<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1997
REGISTRATION NO. 333-23369
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 1
TO
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 Identification Number)
incorporation or Classification Code
organization) Number)
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.
BACHNER, TALLY, POLEVOY & MISHER LLP
TREVOR J. CHAPLICK, ESQ. 380 MADISON AVENUE
PETER S. HEINECKE, ESQ. NEW YORK, NEW YORK 10017-2590
BRADLEY A. BUGDANOWITZ, ESQ. (212) 687-7000
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
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. [_]
PURSUANT TO RULE 416, THERE ARE ALSO BEING REGISTERED SUCH ADDITIONAL SHARES
AND WARRANTS AS MAY BECOME ISSUABLE PURSUANT TO ANTI-DILUTION PROVISIONS OF
THE CLASS A WARRANTS AND THE UNIT PURCHASE OPTION.
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE OF THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
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<PAGE>
<TABLE>
<CAPTION>
================================================================================================
CALCULATION OF REGISTRATION FEE
================================================================================================
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 and one
Class A Warrant (2)................. 1,840,000 $5.00 $ 9,200,000 $2,789
- ------------------------------------------------------------------------------------------------
Common Stock, $.001 par value (3).... 1,840,000 $6.50 $11,960,000 $3,624
- ------------------------------------------------------------------------------------------------
Unit Purchase Option (4)............. 160,000 $.001 $ 160 $ --
- ------------------------------------------------------------------------------------------------
Units, each consisting of one share of
Common Stock, $.001 par value and one
Class A Warrant (5)................. 160,000 $7.00 $ 1,120,000 $ 340
- ------------------------------------------------------------------------------------------------
Common Stock, $.001 par value (6).... 160,000 $6.50 $ 1,040,000 $ 315
- ------------------------------------------------------------------------------------------------
Total................................ $7,019
================================================================================================
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee.
(2) Includes 240,000 Units subject to the Underwriter's over-allotment option.
(3) Issuable upon exercise of the Class A Warrants.
(4) To be issued to the Underwriter.
(5) Issuable upon exercise of the Unit Purchase Option.
(6) Issuable upon exercise of the Class A Warrants underlying the Unit Purchase
Option.
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION -- DATED MAY 29, 1997
[LOGO OF NOTIFY CORPORATION]
1,600,000 UNITS CONSISTING OF 1,600,000 SHARES OF COMMON STOCK
AND 1,600,000 REDEEMABLE CLASS A WARRANTS
Each unit ("Unit") offered by Notify Corporation (the "Company") consists of
one share of common stock, $.001 par value (the "Common Stock"), and one
redeemable Class A Warrant (the "Warrants"). The Warrants will be transferable
separately immediately upon issuance. Each Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $6.50, subject to
adjustment, through 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 (subject to adjustment). 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 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 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................................... $5.00 $.50 $4.50
- ---------------------------------------------------------------------------------------------------
Total(3)................................... $8,000,000 $800,000 $7,200,000
===================================================================================================
</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 160,000
Units at a price per unit equal to 140% of the initial public offering
price, exercisable at any time, in whole or in part, during the two year
period commencing three years from the date of this Prospectus (the "Unit
Purchase Option"). The Company has 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
$730,000 ($766,000 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 240,000
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 $9,200,000, the
Underwriting Discount and Commissions will be $920,000 and the Proceeds to
the Company will be $8,280,000. 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>
[INSIDE FRONT COVER]
A PICTURE OF SEVEN OF THE COMPANY'S MESSAGEALERT PRODUCT AND ONE OF ITS
CENTREX AUTO ATTENDANT PRODUCT. THE MESSAGEALERT PRODUCTS BEAR THE NAMES OF
CERTAIN TELEPHONE COMPANIES THAT SELL THE MESSAGEALERT UNDER THEIR NAME.
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
OR 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 Public
Warrants (as hereinafter defined), (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) 425,000 bridge warrants (the "Bridge
Warrants") issued in connection with the Company's private placement completed
in March 1997 (the "Bridge Financing") into 425,000 warrants with identical
terms to the Warrants offered hereby (the "Public 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 at an exchange ratio of 1 share of Common Stock for each 5.05
shares of Preferred 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
3
<PAGE>
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 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................
1,600,000 Units, each Unit consisting of
one share of Common Stock and one Warrant.
Each Warrant entitles the holder to
purchase one share of Common Stock at an
exercise price of $6.50, subject to
adjustment, at any time through the fifth
anniversary of the date of this Prospectus.
The Warrants are subject to redemption in
certain circumstances on 30 days' written
notice. See "Description of Securities."
Common Stock Outstanding Before
the Offering...................... 2,160,000 shares(1)(2)
Common Stock Outstanding After
the Offering...................... 3,760,000 shares(1)(3)
Use of Proceeds...................
The net proceeds of the Offering will be
used for product development, sales and
marketing efforts, repayment of $850,000
principal amount of 10% promissory notes
issued in the Bridge Financing (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."
4
<PAGE>
Proposed Nasdaq Symbols(4):
Units............................. NTFYU
Common Stock...................... NTFY
Class A Warrants.................. NTFYW
- --------
(1) Includes warrants to purchase 188,034 shares 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 were outstanding as of April 30, 1997, 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) 1,600,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby; (ii) 480,000
shares of Common Stock issuable upon exercise of the Underwriter's over-
allotment option and underlying Warrants; (iii) 320,000 shares of Common
Stock issuable upon exercise of the Unit Purchase Option and the underlying
Warrants; (iv) 425,000 shares of Common Stock issuable upon exercise of the
Public 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. See "Risk Factors--Possible Delisting
of Securities from the Nasdaq Stock Market."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
-------------------------- --------------------
1995 1996 1996 1997
------------ ------------- --------- ---------
<S> <C> <C> <C> <C>
Product sales................ $ 9,333 $ 308,067 $ 62,724 $ 932,366
Cost of sales................ 7,929 428,112 46,601 723,529
----------- ------------- --------- ---------
Gross profit (loss).......... 1,404 (120,045) 16,123 208,837
Operating expenses:
Research and development.... 159,163 537,902 284,005 313,243
Sales and marketing......... 122,884 549,916 247,211 298,253
General and administrative.. 146,756 440,089 183,179 307,802
----------- ------------- --------- ---------
Total operating expenses..... 428,803 1,527,907 714,395 919,298
----------- ------------- --------- ---------
Loss from operations......... (427,399) (1,647,952) (698,272) (710,461)
Interest expense, net........ 1,337 (9,267) 17,526 (59,234)
----------- ------------- --------- ---------
Net loss..................... $ (426,062) $ (1,657,219) $(680,746) $(769,695)
=========== ============= ========= =========
Pro forma net loss per
share(1).................... $ (2.10) $ (0.90)
============= =========
Shares used in computing pro
forma net loss per share(1). 790,594 858,010
============= =========
</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>
MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ (517,813) $5,738,291
Total assets............ 1,551,729 6,681,729
Total liabilities....... 1,632,060 505,956
Total shareholders'
equity (net capital
deficiency)............ (80,331) 6,175,773
</TABLE>
- --------
(1) As adjusted to give effect to the sale of the 1,600,000 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 $214,000 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;
ANTICIPATION OF NEGATIVE CASH FLOW; 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 March
31, 1997, the Company had an accumulated deficit of $2,852,976 and a working
capital deficit of $517,813. The Company anticipates having a negative cash
flow from operating activities in future quarters and years. The Company
incurred a net loss of $769,695 for the six-month period ended March 31, 1997
and expects to incur further operating losses in future quarters and years 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 AND AUDITOR'S REPORT
TO THAT EFFECT
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
7
<PAGE>
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 80% of revenue for the fiscal
year ended September 30, 1996 and the six-month period ended March 31, 1997,
respectively. In addition, three customers accounted for 30%, 18% and 16% of
sales in fiscal 1996, and three customers accounted for 24%, 23% and 18% of
sales in the six-month period ended March 31, 1997.
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"
and "--Manufacturing."
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
Mr. DePond in the amount of $2,000,000 and has entered into employment
agreements with him along with Mr. Larson, 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 effect 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 effect on
the Company's business, financial condition and results of operations. See
"Business--Proprietary Rights."
DEPENDENCE ON SINGLE SUPPLIER; NO CONTRACTS OR AGREEMENTS
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 GOVERNMENT 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, $1,340,000 of the net proceeds will be
used to repay certain indebtedness of the Company, including the principal
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and interest outstanding on $850,000 principal amount of Bridge Notes
(including $50,000 principal amount of notes held by Paul F. DePond, the
Company's President and Chief Executive Officer), $200,000 principal amount of
Convertible Shareholder Notes, $90,000 principal amount of certain loans made
to the Company by Mr. DePond and $200,000 principal amount of the Ballard Note
(as hereinafter defined), held by Michael Ballard, a director of the Company.
In addition, approximately $420,000 of the proceeds will be used over the next
year to pay executive salaries. See "Use of Proceeds," "Management--Employment
Contracts" 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."
CHARGES ARISING FROM DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Upon completion of the Offering and repayment of the Bridge Notes, a non-
recurring charge representing the unamortized debt discount and debt issuance
costs incurred in connection with the Bridge Financing will be charged in the
quarter in which the Offering is completed. The aggregate unamortized debt
discount and debt issue costs associated with the Bridge Notes at March 31,
1997 is $214,000. 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"), or
otherwise, could have an adverse effect on the price of the Company's
securities. Pursuant to the Bridge Financing, the Company has agreed to
register for resale 425,000 Public Warrants and the underlying securities upon
expiration of the one-year restriction on transferability to which the Bridge
Financing investors have agreed. In addition, upon the sale of the 1,600,000
Units offered
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<PAGE>
hereby, the Company will have outstanding 3,571,966 shares of Common Stock,
1,600,000 Class A Warrants, and other warrants to purchase 188,034 shares of
Common Stock (3,811,966 shares of Common Stock and 1,840,000 Warrants if the
Underwriter's over-allotment option is exercised in full). The shares of
Common Stock and 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 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 "Description of
Securities," "Shares Eligible for Future Sale" and "Underwriting."
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS
Upon sale of the 1,600,000 Units offered hereby, the Company will have
outstanding 1,600,000 Warrants to purchase 1,600,000 shares of Common Stock
for $6.50 per share (subject to adjustment in certain circumstances) (or
1,840,000 Warrants if the Underwriter's over-allotment option is exercised in
full). In addition, the Company will have outstanding 425,000 Public Warrants
to purchase 425,000 shares of Common Stock, the Unit Purchase Option to
purchase an aggregate of 320,000 shares of Common Stock assuming exercise of
the underlying Warrants, additional warrants to purchase 188,034 shares of
Common Stock and 200,000 shares of Common Stock reserved for issuance under
the Option Plan, under which no options were outstanding as of April 30, 1997.
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 $3.27 per share or approximately 65% of
the public offering price per share (allocating no value to the Warrants).
Additional dilution to public investors, if any, may result to the extent that
the Warrants, the Unit Purchase Option or outstanding options and warrants are
exercised at a time when the net tangible book value per share of 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
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fluctuate, perhaps substantially. These fluctuations, as well as general
economic conditions, such as recessions or high interest rates, may adversely
affect the market price of the securities.
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET
While the Company's Units, Common Stock and 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 ("PENNY") 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
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participating in a distribution of a penny stock from associating with a
broker-dealer or participating in a distribution of a penny stock, if the
Commission finds that such a restriction would be in the public interest. If
the Company's securities were subject to the rules on penny stocks, the market
liquidity for the Company's securities could be severely adversely affected.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS
The Warrants included in the Units offered hereby will be 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 shares to those persons desiring
to exercise their Warrants unless and until the underlying shares 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 shares
underlying the Warrants is then in effect under the Securities Act and such
shares are qualified for sale or exempt from qualification under the
applicable securities or "blue sky" laws of the states in which the various
holders of the Warrants then reside. Although the Company has undertaken to
use reasonable efforts to maintain the effectiveness of a current prospectus
covering the shares underlying the Warrants, no assurance can be given that
the Company will be able to do so. The value of the Warrants may be greatly
reduced if a current prospectus covering the shares issuable upon the exercise
of the Warrants is not kept effective or if such 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. 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
The Securities and Exchange Commission (the "Commission") is conducting an
investigation concerning various business activities of the Underwriter. The
investigation appears to be broad in scope, involving numerous aspects of the
Underwriter's compliance with the federal securities laws and compliance with
the federal securities laws by issuers whose securities were underwritten by
the Underwriter, or in which the Underwriter made over-the counter markets,
persons associated with the Underwriter, 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, if so,
whether any such action might have an adverse effect on the Underwriter or the
securities offered hereby. See "Underwriting."
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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."
SUBSTANTIAL CONTROL BY OFFICERS AND DIRECTORS
Based upon the number of shares of Common Stock that will be outstanding
upon completion of this Offering (assuming no exercise of the Underwriter's
over-allotment option), the officers and directors of the Company as a group
will beneficially own approximately 26.7%, of the Company's outstanding Common
Stock after giving effect to the exercise of all outstanding options and
warrants held by such individuals. As a result, the officers and directors as
a group will be able to exert substantial influence over the election of the
Company's directors and the direction of the Company's policies. See
"Principal Shareholders."
CONTRACTUAL OBLIGATIONS TO UNDERWRITER FOLLOWING COMPLETION OF OFFERING
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 Company will be obligated to pay the
Underwriter a finder's fee in consideration for origination of such
transaction. The fee is based on a percentage of the consideration paid in the
transaction, ranging from 7% of the first $1,000,000 to 2 1/2% of any
consideration in excess of $9,000,000. In addition, 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. See "Underwriting."
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 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".
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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."
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USE OF PROCEEDS
The net proceeds from the sale of the 1,600,000 Units to be sold in the
Offering, after deducting the underwriting discounts and commissions and other
estimated expenses of the Offering, are anticipated to be approximately
$6,470,000 ($7,514,000 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)......................... $1,340,000 20.7
Product development(2)............................... $1,000,000 15.5
Sales and marketing(3)............................... $1,000,000 15.5
Additional inventory(4).............................. $ 500,000 7.7
Fixed assets(5)...................................... $ 250,000 3.8
Working capital and general corporate purposes(6).... $2,380,000 36.8
---------- ----
Total.............................................. $6,470,000 100%
========== ====
</TABLE>
- --------
(1) Represents repayment of (i) the $850,000 principal amount of Bridge Notes
issued in the Bridge Financing completed by the Company in March 1997,
(ii) the $200,000 principal amount of Outstanding Convertible Shareholder
Notes, (iii) $90,000 principal amount of notes issued to Mr. Paul DePond,
President and Chief Executive Officer of the Company (the "DePond Notes")
and (iv) $200,000 principal amount of a note issued to Michael Ballard, a
director of the Company (the "Ballard Note"). All of such loans were used
for working capital.
(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
March 31, 1997 (after giving retroactive effect to a 1-for-5.05 reverse stock
split effected in February 1997); (ii) as adjusted to reflect the conversion
of the outstanding Preferred Stock into Common Stock upon completion of the
Offering and 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 Notes. This table
should be read in conjunction with the Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Bridge Notes, net of discount(1)..................... $ 636,104 $ --
DePond Notes(2)...................................... 90,000 --
Convertible Shareholder Notes(2)..................... 200,000 --
Shareholders' equity (net capital deficiency):
Convertible Preferred Stock, $.001 par value,
4,500,000 shares authorized, issued and
outstanding at March 31, 1997, aggregate
liquidation preference of $1,850,000; 5,000,000
shares authorized, none outstanding, as
adjusted(3)....................................... 1,850,000 --
Common Stock, $.001 par value, 12,100,000 shares
authorized, 1,080,906 and 3,571,966 shares issued
and outstanding, respectively(3)(4)(5)............ 948,420 3,572
Additional paid-in capital......................... -- 9,264,848
Notes receivable from shareholders................. (25,775) (25,775)
Accumulated deficit(6)............................. (2,852,976) (3,066,872)
----------- -----------
Total shareholders' equity (net capital
deficiency)....................................... (80,331) 6,175,773
----------- -----------
Total capitalization............................. $ 845,773 $ 6,175,773
=========== ===========
</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 DePond Notes are due on demand or upon the completion of the Offering
and the outstanding Convertible Shareholder Notes are currently payable.
See "Use of Proceeds" and "Certain Relationships and Related
Transactions."
(3) As adjusted shares authorized gives effect to an amendment to the
Company's Certificate of Incorporation. Par value of $.001 gives effect to
the Restated Articles of Incorporation which will be filed upon the close
of the Offering.
(4) Excludes (i) up to 480,000 shares of Common Stock issuable upon exercise
of the Underwriter's over-allotment option and the underlying warrants;
(ii) 1,600,000 shares of Common Stock issuable upon exercise of the
Warrants included in the Units offered hereby; (iii) 425,000 shares of
Common Stock issuable upon exercise of the Public Warrants; (iv) 320,000
shares of Common Stock issuable upon exercise of the Unit Purchase Option
and the Warrants included in such option; (v) 200,000 shares of Common
Stock reserved for issuance under the Stock Option Plan, (vi) 188,034
shares of Common Stock issuable upon exercise of outstanding warrants. See
"Management--Stock Option Plan," "Certain Relationships and Related
Transactions," and "Description of Securities."
(5) Includes the 1,263,537 Escrow Shares. See "Principal Shareholders--Escrow
Securities."
(6) As adjusted accumulated deficit gives effect to the recognition of
approximately $214,000 of expense which will be incurred upon the closing
of the Offering representing debt discount and debt issuance costs
relating to the Bridge Financing and repayment of the Bridge Notes. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
19
<PAGE>
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 will be repaid with the
proceeds of the Offering 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 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 Public Warrants, each of
which will be identical to the Warrants included in the Units offered hereby.
The Bridge Financing investors have agreed not to exercise, sell, transfer,
assign, hypothecate or otherwise dispose of the Public Warrants for a period
of one year from the closing of the Offering. The Company has agreed to use
its best efforts to register the Public Warrants for resale upon expiration of
such lock-up period. See "Shares Eligible for Future Sale."
