeemable Class B Warrant ("Class B Warrants") pursuant
to an underwriting agreement (the "Underwriting Agreement") dated
_______________, 1997 between the Company and Blair, the issuance to the
Underwriter or its designees of Unit Purchase Options to purchase an aggregate
of 140,000 additional Units, to be dated as of __________, 1997 (the "Unit
Purchase Options"), and the issuance of 425,000 Class A Warrants upon the
conversion of certain bridge warrants, the Company may issue up to 2,175,000
Class A Warrants and 1,750,000 Class B Warrants (the Class A Warrants and Class
B Warrants may be collectively referred to as "Warrants"); and
WHEREAS, each Class A Warrant initially entitles the Registered Holder
thereof to purchase one (1) share of Common Stock and one (1) Class B Warrant,
and accordingly, the Company may issue up to an additional 2,175,000 Class B
Warrants; and
WHEREAS, each Class B Warrant initially entitles the Registered Holder
thereof to purchase one (1) share of Common Stock; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the Registered Holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have
-----------
the following meanings, unless the context shall otherwise require:
<PAGE>
(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 15,000,000 shares of Common
Stock, $.001 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 $0 Wall Street, New
York, New York 10005.
(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.
(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.
-2-
<PAGE>
(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 (subject to extension as provided herein and in Section 9(e) or,
with respect to Warrants which are outstanding as of the applicable Redemption
Date (as defined in Section 8) and specifically excluding Warrants issuable upon
exercise of Unit Purchase Options if the Unit Purchase Options have not been
exercised, the Redemption Date, whichever is earlier; provided that if such date
shall in the State of New York be a holiday or a day on which banks are
authorized or required to close, then 5:00 P.M. (New York time) on the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized or required to close. Upon notice to all Registered
Holders, the Company shall have the right to extend the Warrant Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
---------------------------------------------
(a) A Class A Warrant initially shall entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase one share of Common
Stock and one Class B Warrant upon the exercise thereof, in accordance with the
terms hereof, subject to modification and adjustment as provided in Section 9.
(b) A Class B Warrant initially shall entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase one share of Common
Stock upon the exercise thereof, in accordance with the terms hereof, subject to
modification and adjustment as provided in Section 9.
(c) The Class A Warrants and Class B Warrants included in the offering of
Units will be detachable and separately transferable immediately from the shares
of Common Stock constituting part of such Units. The Class B Warrants will also
be detachable and separately transferable immediately from the shares of Common
Stock issued upon exercise of the Class A Warrants.
(d) Upon execution of this Agreement, Warrant Certificates representing the
number of Class A Warrants and Class B Warrants sold pursuant to the
Underwriting Agreement shall be executed by the Company and delivered to the
Warrant Agent. Upon written order of the Company signed by its President or
Chairman or a Vice President and by its Secretary or an Assistant Secretary, the
Warrant Certificates shall be countersigned, issued and delivered by the Warrant
Agent as part of the Units.
-3-
<PAGE>
(e) From time to time, up to the Warrant Expiration Date, the Transfer
Agent shall countersign and deliver stock certificates in required whole number
denominations representing up to an aggregate of 6,100,000 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 140,000 Units, which include up to140,000 Class A Warrants and
280,000 Class B Warrants. Notwithstanding anything to the contrary contained
herein, the Warrants underlying the Unit Purchase Option shall not be subject to
redemption by the Company except under the terms and conditions set forth in the
Unit Purchase Options.
SECTION 3. Form and Execution of Warrant Certificates.
------------------------------------------
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibit A as to the Class A Warrants and Exhibit B as to the Class B
Warrants (the provisions of which are hereby incorporated herein) and may have
such letters, numbers or other marks of identification or designation and such
legends, summaries or endorsements printed, lithographed or engraved thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any law or with any rule
or regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Class A Warrants or Class B Warrants may be listed, or to
conform to usage or to the requirements of Section 2(d). The Warrant
Certificates shall be dated the date of issuance thereof (whether upon initial
issuance, transfer, exchange or in lieu of mutilated, lost, stolen, or destroyed
Warrant Certificates) and issued in registered form. Warrant Certificates shall
be numbered serially with the letters AW on Class A Warrants of all
denominations and the letters BW on Class B Warrants of all denominations.
(b) Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, President or any Vice President and by its Secretary or
an Assistant
-4-
<PAGE>
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 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,
-5-
<PAGE>
(iv) disclosure of compensation arrangements was made both at the time of the
original offering and at the time of exercise; and (v) the solicitation of the
exercise of the Warrant was not in violation of Regulation M (as such rule or
any successor rule may be in effect as of such time of exercise) promulgated
under the Securities Exchange Act of 1934, then the Warrant Agent,
simultaneously with the distribution of the Warrant Proceeds to the Company
shall, on behalf of the Company, pay from the Warrant Proceeds, a fee of 5% (the
"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 or the Nasdaq SmallCap Market if the other shares of
outstanding Common Stock of the Company are so included.
-6-
<PAGE>
(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 and
deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Warrants.
-7-
<PAGE>
(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.
SECTION 8. Redemption.
----------
(a) Subject to the provisions of paragraph 2(g) hereof, on not less than
thirty (30) days notice (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 $12.10 with respect to the Class B Warrants (the
-8-
<PAGE>
"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 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".
During the first fifty-four (54) months of this Agreement, the Class B Warrant
Redemption Date may not be earlier than six months 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, 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.
-9-
<PAGE>
(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 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
-10-
<PAGE>
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 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
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<PAGE>
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 no
later than thirty (30) days after the adjustment 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. If such mailing
is not made within such 30-day period the Warrant Expiration Date shall be
extended by the period of time equal to the period commencing on the 31st day
and expires on the date such mailing is effectuated. The Company will, upon the
written request at any time of the Underwriter, furnish to the Underwriter a
report by Ernst & Young 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 such treasury shares shall not be considered a
Change of Shares for purposes of said sections.
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<PAGE>
(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 immediately exercisable, and the price per share for which
Common Stock is issuable upon the conversion or exchange of such
Convertible Securities
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<PAGE>
(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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<PAGE>
(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 outstanding
under the Company's 1997 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
(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,
-15-
<PAGE>
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 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.
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<PAGE>
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.
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
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<PAGE>
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 (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
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<PAGE>
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 necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall
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<PAGE>
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
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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.
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<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 1054 S. DeAnza Blvd., Suite 105, San Jose,
California 95129, attention: President, 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.
NOTIFY CORPORATION
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
NOTIFY CORPORATION
This certifies that FOR VALUE RECEIVED __________________ or
registered assigns (the "Registered Holder") is the owner of the number of Class
A Warrants ("Class A Warrants") specified above. Each Class A Warrant
represented hereby initially entitles the Registered Holder to purchase, subject
to the terms and conditions set forth in this Warrant Certificate and the
Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.001 value ("Common Stock"), of ) Notify Corporation, a
California 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 Notify Corporation.
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.
-23-
<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 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
A-2
-24-
<PAGE>
Warrants represented hereby except to receive the $.05 per Class A Warrant upon
surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Class A Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice 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.
NOTIFY CORPORATION
Dated: ____________________ By: ______________________________
By: ______________________________
[seal]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Warrant Agent
By ___________________________
Authorized Officer
A-3
-25-
<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.
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
A-4
-26-
<PAGE>
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
-27-
<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
-28-
<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
NOTIFY CORPORATION
This certifies that FOR VALUE RECEIVED
_________________________________________ or registered assigns (the "Registered
Holder") is the owner of the number of Class B Warrants specified above. Each
Class B Warrant represented hereby initially entitles the Registered Holder to
purchase, subject to the terms and conditions set forth in this Warrant
Certificate and the Warrant Agreement (as hereinafter defined), one fully paid
and nonassessable share of Common Stock, $.001 par value ("Common Stock"), of
Notify Corporation, a California corporation (the "Company"), at any time
between _____________, 1997 and the Expiration Date (as hereinafter defined),
upon the presentation and surrender of this Warrant Certificate with the
Subscription Form on the reverse hereof duly executed, at the corporate office
of American Stock Transfer & Trust Company as Warrant Agent, or its successor
(the "Warrant Agent"), accompanied by payment of $8.75 (the "Purchase Price") in
lawful money of the United States of America in cash or by official bank or
certified check made payable to Notify Corporation.
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
-29-
<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 $12.10 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 B Warrants represented hereby except to receive the $.05 per Class B
Warrant upon surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Class B Warrant represented hereby
(notwithstanding any notations of ownership or writing
B-2
-30-
<PAGE>
hereon made by anyone other than a duly authorized officer of the Company or the
Warrant Agent) for all purposes and shall not be affected by any notice to the
contrary.
The Company has agreed to pay a fee of 5% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
the Class B Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile, by two of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
NOTIFY CORPORATION
Dated: _________________ By: _______________________________
By: _______________________________
[seal]
Countersigned:
NOTIFY CORPORATION, as Warrant Agent
By: ______________________________
Authorized Officer
B-3
-31-
<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.
The undersigned represents that the exercise of the Class B Warrants
evidenced hereby was solicited by a member of the National Association of
Securities Dealers, Inc. If not
B-4
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<PAGE>
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.
B-5
-33-
<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]
_______________ 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
-34-
<PAGE>
EXHIBIT 4.2
Option to Purchase
________ Units
NOTIFY CORPORATION
Unit Purchase Option
--------------------
Dated: ___________, 1997
THIS CERTIFIES THAT D. H. Blair Investment Banking Corp. (herein sometimes
called the "Holder") is entitled to purchase from Notify Corporation, a
California 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,
$.001 par value, as now constituted ("Common Stock"), one Class A warrant
("Class A Warrants") and one Class B warrant ("Class B Warrants"). Each Class A
Warrant is exercisable to purchase one share of Common Stock and one Class B
Warrant at an exercise price of $6.50 from _______, 1997 to _______ , 2002, and
each Class B Warrant is exercisable to purchase one share of Common Stock at an
exercise price of $8.75 until _______, 2002. The Class A Warrants and Class B
Warrants are herein collectively referred to as the "Warrants."
The Units have been registered under a Registration Statement on Form SB-2,
(File No. 333-_______ ) 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 purchase140,000 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 1,400,000 Units (the "Public Units") through the
Underwriter, in consideration of $140 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
<PAGE>
such redemption shall be on the same terms and conditions as the Warrants
included in the Public Units (the "Public Warrants"). The Company will list the
Common Stock underlying this Option and, at the Holder's request the Warrants,
on the Nasdaq National Market, the Nasdaq Small Cap Market or such other
exchange or market as the Common Stock or Public Warrants may then be listed or
quoted. In the event of any extension of the expiration date or reduction of
the exercise price of the Public Warrants, the same changes to the Warrants
included in the Option Units shall be simultaneously effected.
1. The rights represented by this Option shall be exercised at the prices,
subject to adjustment in accordance with Section 8 of this Option ("the
"Exercise Price"), and during the periods as follows:
(a) During the period from _______, 1997 to _______, 1999,
inclusive, the Holder shall have no right to purchase any Option Units
hereunder, except that in the event of any merger, consolidation or
sale of all or substantially all the capital stock or assets of the
Company or in the case of any statutory exchange of securities with
another corporation (including any exchange effected in connection with
a merger of another corporation into the Company) subsequent to
_______,1997 the Holder shall have the right to exercise this Option
and the Warrants included herein at such time and receive the kind and
amount of shares of stock and other securities and property (including
cash) which a holder of the number of shares of Common Stock underlying
this Option and the Warrants included in this Option would have owned
or been entitled to receive had this Option been exercised immediately
prior thereto.
(b) Between _______, 1999 and _______,2002 inclusive, the Holder
shall have the option to purchase Option Units hereunder at a price of
$6.00 per Unit. For purposes of the adjustments under Section 8 hereof,
the Per Share Exercise Price shall be deemed to be $_______, subject to
further adjustment as provided in such Section 8.
(c) After _________, 2002 the Holder shall have no right to
purchase any Units hereunder.
2. (a) The rights represented by this Option may be exercised at
any time within the period above specified, in whole or in part, by (i) the
surrender of this Option (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the Holder
at the address of the Holder appearing on the books of the Company); and (ii)
payment to the Company of the exercise price then in effect for the number of
Option Units specified in the above-mentioned purchase form together with
applicable stock transfer taxes, if any. This Option shall be deemed to have
been exercised, in whole or in part to the extent specified, immediately prior
to the close of business on the date this Option is surrendered and
-2-
<PAGE>
payment is made in accordance with the foregoing provisions of this Section 2,
and the person or persons in whose name or names the certificates for shares of
Common Stock and Warrants shall be issuable upon such exercise shall become the
holder or holders of record of such Common Stock and Warrants at that time and
date. The certificates for the Common Stock and Warrants so purchased shall be
delivered to the Holder as soon as practicable but not later than ten (10) days
after the rights represented by this Option shall have been so exercised.
(b) At any time during the period above specified, during which this
Option may be exercised, the Holder may, at its option, exchange this Option, in
whole or in part (an "Option Exchange"), into the number of Option Units
determined in accordance with this Section (b), by surrendering this Option at
the principal office of the Company or at the office of its stock transfer
agent, accompanied by a notice stating such Holder's intent to effect such
exchange, the number of Option Units into which this Option is to be exchanged
and the date on which the Holder requests that such Option Exchange occur (the
"Notice of Exchange"). The Option Exchange shall take place on the date
specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
shares of Common Stock and Warrants issuable upon such Option Exchange and, if
applicable, a new Option of like tenor evidencing the balance of the Option
Units remaining subject to this Option, shall be issued as of the Exchange Date
and delivered to the Holder within seven (7) days following the Exchange Date.