Upon repayment of the Bridge Notes, the Company will incur charges
aggregating approximately $214,000 relating to unamortized debt discount and
debt issuance costs attributable to the Bridge Warrants. 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. 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 after giving effect to the conversion of
all outstanding shares of Preferred Stock into Common Stock upon completion of
the Offering and the repayment of the Bridge Notes. At March 31, 1997, the
Company had a net tangible book value of ($294,227), or approximately ($0.15)
per share (($0.42) per share if the Escrow Securities are excluded). After
giving effect to the issuance of the 1,600,000 Units offered hereby, and the
Company's receipt of the estimated net proceeds therefrom and after deduction
of expenses aggregating approximately $730,000 and the use of a portion of the
net proceeds to repay the Bridge Notes, the outstanding Convertible
Shareholder Notes, the DePond Notes, and the Ballard Note, the net tangible
book value per share of the Company, as adjusted at March 31, 1997 would have
been $6,175,773, or approximately $1.73 per share ($2.68 per share if the
Escrow Securities were excluded). This would result in an immediate dilution
to investors in the Offering of $3.27, or 65%, per share ($2.32 or 46%, per
share if the Escrow Securities were excluded), and the aggregate increase in
the net tangible book value to present shareholders would be $1.88 per share
($3.10 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
Net tangible book value per share before Offering........ $ (.15)
Increase per share attributable to new investors in the
Units..................................................... 1.88
------
Net tangible book value per share after the Offering....... 1.73
-----
Dilution per share to investors(1)......................... $3.27
=====
</TABLE>
- --------
(1) If the over-allotment option is exercised in full, the net tangible book
value per share after the Offering would be approximately $1.89, resulting
in dilution to new investors in the Offering of $3.11, or 62% 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)........ 1,971,966 55.2% $2,798,420 28.0% $1.42
New Investors........... 1,600,000 44.8 8,000,000 72.0 $5.00
--------- ----- ----------- -----
Total................... 3,571,966 100.0% $10,798,420 100.0%
========= ===== =========== =====
</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 188,034 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
March 31, 1997 and for the six-month periods ended March 31, 1996 and 1997
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 SIX-MONTH PERIOD
SEPTEMBER 30, ENDED MARCH 31,
---------------------- --------------------
1995 1996 1996 1997
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product sales.................... $ 9,333 $ 308,067 $ 62,724 $ 932,366
Cost of sales.................... 7,929 428,112 46,601 723,529
--------- ----------- --------- ---------
Gross profit (loss).............. 1,404 (120,045) 16,123 208,837
Operating expenses:
Research and development....... 159,163 537,902 284,005 313,243
Sales and marketing............ 122,884 549,916 247,211 298,253
General and administrative..... 146,756 440,089 183,179 307,802
--------- ----------- --------- ---------
Total operating expenses......... 428,803 1,527,907 714,395 919,298
--------- ----------- --------- ---------
Loss from operations............. (427,399) (1,647,952) (698,272) (710,461)
Interest expense, net............ 1,337 (9,267) 17,526 (59,234)
--------- ----------- --------- ---------
Net loss......................... $(426,062) $(1,657,219) $(680,746) $(769,695)
========= =========== ========= =========
Net loss per share............... $ (1.02) $ (3.78) $ (1.57) $ (1.56)
========= =========== ========= =========
Weighted average shares
outstanding..................... 419,456 438,452 434,217 492,703
========= =========== ========= =========
Pro forma net loss per share..... $ (2.10) $ (0.90)
=========== =========
Weighted average shares used in
computing pro forma net loss
per share....................... 790,594 858,010
=========== =========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................................ $ (517,813)
Total assets..................................................... 1,551,729
Total liabilities................................................ 1,632,060
Total shareholders' equity (net capital deficiency).............. (80,331)
</TABLE>
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 six-month period ended March
31, 1997, 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 six- month period ended March 31, 1997 increased to
$932,366 from $62,724 for the six-month period ended March 31, 1996. Sales to
RBOCs and LECs constituted 69% and 80% of revenue for the fiscal year ended
September 30, 1996 and the six-month period ended March 31, 1997,
respectively. In addition, three customers accounted for 30%, 18% and 16% of
sales in fiscal 1996, and three customers accounted for 24%, 23% and 18% of
sales in the six-months period ended March 31, 1997.
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 $723,529 for the six-month period ended March 31, 1997 from $46,601 for the
six-month period ended March 31, 1996. 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 six-
23
<PAGE>
month period ended March 31, 1997 was $313,243, relatively unchanged from the
six-month period ended March 31, 1996.
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 $298,253 for the six-month period ended March 31, 1997 from
$247,211 for the six-month period ended March 31, 1996. 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
$307,802 for the six-month period ended March 31, 1997 from $183,179 for the
six-month period ended March 31, 1996. 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 six-month periods ended March 31, 1996 and 1997, 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 its 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 six-month
period ended March 31, 1997, the Company's net cash used in operating
activities equaled $2,034,658 and $950,449, respectively. The Company
anticipates that it will have a negative cash flow from operating activities
in future quarters and years.
24
<PAGE>
In March 1997, 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 Bridge 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 $735,000 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 $214,000 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, which will be
repaid upon closing of the Offering. See "Use of Proceeds" and "Certain
Relationships and Related Transactions."
In April 1997, one of the Company's directors loaned the Company $200,000 in
exchange for the Ballard Note and warrants to purchase 2,970 shares of the
Company's Common Stock at a price per share of $5.00. The Ballard Note bears
interest at the rate of 10% per annum and is payable in October 1997. 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 Offering, 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.
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<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 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
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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.
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
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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.
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
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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 line Reliability Works in almost all environments
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 Holder promotions
- ----------------------------------------------------------------------------------------------
</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 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.
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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 Director More flexible call processing Competitive feature for CENTREX
& Extension competing against PBX
Dialing
- ---------------------------------------------------------------------------------------------------
Daily Call Allows tracking of call volumes, types Statistics can be used to justify
Statistics of calls, etc. additional CENTREX trunk lines
- ---------------------------------------------------------------------------------------------------
Voice Prompts Easy to configure Reduces customer support
for Set-up
- ---------------------------------------------------------------------------------------------------
Large Memory Allows for 9 minutes of recording Provides solution for a range of
Capacity time of information business applications
- ---------------------------------------------------------------------------------------------------
72 Hour Battery Saves all configuration info during Reduces customer support and
Back-up power failure enhances CENTREX reliability
- ---------------------------------------------------------------------------------------------------
System Copy/ Simple disaster recovery or Reduces customer support and
Back-up duplication of system enhances CENTREX reliability
(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 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
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<PAGE>
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 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.
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<PAGE>
RESEARCH AND DEVELOPMENT
Since its inception, the Company has incurred approximately $1,010,308 in
research and development expenses. 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.
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.
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<PAGE>
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.
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
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<PAGE>
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 May 5, 1997, the Company employed 13 persons of whom two were engaged
in research and development, two in manufacturing, six 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.
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.
35
<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.
36
<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 Mr. DePond
in the amount of $2 million and has entered into employment agreements with
him and with Messrs. Larson, 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. The Company
has agreed to grant options to purchase an aggregate of 17,500 shares of
Common Stock to three employees at $5.00 per share on the date of this
Prospectus.
37
<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
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 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 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.
38
<PAGE>
In December 1996, the Company entered into an employment agreement with Mr.
Yewell, the Company's Vice President of Sales and Marketing. 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 provided, however, that an initial public
offering of the Company's common stock does not constitute a change of
control. 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.
39
<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.
Additionally, 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. These notes (collectively,
the "DePond Notes"') will be repaid with a portion of the proceeds of the
Offering. See "Use of Proceeds."
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 March 1997, the Company issued and sold 17 bridge units ("Bridge Units")
at $50,000 per unit. Each Bridge Unit consisted of a Bridge Note in the
principal amount of $50,000 and Bridge Warrants to purchase 25,000 shares of
Common Stock at a purchase price of $3.00 per share. The Bridge Warrants
automatically convert into Public Warrants upon the closing of the Offering.
Paul DePond purchased one Bridge Unit in the Bridge Financing. See "Use of
Proceeds" and "Capitalization--Bridge Financing."
In April 1997 Michael Ballard, one of the Company's directors, loaned the
Company $200,000 in exchange for the Ballard Note in the principal amount of
$200,000 and warrants to purchase 2,970 shares of the Company's Common Stock
at a price per share of $5.00. The Company intends to use a portion of the
proceeds of the Offering to repay the Ballard Note. See "Use of Proceeds."
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. The Company uses COMAC, along with other fulfillment
companies, on a project by project basis to facilitate the distribution of its
products
40
<PAGE>
to telephone company customers. The Company has no contractual obligation to
use COMAC's services. In fiscal year 1996, the Company paid to COMAC $4,349 in
fees. During the six-month period ended March 31, 1997, the Company paid to
COMAC $17,564 in fees.
The Company has entered into 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 an employment agreement with Mr. Yewell, the terms of which call
for a base salary of $90,000 per annum. In addition, the Company has entered
into an agreement whereby it will pay Mr. Welling $48,000 over two years for
consulting services relating to home telephony products. See "Management--
Employment Contracts."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors of the Board
of Directors, and will be on terms no less favorable to the Company than could
be obtained from unaffiliated third parties.
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 13.4
Gaylan I. Larson................................ 198,019 10.0 5.5
David Welling................................... 138,200 7.0 3.9
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 3.0
555 California Street
San Francisco, CA 94104
David P. Yewell................................. 46,534 2.4 1.3
Michael Ballard(5).............................. 71,905 3.6 2.0
Barry Bellue.................................... 46,533 2.4 1.3
Michael Smith(6)................................ 54,269 2.7 1.5
All directors and executive officers as a group
(7 persons).................................... 978,298 47.2 26.7
</TABLE>
- --------
* Less than 1%.
(1) Applicable percentage of ownership is based on 1,971,966 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 Public
Warrants acquired in the Bridge Financing. See "Capitalization--Bridge
Financing."
(3) Includes 6,528 shares issuable upon exercise of currently exercisable
warrants. The general partners of SIPPL Macdonald Ventures, L.P. are
Jacqueline Macdonald and Roger Sippl.
(4) Includes 8,233 shares issuable upon exercise of currently exercisable
warrants. The general partner of Bayview Investors is Robertson Stephens &
Company Private Equity Group, L.L.P.
(5) Includes 9,498 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;
42
<PAGE>
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.
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 $1.4 million for the fiscal year ending September 30,
1997 or September 30, 1998;
2. the Minimum Pretax Income amounts to at least $2.3 million for the
fiscal year ending September 30, 1999;
3. the Minimum Pretax Income amounts to at least $3.4 million for the
fiscal year ending on September 30, 2000;
4. the Minimum Pretax Income amounts to at least $4.5 million for the
fiscal year ending on September 30, 2001;
5. the Minimum Pretax Income amounts to at least $6.8 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 $2.3 million for the
fiscal year ending September 30, 1997 or September 30, 1998;
2. the Minimum Pretax Income amounts to at least $3.4 million for the
fiscal year ending on 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 $5.6 million for the
fiscal year ending on September 30, 2001;
5. the Minimum Pretax Income amounts to at least $7.9 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.
44
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of one share of Common Stock and one Warrant. Each
Warrant entitles 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 Warrant is entitled, upon payment of the exercise price
of $6.50, to purchase one share of Common Stock. Unless previously redeemed,
the Warrants are exercisable at any time after issuance through , 2002,
provided that at such time a current prospectus relating to the underlying
Common Stock is in effect and the underlying Common Stock is qualified for
sale or exempt from qualification under applicable state securities laws. The
Warrants included in the Units offered hereby are immediately transferable
separately from the Common Stock issued with such Warrants as part of the
Units.
REDEMPTION
Commencing on the first anniversary of the effective date of the
Registration Statement, of which this Prospectus is a part, the 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. 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
45
<PAGE>
"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 shares underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable
may buy Units (or the Warrants included therein) in the aftermarket. In this
event, the Company would be unable to issue shares to those persons desiring
to exercise their Warrants unless and until the underlying shares could be
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 shares
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 shares issuable upon the
exercise of the Warrants is not kept effective or if such shares are not
qualified or exempt from qualification in the states in which the holders of
the Warrants then reside.
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
46
<PAGE>
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 160,000 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 two-year period commencing
three years from the date of this Prospectus at an exercise price of $7.00 per
Unit (140% 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.
47
<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
3,571,966 shares of Common Stock, assuming no exercise of the Underwriter's
over-allotment option. In addition to the 1,600,000 shares of Common Stock
offered hereby, as of the date of this Prospectus, there will be 1,971,966
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 903,310 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 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 1,600,000 shares of Common Stock upon exercise of the
Warrants 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 320,000 additional shares of Common Stock may be purchased by the
Underwriter through the exercise of the Unit Purchase Option and the Warrants
contained in 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."
The Bridge Financing investors have agreed with the Company not to exercise,
sell, transfer, assign, hypothecate or otherwise dispose of their Public
Warrants for a period of one year following the closing of the Offering. The
Company has agreed to register for resale on behalf of the Bridge Financing
investors the 425,000 Public Warrants and the shares of Common Stock
underlying such Public Warrants upon expiration of such one-year period.
48
<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
1,600,000 Units offered hereby from the Company on a "firm commitment" basis,
if any are purchased.
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 the initial
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 240,000 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 160,000
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 $7.00 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 or 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.
49
<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 Commission is conducting an investigation concerning various business
activities of the Underwriter. The investigation appears to be broad in scope,
involving numerous aspects of the Underwriter's compliance with the federal
securities laws and compliance with the federal securities laws by issuers
whose securities were underwritten by the Underwriter, or in which the
Underwriter made over-the-counter markets, persons associated with the
Underwriter, 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, if so, whether any such action
might have an adverse effect on the Underwriter or the securities offered
hereby.
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.
50
<PAGE>
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.
51
<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 8, as to which the
date is May 21, 1997
F-2
<PAGE>
NOTIFY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
UNAUDITED
SHAREHOLDERS'
SEPTEMBER 30, MARCH 31, EQUITY AT
1996 1997 MARCH 31, 1997
------------- ----------- --------------
(UNAUDITED) (UNAUDITED)
(NOTE 8)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 260,380 $ 141,668
Accounts receivable, net of allowance
for doubtful accounts of $2,106 and
$22,839, respectively..................... 134,682 316,205
Inventories............................... 579,929 656,374
----------- -----------
Total current assets........................ 974,991 1,114,247
Property and equipment, net................. 92,903 118,638
Other assets................................ 8,765 318,844
----------- -----------
$ 1,076,659 $ 1,551,729
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Line of credit............................ $ 50,000 $ --
Accounts payable.......................... 116,797 433,053
Accrued liabilities....................... 265,049 272,903
Notes payable to shareholder.............. 30,000 90,000
Bridge notes.............................. -- 636,104
Convertible promissory notes.............. 807,125 200,000
----------- -----------
Total current liabilities................... 1,268,971 1,632,060
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 1,080,906
shares issued and outstanding at
September 30, 1996 and March 31,
1997, respectively; 1,971,966
shares issued and outstanding pro
forma--unaudited......................... 58,619 948,420 2,798,420
Notes receivable from shareholders........ (17,650) (25,775) (25,775)
Accumulated deficit....................... (2,083,281) (2,852,976) (2,852,976)
----------- ----------- ------------
Total shareholders' equity (net
capital deficiency)........................ (192,312) (80,331) $ (80,331)
----------- ----------- ============
$ 1,076,659 $ 1,551,729
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
NOTIFY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX-
MONTH PERIOD ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- --------------------
1995 1996 1996 1997
------------ ------------- --------- ---------
<S> <C> <C> <C> <C>
Product sales................ $ 9,333 $ 308,067 $ 62,724 $ 932,366
Cost of sales................ 7,929 428,112 46,601 723,529
----------- ------------- --------- ---------
Gross profit (loss).......... 1,404 (120,045) 16,123 208,837
Operating expenses:
Research and development... 159,163 537,902 284,005 313,243
Sales and marketing........ 122,884 549,916 247,211 298,253
General and administrative. 146,756 440,089 183,179 307,802
----------- ------------- --------- ---------
Total operating expenses..... 428,803 1,527,907 714,395 919,298
----------- ------------- --------- ---------
Loss from operations......... (427,399) (1,647,952) (698,272) (710,461)
Interest expense............. -- (32,811) (44) (57,757)
Other income and expense,
net......................... 1,337 23,544 17,570 (1,477)
----------- ------------- --------- ---------
Net loss..................... $(426,062) $(1,657,219) $(680,746) $(769,695)
=========== ============= ========= =========
Net loss per share........... $ (1.02) $ (3.78) $ (1.57) $ (1.56)
=========== ============= ========= =========
Weighted average shares
outstanding................. 419,456 438,452 434,217 492,703
=========== ============= ========= =========
Pro forma net loss per share. $ (2.10) $ (0.90)
============= =========
Weighted average shares used
in computing pro forma net
loss per share.............. 790,594 858,010
============= =========
</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
Repurchases of common
stock (unaudited)...... -- -- (2,970) (750) 750 -- --
Issuances of common
stock pursuant to
conversion of
convertible promissory
notes and accrued
interest (unaudited)... -- -- 165,694 761,476 -- -- 761,476
Issuance of bridge
warrants (unaudited)... -- -- -- 116,875 -- -- 116,875
Net loss (unaudited).... -- -- -- -- -- (769,695) (769,695)
--------- ---------- --------- -------- -------- ----------- ----------
Balance at March 31,
1997 (unaudited)....... 4,500,000 $1,850,000 1,080,906 $948,420 $(25,775) $(2,852,976) $ (80,331)
========= ========== ========= ======== ======== =========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
NOTIFY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-
MONTH PERIOD ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- ---------------------
1995 1996 1996 1997
------------ ------------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING
ACTIVITIES
Net loss.................... $(426,062) $(1,657,219) $ (680,746) $(769,695)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 3,193 23,132 9,602 15,353
Amortization of debt
discount and issuance
costs..................... -- -- -- 18,479
Conversion of accrued
interest on convertible
notes to common stock..... 29,351
Changes in operating assets
and liabilities:
Accounts receivable....... (3,868) (130,814) (44,228) (181,523)
Inventory................. (19,849) (560,080) (296,671) (76,445)
Other assets.............. (5,609) (3,156) (6,508) (310,079)
Accounts payable.......... 23,746 93,051 100,435 316,256
Accrued liabilities....... 64,621 200,428 381 7,854
----------- ------------- ---------- ---------
Net cash used in operating
activities................. (363,828) (2,034,658) (919,992) (950,449)
----------- ------------- ---------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES
Expenditures for property
and equipment.............. (30,662) (88,566) (59,834) (41,088)
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES
Proceeds from issuance of
preferred stock............ 100,000 1,450,000 1,450,000 --
Proceeds from issuance of
common stock............... 10,000 5,104 13,654 3,000
Proceeds from issuance of
convertible promissory
notes...................... 300,000 807,125 -- 125,000
Net proceeds from private
placement of bridge notes.. -- -- -- 734,500
Advances under line of
credit..................... -- 50,000 -- 150,000
Repayments under line of
credit..................... -- -- (200,000)
Proceeds from note payable
to shareholder............. 75,000 -- -- 65,000
Payments on note payable to
shareholder................ -- (45,000) (25,000) (5,000)
Repayments of notes
receivable from
shareholders............... 13,065 12,800 -- 325
----------- ------------- ---------- ---------
Net cash provided by
financing activities....... 498,065 2,280,029 1,438,654 872,825
----------- ------------- ---------- ---------
Net increase (decrease) in
cash and cash equivalents.. 103,575 156,805 458,828 (118,712)
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 $ 562,403 $ 141,668
=========== ============= ========== =========
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 $ --
=========== ============= ========== =========
Conversion of convertible
notes payable to common
stock...................... $ -- $ -- $ -- $ 732,125
=========== ============= ========== =========
Value ascribed to warrants
issued in conjunction with
Private Placement.......... $ -- $ -- $ -- $ 116,875
=========== ============= ========== =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 8,817 $ 4,308 $ 3,948
=========== ============= ========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING 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 as 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 $2.9 million and has negative
working capital of approximately $518,000 as of March 31, 1997. Management
expects the Company to incur additional losses and recognizes the need for an
infusion of cash during fiscal 1997. As more fully discussed in Note 3, the
Company secured net proceeds of approximately $735,000 through a private
placement of notes payable and warrants in February 1997 and $200,000 through
the issuance of a promissory note payable and a warrant issued to a
shareholder in April 1997. The Company is also in the process of securing
additional financing through an offering of equity securities. If the Company
is unable to complete its proposed offering, substantial doubt about its
ability to continue as a going concern will remain.
INTERIM RESULTS
The accompanying balance sheet as of March 31, 1997 and the statements of
operations, stockholders' equity (net capital deficiency) and cash flows for
the six-month periods ended March 31, 1996 and 1997 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.
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.
CASH AND CASH EQUIVALENTS
The Company maintains it cash and cash equivalents in depository and money
market accounts with two financial institutions.