In connection with any Option Exchange, this Option shall represent the right to
subscribe for and acquire the number of Option Units (rounded to the next
highest integer) equal to (x) the number of Option Units specified by the Holder
in its Notice of Exchange up to the maximum number of Option Units subject to
this option (the "Total Number") less (y) the number of Option Units equal to
the quotient obtained by dividing (A) the product of the Total Number and the
existing Exercise Price by (B) the Fair Market Value. "Fair Market Value" shall
mean first, if there is a trading market as indicated in Subsection (i) below
for the Units, such Fair Market Value of the Units and if there is no such
trading market in the Units, then Fair Market Value shall have the meaning
indicated in Subsections (ii) through (v) below for the aggregate value of all
shares of Common Stock and Warrants which comprise a Unit:
(i) If the Units are listed on a national securities exchange or
listed or admitted to unlisted trading privileges on such exchange or
listed for trading on the Nasdaq National Market or the Nasdaq Small Cap
Market, the Fair Market Value shall be the average of the last reported
sale prices or the average of the means of the last reported bid and asked
prices, respectively, of the Units on such exchange or market for the five
(5) business days ending on the last business day prior to the Exchange
Date; or
(ii) If the Common Stock or Warrants are listed on a national
securities exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the Nasdaq National Market or the Nasdaq
Small Cap Market, the Fair Market Value shall be the average of the last
reported sale prices or the average of the means of the last reported bid
and asked prices, respectively, of Common
-3-
<PAGE>
Stock or Warrants, respectively, on such exchange or market for the five
(5) business days ending on the last business day prior to the Exchange
Date; or
(iii) If the Common Stock or Warrants are not so listed or
admitted to unlisted trading privileges, the Fair Market Value shall be the
average of the means of the last reported bid and asked prices of the
Common Stock or Warrants, respectively, for the five (5) business days
ending on the last business day prior to the Exchange Date; or
(iv) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the Fair
Market Value shall be an amount, not less than book value thereof as at the
end of the most recent fiscal year of the Company ending prior to the
Exchange Date, determined in such reasonable manner as may be prescribed by
the Board of Directors of the Company; or
(v) If the Warrants are not so listed or admitted to unlisted
trading privileges, and bid and asked prices are not so reported for
Warrants, then Fair Market Value for the Warrants shall be an amount equal
to the difference between (i) the Fair Market Value of the shares of Common
Stock and Warrants which may be received upon the exercise of the Warrants,
as determined herein, and (ii) the Warrant Exercise Price.
3. Neither this Option nor the underlying securities shall be
transferred, sold, assigned, or hypothecated for a period of two years
commencing ___________, 1997, except that they may be transferred to successors
of the Holder, and may be assigned in whole or in part to any person who is an
officer of the Holder, any member participating in the selling group relating to
the Offering or any officer of such selling group member. Any such assignment
shall be effected by the Holder (i) executing the form of assignment at the end
hereof and (ii) surrendering this Option for cancellation at the office or
agency of the Company referred to in Section 2 hereof, accompanied by a
certificate (signed by an officer of the Holder if the Holder is a corporation),
stating that each transferee is a permitted transferee under this Section 3
hereof; whereupon the Company shall issue, in the name or names specified by the
Holder (including the Holder) a new Option or Options of like tenor and
representing in the aggregate rights to purchase the same number of Option Units
as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Common Stock
which may be issued as part of the Option Units purchased hereunder and the
Common Stock which may be issued upon exercise of the Warrants will, upon
issuance, be duly and validly issued, fully paid and nonassessable and no
personal liability will attach to the holder thereof. The Company further
covenants and agrees that during the periods within which this Option may be
exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of its Common Stock to provide for the exercise of
this Option and that it will have
-4-
<PAGE>
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon exercise of the Warrants included in the Option Units.
5. This Option shall not entitle the Holder to any voting rights or
any other rights, or subject to the Holder to any liabilities, as a stockholder
of the Company.
6. (a) The Company shall advise the Holder or its transferee,
whether the Holder holds the Option or has exercised the Option and holds Option
Units or any of the securities underlying the Option Units, by written notice at
least four weeks prior to the filing of any post-effective amendment to the
Registration Statement or of any new registration statement or post-effective
amendment thereto under the Act covering any securities of the Company, for its
own account or for the account of others, and will for a period of 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.
(b) If D.H. Blair Investment Banking Corp., D.H. Blair & Co.
Inc. or J. Morton Davis (a "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 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 the Requesting 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
-5-
<PAGE>
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).
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
-6-
<PAGE>
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 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
-7-
<PAGE>
any losses, claims, damages or liabilities, joint or several, to which the
Distributing Holder, any such controlling person or any such underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any such registration statement or any preliminary prospectus or
final prospectus constituting a part thereof or any amendment or supplement
thereto, or arise out of or are based upon the omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse the Distributing Holder and each such
controlling person and underwriter for any legal or other expenses reasonably
incurred by the Distributing Holder or such controlling person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in said registration statement, said
preliminary prospectus, said final prospectus or said amendment or supplement in
reliance upon and in conformity with written information furnished by such
Distributing Holder specifically for use in the preparation thereof.
(b) If requested by the Company prior to the filing of any
registration statement covering the Registrable Securities, each Distributing
Holder will agree, severally but not jointly, to indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the Company
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue or alleged
untrue statement of any material fact contained in said registration statement,
said preliminary prospectus, said final prospectus, or said amendment or
supplement, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder specifically for use in the preparation
thereof; except that the maximum amount which may be recovered from the
Distributing Holder pursuant to this Section 7 or otherwise shall be limited to
the amount of net proceeds received by the Distributing Holder from the sale of
the Registrable Securities.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Section 7.
(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
-8-
<PAGE>
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 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
-9-
<PAGE>
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.
(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.
-10-
<PAGE>
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, Notify Corporatin has caused this Option to be
signed by its duly authorized officers under its corporate seal, and this Option
to be dated ____________, 1997.
NOTIFY CORPORATION
By: ____________________________
Paul DePond, President
(Corporate Seal)
Attest:
__________________________
<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 Notify Corporation, each Unit
consisting of _________ shares of $.001 par value Common Stock, _________ Class
A Warrant(s) to purchase _________ share(s) _________ of Common Stock and
_________ Class B Warrant(s), and _________ 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 Notify Corporation,
each Unit consisting of shares of $.001 par value Common Stock, _________
Class A Warrant(s) to purchase _________ share(s) _________ of Common Stock and
_________ Class B Warrant(s), 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__
By: _____________________________________
________________________________________
Address
In the presence of:
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
This employment agreement (the "Agreement") is made and entered into
effective as of (the "Effective Date"), by and between Paul DePond (the
"Employee") and Notify Corporation (the "Company").
RECITALS
--------
A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interest of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of
Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
In Consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company shall employ the Employee in the positions
--------
of President and Chief Executive Officer, with such duties, responsibilities and
compensation as in effect as of the Effective Date (as defined below); provided,
however, that the Board shall have the right, prior to the occurrence of a
Change of Control, to revise such responsibilities and compensation from time to
time as the Board may deem necessary or appropriate.
(b) Obligations. The Employee shall devote his full business efforts
-----------
and time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from
<PAGE>
engaging in such activities and services as do not interfere or conflict with
his responsibilities to the Company.
2. At-Will Employment. The Company and the Employee acknowledge the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or other agreements with the Company at the time of termination. The
terms of this Agreement shall be extended so as to terminate two (2) years from
the Effective Date (unless extended for an additional period or periods by the
Company and the Employee by mutual written agreement), provided that in the
event of a Change of Control of the Company prior to such termination, the terms
of this Agreement shall be extended so as to terminate twenty-four (24) months
after such Change of Control, subject in either case to earlier termination as
of the date that all obligations of the parties hereunder have been satisfied.
A termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Compensation. The Company shall pay the Employee as
-----------------
compensation for services a base salary at an annualized rate of $_______. Such
salary shall be reviewed at least annually and shall be increased from time to
time subject to accomplishment of such performance and contribution goals and
objectives as may be established from time to time by the Board. Such salary
shall be paid periodically in accordance with normal Company payroll. The annual
compensation specified in this Section 3(a), together with any increases in such
compensation that the Board may grant from time to time, is referred to in this
Agreement as "Base Compensation".
(b) Bonus. Beginning with the Company's current fiscal year and for
-----
each fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus payable
hereunder shall be payable in accordance with the Company's normal practices and
policies.
(c) Employee Benefits. The Employee shall be eligible to participate
-----------------
in the employee benefit plans and executive compensation programs maintained by
the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, deferred
compensation plans, supplemental retirement or excess-benefit plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations, and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the plan or
program in question and to the determination of any committee administering such
plan or program.
-2-
<PAGE>
4. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Employee's
-----------------------------------------
employment with the Company terminates at any time within twenty-four (24)
months after a Change of Control, then, subject to Section 5, the Employee shall
be entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination (as defined below) other than
for Cause (as defined below), then the Employee shall be entitled to receive a
continuation of the Employee's Base Compensation for a period equal to twelve
(12) months. In addition, the Employee shall be entitled to a payment of a pro-
---
rata portion of the Target Bonus as shall be determined by multiplying the
- ----
Target Bonus by a fraction, the numerator of which shall be the number of days
in which the Employee was employed by the Company in the fiscal year in which
such termination occurs, and the denominator of which shall be the number of
days in such fiscal year, such payment to be made in a lump sum within ten (10)
business days after the Termination Date.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's termination by reason of the Employee's voluntary resignation (and in
not an Involuntary Termination), or if the Employee is terminated for Cause,
then the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and policies at the time of such
termination.
(iii) Disability: Death. If the Company terminates the Employee's
-----------------
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except those (if
any) as may then be established under the Company's then existing severance and
benefits plans and policies at the time of such Disability or Death.
(b) Termination Apart from Change of Control. If, during the term of
----------------------------------------
this Agreement, the Employee's employment with the Company terminates, either
prior to the occurrence of a Change of Control or after the twenty-four (24)
month period following a Change of Control, then, subject to Section 5, the
Employee shall be entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Employee shall be entitled to receive continuation of the Employee's Base
Compensation for the period of six (6) months. In addition, the Employee shall
be entitled to a payment of a pro-rata portion of the Target Bonus as shall be
--------
determined by multiplying the Target Bonus by a fraction, the numerator
of which shall be the number of days in which the Employee was employed by the
Company in the fiscal year in which such termination occurs, and the denominator
of which shall be the number of days in such fiscal year, such payment to be
made in a lump sum within ten (10) business days after the Termination Date.
-3-
<PAGE>
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's termination by reason of the Employee's voluntary resignation (and in
not an Involuntary Termination), or if the Employee is terminated for Cause,
then the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and policies at the time of such
termination.
(iii) Disability; Death. If the Company terminates the Employee's
-----------------
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except those (if
any) as may then be established under the Company's then existing severance and
benefits plans and policies at the time of such Disability or Death.
(c) Benefits. In the event the Employee is entitled to severance
--------
benefits pursuant to subsection 4(a)(i) or subsection 4(b)(i), then in addition
to such severance benefits, the Employee shall receive 100% Company-paid health,
dental and life insurance coverage as provided to such employee immediately
prior to the Employee's termination ( the "Company-Paid Coverage"). If such
coverage included the Employee's dependents immediately prior to the
Employee's's termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue for (i) twelve (12) months
following termination in the case of a termination described in 4(a)(i), or (ii)
six (6) months following termination in the case of a termination described in
subsection 4(b)(i) , in either case until (and to the extent) the Employee
becomes covered under another employer's group health, dental or life insurance
plan. In addition, without regard to the reason for termination of the
Employee's employment: (i) the Company shall pay the Employee any unpaid salary
due for periods prior to the Termination Date; (ii) the Company shall pay the
Employee all of the Employee's accrued and unused PTO ("Personal Time Off")
through the Termination Date; and (iii) following submission of proper expense
reports by the Employee, the Company shall reimburse the Employee for all
expenses reasonably and necessarily incurred by the Employee in connection with
the business of the Company prior to termination. These payments shall be made
promptly upon termination and within the period of time mandated by law.
(d) Options. In the event the Employee is entitled to severance
-------
benefits pursuant to subsection 4(a)(i), upon such termination, in addition to
any portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall become exercisable as to an
additional amount as though the Employee had remained continuously employed for
a period of thirty-six (36) months following such termination, for the period
prescribed in such option plans. In the event the Employee is entitled to
severance benefits pursuant to subsection 4(b)(i), upon such termination, in
addition to any portion of the Employee's stock options that were exercisable
immediately prior to such termination, such options shall become exercisable as
to an additional amount as though the Employee had remained continuously
employed for a period of twelve (12) months following such termination, for the
period prescribed in such option plans
-4-
<PAGE>
5. Limitations on Payments. In the event that the severance and other
-----------------------
benefits provided for in this Agreement or otherwise payable to the Employee (i)
constitute "parachute payments" with in the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the"Code") and (ii) but for this
Section, would be subject to the excise tax imposed by Section 4999 of the Code,
then the Employee's severance benefits under Section 4(a)(i), as applicable,
shall be payable either
(a) in full, or
(b) as to such lessor amount which would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the Code,
whichever of the following amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis, of the greatest amount of
severance benefits under subsection 4(a)(i), notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 5 shall be made in writing by the
Company's independent public accountants (the "Accountant"), whose determination
shall be conclusive and binding upon the Employee and the Company for all
purposes. For the purposes of making calculation required by this Section 5, the
Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may relay on reasonable, good faith interpretations
concerning the application of Sections 280G and 4999 of the Code. The Company
and the Employee shall furnish to the Accountants such information and documents
as the Accountants may reasonably request in order to make a determination under
this Section. The Company shall bear all costs the Accountant may reasonable
incur in connection with any calculations contemplated by this Section 5.
6. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 30% or
more of the total voting power represented by the Company's then outstanding
voting securities; or
-5-
<PAGE>
(ii) A change in the composition of the Board of Directors of the
Company occurring within a two-year period, as a result of which fewer than a
majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual whose election or nomination is in connection with an
actual threatened proxy contest relating to the election of directors to the
Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such a merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
(b) Involuntary Termination. "Involuntary Termination" shall mean (i)
-----------------------
without the Employee's express written consent, a significant reduction of the
Employee's duties, position or responsibilities, or the removal of the Employee
from such position and responsibilities, unless the Employee is provided with a
comparable position (i.e., a position of equal or greater organizational level,
duties, authority, compensation and status); (ii) without the Employee's express
written consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) a reduction by the
Company in the Base Compensation of the Employee as in effect immediately prior
to such reduction; (iv) a material reduction by the Company in the kind or level
of employee benefits to which the Employee is entitled immediately prior to such
reduction with the result that the Employee's overall benefits package is
significantly reduced; (v) the relocation of the Employee to a facility or a
location more than 25 miles from the Employee's then present location, without
the Employee's express written consent; (vi) any purported termination of the
Employee by the Company which is not affected for Disability or for Cause, or
any purported termination for which the grounds relied upon are not valid; or
(vii) the failure of the Company to obtain the assumption of this agreement by
any successors contemplated in Section 7 below.
(c) Cause. "Cause" shall mean (i) any act of personal dishonesty taken
-----
by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee, (ii) the
conviction of a felony which the Board reasonably believes had or will have a
material detrimental effect on the Company's reputation or business, (iii) a
willful act by the Employee which constitutes gross misconduct and which is
injurious to the Company, and (iv) continued violations by the Employee of the
Employee's obligations which are demonstrably willful and deliberate on the
Employee's part after there has been delivered to the
-6-
<PAGE>
Employee a written demand for performance from the Company which describes the
basis for the Company's belief that the Employee has not substantially performed
his duties.
(d) Disability. "Disability" shall mean that the Employee has been
----------
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the Employee
or the Employee's legal representative (such Agreement as to acceptability not
to be unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written by the Company of its intention to
terminate the Employee's employment. In the event that the Employee resumes the
performance of substantially all of his duties hereunder before the termination
of his employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
(e) Termination Date. "Termination Date" shall mean (i) if this
----------------
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee shall
not have returned to the performance of the Employee's duties on a full-time
basis during such thirty (30) day period), (ii) if the Employee's employment is
terminated by the Company for any other reason, the date on which a notice of
termination is given, provided that if within (30) days after the Company gives
the Employee notice of termination, the Employee notifies the Company that a
dispute exists concerning the termination, the Termination Date shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected), or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligation under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
---------------------
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
-7-
<PAGE>
8. Notice.
------
(a) General. Notices and all other communications contemplated by this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be delivered to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause or
---------------------
by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with this Section 8 of this Agreement. Such notice
shall indicate, the specific termination provision in this Agreement relied
upon, shall be set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which shall be not more than 30 days after
the giving of such notice). The failure by the Employee to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not wave any right of the Employee hereunder or preclude the
Employee from asserting such fact or circumstance in enforcing his right
hereunder.
9. Arbitration. At the option of either party, any and all disputes or
-----------
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and regulations of that
Association.
The arbitrator shall be selected as follows: in the event the Company and
the Employee agree on one arbitrator, the arbitration shall be conducted by such
arbitrator. In the event the Company and the Employee do not do agree, the
Company and the Employee shall each select one independent, qualified arbitrator
and the two arbitrators so selected shall select the third arbitrator. The
Company reserves the right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
Arbitration shall take place at San Jose, California, or any other location
mutually agreeable to the parties. At the request of either party, arbitration
proceedings will be conducted in the utmost secrecy; in such case all documents,
testimony and records shall be received, heard and maintained by the arbitrators
in secrecy under seal, available for the inspection only of the Company or the
Employee and their respective attorneys and their respective experts who shall
agree in advance and in writing to receive all such information confidentially
and to maintain such information in secrecy until such information shall become
generally known. The arbitrator, who shall act by majority vote, shall be able
to decree any and all relief of an equitable nature, including but not limited
to such relief as a temporary restraining order, a temporary and/or a permanent
injunction, and shall also be able to award damages, with, or without an
accounting and costs, provided that punitive damages
-8-
<PAGE>
shall not be awarded. The decree or judgment of an award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
Reasonable notice of the time and place of arbitration shall be given to
all persons, other than the parties, as shall be required by law, in which case
such persons or those authorized representatives shall have the right to attend
and/or participate in all the arbitration hearings in such manner as the law
shall require.
10. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement shall be modified, waived or
------
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representation or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) No Assignment of Benefits. The rights of any person to payments or
-------------------------
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection (f) shall be void.
(g) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
-9-
<PAGE>
(h) Assignment by Company. The Company may assign its rights under this
---------------------
Agreement to an affiliate, and an affiliate may assign its rights under this
agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of the assignment. In the
event of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Employee.
(i) Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.
-10-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
COMPANY NOTIFY CORPORATION
By:______________________________
Title:___________________________
Date:____________________________
EMPLOYEE _________________________________
Date:____________________________
-11-
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
This employment agreement (the "Agreement") is made and entered into
effective as of (the "Effective Date"), by and between Gaylan Larson (the
"Employee") and Notify Corporation (the "Company").
RECITALS
--------
A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interest of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of
Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
In Consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company shall employ the Employee in the position
--------
of Vice President of Operations, with such duties, responsibilities and
compensation as in effect as of the Effective Date (as defined below); provided,
however, that the Board shall have the right, prior to the occurrence of a
Change of Control, to revise such responsibilities and compensation from time to
time as the Board may deem necessary or appropriate.
(b) Obligations. The Employee shall devote his full business efforts
-----------
and time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from
<PAGE>
engaging in such activities and services as do not interfere or conflict with
his responsibilities to the Company.
2. At-Will Employment. The Company and the Employee acknowledge the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or other agreements with the Company at the time of termination. The
terms of this Agreement shall be extended so as to terminate two (2) years from
the Effective Date (unless extended for an additional period or periods by the
Company and the Employee by mutual written agreement), provided that in the
event of a Change of Control of the Company prior to such termination, the terms
of this Agreement shall be extended so as to terminate twenty-four (24) months
after such Change of Control, subject in either case to earlier termination as
of the date that all obligations of the parties hereunder have been satisfied.
A termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Compensation. The Company shall pay the Employee as
-----------------
compensation for services a base salary at an annualized rate of $115,000. Such
salary shall be reviewed at least annually and shall be increased from time to
time subject to accomplishment of such performance and contribution goals and
objectives as may be established from time to time by the Board. Such salary
shall be paid periodically in accordance with normal Company payroll. The annual
compensation specified in this Section 3(a), together with any increases in such
compensation that the Board may grant from time to time, is referred to in this
Agreement as "Base Compensation".
(b) Bonus. Beginning with the Company's current fiscal year and for
-----
each fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus payable
hereunder shall be payable in accordance with the Company's normal practices and
policies.
(c) Employee Benefits. The Employee shall be eligible to participate
-----------------
in the employee benefit plans and executive compensation programs maintained by
the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, deferred
compensation plans, supplemental retirement or excess-benefit plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations, and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the plan or
program in question and to the determination of any committee administering such
plan or program.
-2-
<PAGE>
4. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Employee's
-----------------------------------------
employment with the Company terminates at any time within twenty-four (24)
months after a Change of Control, then, subject to Section 5, the Employee shall
be entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination (as defined below) other than
for Cause (as defined below), then the Employee shall be entitled to receive a
continuation of the Employee's Base Compensation for a period equal to twelve
(12) months. In addition, the Employee shall be entitled to a payment of a
pro-rata portion of the Target Bonus as shall be determined by multiplying the
- --------
Target Bonus by a fraction, the numerator of which shall be the number of days
in which the Employee was employed by the Company in the fiscal year in which
such termination occurs, and the denominator of which shall be the number of
days in such fiscal year, such payment to be made in a lump sum within ten (10)
business days after the Termination Date.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's termination by reason of the Employee's voluntary resignation (and in
not an Involuntary Termination), or if the Employee is terminated for Cause,
then the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and policies at the time of such
termination.
(iii) Disability: Death. If the Company terminates the
-----------------
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except
those (if any) as may then be established under the Company's then existing
severance and benefits plans and policies at the time of such Disability or
Death.
(b) Termination Apart from Change of Control. If, during the term of
----------------------------------------
this Agreement, the Employee's employment with the Company terminates, either
prior to the occurrence of a Change of Control or after the twenty-four (24)
month period following a Change of Control, then, subject to Section 5, the
Employee shall be entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Employee shall be entitled to receive continuation of the Employee's Base
Compensation for the period of six (6) months. In addition, the Employee shall
be entitled to a payment of a pro-rata portion of the Target Bonus as shall be
--------
determined by multiplying the Target Bonus by a fraction, the numerator of which
shall be the number of days in which the Employee was employed by the Company in
the fiscal year in which such termination occurs, and the denominator of which
shall be the number of days in such fiscal year, such payment to be made in a
lump sum within ten (10) business days after the Termination Date.
-3-
<PAGE>
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's termination by reason of the Employee's voluntary resignation (and in
not an Involuntary Termination), or if the Employee is terminated for Cause,
then the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and policies at the time of such
termination.
(iii) Disability; Death. If the Company terminates the
-----------------
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except
those (if any) as may then be established under the Company's then existing
severance and benefits plans and policies at the time of such Disability or
Death.
(c) Benefits. In the event the Employee is entitled to severance
--------
benefits pursuant to subsection 4(a)(i) or subsection 4(b)(i), then in addition
to such severance benefits, the Employee shall receive 100% Company-paid health,
dental and life insurance coverage as provided to such employee immediately
prior to the Employee's termination ( the "Company-Paid Coverage"). If such
coverage included the Employee's dependents immediately prior to the
Employee's's termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue for (i) twelve (12) months
following termination in the case of a termination described in 4(a)(i), or (ii)
six (6) months following termination in the case of a termination described in
subsection 4(b)(i) , in either case until (and to the extent) the Employee
becomes covered under another employer's group health, dental or life insurance
plan. In addition, without regard to the reason for termination of the
Employee's employment: (i) the Company shall pay the Employee any unpaid salary
due for periods prior to the Termination Date; (ii) the Company shall pay the
Employee all of the Employee's accrued and unused PTO ("Personal Time Off")
through the Termination Date; and (iii) following submission of proper expense
reports by the Employee, the Company shall reimburse the Employee for all
expenses reasonably and necessarily incurred by the Employee in connection with
the business of the Company prior to termination. These payments shall be made
promptly upon termination and within the period of time mandated by law.
(d) Options. In the event the Employee is entitled to severance
-------
benefits pursuant to subsection 4(a)(i), upon such termination, in addition to
any portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall become exercisable as to an
additional amount as though the Employee had remained continuously employed for
a period of thirty-six (36) months following such termination, for the period
prescribed in such option plans. In the event the Employee is entitled to
severance benefits pursuant to subsection 4(b)(i), upon such termination, in
addition to any portion of the Employee's stock options that were exercisable
immediately prior to such termination, such options shall become exercisable as
to an additional amount as though the Employee had remained continuously
employed for a period of twelve (12) months following such termination, for the
period prescribed in such option plans
-4-
<PAGE>
5. Limitations on Payments. In the event that the severance and other
-----------------------
benefits provided for in this Agreement or otherwise payable to the Employee (i)
constitute "parachute payments" with in the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the"Code") and (ii) but for this
Section, would be subject to the excise tax imposed by Section 4999 of the Code,
then the Employee's severance benefits under Section 4(a)(i), as applicable,
shall be payable either
(a) in full, or
(b) as to such lessor amount which would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the Code,
whichever of the following amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis, of the greatest amount of
severance benefits under subsection 4(a)(i), notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 5 shall be made in writing by the
Company's independent public accountants (the "Accountant"), whose determination
shall be conclusive and binding upon the Employee and the Company for all
purposes. For the purposes of making calculation required by this Section 5, the
Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may relay on reasonable, good faith interpretations
concerning the application of Sections 280G and 4999 of the Code. The Company
and the Employee shall furnish to the Accountants such information and documents
as the Accountants may reasonably request in order to make a determination under
this Section. The Company shall bear all costs the Accountant may reasonable
incur in connection with any calculations contemplated by this Section 5.
6. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
30% or more of the total voting power represented by the Company's then
outstanding voting securities; or
-5-
<PAGE>
(ii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period, as a result of which fewer than
a majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual whose election or nomination is in connection with an
actual threatened proxy contest relating to the election of directors to the
Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such a merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
(b) Involuntary Termination. "Involuntary Termination" shall mean
-----------------------
(i) without the Employee's express written consent, a significant reduction of
the Employee's duties, position or responsibilities, or the removal of the
Employee from such position and responsibilities, unless the Employee is
provided with a comparable position (i.e., a position of equal or greater
organizational level, duties, authority, compensation and status); (ii) without
the Employee's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space and
location) available to the Employee immediately prior to such reduction; (iii) a
reduction by the Company in the Base Compensation of the Employee as in effect
immediately prior to such reduction; (iv) a material reduction by the Company in
the kind or level of employee benefits to which the Employee is entitled
immediately prior to such reduction with the result that the Employee's overall
benefits package is significantly reduced; (v) the relocation of the Employee to
a facility or a location more than 25 miles from the Employee's then present
location, without the Employee's express written consent; (vi) any purported
termination of the Employee by the Company which is not affected for Disability
or for Cause, or any purported termination for which the grounds relied upon are
not valid; or (vii) the failure of the Company to obtain the assumption of this
agreement by any successors contemplated in Section 7 below.