F-7
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, MARCH 31,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
Raw materials......................................... $399,719 $375,180
Work-in-progress...................................... 47,166 240,381
Finished goods........................................ 133,044 40,813
-------- --------
$579,929 $656,374
======== ========
</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.
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 six-
month period ended March 31, 1997, three customers accounted for 24%, 23% and
18% of sales, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
The Company does not currently develop software that is sold, licensed or
otherwise marketed.
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 March 31, 1997,
four customers accounted for 32%, 24%, 22%, and 15% of accounts receivable,
respectively.
F-8
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NOTES PAYABLE
The carrying amounts of the Company's notes payable approximate their fair
value. The fair values of the Company's notes payable are estimated using
discounted cash flow analysis, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
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.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets. The Company has adopted Statement
No. 121 in fiscal year 1996, which has not had a material impact.
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 8).
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 prior to 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, MARCH 31,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
Furniture and office equipment........................ $116,982 $158,316
Leasehold improvements................................ 2,246 2,246
-------- --------
119,228 160,316
Less accumulated depreciation and amortization........ (26,325) (41,678)
-------- --------
$ 92,903 $118,638
======== ========
</TABLE>
F-9
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
3. 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
$735,000 (after expenses of issuance). 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 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 not to exercise the Public Warrants for a period of one
year from the closing date of the public offering and not to sell publicly the
Public Warrants except as provided in certain lock-up provisions which expire
one year after the closing date of the public offering. The fair value of the
Bridge Warrants, amounting to approximately $117,000 together with the cost of
issuance (approximately $115,000) will be treated as additional interest
expense over the term of the Bridge Notes.
4. OTHER 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. The Company was
not in compliance with certain covenants at September 30, 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. Subsequent to
fiscal 1996, the Company received proceeds of $125,000 from the issuance of
additional convertible promissory notes with terms identical with those
described above. In January 1997, the Company completed a restructuring of the
convertible promissory notes 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 approximately $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 which are due on demand 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.
During February 1997, the Company issued a $65,000 promissory note to a
shareholder which accrues interest at the rate of 8%. The shareholder also
received a warrant to purchase 11,535 shares of common stock of the Company at
$3.00 per share. The Company believes that the value of the warrant at the
date of issuance was not material and no value has been attributed to it in
these financial statements.
F-10
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
4. OTHER FINANCING ARRANGEMENTS (CONTINUED)
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 March 31, 1997.
In April 1997, the Company issued a $200,000 promissory note to a
shareholder which accrues interest at 10% per annum and is due and payable in
October 1997. In conjunction with this promissory note, the Company also
issued the shareholder a warrant to purchase 2,970 shares of the Company's
common stock at an exercise price of $5.00 per share on or before April 3,
2002.
5. 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 at September
30, 1996 is $200,000.
Rent expense totaled $19,000, $44,000, 16,000 and 30,000 for the years ended
September 30, 1995 and 1996 and the six-month periods ended March 31, 1996 and
1997, respectively.
6. 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 March 31, 1997) 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
F-11
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
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 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.
COMMON STOCK
The Company has outstanding 915,212 common shares issued 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 March 31, 1997,
132,685 shares were subject to repurchase at their paid-in amounts.
1997 STOCK OPTION PLAN
In January 1997, the Company adopted the Notify Corporation 1997 Stock Plan
(the "Plan"). A total of 200,000 shares of the Company's common stock are
reserved for issuance under the Plan which provides for the grant of stock
options to employees, consultants and directors of the Company. No options
were granted as of March 31, 1997 under the Plan.
7. 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.
8. SUBSEQUENT EVENTS
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 and one
Class A 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 140% of the price of the units sold in the offering
during a three-year period commencing two-years from the date of the offering.
F-12
<PAGE>
NOTIFY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
ESCROW SECURITIES
In February 1997, the holders of the Company's common and preferred stock
agreed to place 1,263,537 of their shares into escrow subject to the
completion of the initial public offering of units. Additionally, the holders
of warrants agreed to place warrants to purchase 111,008 shares of common
stock into escrow subject to the completion of the initial public offering of
units. 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 September 30, 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.
PRO FORMA UNAUDITED SHAREHOLDERS' EQUITY
Pro forma unaudited shareholders' equity at March 31, 1997 reflects the
assumed conversion of convertible preferred stock, as set forth on the
accompanying balance sheet.
F-13
<PAGE>
INSIDE BACK COVER:
UPPER LEFT HAND CORNER:
[PICTURE OF COMPANY'S MESSAGEALERT PRODUCT ON A DESKTOP]
LOWER LEFT HAND CORNER:
[A PICTURE OF COMPANY'S CENTREX AUTO ATTENDANT PRODUCT NEXT TO A TELEPHONE].
<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................................................................ 36
Certain Relationships and Related
Transactions............................................................. 40
Principal Shareholders.................................................... 42
Description of Securities................................................. 45
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 49
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,600,000 UNITS
LOGO
CONSISTING OF 1,600,000
SHARES OF COMMON STOCK AND
1,600,000 REDEEMABLE CLASS A WARRANTS
------------------------
PROSPECTUS
------------------------
D.H. BLAIR INVESTMENT
BANKING CORP.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 6(b) 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............................................... 150,000
Auditors' accounting fees and expenses................................ 150,000
Transfer Agent and Registrar fees..................................... 5,000
Underwriter's nonaccountable expense allowance........................ 240,000
Miscellaneous expenses................................................ 22,022
--------
Total................................................................. $730,000
========
</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. The sale and issuance of these securities was exempt from
the registration requirements of the Securities Act pursuant to regulation 701
promulgated thereunder.
(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. The sale and
issuance of these securities was exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof.
(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. The sale and issuance of these securities was
exempt from the registration requirements of the Securities Act pursuant to
regulation 701 promulgated thereunder.
(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. The sale and issuance of these securities was
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof.
(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. The
sale and issuance of these securities was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
(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. The sale and issuance of
these securities was exempt from the registration requirements of the
Securities Act pursuant to Rule 506 of Regulation D promulgated thereunder.
(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. The sale and issuance of these securities was exempt from the
registration requirements of the Securities Act pursuant to Section 3(a)(9)
thereof.
(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. The sale and issuance of
these securities was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof.
II-2
<PAGE>
(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 warrants with identical terms as the 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. The sale and issuance of these securities was exempt from the
registration requirements of the Securities Act pursuant to Rule 506 of
Regulation D promulgated thereunder.
(11) In April 1997, the Company issued to one of its directors a 10%
subordinated promissory note with a principal amount of $200,000 and warrant
to purchase 2,970 shares of the Company's Common Stock at a price per share of
$5.00 for an aggregate purchase price of $200,000. The sale and issuance of
these securities was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof.
The sale and exchange of the above securities were deemed to be exempt from
registration under the Securities Act as indicated. 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.
II-3
<PAGE>
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.
4.3 Form of Common Stock Certificate.
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 (as amended).
10.2 Employment Agreement dated as of March 1, 1997 between the Company and
Gaylan Larson (as amended).
10.3 Employment Agreement dated as of March 1, 1997 between the Company and
Gerald Rice (as amended).
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 Form of Lock-up Agreement.
10.9 Lease between Registrant and C.C. Poon.
11.1 Statement Regarding the Computation Per Share Loss.
23.1 Consent of Independent Auditors (see page II-7).
Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included as part of
23.2 Exhibit 5.1).
24.1* Power of Attorney.
27* Financial Data Schedule.
</TABLE>
--------
(*)Previously filed.
(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-4
<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:
(1) It will file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, Registrant will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) It will file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(4) It will provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) 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.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements 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 27th day of May, 1997.
NOTIFY CORPORATION
/s/ Paul DePond
By: __________________________________
Paul DePond
President, Chief Executive Officer
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
<C> <S> <C>
/s/ Paul DePond President, Chief Executive Officer and May 27, 1997
- ---------------------------- Chairman (Principal Executive Officer)
Paul DePond
* Chief Financial Officer (Principal Financial May 27, 1997
- ---------------------------- and Accounting Officer)
Gerald Rice
*
- ---------------------------- Vice President, Operations and Director May 27, 1997
Gaylan Larson
*
- ---------------------------- Director May 27, 1997
Michael Ballard
*
- ---------------------------- Director May 27, 1997
Barry Bellue
*
- ---------------------------- Director May 27, 1997
Michael Smith
Paul DePond
*By: /s/ Paul DePond
-------------------------
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
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 8, as to which the date is May 21, 1997 in the
Registration Statement (Form SB-2) and the related Prospectus of Notify
Corporation for the registration of (i) 1,840,000 units consisting of
1,840,000 shares of common stock, and 1,840,000 redeemable Class A warrants,
and the 1,840,000 shares of Common Stock underlying the Class A warrants and
(ii) the Underwriters' option to purchase 160,000 Units and the securities
underlying the option.
ERNST & YOUNG LLP
San Jose, California
May 28, 1997
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement (as amended).
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 (as amended).
4.2 Form of Underwriter's Unit Purchase Option (as
amended).
4.3 Form of Common Stock Certificate
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 (as amended).
10.2 Employment Agreement dated as of March 1, 1997 between
the Company and Gaylan Larson (as amended).
10.3 Employment Agreement dated as of March 1, 1997 between
the Company and Gerald Rice (as amended).
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 Form of Lock-Up Agreement
10.9 Lease between Registrant and C.C. Poon.
11.1 Statement Regarding the Computation Per Share Loss.
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.
27* Financial Data Schedule
</TABLE>
- --------
(*)Previously filed.
<PAGE>
EXHIBIT 1.1
1,600,000 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"), and (ii) one
redeemable Class A warrant ("Warrants") to purchase one share of Common Stock.
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 240,000 additional Units. Unless the
context otherwise indicates, the term "Units" shall include the 240,000
additional Units referred to above.
The aggregate of 1,600,000 Units to be sold by the Company, together
with all or any part of the 240,000 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. 333-23369) 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. 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 March 31, 1997 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued and are
fully paid and non-assessable; except as set forth in the 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
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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.
(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
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<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, except as set forth in the
Prospectus, 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, 1,600,000 (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 Underwriter of First Units referred to in subsection (a) above. In the
event the Company declares or pays a dividend or distribution on its Common
Stock, whether in the form of cash, shares of Common Stock or any other
consideration, prior to the Option Closing Date, such dividend or distribution
shall also be paid on the Option Units on the Option Closing Date.
(c) The Company will make the certificates for the securities
comprising the Units to be purchased by the Underwriter hereunder available to
you for checking at least two full business days prior to the First Closing Date
or the Option Closing Date (which are collectively referred to herein as the
"Closing Dates"). The certificates shall be in such names and denominations as
you may request, at least two full business days prior to the Closing Dates.
Time shall be of the essence and delivery at the time and place specified in
this Agreement is a further condition to the obligations of 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
Underwriter the use thereof is required to comply with the applicable
provisions of the Act and the Rules and Regulations. In case of the happening,
at any time within such period as a Prospectus is required under the Act to be
delivered in connection with sales by an underwriter or dealer of any event of
which the Company has knowledge and
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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 out-of-pocket expenses of the Underwriter.
(d) The Company will use its best efforts to (i) cause a
registration statement under the Securities Exchange Act of 1934 to be declared
effective concurrently with the completion of this offering and will notify the
Underwriter in writing immediately upon the effectiveness of such registration
statement, and (ii) if requested by the Underwriter, to obtain a listing on the
Pacific Stock Exchange and to obtain and keep current a listing in the Standard
& Poors or Moody's Industrial OTC Manual.
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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 10:00 a.m., New York City
time, on the business day following the date of determination of the public
offering price, 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) 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.
(o) 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) for three years from the date of this Agreement,
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).
(p) 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.
(q) 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").
(r) 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.
(s) 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.
(t) 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.
(u) 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.
(v) 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.
(w) 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.
(x) 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 Shares; 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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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 Underwriter is consummated, the Company will pay all
costs and expenses incident to the performance of this Agreement by the Company
including, but not limited to, the fees and expenses of counsel to the Company
(which fees shall not exceed $150,000) and of the Company's accountants; the
costs and expenses incident to the preparation, printing, filing and
distribution under the Act of the Registration Statement (including the
financial statements therein and all amendments and exhibits thereto),
Preliminary Prospectus and the Prospectus, as amended or supplemented, or the
Term Sheet, the fee of the NASD in connection with the filing
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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
Underwriter, in connection with the qualification of the Units under the state
securities or blue sky laws which the Underwriter shall designate; the cost of
printing and furnishing to the Underwriter copies of the Registration Statement,
each Preliminary Prospectus, the Prospectus, this Agreement, Selling
Agreement, and the Blue Sky Memorandum, any fees relating to the listing of
the Units, Common Stock and Warrants on the Nasdaq SmallCap Market or any
other securities exchange, the cost of printing the certificates representing
the securities comprising the Units, the fees of the transfer agent and
warrant agent the cost of publication of at least three "tombstones" of the
offering (at least one of which shall be in national business newspaper and
one of which shall be in a major New York newspaper) and the cost of preparing
at least four hard cover "bound volumes" relating to the offering, in
accordance with the Underwriter's request. The Company shall pay any and all
taxes (including any transfer, franchise, capital stock or other tax imposed
by any jurisdiction) on sales to the Underwriter hereunder. The Company will
also pay all costs and expenses incident to the furnishing of any amended
Prospectus or of any supplement to be attached to the Prospectus as called for
in Section 3(a) of this Agreement except as otherwise set forth in said
Section.
(b) In addition to the foregoing expenses the Company shall at the
First Closing Date pay to the Underwriter a non-accountable expense allowance of
$240,000 of which $40,000 has been paid. In the event the overallotment option
is exercised, the Company shall pay to the Underwriter at the Option Closing
Date an additional amount equal to 3% of the gross proceeds received upon
exercise of the overallotment option. In the event the transactions
contemplated hereby are not consummated by reason of any action 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
$240,000.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from the Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless the Underwriter against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Underwriter or 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.
-26-
<PAGE>
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
-29-
<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"), and one (1) Class A Warrant ("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 Warrants upon the conversion of
certain bridge warrants, the Company may issue up to 2,175,000; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the Registered Holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall
-----------
have the following meanings, unless the context shall otherwise require:
(a) "Aggregate Per Share Price" shall mean the Purchase Price per
share multiplied by the number of shares of Common Stock purchasable upon the
exercise of a Warrant.
(b) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in the
distribution of earnings and assets of the Company without limit as to amount or
percentage, which at the date hereof consists of 15,000,000 shares of Common
Stock, $.001 par value.
<PAGE>
(c) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall be
administered, which office is located at the date hereof at $0 Wall Street, New
York, New York 10005.
(d) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(e) "Initial Warrant Exercise Date" shall mean __________, 1997.
(f) "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.
(g) "Purchase Price" shall mean the purchase price to be paid upon
exercise of each Warrant in accordance with the terms hereof, which price shall
be $6.50, subject to adjustment from time to time pursuant to the provisions of
Section 9 hereof, and subject to the Company's right to reduce the Purchase
Price upon notice to all Registered Holders of Warrants.
(h) "Redemption Price" shall mean the price at which the Company may,
at its option in accordance with the terms hereof, redeem the Warrants, which
price shall be $0.05 per Warrant.
(i) "Registered Holder" shall mean as to any Warrant and as of any
particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(j) "Transfer Agent" shall mean American Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as such.
(k) "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
-2-
<PAGE>
authorized or required to close, then 5:00 P.M. (New York time) on the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized or required to close. Upon notice to all Registered
Holders, the Company shall have the right to extend the Warrant Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
---------------------------------------------
(a) A Warrant initially shall entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase one share of Common
Stock upon the exercise thereof, in accordance with the terms hereof, subject to
modification and adjustment as provided in Section 9.
(b) The Warrants included in the offering of Units will be detachable
and separately transferable immediately from the shares of Common Stock
constituting part of such Units.
(c) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
shall be executed by the Company and delivered to the Warrant Agent. Upon
written order of the Company signed by its President or Chairman or a Vice
President and by its Secretary or an Assistant Secretary, the Warrant
Certificates shall be countersigned, issued and delivered by the Warrant Agent
as part of the Units.
(d) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 2,175,000 shares
of Common Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(e) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no Warrant
Certificates shall be issued except (i) those initially issued hereunder, (ii)
those issued on or after the Initial Warrant Exercise Date, upon the exercise of
fewer than all Warrants represented by any Warrant Certificate, to evidence any
unexercised Warrants held by the exercising Registered Holder, (iii) those
issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in
replacement of lost, stolen, destroyed or mutilated Warrant Certificates
pursuant to Section 7; (v) those issued pursuant to the Unit Purchase Option;
and (vi) at the option of the Company, in such form as may be approved by the
its Board of Directors, to reflect any adjustment or change in the Purchase
Price, the number of shares of Common Stock purchasable upon exercise of the
Warrants or the Target Price therefor made pursuant to Section 8 hereof.
-3-
<PAGE>
(f) Pursuant to the terms of the Unit Purchase Options, the
Underwriter may purchase up to 140,000 Units, which include up to 140,000
Warrants. Notwithstanding anything to the contrary contained herein, the
Warrants underlying the Unit Purchase Option shall not be subject to redemption
by the Company except under the terms and conditions set forth in the Unit
Purchase Options.
SECTION 3. Form and Execution of Warrant Certificates.
------------------------------------------
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Warrants may be listed, or to
conform to usage or to the requirements of Section 2(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 letterw AW on Warrants of all denominations.
(b) Warrant Certificates shall be executed on behalf of the Company
by its Chairman of the Board, President or any Vice President and by its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be an officer of the Company or to hold the
particular office referenced in the Warrant Certificate before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates may nevertheless
be countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed such Warrant Certificates had not
ceased to be an officer of the Company or to hold such office. After
countersignature by the Warrant Agent, Warrant Certificates shall be delivered
by the Warrant Agent to the Registered Holder without further action by the
Company, except as otherwise provided by Section 4(a) hereof.
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
-4-
<PAGE>
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,
(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
-5-
<PAGE>
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.
(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 upon exercise of the Class A
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
-6-
<PAGE>
(d) The Warrant Agent is hereby irrevocably authorized to requisition
the Company's Transfer Agent from time to time for certificates representing
shares of Common Stock issuable upon exercise of the Warrants, and the Company
will authorize the Transfer Agent to comply with all such proper requisitions.
The Company will file with the Warrant Agent a statement setting forth the name
and address of the Transfer Agent of the Company for shares of Common Stock
issuable upon exercise of the Warrants.
SECTION 6. Exchange and Registration of Transfer.
-------------------------------------
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute
and the Warrant Agent shall countersign, issue and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
(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
-7-
<PAGE>
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 (the "Target Price"),
subject to adjustment as set forth in Section 8(f), below. All Warrants must be
redeemed if any are redeemed, provided that the Warrants underlying the Unit
Purchase Option may only be redeemed in compliance with and subject to the terms
and conditions of the Unit Purchase Option. For purposes of this Section 8, the
Calculation Date shall mean a date within 15 days of the mailing of the
Redemption Notice. The date fixed for redemption of the Warrants is referred to
herein as the "Redemption Date".
(b) If the conditions set forth in Section 8(a) are met, and the
Company desires to exercise its right to redeem the Warrants, it shall request
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
-8-
<PAGE>
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.
(f) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the Target
Price shall be proportionally adjusted by the ratio which the total number of
shares of Common Stock outstanding immediately prior to such event bears to the
total number of shares of Common Stock to be outstanding immediately after such
event.
SECTION 9. Adjustment of Exercise Price and Number of Shares of
----------------------------------------------------
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
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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
Warrant shall (subject to the provisions contained in Section 9(b) hereof) be
such number of shares (calculated to the nearest one-hundredth; provided,
--------
however, that in no event shall the Aggregate Per Share Price increase as a
- -------
result of such rounding calculation) purchasable at the Purchase Price in effect
immediately prior to such adjustment multiplied by a fraction, the numerator of
which shall be the Purchase Price in effect immediately prior to such adjustment
and the denominator of which shall be the Purchase Price in effect immediately
after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase Price
hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the exercise
of each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock.
Each Warrant held of record prior to such adjustment of the number of Warrants
shall become that number of Warrants (calculated to the nearest tenth)
determined by multiplying the number one by a fraction, the numerator of which
shall be the Purchase Price in effect immediately prior to such adjustment and
the denominator of which shall be the Purchase Price in effect immediately after
such adjustment. Upon each adjustment of the number of Warrants pursuant to
this Section 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
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thereafter, by exercising such Warrant, to purchase the kind and number of
shares of stock or other securities or property (including cash) receivable upon
such reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been purchased upon exercise of such Warrant immediately prior
to such reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 9. The Company shall not effect any
such consolidation, merger or sale unless prior to or simultaneously with the
consummation thereof the successor (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing assets or other
appropriate corporation or entity shall assume, by written instrument executed
and delivered to the Warrant Agent, the obligation to deliver to the holder of
each Warrant such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holders may be entitled to purchase and the other
obligations of the Company under this Agreement. The foregoing provisions shall
similarly apply to successive reclassifications, capital reorganizations and
other changes of outstanding shares of Common Stock and to successive
consolidations, mergers, sales or conveyances.
(d) Irrespective of any adjustments or changes in the Purchase Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(f) hereof, continue to express the Purchase Price per
share, the number of shares purchasable thereunder and the Redemption Price
therefor as the Purchase Price per share, and the number of shares purchasable
and the Redemption Price therefor were expressed in the Warrant Certificates
when the same were 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
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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.
(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
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<PAGE>
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 (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
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<PAGE>
outstanding on the date prior to the modification plus the number of shares
of Common Stock which the aggregate consideration receivable by the Company
for the securities affected by the modification would purchase at the
Market Price and of which the denominator shall be the number of shares of
Common Stock outstanding on such date plus the number of shares of Common
Stock to be issued upon conversion, exchange or exercise of the modified
securities at the modified rate. Such adjustment shall become effective as
of the date upon which such modification shall take effect. On the
expiration of any such right, warrant or option or the termination of any
such right to convert or exchange any such Convertible Securities referred
to in Paragraph (C) or (D) above, the Purchase Price then in effect
hereunder shall forthwith be readjusted to such Purchase Price as would
have obtained (a) had the adjustments made upon the issuance or sale of
such rights, warrants, options or Convertible Securities been made upon the
basis of the issuance of only the number of shares of Common Stock
theretofore actually delivered (and the total consideration received
therefor) upon the exercise of such rights, warrants or options or upon the
conversion or exchange of such Convertible Securities and (b) had
adjustments been made on the basis of the Purchase Price as adjusted under
clause (a) for all transactions (which would have affected such adjusted
Purchase Price) made after the issuance or sale of such rights, warrants,
options or Convertible Securities.
(F) In case of the sale for cash of any shares of Common Stock,
any Convertible Securities, any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, the consideration received by the Company therefore shall be
deemed to be the gross sales price therefor without deducting therefrom any
expense paid or incurred by the Company or any underwriting discounts or
commissions or concessions paid or allowed by the Company in connection
therewith.
(G) In case any event shall occur as to which the provisions of
Section 9 are not strictly applicable but the failure to make any
adjustment would not fairly protect the purchase rights represented by the
Warrants in accordance with the essential intent and principles of Section
9, then, in each such case, the Board of Directors of the Company shall in
good faith by resolution provide for the adjustment, if any, on a basis
consistent with the essential intent and principles established in Section
9, necessary to preserve, without dilution, the purchase rights represented
by the Warrants. The Company will promptly make the adjustments described
therein.
(g) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Common Stock purchasable upon the exercise of each Warrant
will be made, however,
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<PAGE>
(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, 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
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<PAGE>
in Section 9(c) hereof, the stock, securities or property provided for in such
section or (ii), in the case of any reclassification or change in the
outstanding shares of Common Stock issuable upon exercise of the Warrants as a
result of a subdivision or combination or consisting of a change in par value,
or from par value to no par value, or from no par value to par value, such
shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to Section 9, or as to the amount
of any such adjustment, if required, shall be binding upon the holders of the
Warrants and the Company if made in good faith by the Board of Directors of the
Company.
(j) If and whenever the Company shall grant to the holders of Common
Stock, as such, rights or warrants to subscribe for or to purchase, or any
options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding, the
rights, warrants or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this Section 9(j), that
exercise of Warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his Warrants. Such grant by the Company to the holders of the
Warrants shall be in lieu of any adjustment which otherwise might be called for
pursuant to this Section 9.
SECTION 10. Fractional Warrants and Fractional Shares.
-----------------------------------------
(a) If the number of shares of 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
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(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 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
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(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 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
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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 be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged or any corporation resulting from any consolidation
to which the Warrant Agent or any new warrant agent shall be a party or any
corporation succeeding to the trust business of the Warrant Agent shall be a
successor warrant agent under this Agreement without any further act, provided
that such corporation is eligible for appointment as successor to the Warrant
Agent under the provisions of the preceding paragraph. Any such successor
warrant agent shall promptly cause notice of its succession as warrant agent to
be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
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The Warrant Agent, its subsidiaries and affiliates, and any of its or
their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effects as though it were not Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
SECTION 16. Modification of Agreement. Subject to the provisions of
-------------------------
Section 4(b), the parties hereto and the Company may by supplemental agreement
make any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained; (ii) to reflect an
increase in the number of Warrants which are to be governed by this Agreement
resulting from (a) a subsequent public offering of Company securities which
includes Warrants or (b) a subsequent private placement of Company securities
which includes Warrants, in either case having the same terms and conditions as
the Warrants, respectively, originally covered by or subsequently added to this
Agreement under this Section 16, provided, however, that in the case of a
-------- -------
private placement, the amendment to this Agreement will be effective only at
such time as the resale of such Warrants, as well as the securities underlying
such Warrants is covered by an effective registration statement under the Act;
or (iii) that they may deem necessary or desirable and which shall not adversely
affect the interests of the holders of Warrant Certificates; provided, however,
-------- -------
that this Agreement shall not otherwise be modified, supplemented or altered in
any respect except with the consent in writing of the Registered Holders of
Warrant Certificates representing not less than 50% of the Warrants then
outstanding; and provided, further, that no change in the number or nature of
-------- -------
the securities purchasable upon the exercise of any Warrant, or the Purchase
Price therefor, or the acceleration of the Warrant Expiration Date, shall be
made without the consent in writing of the Registered Holder of the Warrant
Certificate representing such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed or are made in
compliance with applicable law.
SECTION 17. Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at
the address of such holder as shown on the registry books maintained by the
Warrant Agent; if to the Company, at 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.
-20-
<PAGE>
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.
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
-21-
<PAGE>
EXHIBIT A
[FORM OF FACE OF WARRANT CERTIFICATE]
No. W __________ Warrants
VOID AFTER _______, 2002
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
Warrants ("Warrants") specified above. Each Warrant represented hereby
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Warrant Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.001 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 $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 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 Warrant represented hereby are subject to
modification or adjustment.
A-1
<PAGE>
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on
_________________, 2002 or such earlier date as the Warrants shall be redeemed.
If such date shall in the State of New York be a holiday or a day on which banks
are authorized to close, then the Expiration Date shall mean 5:00 P.M. (New
York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Warrants represented hereby unless a registration
statement under the Securities Act of 1933, as amended, with respect to such
securities is effective. The Company has covenanted and agreed that it will
file a registration statement and will use its best efforts to cause the same to
become effective and to keep such registration statement current while any of
the Warrants are outstanding. The Warrants represented hereby shall not be
exercisable by a Registered Holder in any state where such exercise would be
unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any tax or other
governmental charge imposed in connection therewith, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
The Warrants represented hereby may be redeemed at the option of the
Company, at a redemption price of $.05 per 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 Warrants
represented hereby except to receive the $.05 per Warrant upon surrender of this
Warrant Certificate.
A-2
<PAGE>
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 Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
The Company has agreed to pay a fee of 5% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
the Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile, by two of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
NOTIFY CORPORATION
Dated: ____________________ By: ______________________________
By: ______________________________
[seal]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Warrant Agent
By ___________________________
Authorized Officer
A-3
<PAGE>
[FORM OF REVERSE OF WARRANT CERTIFICATE]
TRANSFER FEE: $_______ PER CERTIFICATE ISSUED
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise _______ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
[please print or type name and address]
and be delivered to
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
A-4
<PAGE>
The undersigned represents that the exercise of the Warrants evidenced
hereby was solicited by a member of the National Association of Securities
Dealers, Inc. If not solicited by an NASD member, please write "unsolicited" in
the space below. Unless otherwise indicated by listing the name of another NASD
member firm, it will be assumed that the exercise was solicited by D.H. Blair
Investment Banking Corp. or D.H. Blair & Co., Inc.
____________________________________
(Name of NASD Member)
Dated: ______________________ X _________________________________
____________________________________
____________________________________
Address
____________________________________
Taxpayer Identification Number
____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
OF TRANSFEREE
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
[please print or type name and address]
_________________ of the Warrants represented by this Warrant Certificate, and
hereby irrevocably constitutes and appoints ____________________________________
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the premises.
Dated:________________ X ______________________________
Signature Guaranteed
___________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGE-MENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-6
<PAGE>
B-1
<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"), and one Class A Warrant
("Warrants"). Each Warrant is exercisable to purchase one share of Common Stock
at an exercise price of $6.50 from _______, 1997 to _______ , 2002.
The Units have been registered under a Registration Statement on Form SB-2,
(File No. 333-23369) declared effective by the Securities and Exchange
Commission on _______, 1997 (the "Registration Statement". This Option,
together with options of like tenor, constituting in the aggregate options
(the "Options") to purchase 160,000 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 1,600,000 Units (the "Public
Units") through the Underwriter, in consideration of $160 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 _______, 2000,
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 _______, 2000 and _______,2002 inclusive, the Holder
shall have the option to purchase Option Units hereunder at a price of
$7.00 per Unit. For purposes of the adjustments under Section 8 hereof,
the Per Share Exercise Price shall be deemed to be $7.00, subject to
further adjustment as provided in such Section 8.
(c) After _________, 2002 the Holder shall have no right to
purchase any Units hereunder.
2. (a) The rights represented by this Option may be exercised at
any time within the period above specified, in whole or in part, by (i) the
surrender of this Option (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the Holder
at the address of the Holder appearing on the books of the Company); and (ii)
payment to the Company of the exercise price then in effect for the number of
Option Units specified in the above-mentioned purchase form together with
applicable stock transfer taxes, if any. This Option shall be deemed to have
been exercised, in whole or in part to the extent specified, immediately prior
to the close of business on the date this Option is surrendered and
-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 three 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 4.3
[NOTIFY CORPORATION LOGO]
NUMBER SHARES
[ ] [ ]
COMMON STOCK COMMON STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
AND A STATEMENT AS TO
THE RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS
ON SHARES.
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
CUSIP 669956104
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, .001 PAR VALUE, OF
NOTIFY CORPORATION
transferable on the books of the Corporation by the holder hereof in person or
by a duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of this duly authorized officers.
Dated:
[SEAL OF NOTIFY CORPORATION INCORPORATED CALIFORNIA AUGUST 12 1994]
COUNTERSIGNED AND REGISTERED:
Dated: AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
/s/ Gerald W. Rice /s/ Paul F. DeFord
Secretary and Chief Financial Officer President and Chief Executive Officer
<PAGE>
A STATEMENT OF THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS GRANTED
TO OR IMPOSED UPON THE RESPECTIVE CLASSES OR SERIES OF SHARES AND UPON THE
HOLDERS THEREOF AS ESTABLISHED BY THE ARTICLES OF INCORPORATION OF THE
CORPORATION AND BY ANY CERTIFICATE OF DETERMINATION AND THE NUMBER OF SHARES
CONSTITUTING EACH CLASS AND SERIES AND THE DESIGNATIONS THEREOF, MAY BE OBTAINED
BY THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE FROM THE SECRETARY
OF THE CORPORATION AT ITS CORPORATE HEADQUARTERS.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- Uniform Gifts
TEN ENT -- as tenants by the entities to Minors Act
JT TEM -- as joint tenants with right UNIF TRAN MIN ACT -- Uniform Transfers
of survivorship and not as to Minors Act
tenants in common CUST -- Custodian
Additional abbreviations may also be used though not in the above list.
For Value Received, _________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
fully power of substitution in the premises.
Dated _______________________________
________________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
________________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCK BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE GUARANTEE PROGRAM PURSUANT TO
SEC RULE 17 AP. 15.
<PAGE>
EXHIBIT 5.1
May 27, 1997
Notify Corporation
1054 South De Anza Blvd., Suite 105
San Jose, CA 95129
RE: REGISTRATION STATEMENT NO. 333-23369 ON FORM SB-2
-------------------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form SB-2 filed by you with
the Securities and Exchange Commission on March 14, 1997 (Registration No. 333-
23369) (the "Registration Statement") in connection with the registration under
the Securities Act of 1933, as amended, of 1,610,000 units ("Units") consisting
in the aggregate of 1,610,000 shares of Common Stock (the "Shares") and
1,610,000 Class A Warrants (the "Warrants")(including 210,000 Units subject to
an over allotment option granted to the underwriter). As your counsel in
connection with this transaction, we have examined the proceedings proposed to
be taken in connection with said sale and issuance of the Units.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the sale and the
issuance of the Units, and upon completion of the proceedings being taken in
order to permit such transactions to be carried out in accordance with the
securities laws of the various states, where required:
The Shares covered by the Registration Statement, when issued and sold in
the manner referred to therein will be legally and validly issued, fully paid,
and non-assessable shares of Common Stock.
The shares of Common Stock underlying the Warrants covered by the
Registration Statement, when issued in the manner referred to therein, will be
legally and validly issued, fully paid, and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
/s/ WILSON, SONSINI, GOODRICH & ROSATI
[HPM]
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
This employment agreement (the "Agreement") is made and entered into
effective as of March 1, 1997 (the "Effective Date"), by and between Paul DePond
(the "Employee") and Notify Corporation (the "Company").
RECITALS
--------
A. The Company desires to retain the services of Employee, and Employee
desires to be employed by the Company, on the terms and conditions set forth in
this Agreement.
B. Certain capitalized terms used in the Agreement are defined in Section
8 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 President and Chief Executive Officer, with such duties, responsibilities and
compensation as in effect as of the Effective Date; 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 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.
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 $120,000. The
base salary shall increase to an annualized rate of $150,000 thirteen months
after the effective date of the Company's initial public offering. Such salary
shall be reviewed at least annually and shall be increased from time to time
subject to
<PAGE>
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 paid 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 employee compensation programs maintained by
the Company applicable to other key employees of the Company, including (without
limitation) life, disability, health, accident and other insurance programs, and
paid vacations, 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.
(d) Expenses. The Company will pay or reimburse Employee for
--------
reasonable travel, entertainment or other expenses incurred by Employee in the
furtherance of or in connection with the performance of Employee's duties
hereunder in accordance with the Company's established policies. Employee shall
furnish the Company with evidence of such expenses within a reasonable period of
time from the date that they were incurred.
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 an Involuntary Termination (as defined in Section 8) other than
for Cause (as defined in Section 8), then the Employee shall be entitled to
receive a continuation of the Employee's Base Compensation for a period equal to
twelve (12) months.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee voluntarily terminates employment with the Company, other than as a
result of an Involuntary Termination, or if the Employee is terminated for
Cause, then the Employee shall not be entitled to receive severance or other
benefits.
(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
-2-
<PAGE>
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 the Employee shall be entitled
to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment terminates
-----------------------
as a result of an 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 ninety (90) days.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee voluntarily terminates employment with the Company, other than as a
result of 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 Section 4(a)(i) or Section 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 termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue until the earlier of (i) twelve
(12) months following termination in the case of a termination described in
Section 4(a)(i), (ii) ninety (90) days following termination in the case of a
termination described in Section 4(b)(i), or (iii) the date the Employee becomes
covered under another employer's group health, dental or life insurance plan (to
the extent covered under such plans). 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.
-3-
<PAGE>
(d) Restricted Stock. In the event the Employee is entitled to
----------------
severance benefits pursuant to Section 4(a)(i) of this Agreement, then all
Company stock purchased by the Employee subject to a repurchase right in favor
of the Company shall vest and any such repurchase right shall lapse.
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" within 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 to the extent such payment, after 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 Section 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 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, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely 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 reasonably incur in connection with any calculations contemplated
by this Section.
6. Confidential Information.
------------------------
(a) Company Information. Employee agrees at all times during the term
-------------------
of Employee's employment and thereafter, to hold in strictest confidence, and
not to use, except for the benefit of the Company, or to disclose to any person,
firm or corporation without written authorization of the Board of Directors of
the Company, any Confidential Information of the Company. Employee understands
that "Confidential Information" means any Company proprietary information, trade
secrets or know-how, including, but not limited to, market research, product
plans, products, services, customer lists and customers (including, but not
limited to, customers of the Company on whom Employee will call), markets,
developments, marketing, finances or other business information disclosed to
Employee by the Company either directly or indirectly in writing, orally or by
drawings or observation of parts or equipment. Employee further understands
that Confidential Information does not include any of the foregoing items which
is based on either Employee's prior knowledge or the experience of the Employee
or has become publicly known and made generally available through no wrongful
act of Employee or of others who were under confidentiality obligations as to
the item or items involved.
(b) Third Party Information. Employee recognizes that the Company has
-----------------------
received and in the future will receive from third parties their confidential or
proprietary information subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. Employee agrees to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as
-4-
<PAGE>
necessary in carrying out Employee's work for the Company consistent with the
Company's agreement with such third party.
7. Covenant Not to Solicit.
-----------------------
(a) Until one year after termination of Employee's employment with the
Company for any reason, the Employee agrees that he shall not solicit, induce,
attempt to hire, recruit, encourage, take away, or hire any employee of the
Company or cause an employee to leave his or her employment either for Employee
or for any other entity or person.
(b) The Employee represents that he (i) is familiar with the foregoing
covenant not to solicit, and (ii) is fully aware of his obligations hereunder,
including, without limitation, the reasonableness of the length of time and
scope of this covenant.
8. 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; provided, however, that an initial public offering of the
Company's Common Stock shall not constitute a Change of Control; or
(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 or 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
-5-
<PAGE>
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,
-----------------------
without the Employee's express written consent, (i) 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) 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, other than a reduction which is part of and generally consistent with
a general reduction of comparable employee salaries; (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, other than a
reduction which is part of and generally consistent with a general reduction of
comparable employee benefits packages; (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 effected for death,
Disability or Cause, or (vii) the failure of the Company to obtain the
assumption of this agreement by any successors contemplated in Section 9 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 Company's Board of Directors 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 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 notice 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
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<PAGE>
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 or such other date specified in
the notice of termination, or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.
9. 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 obligations 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 Section
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.
10. Returning Company Documents. Employee agrees that, at the time of
---------------------------
leaving the employ of the Company, Employee will deliver to the Company (and
will not keep in Employee's possession, recreate or deliver to anyone else) any
and all devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, materials, equipment, other documents or
property, or reproductions of any aforementioned items developed by Employee
pursuant to Employee's employment with the Company or otherwise belonging to
the Company, its successors or assigns.