(c) Cause. "Cause" shall mean (i) any act of personal dishonesty
-----
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee, (ii) the
conviction of a felony which the Board reasonably believes had or will have a
material detrimental effect on the Company's reputation or business, (iii) a
willful act by the Employee which constitutes gross misconduct and which is
injurious to the Company, and (iv) continued violations by the Employee of the
Employee's obligations which are demonstrably willful and deliberate on the
Employee's part after there has been delivered to the
-6-
<PAGE>
Employee a written demand for performance from the Company which describes the
basis for the Company's belief that the Employee has not substantially performed
his duties.
(d) Disability. "Disability" shall mean that the Employee has been
----------
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the Employee
or the Employee's legal representative (such Agreement as to acceptability not
to be unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written by the Company of its intention to
terminate the Employee's employment. In the event that the Employee resumes the
performance of substantially all of his duties hereunder before the termination
of his employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
(e) Termination Date. "Termination Date" shall mean (i) if this
----------------
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee shall
not have returned to the performance of the Employee's duties on a full-time
basis during such thirty (30) day period), (ii) if the Employee's employment is
terminated by the Company for any other reason, the date on which a notice of
termination is given, provided that if within (30) days after the Company gives
the Employee notice of termination, the Employee notifies the Company that a
dispute exists concerning the termination, the Termination Date shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected), or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligation under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) Employee's Successors. The terms of this Agreement and all
---------------------
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
-7-
<PAGE>
8. Notice.
------
(a) General. Notices and all other communications contemplated by
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be delivered to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with this Section 8 of this Agreement. Such notice
shall indicate, the specific termination provision in this Agreement relied
upon, shall be set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which shall be not more than 30 days after
the giving of such notice). The failure by the Employee to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not wave any right of the Employee hereunder or preclude the
Employee from asserting such fact or circumstance in enforcing his right
hereunder.
9. Arbitration. At the option of either party, any and all disputes or
-----------
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and regulations of that
Association.
The arbitrator shall be selected as follows: in the event the Company and
the Employee agree on one arbitrator, the arbitration shall be conducted by such
arbitrator. In the event the Company and the Employee do not do agree, the
Company and the Employee shall each select one independent, qualified arbitrator
and the two arbitrators so selected shall select the third arbitrator. The
Company reserves the right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
Arbitration shall take place at San Jose, California, or any other location
mutually agreeable to the parties. At the request of either party, arbitration
proceedings will be conducted in the utmost secrecy; in such case all documents,
testimony and records shall be received, heard and maintained by the arbitrators
in secrecy under seal, available for the inspection only of the Company or the
Employee and their respective attorneys and their respective experts who shall
agree in advance and in writing to receive all such information confidentially
and to maintain such information in secrecy until such information shall become
generally known. The arbitrator, who shall act by majority vote, shall be able
to decree any and all relief of an equitable nature, including but not limited
to such relief as a temporary restraining order, a temporary and/or a permanent
injunction, and shall also be able to award damages, with, or without an
accounting and costs, provided that punitive damages
-8-
<PAGE>
shall not be awarded. The decree or judgment of an award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
Reasonable notice of the time and place of arbitration shall be given to
all persons, other than the parties, as shall be required by law, in which case
such persons or those authorized representatives shall have the right to attend
and/or participate in all the arbitration hearings in such manner as the law
shall require.
10. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representation or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) No Assignment of Benefits. The rights of any person to payments
-------------------------
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
-9-
<PAGE>
(h) Assignment by Company. The Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of the assignment. In the
event of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Employee.
(i) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
-10-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
COMPANY NOTIFY CORPORATION
By:__________________________________
Title:_______________________________
Date:________________________________
EMPLOYEE _____________________________________
_____________________________________
Date:
-11-
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
This employment agreement (the "Agreement") is made and entered into
effective as of (the "Effective Date"), by and between Gerald Rice (the
"Employee") and Notify Corporation (the "Company").
RECITALS
--------
A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interest of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of
Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
In Consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company shall employ the Employee in the position of
--------
Chief Financial Officer, with such duties, responsibilities and compensation as
in effect as of the Effective Date (as defined below); provided, however, that
the Board shall have the right, prior to the occurrence of a Change of Control,
to revise such responsibilities and compensation from time to time as the Board
may deem necessary or appropriate.
(b) Obligations. The Employee shall devote his full business efforts
-----------
and time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from
<PAGE>
engaging in such activities and services as do not interfere or conflict with
his responsibilities to the Company.
2. At-Will Employment. The Company and the Employee acknowledge the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or other agreements with the Company at the time of termination. The
terms of this Agreement shall be extended so as to terminate two (2) years from
the Effective Date (unless extended for an additional period or periods by the
Company and the Employee by mutual written agreement), provided that in the
event of a Change of Control of the Company prior to such termination, the terms
of this Agreement shall be extended so as to terminate twenty-four (24) months
after such Change of Control, subject in either case to earlier termination as
of the date that all obligations of the parties hereunder have been satisfied.
A termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Compensation. The Company shall pay the Employee as
-----------------
compensation for services a base salary at an annualized rate of $95,000. Such
salary shall be reviewed at least annually and shall be increased from time to
time subject to accomplishment of such performance and contribution goals and
objectives as may be established from time to time by the Board. Such salary
shall be paid periodically in accordance with normal Company payroll. The annual
compensation specified in this Section 3(a), together with any increases in such
compensation that the Board may grant from time to time, is referred to in this
Agreement as "Base Compensation".
(b) Bonus. Beginning with the Company's current fiscal year and for
-----
each fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus payable
hereunder shall be payable in accordance with the Company's normal practices and
policies.
(c) Employee Benefits. The Employee shall be eligible to participate
-----------------
in the employee benefit plans and executive compensation programs maintained by
the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, deferred
compensation plans, supplemental retirement or excess-benefit plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations, and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the plan or
program in question and to the determination of any committee administering such
plan or program.
-2-
<PAGE>
4. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Employee's
-----------------------------------------
employment with the Company terminates at any time within twenty-four (24)
months after a Change of Control, then, subject to Section 5, the Employee shall
be entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination (as defined below) other than
for Cause (as defined below), then the Employee shall be entitled to receive a
continuation of the Employee's Base Compensation for a period equal to twelve
(12) months. In addition, the Employee shall be entitled to a payment of a pro-
---
rata portion of the Target Bonus as shall be determined by multiplying the
- ----
Target Bonus by a fraction, the numerator of which shall be the number of days
in which the Employee was employed by the Company in the fiscal year in which
such termination occurs, and the denominator of which shall be the number of
days in such fiscal year, such payment to be made in a lump sum within ten (10)
business days after the Termination Date.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's termination by reason of the Employee's voluntary resignation (and in
not an Involuntary Termination), or if the Employee is terminated for Cause,
then the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and policies at the time of such
termination.
(iii) Disability: Death. If the Company terminates the Employee's
-----------------
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except those (if
any) as may then be established under the Company's then existing severance and
benefits plans and policies at the time of such Disability or Death.
(b) Termination Apart from Change of Control. If, during the term of
this Agreement, the Employee's employment with the Company terminates, either
prior to the occurrence of a Change of Control or after the twenty-four (24)
month period following a Change of Control, then, subject to Section 5, the
Employee shall be entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Employee shall be entitled to receive continuation of the Employee's Base
Compensation for the period of six (6) months. In addition, the Employee shall
be entitled to a payment of a pro-rata portion of the Target Bonus as shall be
--------
determined by multiplying the Target Bonus by a fraction, the numerator
of which shall be the number of days in which the Employee was employed by the
Company in the fiscal year in which such termination occurs, and the denominator
of which shall be the number of days in such fiscal year, such payment to be
made in a lump sum within ten (10) business days after the Termination Date.
-3-
<PAGE>
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's termination by reason of the Employee's voluntary resignation (and in
not an Involuntary Termination), or if the Employee is terminated for Cause,
then the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and policies at the time of such
termination.
(iii) Disability; Death. If the Company terminates the Employee's
-----------------
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except those (if
any) as may then be established under the Company's then existing severance and
benefits plans and policies at the time of such Disability or Death.
(c) Benefits. In the event the Employee is entitled to severance
--------
benefits pursuant to subsection 4(a)(i) or subsection 4(b)(i), then in addition
to such severance benefits, the Employee shall receive 100% Company-paid health,
dental and life insurance coverage as provided to such employee immediately
prior to the Employee's termination ( the "Company-Paid Coverage"). If such
coverage included the Employee's dependents immediately prior to the
Employee's's termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue for (i) twelve (12) months
following termination in the case of a termination described in 4(a)(i), or (ii)
six (6) months following termination in the case of a termination described in
subsection 4(b)(i) , in either case until (and to the extent) the Employee
becomes covered under another employer's group health, dental or life insurance
plan. In addition, without regard to the reason for termination of the
Employee's employment: (i) the Company shall pay the Employee any unpaid salary
due for periods prior to the Termination Date; (ii) the Company shall pay the
Employee all of the Employee's accrued and unused PTO ("Personal Time Off")
through the Termination Date; and (iii) following submission of proper expense
reports by the Employee, the Company shall reimburse the Employee for all
expenses reasonably and necessarily incurred by the Employee in connection with
the business of the Company prior to termination. These payments shall be made
promptly upon termination and within the period of time mandated by law.
(d) Options. In the event the Employee is entitled to severance
-------
benefits pursuant to subsection 4(a)(i), upon such termination, in addition to
any portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall become exercisable as to an
additional amount as though the Employee had remained continuously employed for
a period of thirty-six (36) months following such termination, for the period
prescribed in such option plans. In the event the Employee is entitled to
severance benefits pursuant to subsection 4(b)(i), upon such termination, in
addition to any portion of the Employee's stock options that were exercisable
immediately prior to such termination, such options shall become exercisable as
to an additional amount as though the Employee had remained continuously
employed for a period of twelve (12) months following such termination, for the
period prescribed in such option plans
-4-
<PAGE>
5. Limitations on Payments. In the event that the severance and other
-----------------------
benefits provided for in this Agreement or otherwise payable to the Employee (i)
constitute "parachute payments" with in the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the"Code") and (ii) but for this
Section, would be subject to the excise tax imposed by Section 4999 of the Code,
then the Employee's severance benefits under Section 4(a)(i), as applicable,
shall be payable either
(a) in full, or
(b) as to such lessor amount which would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the Code,
whichever of the following amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis, of the greatest amount of
severance benefits under subsection 4(a)(i), notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 5 shall be made in writing by the
Company's independent public accountants (the "Accountant"), whose determination
shall be conclusive and binding upon the Employee and the Company for all
purposes. For the purposes of making calculation required by this Section 5, the
Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may relay on reasonable, good faith interpretations
concerning the application of Sections 280G and 4999 of the Code. The Company
and the Employee shall furnish to the Accountants such information and documents
as the Accountants may reasonably request in order to make a determination under
this Section. The Company shall bear all costs the Accountant may reasonable
incur in connection with any calculations contemplated by this Section 5.
6. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
30% or more of the total voting power represented by the Company's then
outstanding voting securities; or
-5-
<PAGE>
(ii) A change in the composition of the Board of Directors of the
Company occurring within a two-year period, as a result of which fewer than a
majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual whose election or nomination is in connection with an
actual threatened proxy contest relating to the election of directors to the
Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such a merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
(b) Involuntary Termination. "Involuntary Termination" shall mean (i)
-----------------------
without the Employee's express written consent, a significant reduction of the
Employee's duties, position or responsibilities, or the removal of the Employee
from such position and responsibilities, unless the Employee is provided with a
comparable position (i.e., a position of equal or greater organizational level,
duties, authority, compensation and status); (ii) without the Employee's express
written consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) a reduction by the
Company in the Base Compensation of the Employee as in effect immediately prior
to such reduction; (iv) a material reduction by the Company in the kind or level
of employee benefits to which the Employee is entitled immediately prior to such
reduction with the result that the Employee's overall benefits package is
significantly reduced; (v) the relocation of the Employee to a facility or a
location more than 25 miles from the Employee's then present location, without
the Employee's express written consent; (vi) any purported termination of the
Employee by the Company which is not affected for Disability or for Cause, or
any purported termination for which the grounds relied upon are not valid; or
(vii) the failure of the Company to obtain the assumption of this agreement by
any successors contemplated in Section 7 below.
(c) Cause. "Cause" shall mean (i) any act of personal dishonesty taken
-----
by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee, (ii) the
conviction of a felony which the Board reasonably believes had or will have a
material detrimental effect on the Company's reputation or business, (iii) a
willful act by the Employee which constitutes gross misconduct and which is
injurious to the Company, and (iv) continued violations by the Employee of the
Employee's obligations which are demonstrably willful and deliberate on the
Employee's part after there has been delivered to the
-6-
<PAGE>
Employee a written demand for performance from the Company which describes the
basis for the Company's belief that the Employee has not substantially performed
his duties.
(d) Disability. "Disability" shall mean that the Employee has been
----------
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the Employee
or the Employee's legal representative (such Agreement as to acceptability not
to be unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written by the Company of its intention to
terminate the Employee's employment. In the event that the Employee resumes the
performance of substantially all of his duties hereunder before the termination
of his employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
(e) Termination Date. "Termination Date" shall mean (i) if this
----------------
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee shall
not have returned to the performance of the Employee's duties on a full-time
basis during such thirty (30) day period), (ii) if the Employee's employment is
terminated by the Company for any other reason, the date on which a notice of
termination is given, provided that if within (30) days after the Company gives
the Employee notice of termination, the Employee notifies the Company that a
dispute exists concerning the termination, the Termination Date shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected), or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether direct
--------------------
or indirect and whether by purchase, lease, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligation under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
---------------------
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
-7-
<PAGE>
8. Notice.
------
(a) General. Notices and all other communications contemplated by this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be delivered to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause or
---------------------
by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with this Section 8 of this Agreement. Such notice
shall indicate, the specific termination provision in this Agreement relied
upon, shall be set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which shall be not more than 30 days after
the giving of such notice). The failure by the Employee to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not wave any right of the Employee hereunder or preclude the
Employee from asserting such fact or circumstance in enforcing his right
hereunder.