11. 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. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall 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 waive any
right of the Employee
-7-
<PAGE>
hereunder or preclude the Employee from asserting such fact or circumstance in
enforcing his right hereunder.
12. Mediation; Arbitration.
----------------------
(a) Mediation. The Employee agrees that any dispute or controversy
---------
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach or termination
thereof, shall first be submitted to mediation. The mediation shall be
conducted within 45 days of either party notifying the other party of a dispute
or controversy regarding this Agreement or Employee's employment relationship
with the Company. Unless otherwise provided for by law, the Company and
Employee shall each pay half the costs and expenses of the mediation.
(b) Arbitration. In the event mediation pursuant to subsection (a)
-----------
above fails, Employee agrees that any dispute or controversy arising out of,
relating to, or in connection with this Agreement, or the interpretation,
validity, construction, or breach thereof, shall be finally settled by binding
arbitration to be held in San Jose, California under the National Rules for the
Resolution of Employment Disputes supplemented by the Supplemental Procedures
for Large Complex Disputes, of the American Arbitration Association as then in
effect (the "Rules"). The arbitrator may grant injunctions or other equitable
relief in such dispute or controversy. The decision of the arbitrator shall be
final, conclusive and binding on the parties to the arbitration. Judgment may
be entered on the arbitrator's decision in any court having jurisdiction.
(c) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to rules of conflicts of law. The
arbitration proceedings shall be governed by the Rules.
(d) Unless otherwise provided for by law, the Company and the Employee
shall each pay half of the costs and expenses of such arbitration.
(e) 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.
(f) 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
-8-
<PAGE>
in writing to receive all such information confidentially and to maintain such
information in secrecy until such information shall become generally known.
(g) The decree or judgment of an award rendered by the arbitrators may
be entered in any court having jurisdiction thereof.
(h) 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.
(i) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EMPLOYEE
AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH
THIS EMPLOYMENT AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, OR
BREACH THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE
CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AS TO THESE ISSUES
ONLY.
13. 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, representations 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.
-9-
<PAGE>
(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 Section shall be void.
(g) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
(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) Amendments. This Agreement shall not be changed or modified in
----------
whole or in part except by an instrument in writing signed by each party hereto.
(j) 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.
(k) Effect of Headings. The section headings herein are for
------------------
convenience only and shall not affect the construction or interpretation of this
Agreement.
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: /s/ Gerald Rice
-----------------------
Title: Chief Financial Officer
-----------------------
Date: March 1, 1997
-----------------------
EMPLOYEE /s/ Paul DePond
-----------------------
Paul DePond
Date: March 1, 1997
-----------------------
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<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
This employment agreement (the "Agreement") is made and entered into
effective as of March 1, 1997 (the "Effective Date"), by and between Gaylan
Larson (the "Employee") and Notify Corporation (the "Company").
RECITALS
--------
A. The Company desires to retain the services of Employee, and Employee
desires to be employed by the Company, on the terms and conditions set forth in
this Agreement.
B. Certain capitalized terms used in the Agreement are defined in Section
8 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; 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 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.
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
<PAGE>
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 paid 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 employee compensation programs maintained by
the Company applicable to other key employees of the Company, including (without
limitation) life, disability, health, accident and other insurance programs, and
paid vacations, 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.
(d) Expenses. The Company will pay or reimburse Employee for
--------
reasonable travel, entertainment or other expenses incurred by Employee in the
furtherance of or in connection with the performance of Employee's duties
hereunder in accordance with the Company's established policies. Employee shall
furnish the Company with evidence of such expenses within a reasonable period of
time from the date that they were incurred.
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 an Involuntary Termination (as defined in Section 8)
other than for Cause (as defined in Section 8), then the Employee shall be
entitled to receive a continuation of the Employee's Base Compensation for a
period equal to twelve (12) months.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee voluntarily terminates employment with the Company, other than as a
result of an Involuntary Termination, or if the Employee is terminated for
Cause, then the Employee shall not be entitled to receive severance or other
benefits.
(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.
-2-
<PAGE>
(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 the Employee shall be entitled
to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of an 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 ninety (90) days.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee voluntarily terminates employment with the Company, other than as a
result of 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 Section 4(a)(i) or Section 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 termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue until the earlier of (i) twelve
(12) months following termination in the case of a termination described in
Section 4(a)(i), (ii) ninety (90) days following termination in the case of a
termination described in Section 4(b)(i), or (iii) the date the Employee becomes
covered under another employer's group health, dental or life insurance plan (to
the extent covered under such plans). 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) Restricted Stock. In the event the Employee is entitled to
----------------
severance benefits pursuant to Section 4(a)(i) of this Agreement, then all
Company stock purchased by the Employee subject to a repurchase right in favor
of the Company shall vest and any such repurchase right shall lapse.
-3-
<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" within 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 to the extent such payment, after 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 Section 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 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, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely 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 reasonably incur in connection with any calculations contemplated
by this Section.
6. Confidential Information.
------------------------
(a) Company Information. Employee agrees at all times during the term
-------------------
of Employee's employment and thereafter, to hold in strictest confidence, and
not to use, except for the benefit of the Company, or to disclose to any person,
firm or corporation without written authorization of the Board of Directors of
the Company, any Confidential Information of the Company. Employee understands
that "Confidential Information" means any Company proprietary information, trade
secrets or know-how, including, but not limited to, market research, product
plans, products, services, customer lists and customers (including, but not
limited to, customers of the Company on whom Employee will call), markets,
developments, marketing, finances or other business information disclosed to
Employee by the Company either directly or indirectly in writing, orally or by
drawings or observation of parts or equipment. Employee further understands
that Confidential Information does not include any of the foregoing items which
is based on either Employee's prior knowledge or the experience of the Employee
or has become publicly known and made generally available through no wrongful
act of Employee or of others who were under confidentiality obligations as to
the item or items involved.
(b) Third Party Information. Employee recognizes that the Company has
-----------------------
received and in the future will receive from third parties their confidential or
proprietary information subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. Employee agrees to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as necessary in carrying out Employee's
work for the Company consistent with the Company's agreement with such third
party.
-4-
<PAGE>
7. Covenant Not to Solicit.
-----------------------
(a) Until one year after termination of Employee's employment with the
Company for any reason, the Employee agrees that he shall not solicit, induce,
attempt to hire, recruit, encourage, take away, or hire any employee of the
Company or cause an employee to leave his or her employment either for Employee
or for any other entity or person.
(b) The Employee represents that he (i) is familiar with the foregoing
covenant not to solicit, and (ii) is fully aware of his obligations hereunder,
including, without limitation, the reasonableness of the length of time and
scope of this covenant.
8. 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; provided, however, that an initial public
offering of the Company's Common Stock shall not constitute a Change of Control;
or
(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 or 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,
-----------------------
without the Employee's express written consent, (i) a significant reduction of
the Employee's duties, position or
-5-
<PAGE>
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) 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, other than a reduction which is part of and generally
consistent with a general reduction of comparable employee salaries; (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,
other than a reduction which is part of and generally consistent with a general
reduction of comparable employee benefits packages; (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 effected for
death, Disability or Cause, or (vii) the failure of the Company to obtain the
assumption of this agreement by any successors contemplated in Section 9 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 Company's Board of Directors 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 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 notice 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 or such other date specified in the notice of termination,
or (iii) if the Agreement is terminated by the Employee, the date on which the
Employee delivers the notice of termination to the Company.
-6-
<PAGE>
9. 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 obligations 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 Section
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.
10. Returning Company Documents. Employee agrees that, at the time of
---------------------------
leaving the employ of the Company, Employee will deliver to the Company (and
will not keep in Employee's possession, recreate or deliver to anyone else) any
and all devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, materials, equipment, other documents or
property, or reproductions of any aforementioned items developed by Employee
pursuant to Employee's employment with the Company or otherwise belonging to
the Company, its successors or assigns.
11. 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. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall 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 waive any
right of the Employee hereunder or preclude the Employee from asserting such
fact or circumstance in enforcing his right hereunder.
-7-
<PAGE>
12. Mediation; Arbitration.
----------------------
(a) Mediation. The Employee agrees that any dispute or controversy
---------
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach or termination
thereof, shall first be submitted to mediation. The mediation shall be
conducted within 45 days of either party notifying the other party of a dispute
or controversy regarding this Agreement or Employee's employment relationship
with the Company. Unless otherwise provided for by law, the Company and
Employee shall each pay half the costs and expenses of the mediation.
(b) Arbitration. In the event mediation pursuant to subsection (a)
-----------
above fails, Employee agrees that any dispute or controversy arising out of,
relating to, or in connection with this Agreement, or the interpretation,
validity, construction, or breach thereof, shall be finally settled by binding
arbitration to be held in San Jose, California under the National Rules for the
Resolution of Employment Disputes supplemented by the Supplemental Procedures
for Large Complex Disputes, of the American Arbitration Association as then in
effect (the "Rules"). The arbitrator may grant injunctions or other equitable
relief in such dispute or controversy. The decision of the arbitrator shall be
final, conclusive and binding on the parties to the arbitration. Judgment may
be entered on the arbitrator's decision in any court having jurisdiction.
(c) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to rules of conflicts of law. The
arbitration proceedings shall be governed by the Rules.
(d) Unless otherwise provided for by law, the Company and the Employee
shall each pay half of the costs and expenses of such arbitration.
(e) 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.
(f) 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.
(g) The decree or judgment of an award rendered by the arbitrators may
be entered in any court having jurisdiction thereof.
-8-
<PAGE>
(h) 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.
(i) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EMPLOYEE
AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH
THIS EMPLOYMENT AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, OR
BREACH THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE
CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AS TO THESE ISSUES
ONLY.
13. 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, representations 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 Section 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) Amendments. This Agreement shall not be changed or modified in
----------
whole or in part except by an instrument in writing signed by each party hereto.
(j) 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.
(k) Effect of Headings. The section headings herein are for
------------------
convenience only and shall not affect the construction or interpretation of this
Agreement.
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: /s/ Paul DePond
------------------------------
Title: Chief Executive Officer
---------------------------
Date: March 1, 1997
---------------------------
EMPLOYEE Gaylan Larson
---------------------------
Gaylan Larson
Date: March 1, 1997
---------------------------
-10-
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
This employment agreement (the "Agreement") is made and entered into
effective as of March 1, 1997 (the "Effective Date"), by and between Gerald Rice
(the "Employee") and Notify Corporation (the "Company").
RECITALS
--------
A. The Company desires to retain the services of Employee, and Employee
desires to be employed by the Company, on the terms and conditions set forth in
this Agreement.
B. Certain capitalized terms used in the Agreement are defined in Section
8 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; 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 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.
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
<PAGE>
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 paid 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 employee compensation programs maintained by
the Company applicable to other key employees of the Company, including (without
limitation) life, disability, health, accident and other insurance programs, and
paid vacations, 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.
(d) Expenses. The Company will pay or reimburse Employee for
--------
reasonable travel, entertainment or other expenses incurred by Employee in the
furtherance of or in connection with the performance of Employee's duties
hereunder in accordance with the Company's established policies. Employee shall
furnish the Company with evidence of such expenses within a reasonable period of
time from the date that they were incurred.
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 an Involuntary Termination (as defined in Section 8)
other than for Cause (as defined in Section 8), then the Employee shall be
entitled to receive a continuation of the Employee's Base Compensation for a
period equal to twelve (12) months.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee voluntarily terminates employment with the Company, other than as a
result of an Involuntary Termination, or if the Employee is terminated for
Cause, then the Employee shall not be entitled to receive severance or other
benefits.
(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.
-2-
<PAGE>
(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 the Employee shall be entitled
to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of an 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 ninety (90) days.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee voluntarily terminates employment with the Company, other than as a
result of 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 Section 4(a)(i) or Section 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 termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue until the earlier of (i) twelve
(12) months following termination in the case of a termination described in
Section 4(a)(i), (ii) ninety (90) days following termination in the case of a
termination described in Section 4(b)(i), or (iii) the date the Employee becomes
covered under another employer's group health, dental or life insurance plan (to
the extent covered under such plans). 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) Restricted Stock. In the event the Employee is entitled to
----------------
severance benefits pursuant to Section 4(a)(i) of this Agreement, then all
Company stock purchased by the Employee subject to a repurchase right in favor
of the Company shall vest and any such repurchase right shall lapse.
-3-
<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" within 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 to the extent such payment, after 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 Section 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 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, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely 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 reasonably incur in connection with any calculations contemplated
by this Section.
6. Confidential Information.
------------------------
(a) Company Information. Employee agrees at all times during the term
-------------------
of Employee's employment and thereafter, to hold in strictest confidence, and
not to use, except for the benefit of the Company, or to disclose to any person,
firm or corporation without written authorization of the Board of Directors of
the Company, any Confidential Information of the Company. Employee understands
that "Confidential Information" means any Company proprietary information, trade
secrets or know-how, including, but not limited to, market research, product
plans, products, services, customer lists and customers (including, but not
limited to, customers of the Company on whom Employee will call), markets,
developments, marketing, finances or other business information disclosed to
Employee by the Company either directly or indirectly in writing, orally or by
drawings or observation of parts or equipment. Employee further understands
that Confidential Information does not include any of the foregoing items which
is based on either Employee's prior knowledge or the experience of the Employee
or has become publicly known and made generally available through no wrongful
act of Employee or of others who were under confidentiality obligations as to
the item or items involved.
(b) Third Party Information. Employee recognizes that the Company has
-----------------------
received and in the future will receive from third parties their confidential or
proprietary information subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. Employee agrees to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as necessary in carrying out Employee's
work for the Company consistent with the Company's agreement with such third
party.
-4-
<PAGE>
7. Covenant Not to Solicit.
-----------------------
(a) Until one year after termination of Employee's employment with the
Company for any reason, the Employee agrees that he shall not solicit, induce,
attempt to hire, recruit, encourage, take away, or hire any employee of the
Company or cause an employee to leave his or her employment either for Employee
or for any other entity or person.
(b) The Employee represents that he (i) is familiar with the foregoing
covenant not to solicit, and (ii) is fully aware of his obligations hereunder,
including, without limitation, the reasonableness of the length of time and
scope of this covenant.
8. 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; provided, however, that an initial public
offering of the Company's Common Stock shall not constitute a Change of Control;
or
(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 or 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,
-----------------------
without the Employee's express written consent, (i) a significant reduction of
the Employee's duties, position or
-5-
<PAGE>
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) 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, other than a reduction which is part of and generally
consistent with a general reduction of comparable employee salaries; (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,
other than a reduction which is part of and generally consistent with a general
reduction of comparable employee benefits packages; (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 effected for
death, Disability or Cause, or (vii) the failure of the Company to obtain the
assumption of this agreement by any successors contemplated in Section 9 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 Company's Board of Directors 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 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 notice 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 or such other date specified in the notice of termination,
or (iii) if the Agreement is terminated by the Employee, the date on which the
Employee delivers the notice of termination to the Company.
-6-
<PAGE>
9. 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 obligations 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 Section
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.
10. Returning Company Documents. Employee agrees that, at the time of
---------------------------
leaving the employ of the Company, Employee will deliver to the Company (and
will not keep in Employee's possession, recreate or deliver to anyone else) any
and all devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, materials, equipment, other documents or
property, or reproductions of any aforementioned items developed by Employee
pursuant to Employee's employment with the Company or otherwise belonging to
the Company, its successors or assigns.
11. 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. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall 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 waive any
right of the Employee hereunder or preclude the Employee from asserting such
fact or circumstance in enforcing his right hereunder.
-7-
<PAGE>
12. Mediation; Arbitration.
----------------------
(a) Mediation. The Employee agrees that any dispute or controversy
---------
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach or termination
thereof, shall first be submitted to mediation. The mediation shall be
conducted within 45 days of either party notifying the other party of a dispute
or controversy regarding this Agreement or Employee's employment relationship
with the Company. Unless otherwise provided for by law, the Company and
Employee shall each pay half the costs and expenses of the mediation.
(b) Arbitration. In the event mediation pursuant to subsection (a)
-----------
above fails, Employee agrees that any dispute or controversy arising out of,
relating to, or in connection with this Agreement, or the interpretation,
validity, construction, or breach thereof, shall be finally settled by binding
arbitration to be held in San Jose, California under the National Rules for the
Resolution of Employment Disputes supplemented by the Supplemental Procedures
for Large Complex Disputes, of the American Arbitration Association as then in
effect (the "Rules"). The arbitrator may grant injunctions or other equitable
relief in such dispute or controversy. The decision of the arbitrator shall be
final, conclusive and binding on the parties to the arbitration. Judgment may
be entered on the arbitrator's decision in any court having jurisdiction.
(c) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to rules of conflicts of law. The
arbitration proceedings shall be governed by the Rules.
(d) Unless otherwise provided for by law, the Company and the Employee
shall each pay half of the costs and expenses of such arbitration.
(e) 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.
(f) 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.
(g) The decree or judgment of an award rendered by the arbitrators may
be entered in any court having jurisdiction thereof.
-8-
<PAGE>
(h) 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.
(i) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EMPLOYEE
AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH
THIS EMPLOYMENT AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, OR
BREACH THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE
CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AS TO THESE ISSUES
ONLY.
13. 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, representations 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 Section 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) Amendments. This Agreement shall not be changed or modified in
----------
whole or in part except by an instrument in writing signed by each party hereto.
(j) 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.
(k) Effect of Headings. The section headings herein are for
------------------
convenience only and shall not affect the construction or interpretation of this
Agreement.
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: /s/ Paul DePond
--------------------------------
Title: Chief Executive Officer
--------------------------------
Date: March 1, 1997
--------------------------------
EMPLOYEE /s/ Gerald Rice
--------------------------------
Gerald Rice
Date: March 1, 1997
---------------------------------
-10-
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
This employment agreement (the "Agreement") is made and entered into
effective as of [____________] (the "Effective Date"), by and between David P.
Yewell (the "Employee") and Notify Corporation (the "Company").
RECITALS
--------
A. The Company desires to retain the services of Employee, and Employee
desires to be employed by the Company, on the terms and conditions set forth in
this Agreement.
B. Certain capitalized terms used in the Agreement are defined in Section
8 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, Sales and Marketing, 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 engaging in such activities and services as do not
interfere or conflict with his responsibilities to the Company.
(c) Sales Quotas. Employee understands and acknowledges that Company
------------
has determined a sales quota for 1997 as attached as Exhibit A to this
Agreement. Employee understands and acknowledges that attainment of the 1997
Sales Quota is material to Employee's performance with 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.
<PAGE>
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 $90,000. 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) Commissions. For the 1997 fiscal year, commissions shall be paid
-----------
in accordance with Exhibit B to this Agreement.
(c) Employee Benefits. The Employee shall be eligible to participate
-----------------
in the employee benefit plans and employee compensation programs maintained by
the Company applicable to other key employees of the Company, including (without
limitation) life, disability, health, accident and other insurance programs, and
paid vacations, 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.
(d) Expenses. The Company will pay or reimburse Employee for
--------
reasonable travel, entertainment or other expenses incurred by Employee in the
furtherance of or in connection with the performance of Employee's duties
hereunder in accordance with the Company's established policies. Employee shall
furnish the Company with evidence of the incurrence of such expenses within a
reasonable period of time from the date that they were incurred.
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 in Section 8)
other than for Cause (as defined in Section 8), then the Employee shall be
entitled to receive a continuation of the Employee's Base Compensation for a
period equal to twelve (12) months.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee voluntarily terminates employment with the Company, other than for 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.