9. Arbitration. At the option of either party, any and all disputes or
-----------
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and regulations of that
Association.
The arbitrator shall be selected as follows: in the event the Company and
the Employee agree on one arbitrator, the arbitration shall be conducted by such
arbitrator. In the event the Company and the Employee do not do agree, the
Company and the Employee shall each select one independent, qualified arbitrator
and the two arbitrators so selected shall select the third arbitrator. The
Company reserves the right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
Arbitration shall take place at San Jose, California, or any other location
mutually agreeable to the parties. At the request of either party, arbitration
proceedings will be conducted in the utmost secrecy; in such case all documents,
testimony and records shall be received, heard and maintained by the arbitrators
in secrecy under seal, available for the inspection only of the Company or the
Employee and their respective attorneys and their respective experts who shall
agree in advance and in writing to receive all such information confidentially
and to maintain such information in secrecy until such information shall become
generally known. The arbitrator, who shall act by majority vote, shall be able
to decree any and all relief of an equitable nature, including but not limited
to such relief as a temporary restraining order, a temporary and/or a permanent
injunction, and shall also be able to award damages, with, or without an
accounting and costs, provided that punitive damages
-8-
<PAGE>
shall not be awarded. The decree or judgment of an award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
Reasonable notice of the time and place of arbitration shall be given to
all persons, other than the parties, as shall be required by law, in which case
such persons or those authorized representatives shall have the right to attend
and/or participate in all the arbitration hearings in such manner as the law
shall require.
10. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representation or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) No Assignment of Benefits. The rights of any person to payments or
-------------------------
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection (f) shall be void.
(g) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
-9-
<PAGE>
(h) Assignment by Company. The Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of the assignment. In the
event of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Employee.
(i) Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.
-10-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
COMPANY NOTIFY CORPORATION
By: ____________________________________
Title: _________________________________
Date: __________________________________
EMPLOYEE
_______________________________________
Date: _________________________________
-11-
<PAGE>
EXHIBIT 10.5
INDEMNIFICATION AGREEMENT
-------------------------
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of this ___ day of
___, ___ by and between Notify Corporation, a California corporation (the
"Company"), and ___ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee if
-----------------------
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while
an officer or director or by reason of the fact that Indemnitee is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (includ ing attorneys' fees), judgments, fines
and amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld) actually and
reason ably incurred by Indemnitee in connection with such action or
proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the Com pany, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe Indemnitee's conduct was unlawful. The termination of any action 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
- ----------
(i) Indemnitee did not act in good faith and in a manner which Indemnitee
reason-
<PAGE>
ably believed to be in the best interests of the Company, or (ii) with
respect to any criminal action or proceeding, Indemnitee had reasonable cause
to believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be
made a party to any threatened, pending or completed action or proceeding by
or in the right of the Company or any subsidiary of the Company to procure a
judgment in its favor by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while
an officer or director or by reason of the fact that Indemnitee is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) and, to the fullest
extent permitted by law, amounts paid in settlement, in each case to the
extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or proceeding if Indemnitee acted in good
faith and in a manner Indemnitee reasonably believed to be in the best
interests of the Company and its shareholders, except that no indemnification
shall be made in respect of any claim, issue or matter as to which Indemnitee
shall have been adjudged to be liable to the Company in the performance of
Indemnitee's duty to the Company and its shareholders unless and only to the
extent that the court in which such action or proceeding is or was pending
shall determine upon application that, in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for expenses
and then only to the extent that the court shall determine.
2. EXPENSES; INDEMNIFICATION PROCEDURE.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense,
settlement or appeal of any civil or criminal action or proceeding referenced
in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of
any such action or proceeding). Indemnitee hereby undertakes to repay such
amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee within twenty (20) days following delivery of a written
request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to his right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). Notice shall be deemed received three business days after the
date postmarked if sent by domestic certified or registered mail, properly
addressed; otherwise notice shall be deemed received when such notice shall
actually be received by the Company. In addition, Indemnitee shall give the
Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
-2-
<PAGE>
(c) Procedure. Any indemnification provided for in Section 1 shall be
---------
made no later than forty-five (45) days after receipt of the written request
of Indemnitee. If a claim under this Agreement, under any statute, or under
any provision of the Company's Articles of Incorporation or By-laws providing
for indemnification, is not paid in full by the Company within forty-five (45)
days after a written request for payment thereof has first been received by
the Company, Indemnitee may, but need not, at any time thereafter bring an
action against the Company to recover the unpaid amount of the claim and,
subject to Section 12 of this Agreement, Indemnitee shall also be entitled to
be paid for the expenses (including attorneys' fees) of bringing such action.
It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in connection with any action or
proceeding in advance of its final disposition) that Indemnitee has not met
the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company, and Indemnitee shall be entitled
to receive interim payments of expenses pursuant to Subsection 2(a) unless and
until such defense may be finally adjudicated by court order or judgment from
which no further right of appeal exists. It is the parties' intention that if
the Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its shareholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee
or subgroup of the Board of Directors, independent legal counsel, or its
shareholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 2(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on
behalf of the Indemnitee, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 2(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, with counsel approved by Indemnitee, which
approval shall not be unreasonably withheld, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by
the Company, the Company will not be liable to Indemnitee under this Agreement
for any fees of counsel subsequently incurred by Indemnitee with respect to
the same proceeding, provided that (i) Indemnitee shall have the right to
employ his coun sel in any such proceeding at Indemnitee's expense; and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized
by the Company, (B) Indemnitee shall have reasonably concluded that there may
be a conflict of interest between the Company and Indemnitee in the conduct of
any such defense or (C) the Company shall not, in fact, have employed counsel
to assume
-3-
<PAGE>
the defense of such proceeding, then the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the
Company's Articles of Incorporation, the Company's By-laws or by statute. In
the event of any change, after the date of this Agreement, in any applicable
law, statute or rule which expands the right of a California corporation to
indemnify a member of its board of directors or an officer, such changes shall
be, ipso facto, within the purview of Indemnitee's rights and Company's
---- -----
obligations, under this Agreement. In the event of any change in any
applicable law, statute or rule which narrows the right of a California
corporation to indemnify a member of its Board of Directors or an officer,
such changes, to the extent not otherwise required by such law, statute or
rule to be applied to this Agreement shall have no effect on this Agreement or
the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be
entitled under the Company's Articles of Incorporation, its By-laws, any
agreement, any vote of shareholders or disinterested directors, the California
General Corporation Law, or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while holding such
office. The indemnification provided under this Agreement shall continue as to
Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though he may have ceased to serve in such capacity at the time
of any action or other covered proceeding.
4. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of
the expenses, judgments, fines or penalties actually or reasonably incurred by
him in the investigation, defense, appeal or settlement of any civil or
criminal action or proceeding, but not, however, for the total amount there
of, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
5. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, Federal law or applicable public policy may
prohibit the Company from indemnifying its directors and officers under this
Agreement or otherwise. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
Securities and Exchange Commission to submit the question of indemnification
to a court in certain circumstances for a determination of the Company's right
under public policy to indemnify Indemnitee.
6. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company shall, from
--------------------------------------------
time to time, make the good faith determination whether or not it is
practicable for the Company to obtain
-4-
<PAGE>
and maintain a policy or policies of insurance with reputable insurance
companies providing the officers and directors of the Company with coverage for
losses from wrongful acts, or to ensure the Company's performance of its
indemnification obligations under this Agreement. Among other considerations,
the Company will weigh the costs of obtaining such insurance coverage against
the protection afforded by such coverage. In all policies of directors' and
officers' liability insurance, Indemnitee shall be named as an insured in such a
manner as to provide Indemnitee the same rights and benefits as are accorded to
the most favorably insured of the Company's directors, if Indemnitee is a
director; or of the Company's officers, if Indemnitee is not a director of the
Company but is an officer; or of the Company's key employees, if Indemnitee is
not an officer or director but is a key employee. Notwithstanding the
foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reason ably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company.
7. SEVERABILITY. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach
of this Agreement. The provisions of this Agreement shall be severable as
provided in this Section 7. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee to the full extent permitted
by any applicable portion of this Agreement that shall not have been
invalidated, and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms.
8. EXCEPTIONS. Any other provision herein to the contrary notwithstanding,
----------
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or
-------------
transactions from which a director may not be relieved of liability under the
California General Corporation Law.
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses to
------------------------------
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 317 the California General Corporation Law, but such indemnification
or advancement of expenses may be provided by the Company in specific cases if
the Board of Directors has approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
-5-
<PAGE>
(d) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy
of directors' and officers' liability insurance maintained by the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and
--------------------------
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of
1934, as amended, or any similar successor statute.
9. EFFECTIVENESS OF AGREEMENT. To the extent that the indemnification
--------------------------
permitted under the terms of certain provisions of this Agreement exceeds the
scope of the indemnification provided for in the California General
Corporation Law, such provisions shall not be effective unless and until the
Company's Articles of Incorporation authorize such additional rights of
indemnification. In all other respects, the balance of this Agreement shall be
effective as of the date set forth on the first page and may apply to acts or
omissions of Indemnitee which occurred prior to such date if Indemnitee was an
officer, director, employee or other agent of the Company, or was serving at
the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, at
the time such act or omission occurred.
10. CONSTRUCTION OF CERTAIN PHRASES.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a con stituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, employees or agents, so
that if Indemnitee is or was a director, officer, employee or agent of such
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, Indemnitee
shall stand in the same position under the provisions of this Agreement with
respect to the resulting or surviving corporation as Indemnitee would have
with respect to such constituent corporation if its separate existence had
continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company 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.
11. COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
-6-
<PAGE>
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
13. ATTORNEYS' FEES. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, the court of competent
jurisdiction determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the
Company under this Agreement or to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all court costs and
expenses, including attorneys' fees, incurred by Indemnitee in defense of such
action (including with respect to Indemnitee's counterclaims and cross-claims
made in such action), unless as a part of such action the court determines
that each of Indemnitee's material defenses to such action were made in bad
faith or were frivolous.
14. NOTICE. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of
such receipt, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked.
Addresses for notice to either party are as shown on the signature page of
this Agreement, or as subsequently modified by written notice.
15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
------------------------
irrevocably consent to the jurisdiction of the courts of the State of
California for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any action
instituted under this Agreement shall be brought only in the state courts of
the State of California.
16. CHOICE OF LAW. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of California as applied to
contracts between California residents entered into and to be performed entirely
within California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
NOTIFY CORPORATION
By: _________________________________
Title: ______________________________
Address: 1054 South De Anza Blvd, Suite 105
San Jose, CA 95129
-7-
<PAGE>
AGREED TO AND ACCEPTED:
INDEMNITEE:
______________________________
(type name)
______________________________
(signature)
-8-
<PAGE>
EXHIBIT 10.6
ESCROW AGREEMENT
----------------
AGREEMENT, dated as of the 27th day of January, 1997 and effective as of
the Effective Date, as defined herein, by and among American Stock Transfer &
Trust Company, a New York corporation (hereinafter referred to as the "Escrow
Agent"), Notify Corporation, a California corporation (the "Company"), and the
shareholders of the Company who have executed this agreement (hereinafter
collectively called the "Shareholders").
WHEREAS, the Company contemplates a public offering ("Public Offering") of
Units ("Units"), each Unit consisting of one share of its Common Stock, $.001
par value (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 (the "Registration Statement") on Form SB-2 to be filed
with the Securities and Exchange Commission ("SEC"); and
WHEREAS, the Shareholders have agreed to deposit in escrow an aggregate of
1,374,545 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 Shareholders and the Company hereby appoint American Stock Transfer
& Trust Company as Escrow Agent and agree that the Shareholders will, prior to
the filing of the Registration Statement relating to the Public Offering,
deliver to the Escrow Agent to hold in accordance with the provisions hereof,
certificates representing an aggregate of 1,374,545
<PAGE>
shares of Common Stock owned of record by the Shareholders in the respective
amounts set forth on Exhibit A hereto (the "Escrow Shares"), together with
---------
stock powers executed in blank. The Escrow Agent, by its execution and
delivery of this Agreement hereby acknowledges receipt of the Escrow Shares
and accepts its appointment as Escrow Agent to hold the Escrow Shares in
escrow, upon the terms, provisions and conditions hereof.
2. This Agreement shall become effective upon the date on which the
Securities and Exchange Commission declares effective the Registration Statement
("Effective Date") and shall continue in effect until the earlier of (i) the
date specified in paragraph 4(e) hereof or (ii) the distribution by the Escrow
Agent of all of the Escrow Shares in accordance with the terms hereof (the
"Termination Date"). The period of time from the Effective Date until the
Termination Date is referred to herein as the "Escrow Period."
3. During the Escrow Period, the Escrow Agent shall receive all of the
money, securities, rights or property distributed in respect of the Escrow
Shares then held in escrow, including any such property distributed as dividends
or pursuant to any stock split, merger, recapitalization, dissolution, or total
or partial liquidation of the Company, such property to be held and distributed
as herein provided and hereinafter referred to collectively as the "Escrow
Property."