-2-
<PAGE>
(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 ninety (90) days.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee voluntarily terminates employment with the Company, other than for 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 Section 4(a)(i) or Section 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 until the earlier of (i) twelve
(12) months following termination in the case of a termination described in
Section 4(a)(i), or (ii) ninety (90) days following termination in the case of a
termination described in Section 4(b)(i), or (iii) 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.
-3-
<PAGE>
(d) Restricted Stock. In the event the Employee is entitled to
----------------
severance benefits pursuant to Section 4(a)(i) of this Agreement, then all
Company stock purchased by the Employee subject to a repurchase right in favor
of the Company shall vest and any such repurchase right shall lapse.
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" within 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 if an excise tax under Section 4999 of the Code would
apply to such payment then
(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 Section 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 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, the
Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely 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 reasonably
incur in connection with any calculations contemplated by this Section.
6. Confidential Information.
------------------------
(a) Company Information. Employee agrees at all times during the term
-------------------
of Employee's employment and thereafter, to hold in strictest confidence, and
not to use, except for the benefit of the Company, or to disclose to any person,
firm or corporation without written authorization of the Board of Directors of
the Company, any Confidential Information of the Company. Employee understands
that "Confidential Information" means any Company proprietary information, trade
secrets or know-how, including, but not limited to, market research, product
plans, products, services, customer lists and customers (including, but not
limited to, customers of the Company on whom Employee will call), markets,
developments, marketing, finances or other business information disclosed to
Employee by the Company either directly or indirectly in writing, orally or by
drawings or observation of parts or equipment. Employee further understands
that Confidential Information does not include any of the foregoing items which
is based on either Employee's prior knowledge or the experience of the Employee
or has become publicly known and made generally available through no wrongful
act of Employee or of others who were under confidentiality obligations as to
the item or items involved.
-4-
<PAGE>
(b) Third Party Information. Employee recognizes that the Company has
-----------------------
received and in the future will receive from third parties their confidential or
proprietary information subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. Employee agrees to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as necessary in carrying out Employee's
work for the Company consistent with the Company's agreement with such third
party.
7. Covenant Not to Solicit.
-----------------------
(a) Until one year after termination of Employee's employment with the
Company for any reason, the Employee agrees that he shall not solicit, induce,
attempt to hire, recruit, encourage, take away, hire any employee of the Company
or cause an employee to leave their employment either for Employee or for any
other entity or person.
(b) The Employee represents that he (i) is familiar with the foregoing
covenant not to solicit, and (ii) is fully aware of his obligations hereunder,
including, without limitation, the reasonableness of the length of time, scope
and geographic coverage of this covenant.
8. 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; provided, however, that an initial public
offering of the Company's Common Stock shall not constitute a Change of Control;
or
(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 or 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
-5-
<PAGE>
(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
-----------------------
without the Employee's express written consent (i) 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) 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, other than a reduction which is part of and generally consistent with
a general reduction of officer salaries; (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, other than a reduction which
is part of and generally consistent with a general reduction of officer benefits
packages; (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 effected for Disability or for Cause, or (vii) the failure
of the Company to obtain the assumption of this agreement by any successors
contemplated in Section 9 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 Company's Board of Directors 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 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 notice 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.
-6-
<PAGE>
(e) Shipments. "Shipments" shall mean invoiced sales of product
---------
net of all discounts, trade-ins, allowances, and adjustments. Shipping and
handling charges, telemarketing, and other custom merchandising work done by the
Company on a subcontracting basis shall be excluded from the calculation of
Shipments.
(f) 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 or such other date specified in the notice of termination,
or (iii) if the Agreement is terminated by the Employee, the date on which the
Employee delivers the notice of termination to the Company.
9. 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 Section
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.
10. Returning Company Documents. Employee agrees that, at the time of
---------------------------
leaving the employ of the Company, Employee will deliver to the Company (and
will not keep in Employee's possession, recreate or deliver to anyone else) any
and all devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, materials, equipment, other documents or
property, or reproductions of any aforementioned items developed by Employee
pursuant to Employee's employment with the Company or otherwise belonging to
the Company, its successors or assigns.
11. 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.
-7-
<PAGE>
(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. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall 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 waive any
right of the Employee hereunder or preclude the Employee from asserting such
fact or circumstance in enforcing his right hereunder.
12. Mediation; Arbitration.
----------------------
(a) Mediation. The Employee agrees that any dispute or controversy
---------
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach or termination
thereof, shall first be submitted to mediation. The mediation shall be
conducted within 45 days of either party notifying the other party of a dispute
or controversy regarding this Agreement or Employee's employment relationship
with the Company. Unless otherwise provided for by law, the Company and
Employee shall each pay half the costs and expenses of the mediation.
(b) Arbitration. Employee agrees that any dispute or controversy
-----------
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, or breach thereof, shall be finally
settled by binding arbitration to be held in San Jose, California under the
National Rules for the Resolution of Employment Disputes supplemented by the
Supplemental Procedures for Large Complex Disputes, of the American Arbitration
Association as then in effect (the "Rules"). The arbitrator may grant
injunctions or other equitable relief in such dispute or controversy. The
decision of the arbitrator shall be final, conclusive and binding on the parties
to the arbitration. Judgment may be entered on the arbitrator's decision in any
court having jurisdiction.
(c) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to rules of conflicts of law. The
arbitration proceedings shall be governed by the Rules.
(d) Unless otherwise provided for by law, the Company and the Employee
shall each pay half of the costs and expenses of such arbitration.
(e) 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.
-8-
<PAGE>
(f) 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.
(g) The decree or judgment of an award rendered by the arbitrators may
be entered in any court having jurisdiction thereof.
(h) 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.
(i) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EMPLOYEE
AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH
THIS EMPLOYMENT AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, OR
BREACH THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE
CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AS TO THESE ISSUES
ONLY.
13. 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, representations 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.
-9-
<PAGE>
(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 Section 13(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.
(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) Amendments. This Agreement shall not be changed or modified in
----------
whole or in part except by an instrument in writing signed by each party hereto.
(j) 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.
(k) Effect of Headings. The section headings herein are for
------------------
convenience only and shall not affect the construction or interpretation of this
Agreement.
-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: /s/ Paul DePond
-----------------------
Title: Chief Executive Officer
-----------------------
Date: March 1, 1997
-----------------------
EMPLOYEE
/s/ David P. Yewell
----------------------
David P. Yewell
Date: March 1, 1997
----------------------
-11-
<PAGE>
EXHIBIT A
---------
For the 1997 fiscal year, your Shipment quota per quarter shall be as
follows:
First Quarter $ 400,000
Second Quarter $ 600,000
Third Quarter $1,100,000
Fourth Quarter $1,700,000
Annual Total $3,800,000
-12-
<PAGE>
EXHIBIT B
---------
Commissions
- -----------
For fiscal year 1997, Commissions shall be paid monthly 15 days after the
end of the month based on Shipments (as defined in Section 8(e) of the
Agreement) and the following rate schedule:
Commission Rate
---------------
Margin of Product Commission Rate
51% to 90% 1.5%
26% to 50% 0.75%
15% to 25% 0.35%
less than 14% 0%
Bonus
- -----
In addition to any commissions paid, Employee shall receive a $5,000 bonus
if Employee achieves $500,000 of new Shipments to the following companies:
Ameritech, Bell Atlantic, NYNEX, Sprint, SNET or
International Telco.
-13-
<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 $1.4 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 $2.3 million
for the fiscal year ending on September 30, 1999; or
(iii) the Minimum Pretax Income amounts to at least $3.4 million
for the fiscal year ending on September 30, 2000; or
(iv) the Minimum Pretax Income amounts to at least $4.5 million
for the fiscal year ending on September 30, 2001; or
(v) the Minimum Pretax Income amounts to at least $6.8 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 $2.3 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 $3.4 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 $5.6 million
for the fiscal year ending on September 30, 2001; or
(v) the Minimum Pretax Income amounts to at least $7.9 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
-15-
<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
-19-
<PAGE>
EXHIBIT 10.8
LOCK-UP AGREEMENT
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
RE: NOTIFY CORPORATION
Gentlemen:
In consideration of the public offering of units comprised of shares of
Common Stock and warrants to purchase shares of Common Stock (the "Units") of
Notify Corporation, a California corporation (the "Company"), and to induce you
to act as underwriters in connection with the offering, the undersigned holder
of shares of Common Stock, or securities convertible into or exercisable or
exchangeable for Common Stock, hereby covenants and agrees with you, D.H. Blair
Investment Banking Corp ("Blair) that:
1. For a period of thirteen (13) months following the closing date of the
Company's initial public offering of securities, the undersigned will not offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
now owned by the undersigned or are hereafter acquired), without the prior
written consent of Blair. In order to enforce this covenant, the Company may
impose stop-transfer instructions with respect to all of the undersigned's
shares of Common Stock until the end of such period.
2. The undersigned waives any anti-dilution rights which it might hold
with respect to securities of the Company under any agreement between the
undersigned and the Company; and
3. The undersigned waives any registration rights it may have with
respect to the Company's initial public offering and for a period of 13 months
thereafter.
If the Company's initial public offering has not been completed by 5:00
P.M. New York City time on June 30, 1997, this agreement shall then terminate
and be of no further force and effect.
____________________________________________
Signature
____________________________________________
Print Name
____________________________________________
Date
<PAGE>
EXHIBIT 10.9
ADDENDUM OF Lease between C.C. Poon & Notify Corporation
- --------------------------------------------------------
The following are extensions to Paragraph
4.2 Operating Expense Increases
Lessee is only responsible for an annual operating expense increase of up
to 10% of that portion of Lessee's rent which is attributable to operating
expense. Therefore, for the first 12 months of the Lease term, Lessee's
responsibility is capped at $7196 x 12 = $86,352.00 x 10% = $8635.20; for
the second 12 months, at $8023.54 x 12 = $96,282.48 x 10% = $9,628.25
maximum.
9.3 If the Lessee is not able to occupy a reasonable portion of the premise due
to damage, the Lessee shall have the option to terminate the Lease.
Signed:
Lessor: /s/C.C. POON Dated: April 1, '97
--------------------------- -------------------------
C.C. Poon
Lessee: /s/GERALD RICE Dated: April 4, '97
--------------------------- -------------------------
Gerald Rice
<PAGE>
STANDARD OFFICE LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC LEASE PROVISIONS ("BASIC LEASE PROVISIONS")
-------------------------------------------------
1.1 Parties: This Lease, dated, for reference purposes only, March
-------
21, 1997, is made by and between C.C. Poon (herein called "Lessor") and Notify
Corporation doing business under the name of Notify Corporation (herein called
"Lessee").
1.2 Premises: Suite Number(s) 105/106, first floors, consisting of
--------
approximately 3,598 square feet, more or less, as defined in paragraph 2 and as
shown on Exhibit "A" hereto (the "Premises").
1.3 Building: Commonly described as being located at 1054 De Anza
--------
Boulevard, County of Santa Clara, State of California, as more particularly
described in Exhibit 1 hereto, and as defined in paragraph 2.
1.4 Use: General Office.
---
1.5 Term: 24 months commencing April 1, 1997 ("Commencement Date")
----
and ending March 31, 1999 as defined in paragraph 3.
1.6 Base Rent: 3,598 square feet x $2 = $7,196.00 per month,
---------
payable on the first day of each month, per paragraph 4.1 from April 1, 1998 to
March 31, 1999, the monthly rent will be $8,023.54.
1.7 Base Rent Increase: On ________________ the monthly Base Rent
------------------
payable under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3
below.
1.8 Rent Paid Upon Execution: $7,196.00 for ________________.
------------------------
1.9 Security Deposit: $7,196.00
----------------
1.10 Lessee's Share of Operating Expense Increase: 11.3% as defined
--------------------------------------------
in paragraph 4.2.
2. PREMISES, PARKING AND COMMON AREAS
----------------------------------
2.1 Premises: The Premises are a portion of a building, herein
--------
sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic
Lease Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor
for the term, at the rental and upon all of the conditions set forth
<PAGE>
herein, the real property referred to in the Basic Lease Provisions, paragraph
1.2, as the "Premises," including rights to the Common Areas as hereinafter
specified.
2.2 Vehicle Parking: So long as lessee is not in default, and
---------------
subject to the rules and regulations attached hereto, and as established by
lessor from time to time, lessee shall be entitled to rent and use 14 parking
spaces in the Office Building Project at the monthly rate applicable from time
to time for monthly parking as set by Lessor and/or its licensee.
2.2.1 If Lessee commits, permits or allows any of the
prohibited activities described in the Lease or the rules then in effect, then
Lessor shall have the right, without notice, in addition to such other rights
and remedies that it may have, to remove or tow away the vehicle involved and
charge the cost to Lessee, which cost shall be immediately payable upon demand
by Lessor.
2.2.2 The monthly parking rate per parking space will be $0
per month at the commencement of the term of this Lease, and is subject to
change upon five (5) days prior written notice to Lessee. Monthly parking fees
shall be payable one month in advance prior to the first day of each calendar
month.
2.3 Common Areas-Definition: The term "Common Areas" is defined as
-----------------------
all areas and facilities outside the Premises and within the exterior boundary
line of the Office Building Project that are provided and designated by the
Lessor from time to time for the general non-exclusive use of Lessor, Lessee and
of other lessees of the Office Building Project and their respective employees,
suppliers, shippers, customers and invitees, including but not limited to,
common entrances, lobbies, corridors, stairways and stairwells, public
restrooms, elevators, escalators, parking areas to the extent not otherwise
prohibited by this Lease, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative
walls.
2.4 Common Areas - Rules and Regulations: Lessee agrees to abide by
------------------------------------
and conform to the rules and regulations attached hereto as Exhibit B with
respect to the Office Building Project and Common Areas, and to cause its
employees, suppliers, shippers, customers and invitees to so abide and conform.
Lessor or such other person(s) as Lessor may appoint shall have the exclusive
control and management of the Common Areas and shall have the right, from time
to time, to modify, amend and enforce said rules and regulations. Lessor shall
not be responsible to Lessee for the non-compliance with said rules and
regulations by other lessees, their agents, employees and invitees of the Office
Building Project.
2.5 Common Areas - Changes: Lessor shall have the right, in
----------------------
Lessor's sole discretion, from time to time:
(a) To make changes to the Building interior and exterior
and Common Areas, including, without limitations, changes in the location, size,
shape, number and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress,
-2-
<PAGE>
direction of traffic, decorative walls, landscaped areas and walkways;
provided, however, Lessor shall at all times provide the parking facilities
required by applicable law;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land and improvements outside the
boundaries of the Office Building Project to be a part of the Common Areas,
provided that such other land and improvements have a reasonable and functional
relationship to the Office Building Project;
(d) To add additional buildings and improvements to the
Common Areas;
(e) To use the Common Areas while engaged in making
additional improvements, repairs or alterations to the Office Building Project,
or any portion thereof;
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Office Building Project
_________ Lessor may, in the exercise of sound business judgment deem to be
appropriate.
3. TERM
----
3.1 Term: The term and Commencement Date of this Lease shall be as
----
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 Delay in Possession: Notwithstanding said Commencement Date, if
-------------------
for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date and subject to paragraph 3.2.2, Lessor shall not be subject to any
liability therefor, no shall such failure affect the validity of this Lease or
the obligation of Lessee hereunder or extend the term hereof; but, in such case,
Lessee shall not be obligated to pay rent or perform any other obligation of
Lessee under the _________ of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date, as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee, Lessee may, at Lessee's option, by notice in writing to
Lessor within ten (10) days cancel this Lease, in which event the parties shall
be discharged from all obligations hereunder; provided, however, that, as to
Lessee's obligations, Lessee first reimbursed Lessor for all costs incurred for
Non-Standard improvements and, as to Lessor's obligations, Lessor shall return
any money previously deposited by Lessee (less any offsets due Lessor for Non-
Standard improvements); and provided, further, that if such written notice by
Lessee is not received by Lessor within said ten (10) day period, Lessee's right
to cancel this Lease hereunder shall terminate and be of no further force or
effect.
3.2.1 Possession Tendered - Defined. Possession of
-----------------------------
the Premises shall be deemed tendered to Lessee ("Tender of Possession") when
(1) the improvements to be provided by Lessor under this Lease are substantially
completed, (2) the Building utilities are ready for use in the
-3-
<PAGE>
Premises, (3) Lessee has reasonable access to the Premises, and (4) ten (10)
days shall have expired following advance written notice to Lessee of the
occurrence of the matters described in (1), (2) and (3), above of this paragraph
3.2.1.
3.2.2 Delays Caused by Lessee. There shall be no abatement of
-----------------------
rent, and the sixty (60) day period following the Commencement Date before which
Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed
extended to the extent of any delays caused by acts or omissions of Lessee,
Lessee's agents, employees and contractors.
3.3 Early Possession: If Lessee occupies the Premises prior to said
----------------
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee shall
pay rent for such occupancy.
3.4 Uncertain Commencement: In the event commencement of the Lease
----------------------
term is defined as the completion of the improvements, Lessee and Lessor shall
execute an amendment to this Lease establishing the date of Tender of Possession
(as defined in paragraph 3.2.1) or the actual taking of possession by Lessee,
whichever first occurs, as the Commencement Date.
4. RENT
----
4.1 Base Rent: Subject to adjustment as hereinafter provided in
---------
paragraph 4.3, and except as may be otherwise expressly provided in this Lease,
Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph
1.6 of the Basic Lease Provisions, without offset or deduction, Lessee shall pay
Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of
the Basic Lease Provisions. Rent for any period during the term hereof which is
for less than one month shall be prorated based upon the actual number of days
of the calendar month involved. Rent shall be payable in lawful money of the
United States to Lessor at the address stated herein or to such other persons or
at such other places as Lessor may designate in writing.
4.2 Operating Expense Increase: Lessee shall pay to Lessor during
--------------------------
the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter
defined, of the amount by which all Operating Expenses, as hereinafter defined,
for each Comparison Year exceeds the amount of all Operating Expenses for the
Base Year, such excess being hereinafter referred to as the "Operating Expense
Increase," in accordance with the following provisions:
(a) "LESSEE'S SHARE" is defined, for purposes of this Lease,
as the percentage set forth in paragraph 1.10 of the Basic Lease Provisions,
which percentage has been determined by dividing the approximate square footage
of the Premises by the total approximate square footage of the rentable space
contained in the Office Building Project. It is understood and agreed that the
square footage figures set forth in the Basic Lease Provisions are
approximations which Lessor and Lessee agree are reasonable and shall not be
subject to revision except in connection with an actual change in the size of
the Premises or a change in the space available for lease in the Office Building
Project.
-4-
<PAGE>
(b) "BASE YEAR" is defined as the calendar year in which the
Lease term commences.
(c) "COMPARISON YEAR" is defined as each calendar year
during the term of this Lease subsequent to the Base Year; provided, however,
Lessee shall have no obligation to pay a share of the Operating Expense Increase
applicable to the first twelve (12) months of the Lease Term (other than such as
are mandated by a governmental authority, as to which government mandated
expenses Lessee shall pay Lessee's Share, notwithstanding they occur during the
first twelve (12) months). Lessee's Share of the Operating Expense Increase for
the first and last Comparison Years of the Lease Term shall be prorated
according to that portion of such Comparison Year as to which Lessee is
responsible for a share of such increase.
(d) "OPERATING EXPENSES" is defined, for purposes of this
Lease, to include all costs, if any, incurred by Lessor in the exercise of its
reasonable discretion, for:
(i) The operation, repair, maintenance and
replacement, in neat, clean, safe, good order and condition, of the Office
Building Project, including but not limited to, the following:
(aa) The Common Areas, including their
surfaces, coverings, decorative items, carpets, drapes and window coverings, and
including parking areas, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping,
bumpers, irrigation systems, Common Areas lighting facilities, building
exteriors and roofs, fences and gates;
(bb) All heating, air conditioning, plumbing,
electrical systems, life safety equipment, telecommunication and other equipment
used in common by, or for the benefit of, lessees or occupants of the Office
Building Project, including elevators and escalators, tenant directories, fire
detection systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security
services;
(iii) Any other service to be provided by Lessor that
is elsewhere in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and
property insurance policies to be maintained by Lessor under paragraph 8 hereof;
(v) The amount of the real property taxes to be paid
by Lessor under paragraph 10.1 hereof;
(vi) The cost of water, sewer, gas, electricity and
other publicly mandated services to the Office Building Project;
-5-
<PAGE>
(vii) Labor, salaries and applicable fringe benefits
and costs, materials, supplies and tools, used in maintaining and/or cleaning
the Office Building Project and accounting and a management fee attributable to
the operation of the Office Building Project;
(viii) Replacing and/or adding improvements mandated by
any governmental agency and any repairs or removals necessitated thereby
amortized over its useful life according to Federal income tax regulations or
guidelines for depreciation thereof (including interest on the unamortized
balance as is then reasonable in the judgment of Lessor's accountants);
(ix) Replacements of equipment or improvements that
have a useful life for depreciation purposes according to Federal income tax
guidelines of five (5) years or less, as amortized over such life.
(e) Operating Expenses shall not include the costs of
replacements of equipment or improvements that have a useful life for Federal
income tax purposes in excess of five (5) years unless it is of the type
described in paragraph 4.2(d)(viii), in which case their cost shall be included
as above provided.
(f) Operating Expenses shall not include any expenses paid
by any lessee directly to third parties, or as to which Lessor is otherwise
reimbursed by any third party, other tenant, or by insurance proceeds.
(g) Lessee's Share of Operating Expense Increase shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time in advance of Lessee's
Share of the Operating Expense Increase for any Comparison Year, and the same
shall be payable monthly or quarterly, as Lessor shall designate, during each
Comparison Year of the Lease term, on the same day as the Base Rent is due
hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of
Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within
sixty (60) days after the expiration of each Comparison Year a reasonably
detailed statement showing Lessee's Share of the actual Operating Expense
Increase incurred during such year. If Lessee's payments under the paragraph
4.2(g) during said Comparison Year exceed Lessee's Share as indicated on said
statement, Lessee shall be entitled to credit the amount of such overpayment
against Lessee's Share of Operating Expense Increase next falling due. If
Lessee's payments under this paragraph during said Comparison Year were less
than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor
the amount of the deficiency within ten (10) days after delivery by Lessor to
Lessee of said statement. Lessor and Lessee shall forthwith adjust between them
by cash payment any balance determined to exist with respect to that portion of
the last Comparison Year for which Lessee is responsible as to Operating Expense
Increases, notwithstanding that the Lease term may have terminated before the
end of such Comparison Year.
-6-
<PAGE>
4.3 Rent Increase:
-------------
4.3.1 At the times set forth in paragraph 1.7 of the Basic
Lease Provisions, the monthly Base Rent payable under paragraph 4.1 of this
Lease shall be adjusted by the increase, if any, in the Consumer Price Index of
the Bureau of Labor Statistics of the Department of Labor for All Urban
Consumers, (1967=100). "All Items," for the city nearest the location of the
Building, herein referred to as "C.P.I." since the date of this Lease.
4.3.2 The monthly Base Rent payable pursuant to paragraph
4.3.1 shall be calculated as follows: the Base Rent payable for the first month
of the term of this Lease, as set forth in paragraph 4.1 of this Lease, shall be
multiplied by a fraction the numerator of which shall be the C.P.I. of the
calendar month during which the adjustment is to take effect, and the
denominator of which shall be the C.P.I. for the calendar month in which the
original Lease term commences. The sum so calculated shall constitute the new
monthly Base Rent hereunder, but, in no event, shall such new monthly Base Rent
be less than the Base Rent payable for the month immediately preceding the date
for the rent adjustment.
4.3.3 In the event the compilation and/or publication of the
C.P.I. shall be transferred to any other governmental department or bureau or
agency or shall be discontinued, then the index most nearly the same as the
C.P.I. shall be used to make such calculations. In the event that Lessor and
Lessee cannot agree on such alternative index, then the matter shall be
submitted for decision to the American Arbitration Association in the County in
which the Premises are located, in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties, notwithstanding one party failing to appear after due notice of the
proceeding. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
4.3.4 Lessee shall continue to pay the rent at the rate
previously in effect until the increase, if any, is determined. Within five (5)
days following the date on which the increase is determined, Lessee shall make
such payment to Lessor as will bring the increased rental current, commencing
with the effective date of such increase through the date of any rental
installments then due. Thereafter the rental shall be paid at the increased
rate.
4.3.5 At such time as the amount of any change in rental
required by this Lease is known or determined, Lessor and Lessee shall execute
an amendment to this Lease setting forth such change.
5. SECURITY DEPOSIT: Lessee shall deposit with Lessor upon execution
----------------
hereof the security deposit set forth in paragraph 1.9 of the Basic Lease
Provisions as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may use,
apply or retain all or any portion of said deposit for the payment of any rent
or other charge in default for the payment of any other sum to which Lessor may
become obligated by reason of Lessee's default, or to compensate Lessor for any
loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all
or any portion of said deposit, Lessee shall within ten (10) days after written
demand therefor deposit cash with Lessor
-7-
<PAGE>
in an amount sufficient to restore said deposit to the full amount then required
of Lessee. If the monthly Base Rent shall, from time to time, increase during
the term of this Lease, Lessee shall, at the time of such increase, deposit with
Lessor additional money, as a security deposit so that the total amount of the
security deposit held by Lessor shall at all times bear the same proportion to
the then current Base Rent as the initial security deposit bears to the initial
Base Rent set forth in paragraph 1.6 of the Basic Lease Provisions. Lessor shall
not be required to keep said security deposit separate from its general
accounts. If Lessee performs all of Lessee's obligations hereunder, said
deposit, on so much thereof as has not heretofore been applied by Lessor, shall
be returned, without payment of interest or other increment for its use, to
Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's
interest hereunder) at the expiration of the term hereof, and after Lessee has
vacated the Premises. No trust relationship is created herein between Lessor and
Lessee with respect to said Security Deposit.
6. USE
---
6.1 Use: The Premises shall be used and occupied only for the
---
purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other
use which is reasonably comparable to that use and for not other purpose.
6.2 Compliance with Law:
-------------------
(a) Lessor warrants to Lessee that the Premises, in the
state existing on the date that the Lease term commences, but without regard to
alterations or improvements made by Lessee or the use for which Lessee will
occupy the Premises, does not violate any covenants or restrictions of record,
or any applicable building code, regulation or ordinance in effect on such Lease
term Commencement Date. In the event it is determined that this warranty has
been violated, then it shall be the obligation of the Lessor, after written
notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any
such violation.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at
Lessee's expense, promptly comply with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements of any fire insurance underwriters or rating bureaus, now in effect
or which may hereafter come into effect, whether or not they reflect a change in
policy from that now existing, during the term or any part of the term hereof,
relating in any manner to the Premises and the occupation and use by Less of the
Premises. Lessee shall conduct its business in a lawful manner and shall not use
or permit the use of the Premises or the Common Areas in any manner that will
tend to create waste or a nuisance or shall tend to disturb other occupants of
the Office Building Project.
6.3 Condition of Premises:
---------------------
(a) Lessor shall deliver the Premises to Lessee in a clean
condition on the Lease Commencement Date (unless Lessee is already in
possession) and Lessor warrants to Lessee that the plumbing, lighting, air
conditioning and heating system in the Premises shall be in good operating
condition. In the event that it is determined that this warranty has been
violated, then it shall be the
-8-
<PAGE>
obligation of Lessor, after receipt of written notice from Lessee setting forth
with specificity the nature of the violation, to promptly, at Lessor's sole
cost, rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee
hereby accepts the Premises and the Office Building Project in their condition
existing as of the Lease Commencement Date or the date that Lessee takes
possession of the Premises, whichever is earlier, subject to all applicable
zoning, municipal, county and state laws, ordinances and regulations governing
and regulating the use of the Premises, and any easements, covenants or
restrictions of record, and accepts this Lease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that it has satisfied itself by its own independent investigation
that the Premises are suitable for its intended use, and that neither Lessor nor
Lessor's agent or agents has made any representation or warranty as to the
present or future suitability of the Premises, Common Areas, or Office Building
Project for the conduct of Lessee's business.
7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREAS SERVICES
-----------------------------------------------------------
7.1 Lessor's Obligations: Lessor shall keep the Office Building
--------------------
Project, including the Premises, interior and exterior walls, roof and common
areas, and the equipment whether used exclusively for the Premises or in common
with other premises in good condition and repair; provided, however, Lessor
shall not be obligated to paint, repair or replace wall coverings, or to repair
or replace any improvements that are not ordinarily a part of the Building or
are above then Building standards. Except as provided in paragraph 9.5, there
shall be no abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any part
thereof. Lessee expressly waives the benefits of any statute now or hereafter in
effect which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
Premises in good order, condition and repair.
7.2 Lessee's Obligations:
--------------------
(a) Notwithstanding Lessor's obligations to keep the
Premises in good condition and repair, Lessee shall be responsible for payment
of the cost thereof to Lessor as additional rent for that portion of the cost of
any maintenance and repair of the Premises, or any equipment (wherever located)
that serves only Lessee or the Premises, to the extent such cost is attributable
to causes beyond normal wear and tear. Lessee shall be responsible for the cost
of painting, repairing or replacing wall coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above then Building standards. Lessor may, at its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the cost of which is otherwise Lessee's responsibility hereunder.
(b) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as received, ordinary wear and tear excepted, clean and free of debris. Any
damage or deterioration of the Premises shall not be deemed ordinary wear and
tear if the same could have been prevent by good maintenance practices by
Lessee. Lessee shall
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<PAGE>
repair any damage to the Premises occasioned by the installation or removal of
Lessee's trade fixtures, alterations, furnishing and equipment. Except as
otherwise stated in this Lease, Lessee shall leave the air lines, power panels,
electrical distribution systems, lighting fixtures, air conditioning, window
coverings, wall coverings, carpets, wall paneling, ceiling and plumbing on the
Premises and in good operating condition.
7.3 Alterations and Additions:
-------------------------
(a) Lessee shall not, without Lessor's prior written consent
make any alterations, improvements, additions, Utility Installation or repairs
in, on or about the Premises, or the Office Building Project. As used in this
paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and
wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing, and telephone and telecommunication wiring
and equipment. At the expiration of the term, Lessor may require the removal of
any or all of said alterations, improvements, additions or Utility
Installations, and the restoration of the Premises and the Office Building
Project to their prior condition, at Lessee's expense. Should Lessor permit
Lessee to make its own alterations, improvements, additions or Utility
Installations, Lessee shall use only such contractor as has been expressly
approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's
sole cost and expense, a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such improvements, to insure Lessor against
any liability for mechanic's and materialmen's liens and to insure completion of
the work. Should Lessee make any alterations, improvements, additions or Utility
Installations without the prior approval of Lessor, or use a contractor not
expressly approved by Lessor, Lessor may, at any time during the term of this
Lease, require that Lessee remove any part or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Office Building Project that
Lessee shall desire to make shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent to Lessee's making
such alteration, improvement, addition or Utility Installation, the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from the
applicable governmental agencies, furnishing a copy thereof to Lessor prior to
the commencement of the work, and compliance by Lessee with all conditions of
said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use in the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days'
notice prior to the commencement of any work in the Premises by Lessee, and
Lessor shall have the right to post notices of non-responsibility in or on the
Premises or the Building as provided by law. If Lessee shall, in good faith,
contest the validity of any such lien, claim or demand, then Lessee shall at its
sole expense defend itself and Lessor against the same and shall pay and satisfy
any such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises, the Building or the Office Building
Project, upon the condition that if Lessor shall require. Lessee shall furnish
to Lessor a
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<PAGE>
surety bond satisfactory to Lessor in an amount equal to such contested lien
claim or demand indemnifying Lessor against liability for the same and holding
the Premises, the Building and the Office Building Project free from the effect
of such lien or claim. If addition, Lessor may require Lessee to pay Lessor's
reasonable attorneys' fees and costs in participating in such action if Lessor
shall decide it is to Lessor's best interest to do so.
(e) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made to the Premises by Lessee, including but
not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings,
sound alteration and lighting and telephone or communications systems, conduit,
wiring and outlets, shall be made and done in a good and workmanlike manner and
of good and sufficient quality and materials and shall be the property of Lessor
and remain upon and be surrendered with the Premises at the expiration of the
Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a).
Provided Lessee is not in default, notwithstanding the provisions of this
paragraph 7.3(e), Lessee's personal property and equipment, other than that
which is affixed to the Premises so that it cannot be removed without material
damage to the Premises or the Building, and other than Utility Installations,
shall remain the property of Lessee and may be removed by Lessee subject to the
provisions of paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
Installations.
7.4 Utility Additions: Lessor reserves the right to install new or
-----------------
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, communication systems and fire protection and detection systems, so
long as such installations do not unreasonably interfere with Lessee's use of
the Premises.
8. INSURANCE; INDEMNITY
--------------------
8.1 Liability Insurance - Lessee: Lessee shall, at Lessee's
----------------------------
expense, obtain and keep in force during the term of this Lease a policy of
Comprehensive General Liability insurance utilizing an Insurance Services Office
standard form with Broad Form General Liability Endorsement (GL0404), or
equivalent, in an amount of not less than $1,000,000 per occurrence of bodily
injury and property damage combined or in a greater amount as reasonably
determined by Lessor and shall insure Lessee with Lessor as an additional
insured against liability arising out of the use, occupancy or maintenance of
the Premises. Compliance with the above requirement shall not, however, limit
the liability of Lessee hereunder.
8.2 Liability Insurance - Lessor: Lessor shall obtain and keep in
----------------------------
force during the term of this Lease a policy of Combined Single Limit Bodily
Injury and Broad Form Property Damage Insurance, plus coverage against such
other risks Lessor deems advisable from time to time, insuring Lessor, but not
Lessee, against liability arising out of the ownership, use, occupancy or
maintenance of the Office Building Project in an amount not less than
$5,000,000.00 per occurrence.
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<PAGE>
8.3 Property Insurance - Lessee: Lessee shall, at Lessee's expense,
---------------------------
obtain and keep in force during the term of this Lease for the benefit of
Lessee, replacement cost fire and extended coverage insurance, with vandalism
and malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.
8.4 Property Insurance - Lessor: Lessor shall obtain and keep in
---------------------------
force during the term of this Lease a policy or policies of insurance covering
loss of damage to the Office Building Project improvements, but not Lessee's
personal property, fixtures, equipment or tenant improvements, in the amount of
the full replacement cost thereof, as the same may exist from time to time,
utilizing Insurance Services Office standard form, or equivalent, providing
protection against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, plate glass, and such other
perils as Lessor deems advisable or may be required by a lender having a lien on
the Office Building Project. In addition, Lessor shall obtain and keep in force,
during the term of this Lease, a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period. Lessee will not be named in any
such policies carried by Lessor and shall have no right to any proceeds
therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain
such deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an insured loss as defined in paragraph 9.1(f)
hereof, the deductible amounts under the applicable insurance policies shall be
deemed an Operating Expense. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies carried by Lessor. Lessee shall
pay the entirety of any increase in the property insurance premium for the
Office Building Project over what it was immediately prior to the commencement
of the term of this Lease, if the increase is specified by Lessor's insurance
carrier as being caused by the nature of Lessee's occupancy or any act or
omission of Lessee.
8.5 Insurance Policies: Lessee shall deliver to Lessor copies of
------------------
liability insurance policies required under paragraph 8.1 or certificates
evidencing the existence and amounts of such insurance within seven (7) days
after the Commencement Date of this Lease. No such policy shall be cancelable
or subject to reduction of coverage or other modification except after thirty
(30) days prior written notice to Lessor. Lessee shall, at least thirty (30)
days prior to the expiration of such policies, furnish Lessor with renewals
thereof.
8.6 Waiver of Subrogation: Lessee and Lessor each hereby release
---------------------
and relieve the other, and waive their entire right of recovery against the
other, for direct or consequential loss or damage arising out of or incident to
the perils covered by property insurance carried by such party, whether due to
the negligence of Lessor or Lessee or their agents, employees, contractors
and/or invitees. If necessary all property insurance policies required under
this Lease shall be endorsed to so provide.
8.7 Indemnity: Lessee shall indemnify and hold harmless Lessor and
---------
its agents, Lessor's master or ground lessor, partners and lenders, from and
against any and all claims for damage to the person or property of anyone or any
entity arising from Lessee's use of the Office Building Project, or from the
conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor
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from and against any and all claims costs and expenses arising from any breach
or default in the performance of any obligation on Lessee's part to be performed
under the terms of this Lease or arising from any act or omission of Lessee or
any of Lessee's agents, contractors, employees or invitees and from and against
all costs, attorneys' fees, expenses and liabilities incurred by Lessor as the
result of any such use, conduct, activity, work, things done, permitted or
suffered, breach, default or negligence, and in dealing reasonably therewith,
including but not limited to the defense or pursuit of any claim or any action
of proceeding involved therein; and in case any action or proceeding be brought
against Lessor by reason of such matter. Lessee upon notice form Lessor shall
defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor
and Lessor shall cooperate with Lessee in such defense, Lessor need not have
first paid any such claim in order to be so indemnified. Lessee, as a material
part of the consideration to Lessor, hereby assumes all risk of damage to
property of Lessee or injury to persons, in, upon or about the Office Building
Project arising from any cause and Lessee hereby waives all claims in respect
thereof against Lessor. Broker shall not be obligated to perform, or discharge,
(nor) does Broker hereby undertake to perform or discharge, any obligation, duty
or liability under this Lease or under or by reason of any assignment and Lessor
shall, and does hereby agree to indemnify, protect and deferred Broker for, and
to hold Broker harmless from, any and all liability, loss or damage which may or
might be incurred under this Lease or under or by reason of any provision herein
and from any and all claims and demands whatsoever which may be asserted against
Broker by reason of any alleged obligations or undertakings on its part to
perform or discharge any of the terms, covenants or agreements contained in this
Lease. Should Broker incur any such liability under this Lease or in defense of
any such claims or demands, the amount thereof, including costs, expenses and
attorneys' fees shall be secured hereby, and Landlord shall reimburse Broker
therefor immediately upon demand; and, upon the failure of Lessor to do so,
Broker may, at its option, declare all sums secured hereby as evidenced by the
Listing Agreement, immediately due and payable.
8.8 Exemption of Lessor from Liability: Lessee hereby agrees that
----------------------------------
Lessor shall not be liable for injury to Lessee's business or any loss of income
therefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Office Building Project, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from theft,
fire, stream, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause, whether said
damage or injury results from conditions arising upon the Premises or upon other
portions of the Office Building Project, or from other sources or places, or
from new construction or the repair, alteration or improvement of any part of
the Office Building Project, or of the equipment, fixtures or appurtenances
applicable thereto, and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible, Lessor shall not be liable
for any damages arising from any act or neglect of any other lessee, occupant or
user of the Office Building Project, nor from the failure of Lessor to enforce
the provisions of any other lease of any other lessee of the Office Building
Project.