4.(a) The Escrow Shares are subject to release to the Shareholders 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 687,273 of the Escrow Shares and the Escrow Property deposited in escrow
with respect to such Escrow Shares, to the respective Shareholders, if, and only
if, one of the following conditions is met:
-2-
<PAGE>
(i) the Company's net income before provision for income taxes
and exclusive of any extraordinary earnings (all as audited and determined by
the Company's independent public accountants) (the "Minimum Pretax Income")
amounts to at least $1.875 million for either the fiscal year ending on
September 30, 1997 or for the fiscal year ending on September 30, 1998; or
(ii) the Minimum Pretax Income amounts to at least $3.0 million
for the fiscal year ending on September 30, 1999; or
(iii) the Minimum Pretax Income amounts to at least $4.5 million
for the fiscal year ending on September 30, 2000; or
(iv) the Minimum Pretax Income amounts to at least $6.0 million
for the fiscal year ending on September 30, 2001; or
(v) the Minimum Pretax Income amounts to at least $9.0 million
for the fiscal year ending on September 30, 2002; or
(vi) commencing at the Effective Date and ending 18 months after
the Effective Date, the Bid Price of the Company's Common Stock shall average
in excess of $12.00 per share (subject to adjustment in the event of any
reverse stock splits or other similar events) for 30 consecutive business
days; or
(vii) commencing 18 months from the Effective Date and ending 36
months after the Effective Date, the Bid Price shall average in excess of
$15.00 per share (subject to adjustment in the event of any reverse stock
splits or other similar events) for 30 consecutive business days.
(viii) the Company is acquired by or merged into another entity in
a transaction in which shareholders of the Company receive per share
consideration at least equal to the level set forth in (vi) above.
(b) The Escrow Agent, upon notice to such effect from the Company as
provided in paragraph 5 hereof, shall deliver the remaining 687,272 Escrow
Shares, together with stock powers executed in blank, and the Escrow Property
deposited in escrow with respect to such Escrow Shares, to the respective
Shareholders, if, and only if, one of the following conditions is met:
(i) the Minimum Pretax Income amounts to at least $3.0 million for
either the fiscal year ending on September 30, 1997 or for the fiscal year
ending on September 30, 1998; or
-3-
<PAGE>
(ii) the Minimum Pretax Income amounts to at least $4.5 million
for the fiscal year ending on September 30, 1999; or
(iii) the Minimum Pretax Income amounts to at least $6.0 million
for the fiscal year ending on September 30, 2000; or
(iv) the Minimum Pretax Income amounts to at least $7.5 million
for the fiscal year ending on September 30, 2001; or
(v) the Minimum Pretax Income amounts to at least $10.5 million
for the fiscal year ending on September 30, 2002; and
(vi) commencing at the Effective Date and ending 18 months after
the Effective Date, the Bid Price of the Company's Common Stock shall average
in excess of $13.30 per share (subject to adjustment in the event of any
reverse stock splits or other similar events) for 30 consecutive business
days; or
(vii) commencing 18 months from the Effective Date and ending 36
months after the Effective Date, the Bid Price shall average in excess of
$16.75 per share (subject to adjustment in the event of any reverse stock
splits or other similar events) for 30 consecutive business days.
(viii) the Company is acquired by or merged into another entity in
a transaction in which shareholders of the Company receive per share
consideration at least equal to the level set forth in (vi) above.
(c) As used in this Section 4, the term "Closing Price" shall be
subject to adjustments in the event of any stock dividend, stock distribution,
stock split or other similar event and shall mean:
(i) If the principal market for the 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
(ii) if the principal market for the Common Stock is not a
national securities exchange or the Nasdaq National Market and 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 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.
-4-
<PAGE>
(d) The determination of Minimum Pretax Income shall be determined by
the Company's independent public accountants in accordance with U.S. generally
accepted accounting principles provided that such determination is calculated
exclusive of any extraordinary earnings or charges (including any charges
incurred by the Company in connection with the release from escrow of the
Escrow Shares and any Escrow Property in respect thereof pursuant to the
provisions of this paragraph 4).
(e) In the event of any issuance (such issuance being herein called a
"Change of Shares") of additional shares of Common Stock (or securities
convertible into or exchangeable for Common Stock without the payment of
additional consideration, referred to as "Convertible Securities") after the
Effective Date, then each of the Minimum Pretax Income amounts set forth in
subparagraph (a) above shall be increased to an amount (the "Adjusted Minimum
Pretax Income") calculated in accordance with the formula set forth in
subparagraph (ii) below.
(i) For purposes of the foregoing paragraph, a Change of Shares
shall exclude shares of Common Stock sold in the Public Offering, Common Stock
or Convertible Securities issued in connection with a stock split or stock
dividend or distribution, and Common Stock issued upon the exercise of options
or warrants granted prior to the effective date, but shall include any shares
of Common Stock or Convertible Securities that are issued upon the exercise of
the Class A Warrants, the Class B Warrants or any other options or warrants
granted after the Effective Date by the Company.
(ii) Each Adjusted Minimum Pretax Income amount shall be
calculated by multiplying the applicable Minimum Pretax Income amount prior to
the Change of Shares by a fraction, the numerator of which shall be the
weighted average number of shares of Common Stock outstanding during the
fiscal year for which the determination is being made (including the Escrow
Shares, any shares of Common Stock issuable upon the conversion of any
Convertible Securities and any shares of Common Stock issuable upon the
exercise of warrants and options outstanding immediately prior to the
effective date, but excluding treasury stock), and the denominator of which
shall be the sum of (x) the number of shares of Common Stock outstanding on
the Effective Date (including the Escrow Shares and any shares of Common Stock
issuable upon the conversion of Convertible Securities or the exercise of
warrants and options outstanding immediately prior to the Effective Date) plus
(y) the number of shares of
-5-
<PAGE>
Common Stock sold by the Company pursuant to the Prospectus included in the
Registration Statement, after adjustment for any stock dividends, stock splits
or similar events. The Adjusted Minimum Pretax Income amounts shall be
calculated successively whenever such a Change of Shares occurs.
(f) If the Escrow Agent has not received the notice provided for in
Paragraph 5 hereof on or prior to December 31, 2002, the Escrow Agent shall
deliver the certificates representing the remaining Escrow Shares, together
with stock powers executed in blank, and any related Escrow Property to the
Company to be placed in the Company's treasury for cancellation thereof as a
contribution to capital. After such date, the Shareholders shall have no
further rights as a shareholder of the Company with respect to any of the
canceled Escrow Shares.
5. Upon the occurrence or satisfaction of any of the events or
conditions specified in Paragraph 4 hereof, the Company shall promptly give
appropriate notice to the Escrow Agent, the Underwriter (and if the transfer
agent of the Company's Common Stock is different from the Escrow Agent, such
transfer agent) and present such documentation as is reasonably required by the
Escrow Agent to evidence the satisfaction of such conditions.
6. It is understood and agreed by the parties to this Agreement as
follows:
(a) The Escrow Agent is not and shall not be deemed to be a
trustee for any party for any purpose and is merely acting as a depository and
in a ministerial capacity hereunder with the limited duties herein prescribed.
(b) The Escrow Agent does not have and shall not be deemed to
have any responsibility in respect of any instruction, certificate or notice
delivered to it or of the Escrow Shares or any related Escrow Property other
than faithfully to carry out the obligations undertaken in this Agreement
-6-
<PAGE>
and to follow the directions in such instruction or notice provided in
accordance with the terms hereof.
(c) The Escrow Agent is not and shall not be deemed to be liable
for any action taken or omitted by it in good faith and may rely upon, and act
in accordance with, the advice of its counsel without liability on its part for
any action taken or omitted in accordance with such advice. In any event, its
liability hereunder shall be limited to liability for gross negligence, willful
misconduct or bad faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in
accordance with any certificate, instruction, notice, letter, telegram,
cablegram or other written instrument believed by it to be genuine and to have
been signed by the proper party or parties.
(e) The Company agrees (i) to pay the Escrow Agent's reasonable
fees and to reimburse it for its reasonable expenses including 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 Shareholders 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.
-7-
<PAGE>
(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 Shareholders 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 Shareholders and the Company. The Escrow Agent shall not be
required to institute legal proceedings of any kind.
(g) The Escrow Agent shall not, by act, delay, omission or
otherwise, be deemed to have waived any right or remedy it may have either under
this Agreement or generally, unless such waiver be in writing, and no waiver
shall be valid unless it is in writing, signed by the Escrow Agent, and only to
the extent expressly therein set forth. A waiver by the Escrow Agent under the
term of this Agreement shall not be construed as a bar to, or waiver of, the
same or any other such right or remedy which it would otherwise have on any
other occasion.
(h) The Escrow Agent may resign as such hereunder by giving 30
days written notice thereof to the Shareholders and the Company. Within 20 days
after receipt of such notice, the Shareholders and the Company shall furnish to
the Escrow Agent written instructions for the release of the Escrow Shares and
any related Escrow Property (if such shares and property, if any, have not yet
been released pursuant to Paragraph 4 hereof) to a substitute Escrow Agent which
(whether designated by written instructions from the Shareholders and the
Company jointly or in the absence thereof by instructions from a court of
competent jurisdiction to the Escrow Agent) shall be a bank or trust company
organized and doing business under the laws of the United States or any state
thereof. Such substitute Escrow Agent shall thereafter hold any Escrow Shares
and any
-8-
<PAGE>
related Escrow Property received by it pursuant to the terms of this Agreement
and otherwise act hereunder as if it were the Escrow Agent originally named
herein. The Escrow Agent's duties and responsibilities hereunder shall
terminate upon the release of all shares then held in escrow according to such
written instruction or upon such delivery as herein provided. This Agreement
shall not otherwise be assignable by the Escrow Agent without the prior
written consent of the Company.
7. The Shareholders 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 Shareholders 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 Shareholders or to any trust for the benefit of the Shareholders, provided
that such transferees agree to be bound by the provisions of this Agreement.
(b) The Shareholders will take any action necessary or appropriate,
including the execution of any further documents or agreements, in order to
effectuate the transfer of the Escrow Shares to the Company if required
pursuant to the provisions of this Agreement.
9. Each of the certificates representing the Escrow Shares will bear
legends to the following effect, as well as any other legends required by
applicable law:
(a) "The sale, transfer, hypothecation, negotiation, pledge, assignment,
encumbrance or other disposition of the shares evidenced by this certificate are
restricted by and are subject to all of the terms, conditions and provisions of
a certain Escrow Agreement entered into among D.H. Blair
-9-
<PAGE>
Investment Banking Corp., Notify Corporation and its Shareholders, dated as of
January 27 , 1997, a copy of which may be obtained from the Notify
Corporation. No transfer, sale or other disposition of these shares may be
made unless specific conditions of such agreement are satisfied.
(b) "The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended. No transfer, sale or other
disposition of these shares may be made unless a registration statement with
respect to these shares has become effective under said act, or the Company is
furnished with an opinion of counsel satisfactory in form and substance to it
that such registration is not required."
Upon execution of this Agreement, the Company shall direct the
transfer agent for the Company to place stop transfer orders with respect to the
Escrow Shares and to maintain such orders in effect until the transfer agent and
the Underwriter shall have received written notice from the Company as provided
in Paragraph 5.
10. 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:
Notify Corporation
1054 South De Anza Blvd., Suite 105
San Jose, California 95129
Attn: Paul F. DePond
(ii) If to the Shareholders 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
-10-
<PAGE>
(iv) If to the Underwriter, to:
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
Attn: 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 Shareholders or
the Escrow Agent shall be sent by ordinary mail to Wilson Sonsini Goodrich &
Rosati, 650 Page Mill Road, Palo Alto, California 94304, Attention: Henry P.
Massey, Jr., Esq. A copy of all communications sent to the Underwriter shall be
sent by ordinary mail to Bachner, Tally, Polevoy & Misher LLP, 380 Madison
Avenue, New York, NY 10017, Attention: Fran Stoller, Esq.
11. Except as set forth in paragraph 12 hereof, this Agreement may
not be modified, altered or amended in any material respect or cancelled or
terminated except with the prior consent of the holders of all of the
outstanding shares of Common Stock of the Company.
12. In the event that (i) the Registration Statement is not declared
effective by the SEC within one year from the date of the filing of the
Registration Statement with the SEC or (ii) the Public Offering is not
consummated within twenty-five (25) days of the Effective Date of the
Registration Statement, this Agreement shall terminate and be of no further
force and effect and the Escrow Agent, upon written notice from both the Company
and the Underwriter in accordance with paragraph 10 hereof of such termination,
will return the Escrow Shares and any
-11-
<PAGE>
Escrow Property in respect thereof to the Shareholders.
13. This Agreement shall be governed by and construed in accordance
with the laws of New York and shall be binding upon and inure to the benefit of
all parties hereto and their respective successors in interest and assigns.
14. This Agreement may be executed in several counterparts, which
taken together shall constitute a single instrument.
-12-
<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.
NOTIFY CORPORATION
By: ______________________
Title: ______________________
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: ______________________
Title: ______________________
SHAREHOLDER
____________________________
____________________________
(Name, printed or typed)
Name and title of signatory if signatory is an
entity
____________________________
____________________________
[SIGNATURE PAGE TO ESCROW AGREEMENT]
-13-
<PAGE>
EXHIBIT A
NOTIFY CORPORATION
SHAREHOLDER ESCROW SHARES ESCROW WARRANTS
Dr. Charles Afeman 18,901 0
6832 Highland Road
Baton Rouge, LA 70808
Ms. Mary Aull 25,201 0
6 Pyixe Lane
San Carlos, CA 94070
Mr. Mike Ballard 39,712 4,154
10020 Chapel Road
Potomac, MD 20854
Mr. Paul Baran 0 0
83 James Ave.
Atherton, CA 94027
Mr. Joel Baudouin 1,444 414
765 Live Oak Avenue, Apt. F
Menlo Park, CA 94025
Mr. Barry Bellue 29,611 0
2601 East Lakeshore
Baton Rouge, LA 70808
Dr. Joel Birnbaum 3,572 1,038
27760 Edgerton Road
Los Altos Hills, CA 94022
Mr. Donald Blockhas 5,040 0
One First Street, Suite 11
Los Altos, CA 94022
Ms. Sheila Breeding 3,533 1,038
875 Garden Drive
San Jose, CA 95126
Mr. David Brewer 12,600 0
Hanabusa Investments
1442 Harker Ave.
Palo Alto, CA 94301-3426
-14-
<PAGE>
SHAREHOLDER ESCROW SHARES ESCROW WARRANTS
Mr. Gari Cheever 2,520 0
Brobeck, Phleger & Harrison
2200 Geng Road
Palo Alto, CA 94303
Mr. William Cook 6,825 0
1615 Bel Air Avenue
San Jose, CA 95126
Mr. Richard Crandall 0 2,520
555 Briarwood Circle
Ann Arbor, MI 48108
Mr. Paul De Zan 25,201 3,150
124 Bloomfield Rd.
Burlingame, CA 94010
Mr. Paul DePond 311,135 60,396
431 Fulton Road
San Mateo, CA 94402
Mr. Thomas Frazer 18,901 0
1450 Knollwood Dr.
Baton Rouge, LA 70808
Mr. Paul Fries 2,520 0
1075 Jessica Drive
Livermore, CA 94550
Mr. Mark Hanson 3,780 0
507 Cornell Ave.
San Mateo, CA 94402
Ms. Donna Helliwell 3,938 0
1761 Killdear Court
Sunnyvale, CA 94087
Mr. Mark Hoenig 6,300 0
7821 Oxbow Lane
Dublin, CA 94568
Mr. Eric Houg 1,890 0
19400 Sorenson Ave. Apt 115
Cupertino, CA 95014
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<PAGE>
SHAREHOLDER ESCROW SHARES ESCROW WARRANTS
Mr. Charles House 12,600 0
22 Preston Road
Woodside, CA 94062
Mr. Lars Karlsson 18,901 9,450
12251 Menalto Drive
Los Altos, CA 94022
Mr. Stephen La Vaute 6,300 0
13561 Hill Way
Los Altos Hills, CA 94022
Ms. Kathy Lane 5,040 0
10695 Magdelana
Los Altos Hills, CA 94024
Mr. Gaylan Larson 149,616 0
899 Boulder Drive
San Jose, CA 95132
Mr. Arthur Laursen 6,300 3,150
116 Winover Dr.
Danville, CA 94506
Mr. Thomas Mancino 9,927 1,038
2190 Washington St. # 901
San Francisco, CA 94109
Mr. David Markus 3,150 0
215 North Santa Cruz
Los Gatos, CA 95030
Mr. Henry Massey 7,750 414
12670 Viscaino Ct.
Los Altos, CA 94022
Ms. Jacquelin McDonald 64,915 4,154
SIPPL MacDonald Ventures, L.P.
5 Elder Court
Menlo Park, CA 94025
Mr. Tom McKinley 6,300 0
PO Box 256
390 Fayette Rd
New Wilmington, PA 16142-0256
-16-
<PAGE>
SHAREHOLDER ESCROW SHARES ESCROW WARRANTS
Ms. Vivian McNab 630 0
424 Dayton Ave.
Santa Cruz, CA 95051
Mr. Stephens Millard 6,300 0
5 Fremontia St.
Portola Valley, CA 94028
Mr. John Montgomery 646 41
1780 Bay Laurel Drive
Menlo Park, CA 94025
Mr. Tony Muller 0 544
Oakmead Investors
449 Los Pajaros Ct.
Los Altos, CA 94024
Mr. Mano Murthy 5,040 0
1969 Vinehill Cir.
Fremont, CA 94539
Mr. Gregory Neal 9,450 0
3994 Whinney Plc. Way
San Jose, CA 95121
Mr. Norman Neuman 0 1,260
755 South Freer Road
Chelsea, MI 48118
Mr. Jeffery Parker 11,927 1,306
Parker Family Limited Partnership
253 Meadowbrook Road
Weston, MA 02193-2465
Dr. Kirk Partick Jr. 18,901 0
8012 Old Hamond Hwy
Baton Rouge, LA 70809
Mr. Richard Pierce 1,890 0
100 Drake Landing Rd.
Suite 300
Green Brae, CA 94904
-17-
<PAGE>
SHAREHOLDER ESCROW SHARES ESCROW WARRANTS
Mr. Richard Preis 12,600 0
4911 Claycut Rd.
Baton Rouge, LA 70806-7120
Mr. Robert Puette 6,300 0
12342 Crayside Lane
Saratoga, CA 95070
Mr. Janardan Ramesh 2,520 0
916 Bonneville Way
Sunnyvale, CA 94087
Mr. Jerry Rice 52,364 0
3206 Upper Lock Ave.
Belmont, CA 94002
Mr. Scott Rowe 630 0
4225 Manuela Ave.
Palo Alto, CA 94306
Mr. Fred Silva 31,502 0
1665 Ebbets Dr.
Campbell, CA 95008
Mr. Michael Smith 32,456 2,077
12418 Beauchamps Lane
Saratoga, CA 95070
Mr. Gene Straube 6,300 0
81 Faxton Road
Atherton, CA 94027
Mr. Richard Vaccarello 6,300 0
13562 Toni Ann Pl.
Saratoga, CA 95070
Venture Lending 0 0
Cupertino National Bank
3 Palo Alto Square, Suite 150
Palo Alto, CA 94306
Mr. Joseph Vitorino 2,520 0
1631 Mt. Rainier Ave.
Milpitas, CA 95035
-18-
<PAGE>
SHAREHOLDER ESCROW SHARES ESCROW WARRANTS
Mr. John Wakerly 33,108 13,604
373 Foxborough Dr.
Mountain View, CA 94041-1603
Mr. Donald Walker 0 1,260
5951 Fox Hollow Ct.
Ann Arbor, MI 48105
Mr. David Welling 87,945 0
20 Shoshone Place
Portola Valley, CA 94028
Mr. Samuel Wood 42,659 0
12648 La Cresta Court
Los Altos Hills, CA 94022
Mr. David Yewell 29,612 0
26885 Taaffe Road
Los Altos Hills, CA 94022
Ms. Sara Yu 630 0
c/o Notify Corporation
1054 South De Anza Blvd., Suite 105
San Jose, CA 95129
Mr. Paul Ziemba 2,520 0
118 Saint Francis St.
Redwood City, CA 94062
Ms. Dana Zink 45,364 0
Bayview Investors, Ltd
Attn: Michael Stark
555 California Street
San Francisco, CA 94104
TOTALS 1,263,537 111,008
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<PAGE>
EXHIBIT 10.7
NOTIFY CORPORATION
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as
-------------
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Notify Corporation, a California corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the time of determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value
of a Share of Common Stock shall be the mean between the high bid and low
asked prices for the Common Stock on the last market trading day prior to the
day of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
-2-
<PAGE>
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this Notify Corporation 1997 Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired
----------------
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
-3-
<PAGE>
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 200,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be
------------------------------
administered by different Committees with respect to different groups of
Service Providers.
(ii) Section 162(m). To the extent that the Administrator
-------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
-4-
<PAGE>
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase Right of the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value
of the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority
to extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be
-5-
<PAGE>
withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined. All elections by an Optionee to have Shares withheld for this
purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on
all Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 50,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 50,000 Shares
which shall not count against the limit set forth in subsection (i) above.
-6-
<PAGE>
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization
as described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
------------
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 15 of the
Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
-7-
<PAGE>
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per
Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before
the Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator and
set forth in the Option Agreement. Unless the Administrator provides
otherwise, vesting of Options granted hereunder shall be tolled during any
unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
-8-
<PAGE>
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
-----------------
Provider, the Option may be exercised within such period of time as is
specified in the Option Agreement (but in no event later
-9-
<PAGE>
than the expiration of the term of such Option as set forth in the Notice of
Grant), by the Optionee's estate or by a person who acquires the right to
exercise the Option by bequest or inheritance, but only to the extent that the
Option is vested on the date of death. In the absence of a specified time in
the Option Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If, at the time of death, the Optionee is
not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall immediately revert to the Plan. The Option may be
exercised by the executor or administrator of the Optionee's estate or, if none,
by the person(s) entitled to exercise the Option under the Optionee's will or
the laws of descent or distribution. If the Option is not so exercised within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing or electronically, by means of a Notice of
Grant, of the terms, conditions and restrictions related to the offer,
including the number of Shares that the offeree shall be entitled to purchase,
the price to be paid, and the time within which the offeree must accept such
offer. The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 13 of the Plan.
-10-
<PAGE>
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee
to have the right to exercise his or her Option until ten (10) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has
not been previously exercised, an Option or Stock Purchase Right will
terminate immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the
assets of the Company, each outstanding
-11-
<PAGE>
Option and Stock Purchase Right shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation refuses
to assume or substitute for the Option or Stock Purchase Right, the Optionee
shall fully vest in and have the right to exercise the Option or Stock
Purchase Right as to all of the Optioned Stock, including Shares as to which
it would not otherwise be vested or exercisable. If an Option or Stock
Purchase Right becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator
shall notify the Optionee in writing or electronically that the Option or
Stock Purchase Right shall be fully vested and exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock
Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned
Stock subject to the Option or Stock Purchase Right immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets
is not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor corporation
or its Parent equal in fair market value to the per share consideration
received by holders of Common Stock in the merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to
-12-
<PAGE>
exercise the powers granted to it hereunder with respect to Options granted
under the Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the approval
of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
NOTIFY CORPORATION
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
[25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to the Optionee continuing to be a Service
Provider on such dates].
<PAGE>
Termination Period:
------------------
This Option may be exercised for _____ [days/months] after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to [Title] of the Company. The Exercise Notice
shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
-2-
<PAGE>
3. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) check; or
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, AND (ii) have a Fair Market Value on the
date of surrender equal to the aggregate Exercise Price of the Exercised Shares;
or
(e) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with
the execution and delivery by the Optionee of the Security Agreement attached
hereto as Exhibit B. The Note shall bear interest at the "applicable federal
rate" prescribed under the Code and its regulations at time of purchase, and
shall be secured by a pledge of the Shares purchased by the Note pursuant to
the Security Agreement.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The
terms of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
----------------
this Option, as of the date of this Option, are set forth below. THIS SUMMARY
IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION
OR DISPOSING OF THE SHARES.
(a) Exercising the Option.
---------------------
(i) Nonstatutory Stock Option. The Optionee may incur regular
-------------------------
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If
-3-
<PAGE>
the Optionee is an Employee or a former Employee, the Company will be required
to withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as an
----------------------
ISO, the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price
will be treated as an adjustment to alternative minimum taxable income for
federal tax purposes and may subject the Optionee to alternative minimum tax
in the year of exercise. In the event that the Optionee ceases to be an
Employee but remains a Service Provider, any Incentive Stock Option of the
Optionee that remains unexercised shall cease to qualify as an Incentive Stock
Option and will be treated for tax purposes as a Nonstatutory Stock Option on
the date three (3) months and one (1) day following such change of status.
(b) Disposition of Shares.
---------------------
(i) NSO. If the Optionee holds NSO Shares for at least one
---
year, any gain realized on disposition of the Shares will be treated as long-
term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one
---
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for
federal income tax purposes. If the Optionee disposes of ISO Shares within one
year after exercise or two years after the grant date, any gain realized on
such disposition will be treated as compensation income (taxable at ordinary
income rates) to the extent of the excess, if any, of the lesser of (A) the
difference between the Fair Market Value of the Shares acquired on the date of
exercise and the aggregate Exercise Price, or (B) the difference between the
sale price of such Shares and the aggregate Exercise Price. Any additional
gain will be taxed as capital gain, short-term or long-term depending on the
period that the ISO Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii)
one year after the exercise date, the Optionee shall immediately notify the
Company in writing of such disposition. The Optionee agrees that he or she may
be subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the
-4-
<PAGE>
Company and Optionee with respect to the subject matter hereof, and may not be
modified adversely to the Optionee's interest except by means of a writing
signed by the Company and Optionee. This agreement is governed by the internal
substantive laws, but not the choice of law rules, of [state].
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: NOTIFY CORPORATION
______________________________ ______________________________________
Signature By
______________________________ ______________________________________
Print Name Title
______________________________
Residence Address
______________________________
-5-
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
_______________________________________
Spouse of Optionee
-7-
<PAGE>
EXHIBIT A
---------
NOTIFY CORPORATION
1997 STOCK PLAN
EXERCISE NOTICE
Notify Corporation
1054 South De Anza Blvd.
San Jose, California 95129
Attention: [Title]
1. Exercise of Option. Effective as of today, ________________, 199__,
------------------
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Notify Corporation (the "Company") under
and pursuant to the Notify Corporation 1997 Stock Plan (the "Plan") and the
Stock Option Agreement dated _____________, 19___ (the "Option Agreement"). The
purchase price for the Shares shall be $_____________, as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
----------------------------
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in [Section 13] of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all
<PAGE>
prior undertakings and agreements of the Company and Purchaser with respect to
the subject matter hereof, and may not be modified adversely to the Purchaser's
interest except by means of a writing signed by the Company and Purchaser. This
agreement is governed by the internal substantive laws, but not the choice of
law rules, of California.
Submitted by: Accepted by:
PURCHASER: NOTIFY CORPORATION
____________________________________ ___________________________________
Signature By
____________________________________ ___________________________________
Print Name Its
Address: Address:
- ------- -------
____________________________________ Notify Corporation
____________________________________ 1054 South De Anza Blvd.
San Jose, California 95129
_____________________________________
Date Received
-2-
<PAGE>
EXHIBIT B
---------
SECURITY AGREEMENT
This Security Agreement is made as of __________, 19___ between Notify
Corporation, a California corporation ("Pledgee"), and _________________________
("Pledgor").
Recitals
--------
Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated ________ (the "Option"), between Pledgor and Pledgee under
Pledgee's Notify Corporation 1997 Stock Plan, and Pledgor's election under the
terms of the Option to pay for such shares with his promissory note (the
"Note"), Pledgor has purchased _________ shares of Pledgee's Common Stock (the
"Shares") at a price of $________ per share, for a total purchase price of
$__________. The Note and the obliga tions thereunder are as set forth in
Exhibit C to the Option.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
---------------------------------------------
the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.
The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledge holder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
a. Payment of Indebtedness. Pledgor will pay the principal sum of the
-----------------------
Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
b. Encumbrances. The Shares are free of all other encumbrances,
------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
c. Margin Regulations. In the event that Pledgee's Common Stock is
------------------
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within
<PAGE>
the meaning of the regulations under Part 207 of Title 12 of the Code of Federal
Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making
any amendments to the Note or providing any additional collateral as may be
necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
-------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
-----------------
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this
------------------
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
-------
this Security Agreement in the event:
a. Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or
b. Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. Release of Collateral. Subject to any applicable contrary rules under
---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder here under upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
-2-
<PAGE>
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment of
----
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross
----------------------
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
-----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the
---------------------
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
-------------
governed under the internal substantive laws, but not the choice of law rules,
of California.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PLEDGOR" _________________________________
Signature
_________________________________
Print Name
Address: _________________________________
_________________________________
"PLEDGEE" Notify Corporation
a California corporation
________________________________
Signature
________________________________
Print Name
________________________________
Title
"PLEDGEHOLDER" ________________________________
Secretary of
Notify Corporation
-4-
<PAGE>
EXHIBIT C
---------
NOTE
$_______________ San Jose, California
______________, 19___
FOR VALUE RECEIVED, _______________ promises to pay to Notify Corporation,
a California corporation (the "Company"), or order, the principal sum of
_______________________ ($_____________), together with interest on the unpaid
principal hereof from the date hereof at the rate of _______________ percent
(____%) per annum, compounded semiannually.
Principal and interest shall be due and payable on __________, 19___.
Payment of principal and interest shall be made in lawful money of the United
States of America.
The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of
________________. This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.
The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
____________________________________
____________________________________
<PAGE>
NOTIFY CORPORATION
1997 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the Company,
subject to the Company's Repurchase Option and your ongoing status as a Service
Provider (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Grant Number _________________________
Date of Grant _________________________
Price Per Share $________________________
Total Number of Shares Subject _________________________
to This Stock Purchase Right
Expiration Date: _________________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR
IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By
your signature and the signature of the Company's representative below, you and
the Company agree that this Stock Purchase Right is granted under and governed
by the terms and conditions of the Notify Corporation 1997 Stock Plan and the
Restricted Stock Purchase Agreement, attached hereto as Exhibit A-1, both of
which are made a part of this document. You further agree to execute the
attached Restricted Stock Purchase Agreement as a condition to purchasing any
shares under this Stock Purchase Right.
GRANTEE: NOTIFY CORPORATION
___________________________ ________________________________
Signature By
___________________________ ________________________________
Print Name Title
<PAGE>
EXHIBIT A-1
-----------
NOTIFY CORPORATION
1997 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is an
Service Provider, and the Purchaser's continued participation is considered by
the Company to be important for the Company's continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Admin istrator has granted to the Purchaser a Stock
Purchase Right subject to the terms and conditions of the Plan and the Notice of
Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement").
NOW THEREFORE, the parties agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
-------------
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per Share purchase price and as otherwise described in
the Notice of Grant.
2. Payment of Purchase Price. The purchase price for the Shares may be
-------------------------
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.
3. Repurchase Option.
-----------------
(a) In the event the Purchaser ceases to be a Service Provider for any
or no reason (including death or disability) before all of the Shares are
released from the Company's Repurchase Option (see Section 4), the Company
shall, upon the date of such termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option (the "Repurchase Option") for
a period of sixty (60) days from such date to repurchase up to that number of
shares which constitute the Unreleased Shares (as defined in Section 4) at the
original purchase price per share (the "Repurchase Price"). The Repurchase
Option shall be exercised by the Company by delivering written notice to the
Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at
the Company's option, (i) by delivering to the Purchaser or the Purchaser's
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
cancelling an amount of the Purchaser's indebtedness to the Company equal to the
aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that
the combined payment and cancellation of indebtedness equals the aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate
Repurchase Price, the Company shall become the legal and beneficial owner of the
Shares being repurchased and all
<PAGE>
rights and interests therein or relating thereto, and the Company shall have the
right to retain and transfer to its own name the number of Shares being
repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares. If the Fair Market Value of the Shares
to be repurchased on the date of such designation or assignment (the "Repurchase
FMV") exceeds the aggregate Repurchase Price of such Shares, then each such
designee or assignee shall pay the Company cash equal to the difference between
the Repurchase FMV and the aggregate Repurchase Price of such Shares.
4. Release of Shares From Repurchase Option.
----------------------------------------
(a) ___________________ percent (______%) of the Shares shall be
released from the Company's Repurchase Option [one year] after the Date of
----------------
Grant and __________________ percent (______%) of the Shares [at the end of each
------------------
month thereafter], provided that the Purchaser does not cease to be a Service
- ----------------
Provider prior to the date of any such release.
(b) Any of the Shares that have not yet been released from the
Repurchase Option are referred to herein as "Unreleased Shares."
(c) The Shares that have been released from the Repurchase Option
shall be delivered to the Purchaser at the Purchaser's request (see Section 6).
5. Restriction on Transfer. Except for the escrow described in Section 6
-----------------------
or the transfer of the Shares to the Company or its assignees contemplated by
this Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until such Shares
are released from the Company's Repurchase Option in accordance with the provi
sions of this Agreement, other than by will or the laws of descent and
distribution.
6. Escrow of Shares.
----------------
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Repurchase
Option, the Purchaser shall, upon execution of this Agreement, deliver and
deposit with an escrow holder designated by the Company (the "Escrow Holder")
the share certificates representing the Unreleased Shares, together with the
stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The
Unreleased Shares and stock assignment shall be held by the Escrow Holder,
pursuant to the Joint Escrow Instructions of the Company and Purchaser attached
hereto as Exhibit A-3, until such time as the Company's Repurchase Option
expires. As a further condition to the Company's obligations under this
Agreement, the Company may require the spouse of Purchaser, if any, to execute
and deliver to the
-2-
<PAGE>
Company the Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow while acting
in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises the Repurchase Option
hereunder, the Escrow Holder, upon receipt of written notice of such exercise
from the proposed transferee, shall take all steps necessary to accomplish such
transfer.
(d) When the Repurchase Option has been exercised or expires
unexercised or a portion of the Shares has been released from the Repurchase
Option, upon request the Escrow Holder shall promptly cause a new certificate to
be issued for the released Shares and shall deliver the certificate to the
Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to the Shares while they are held in
escrow, including without limitation, the right to vote the Shares and to
receive any cash dividends declared thereon. If, from time to time during the
term of the Repurchase Option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Repurchase Option.
7. Legends. The share certificate evidencing the Shares, if any, issued
-------
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
8. Adjustment for Stock Split. All references to the number of Shares
--------------------------
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
9. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
----------------
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contem plated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that
-3-
<PAGE>
the Purchaser (and not the Company) shall be responsible for the Purchaser's own
tax liability that may arise as a result of the transactions contemplated by
this Agreement. The Purchaser understands that Section 83 of the Internal
Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the
difference between the purchase price for the Shares and the Fair Market Value
of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" includes the right of the Company to buy back the Shares
pursuant to the Repurchase Option. The Purchaser understands that the Purchaser
may elect to be taxed at the time the Shares are purchased rather than when and
as the Repurchase Option expires by filing an election under Section 83(b) of
the Code with the IRS within 30 days from the date of purchase. The form for
making this election is attached as Exhibit A-5 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
10. General Provisions.
------------------
(a) This Agreement shall be governed by the internal substantive laws,
but not the choice of law rules of [state]. This Agreement, subject to the terms
and conditions of the Plan and the Notice of Grant, represents the entire
agreement between the parties with respect to the purchase of the Shares by the
Purchaser. Subject to Section 15(c) of the Plan, in the event of a conflict
between the terms and conditions of the Plan and the terms and conditions of
this Agreement, the terms and conditions of the Plan shall prevail. Unless
otherwise defined herein, the terms defined in the Plan shall have the same
defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be given by
either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party hereto.
(c) The rights of the Company under this Agreement shall be
transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision, nor prevent
that party from thereafter enforcing
-4-
<PAGE>
any other provision of this Agreement. The rights granted both parties hereunder
are cumulative and shall not constitute a waiver of either party's right to
assert any other legal remedy available to it.
(e) The Purchaser agrees upon request to execute any further documents
or instruments necessary or desirable to carry out the purposes or intent of
this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.
DATED: _____________________
PURCHASER: NOTIFY CORPORATION
____________________________________ ____________________________
Signature By
____________________________________ ____________________________
Print Name Title
-5-
<PAGE>
EXHIBIT A-2
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto
________________________________________________________________________________
________________ (__________) shares of the Common Stock of Notify Corporation
standing in my name of the books of said corporation represented by Certificate
No. _____ herewith and do hereby irrevocably constitute and appoint
_____________________________________________ to transfer the said stock on the
books of the within named corporation with full power of substitution in the
premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement (the "Agreement") between________________________ and
the undersigned dated ______________, 19__.
Dated: _______________, 19__
Signature:______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
-----------
JOINT ESCROW INSTRUCTIONS
-------------------------
_____________, 19__
Corporate Secretary
Notify Corporation
1054 South De Anza Blvd.
San Jose, California 95129
Dear _________________:
As Escrow Agent for both Notify Corporation, a [state] corporation (the
"Company"), and the undersigned purchaser of stock of the Company (the
"Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Restricted Stock Purchase
Agreement ("Agreement") between the Company and the undersigned, in accordance
with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively as the "Company") exercises the Company's Repurchase Option set
forth in the Agreement, the Company shall give to Purchaser and you a written
notice specifying the number of shares of stock to be purchased, the purchase
price, and the time for a closing hereunder at the principal office of the
Company. Purchaser and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
<PAGE>
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's Repurchase Option has been exercised, you
shall deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's Repurchase Option.
Within 90 days after Purchaser ceases to be a Service Provider, you shall
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's Repurchase
Option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
-2-
<PAGE>
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Notify Corporation
1054 South De Anza Blvd.
San Jose, California 95129
PURCHASER: ________________________________
________________________________
________________________________
ESCROW AGENT: Corporate Secretary
Notify Corporation
1054 South De Anza Blvd.
San Jose, California 95129
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
-3-
<PAGE>
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the internal substantive laws, but not the
choice of law rules, of [state].
Very truly yours,
NOTIFY CORPORATION
_____________________________________
By
_____________________________________
Title
PURCHASER:
_____________________________________
Signature
_____________________________________
Print Name
ESCROW AGENT:
_____________________________________
Corporate Secretary
-4-
<PAGE>
EXHIBIT A-4
-----------
CONSENT OF SPOUSE
-----------------
I, ____________________, spouse of ___________________, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of the Company's grant to my spouse of the right to purchase
shares of Notify Corporation, as set forth in the Agreement, I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares issued pursuant thereto
under the community property laws or similar laws relating to marital property
in effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated: _______________, 19____
__________________________________________
Signature of Spouse
<PAGE>
EXHIBIT A-5
-----------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
for the current taxable year the amount of any compensation taxable to taxpayer
in connection with his or her receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: __________ shares (the "Shares") of the Common Stock of Notify
Corporation (the "Company").
3. The date on which the property was transferred is: ______________, 19__.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, upon certain
events. This right lapses with regard to a portion of the Shares based on
the continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
$_______________.
6. The amount (if any) paid for such property is:
$_______________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: ______________, 19____ ______________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ______________, 19____ _______________________________________________
Spouse of Taxpayer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> SEP-30-1996 DEC-31-1996
<PERIOD-START> OCT-01-1995 OCT-01-1996
<PERIOD-END> SEP-30-1996 DEC-31-1996
<CASH> 260,380 107,951
<SECURITIES> 0 0
<RECEIVABLES> 134,682 117,140
<ALLOWANCES> 0 0
<INVENTORY> 579,929 411,855
<CURRENT-ASSETS> 974,991 636,946
<PP&E> 92,903 83,422
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 1,076,659 738,633
<CURRENT-LIABILITIES> 1,268,971 1,343,859
<BONDS> 0 0
0 0
1,850,000 1,850,000
<COMMON> 58,619 70,819
<OTHER-SE> (2,100,931) (2,525,775)
<TOTAL-LIABILITY-AND-EQUITY> 1,076,659 738,633
<SALES> 308,067 396,294
<TOTAL-REVENUES> 308,067 396,294
<CGS> 428,112 351,079
<TOTAL-COSTS> 1,527,907 441,601
<OTHER-EXPENSES> (23,544) 12,331
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 32,811 7,252
<INCOME-PRETAX> (1,657,219) (1,657,219)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,657,219) (1,657,219)
<EPS-PRIMARY> (3.17) (0.80)
<EPS-DILUTED> 0 0
</TABLE>