8.9 No Representation of Adequate Coverage: Lessor makes no
--------------------------------------
representation that the limits or forms of coverage of insurance specified in
this paragraph 8 are adequate to cover Lessee's property or obligations under
this Lease.
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<PAGE>
9. DAMAGE OR DESTRUCTION
---------------------
9.1 Definitions:
-----------
(a) "PREMISES DAMAGE" shall mean if the Premises are damaged
or destroyed to any extent.
(b) "PREMISES BUILDING PARTIAL DAMAGE" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the extent
that the cost to repair is less than fifty percent (50%) of the then Replacement
Cost of the building.
(c) "PREMISES BUILDING TOTAL DESTRUCTION" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the extent
that the cost to repair is fifty percent (50%) or more of the then Replacement
Cost of the Building.
(d) "OFFICE BUILDING PROJECT BUILDINGS" shall mean all of
the buildings on the Office Building Project site.
(e) "OFFICE BUILDING PROJECT BUILDINGS TOTAL DESTRUCTION"
shall mean if the Office Building Project Buildings are damaged or destroyed to
the extent that the cost of repair is fifty percent (50%) or more of the then
Replacement Cost of the Office Building Project Buildings.
(f) "INSURED LOSS" shall mean damage or destruction which
was caused by an event required to be covered by the insurance described in
paragraph 8. The fact that an Insured Loss has a deductible amount shall not
make the loss an uninsured loss.
(g) "REPLACEMENT COST" shall mean the amount of money
necessary to be spent in order to repair or rebuild the damaged area to the
condition that existed immediately prior to the damage occurring, excluding all
improvements made by lessees, other than those installed by Lessor at Lessee's
expense.
9.2 Premises Damage; Premises Building Partial Damage:
-------------------------------------------------
(a) Insured Loss: Subject to the provisions of paragraph
------------
9.4 and 9.5, if at any time during the term of this Lease there is damage which
is an Insured Loss and which falls into the classification of either Premises
Damage or Premises Building Partial Damage, then Lessor shall, as soon as
reasonably possible and to the extent the required materials and labor are
readily available through usual commercial channels, at Lessor's expense, repair
such damage (but not Lessee's fixtures, equipment or tenant improvements
originally paid for by Lessee) to its condition existing at the time of the
damage, and this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraph
--------------
9.4 and 9.5, if at any time during the term of this Lease there is damage which
is an Insured Loss and which falls into the classification of either Premises
Damage or Premises Building Partial Damage, unless caused by a
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<PAGE>
negligent or willful act of Lessee (in which event Lessee shall make the repairs
at Lessee's expense), which damage prevents Lessee from making any substantial
use of the Premises, Lessor may at Lessor's option either (i) repair such damage
as soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) give written notice to Lessee
within thirty (30) days after the date of the occurrence of such damage of
Lessor's intention to cancel and terminate this Lease as of the date of the
occurrence of such damage, in which event this Lease shall terminate as of the
date of the occurrence of such damage.
9.3 Premises Building Total Destruction; Office Building Project
------------------------------------------------------------
Total Destruction: Subject to the provisions of paragraph 9.4 and 9.5, if at
- -----------------
any time during the term of this Lease there is damage, whether or not it is an
Insured Loss, which falls into the classification of either (i) Premises
Building Total Destruction, or (ii) Office Building Project Total Destruction,
then Lessor may at Lessor's option either (i) repair such damage or destruction
as soon as reasonably possible at Lessor's expense (to the extent the required
materials are readily available through usual commercial channels) to its
condition existing at the time of the damage, but not Lessee's fixtures,
equipment or tenant improvements, and this Lease shall continue in full force
and effect, or (ii) give written notice to Lessee within thirty (30) days after
the date of occurrence of such damage of Lessor's intention to cancel and
terminate this Lease, in which case this Lease shall terminate as of the date of
the occurrence of such damage.
9.4 Damage Near End of Term:
-----------------------
(a) Subject to paragraph 9.4(b), if at any time during the
last twelve (12) months of the term of this Lease there is substantial damage to
the Premises, Lessor may at Lessor's option cancel and terminate this Lease as
of the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of recurrence
of such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that
Lessee has an option to extend or renew this Lease, and the time within which
said option may be exercised has not yet expired, Lessee shall exercise such
option, if it is to be exercised at all, no later than twenty (20) days after
the occurrence of an Insured Loss falling within the classification of Premises
Damage during the last twelve (12) months of the term of this Lease. If Lessee
duly exercises such option during said twenty (20) day period, Lessor shall, at
Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
during said twenty (20) day period, then Lessor may at Lessor's option terminate
and cancel this Lease as of the expiration of said twenty (20) day period by
giving written notice to Lessee of Lessor's election to do so within ten (10)
days after the expiration of said twenty (20) day period, notwithstanding any
term or provision in the grant of option to the contrary.
9.5 Abatement of Rent; Lessee's Remedies:
------------------------------------
(a) In the event Lessor repairs or restores the Building or
Premises pursuant to the provisions of this paragraph 9, and any part of the
Premises are not usable (including loss of use
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<PAGE>
due to loss of access or essential services), the rent payable hereunder
(including Lessee's Share of Operating Expense Increase) for the period during
which such damage, repair or restoration continues shall be abated, provided (1)
the damage was not the result of the negligence of Lessee, and (2) such
abatement shall only be to the extent the operation and profitability of
Lessee's business as operated from the Premises is adversely affected. Except
for said abatement of rent, if any, Lessee shall have no claim against Lessor
for any damages suffered by reason of any such damage, destruction, repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises or the Building under the provisions of this paragraph 9 and shall not
commence such repair or restoration within ninety (90) days after such
occurrence, or if Lessor shall not complete the restoration and repair within
six (6) months after such occurrence, Lessee may at Lessee's option cancel and
terminate this Lease by giving Lessor written notice of Lessee's election to do
so at any time prior to the commencement or completion, respectively, or such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
(c) Lessee agrees to cooperate with Lessor in connection
with any such restoration and repair, including but not limited to the approval
and/or execution of plans and specifications required.
9.6 Termination - Advance Payments: Upon termination of this Lease
------------------------------
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 Waiver: Lessor and Lessee waive the provisions of any statute
------
which relate to termination of leases when leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES
-------------------
10.1 Payment of Taxes: Lessor shall pay the real property tax, as
----------------
defined in paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 Additional Improvements: Lessee shall not be responsible for
-----------------------
paying any increase in real property tax specified in the tax assessor's records
and work sheets as being caused by additional improvements placed upon the
Office Building Project by other lessees or by Lessor for the exclusive
enjoyment of any work sheets as being caused by additional improvements placed
upon the Office Building Project by other lessees or by Lessor for the exclusive
enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time
that Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.
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<PAGE>
10.3 Definition of "Real Property Tax": As used herein, the term
---------------------------------
"real property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Office Building Project or any
portion thereof by any authority having the direct or indirect power to tax,
including any city, county, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Lessor in the Office
Building Project or in any portion thereof, as against Lessor's right to rent or
other income therefrom, and as against Lessor's business of leasing the Office
Building Project. The term "real property tax" shall also include any tax, fee,
levy, assessment or charge (i) in substitution of, partially or totally, any
tax, fee, levy, assessment or charge hereinabove included within the definition
of "real property tax," or (ii) the nature of which was hereinbefore included
within the definition of "real property tax," or (iii) which is imposed for a
service or right not charged prior to June 1, 1978, or, if previously charged,
has been increased since June 1, 1978, or (iv) which is imposed as a result of a
change in ownership, as defined by applicable local statutes for property tax
purposes, of the Office Building Project or which is added to a tax or charge
hereinbefore included within the definition of real property tax by reason of
such change of ownership, or (v) which is imposed by reason of this transaction,
any modifications or changes hereto, or any transfers hereof.
10.4 Joint Assessment: If the improvements or property, the taxes
----------------
for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are
not separately assessed, Lessee's portion of that tax shall be equitably
determined by Lessor from the respective valuations assigned in the assessor's
work sheets or such other information (which may include the cost of
construction) as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5 Personal Property Taxes:
-----------------------
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay to Lessor the taxes
attributable to Lessee within ten (10) days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.
11. UTILITIES
---------
11.1 Services Provided by Lessor: Lessor shall provide heating,
---------------------------
ventilation, air conditioning and janitorial service as reasonably required,
reasonable amounts of electricity for normal lighting and office machines, water
for reasonable and normal drinking and lavatory use, and replacement light bulbs
and/or fluorescent tubes and ballasts for standard overhead fixtures.
11.2 Services Provided by Lessee: Lessor shall pay for all water,
---------------------------
gas, heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered
-17-
<PAGE>
exclusively to the Premises or to Lessee, together with any taxes thereon. If
any such services are not separately metered to the Premises, Lessee shall pay
at Lessor's option, either Lessee's Share or a reasonable proportion to be
determined by Lessor of all charges jointly metered with other premises in the
Building.
11.3 Hours of Service: Said services and utilities shall be provided
----------------
during generally accepted business days and hours or such other days or hours as
may hereafter be set forth. Utilities and services required at other times
shall be subject to advance request and reimbursement by Lessee to Lessor of the
cost thereof.
11.4 Excess Usage by Lessee: Lessee shall not make connection to the
----------------------
utilities except by or through existing outlets and shall not install or use
machinery or equipment on or about the Premises that uses excess water, lighting
or power, or suffer or permit any act that causes extra burden upon the
utilities or for any excess expenses or costs that may arise out of a breach of
this subparagraph by Lessee. Lessor may, in its sole discretion, install at
Lessee's expense supplemental equipment and/or separate metering applicable to
Lessee's excess usage or loading.
11.5 Interruptions: There shall be no abatement of rent and Lessor
-------------
shall not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with government request or directions.
12. ASSIGNMENT AND SUBLETTING
-------------------------
12.1 Lessor's Consent Required: Lessee shall not voluntarily or by
-------------------------
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or part of lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall
include the transfer or transfers aggregating: (a) if Lessee is a corporation,
more than twenty-five percent (25%) of the voting stock of such corporation, or
(b) if Lessee is a partnership, more than twenty-five percent (25%) of the
profit and loss participation in such partnership.
12.2 Lessee Affiliate: Notwithstanding the provisions of paragraph
----------------
12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective, (a) said assignee shall
assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall
be given written notice of such assignment and assumption. Any such assignment
shall not, in any way, affect or limit the liability of Lessee under the terms
of this Lease even if after such assignment or subletting the terms of
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this Lease are materially changed or altered without the consent of Lessee, the
consent of whom shall not be necessary.
12.3 Terms and Conditions Applicable to Assignment and Subletting:
------------------------------------------------------------
(a) Regardless of Lessor's consent, no assignment or
subletting shall release Lessee of Lessee's obligations hereunder or alter the
primary liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expense Increase, and to perform all other
obligations to be performed by lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such
assignment or subletting, nor the acceptance of rent, shall constitute a waiver
or estoppel of Lessor's right to exercise its remedies for the breach of any of
the terms or conditions of this paragraph 12 of this Lease.
(d) If Lessee's obligations under this Lease have been
guaranteed by third parties, then an assignment or sublease, and Lessor's
consent thereto, shall not be effective unless said guarantors give their
written consent to such sublease and the terms thereof.
(e) In the event of any default under this Lease, Lessor may
proceed directly against Lessee, any guarantors or any one else responsible for
the performance of this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(f) In the event of any default under this Lease, Lessor may
proceed directly against Lessee, any guarantors or any one else responsible
therefor to Lessor, or any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or subletting
of the Premises by Lessee shall not constitute an acknowledgment that no default
then exists under this Lease of the obligation to be performed by Lessee nor
shall such consent be deemed a waiver of any then existing default, except as
may be otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement
relied upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent null
and void.
12.4 Additional Terms and Conditions Applicable to Subletting:
--------------------------------------------------------
Regardless of Lessor's consent, the following terms and conditions shall apply
to any subletting by Lessee of all or any part of the Premises and shall be
deemed included in all subleases under this Lease whether or not expressly
incorporated therein.
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<PAGE>
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease heretofore
or hereafter made by Lessee, and Lessor may collect such rent and income and
apply same toward Lessee's obligations under this lease; provided, however, that
until a default shall occur in the performance of Lessee's obligations under
this Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of rents from a sublease, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee under such sublease. Lessee
hereby irrevocably authorizes and directs any such sublessee, upon receipt of a
written notice from Lessor stating that a default exists in the performance of
Lessee's obligations under this Lease, to pay to Lessor the rents due and to
become due under the sublease. Lessee agrees that such sublessee shall have the
right to rely upon any such statement and request from Lessor, and that such
sublessee shall pay such rents to Lessor without any obligation or right to
inquire as to whether such default exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee or Lessor for any such rents so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective
unless and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublessee as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublease shall, by reason
of entering into a sublease under this Lease, be deemed, for the benefit of
Lessor, to have assumed and agreed to conform and comply with each and every
obligation herein to be performed by Lessee other than such obligations as are
contrary to or inconsistent with provisions contained in a sublease to which
Lessor has expressly consented in writing.
(c) In the event Lessee shall default in the performance of
its obligations under this Lease, Lessor at its option and without any
obligation to do so, may request any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of Lessee under such sublease from
the time of the exercise of said option to the termination of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to Lessee or for any other prior defaults of
Lessee under such sublease.
(d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has
consented, Lessor agrees to deliver a copy of any notice of default by Lessee to
the sublessee. Such sublessee shall have the right of reimbursement and offset
from and against Lessee for any such defaults cured by the sublessee.
12.5 Lessor's Expenses: In the event Lessee shall assign or sublet
-----------------
the Premises or request the consent of Lessor to any assignment or subletting or
if Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' and other
consultants' fees.
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12.6 Conditions to Consent: Lessor reserves the right to condition
---------------------
any approval to assign or sublet upon Lessor's determination that (a) the
proposed assignee or sublessee shall conduct a business on the Premises of a
quality substantially equal to that of Lessee and consistent with the general
character of the other occupants of the Office Building Project and not in
violation of any exclusives or rights then held by other tenants, and (b) the
proposed assignee or sublessee be at least as financially responsible as Lessee
was expected to be at the time of the execution of this Lease or of such
assignment or subletting, whichever is greater.
13. DEFAULT; REMEDIES
-----------------
13.1 Default: The occurrence of any one or more of the following
-------
events shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee.
Vacation of the Premises shall include the failure to occupy the Premises for a
continuous period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions
or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment
or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f)
(false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33
(auctions), or 41.1 (easements) all of which are hereby deemed to be material,
non-curable defaults without the necessity of any notice by Lessor to Lessee
thereof.
(c) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(d) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee other than those referenced in subparagraphs (b) and (c), above, where
such failure shall continue for a period of thirty (30) days after written
notice thereof from Lessor to Lessee; provided, however, that if the nature of
Lessee's noncompliance is such that more than thirty (30) days are reasonably
required for its cure, then Lessee shall not be deemed to be in default if
Lessee commenced such cure within said thirty (30) day period and thereafter
diligently pursues such cure to completion. To the extent permitted by law, such
thirty (30) day notice shall constitute the sole and exclusive notice required
to be given to Lessee under applicable Unlawful Detainer statutes.
(e) (i) The making by Lessee of any general arrangement of
general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor"
as defined in 11 U.S.C. (S)101 or any successive statute thereto (unless, in the
case of petition filed against Lessee, the same is dismissed within sixty (60)
days, (iii) the possession is not restored to Lessee within thirty (30) days; or
(iv) the attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the
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Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days. in the event that any provisions of this
paragraph 13.1(e) is contrary to any applicable law, such provision shall be of
no force or effect.
(f) The discovery by Lessor that any financial statement
given to Lessor by Lessee, or its successor in interest or by any guarantor of
Lessee's obligations hereunder, was materially false.
13.2 Remedies: In the event of any material default or breach of
--------
this Lease by Lessee, Lessor may at any time thereafter, with or without notice
or demand and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises
by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the Premises to
Lessor. In such event Lessor shall be entitled to recover from Lessee all
damages incurred by Lessor by reason of Lessee's default including, but not
limited to, the cost of recovering possession of the Premises; expenses of
reletting, including necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and any real estate commission actually paid; the
worth at the time of award by the courts having jurisdiction thereof of the
amount by which the unpaid rent for the balance of the term after the time of
such award exceeds the amount of such rental loss for the same period that
Lessee proves could be reasonably avoided; that portion of the leasing
commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired
term of this Lease.
(b) Maintain Lessee's right to possession in which case this
Lease shall continue in effect whether or not Lessee shall have vacated or
abandoned the Premises. In such event Lessor shall be entitled to enforce all of
Lessor's rights and remedies under this Lease, including the right to recover
the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 Default by Lessor: Lessor shall not be in default unless Lessor
-----------------
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such thirty (30) day period and
thereafter diligently pursues the same to completion.
13.4 Late Charges: Lessee hereby acknowledges that late payment by
------------
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense increase or
other sums due hereunder will cause
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Lessor to incur costs not contemplated by this Lease, the exact amount of which
will be extremely difficult to ascertain. Such costs include, but are not
limited to, processing and accounting charges, and late charges which may be
imposed on Lessor by the terms of any mortgage or trust deed covering the Office
Building Project. Accordingly, if any installment of Base Rent, Operating
Expense Increase, or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a
late charge equal to 6% of such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payment by Lessee. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payment by Lessee. Acceptance of such late charge
by Lessor shall in no event constitute a waiver of Lessee's default with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder.
14. CONDEMNATION: If the Premises or any portion thereof or the Office
------------
Building Project are taken under the power of eminent domain, or sold under the
threat of the exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as of the
date the condemning authority takes title or possession, whichever first occurs;
provided that if so much of the Premises or the Office Building Project are
taken by such condemnation as would substantially and adversely affect the
operation and profitability of Lessee's business conducted from the Premises,
Lessee shall have the option, to be exercised only in writing within thirty (30)
days after Lessor shall have given Lessee written notice of such taking (or in
the absence of such notice, within thirty (30) days after the condemning
authority shall have taken possession), to terminate this Lease as of the date
the condemning authority takes such possession. If Lessee does not terminate
this Lease in accordance with the foregoing, this Lease shall remain in full
force and effect as to the portion of the Premises remaining, except that the
rent and Lessee's Share of Operating Expense Increase shall be reduced in the
proportion that the floor area of the Premises taken bears to the total floor
area of the Premises. Common Areas taken shall be excluded from the Common
Areas usable by Lessee and no reduction of rent shall occur with respect thereto
or by reason thereof. Lessee shall have the option in its sole discretion to
terminate this Lease as of the taking of possession by the condemning authority,
by giving written notice to Lessee of such election within thirty (30) days
after receipt of notice of a taking by condemnation of any part of the Premises
or the Office Building Project. Any award for the taking of all or any part of
the Premises or the Office Building Project under the power of eminent domain or
any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution in value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
separate award for loss of or damage to Lessee's trade fixtures, removable
personal property and unamortized tenant improvements that have been paid for by
Lessee. For that purpose the cost of such improvements shall be amortized over
the original term of this Lease excluding any options. In the event that this
Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of severance damages received by lessor in connection with such
condemnation, repair any damage to the Premises caused by such condemnation
except to the extent that Lessee has been reimbursed therefor by the condemning
authority. Lessee shall pay any amount in excess of such severance damages
required to complete such repair.
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15. BROKER'S FEE
------------
(a) The brokers involved in this transaction are N/L as "listing
broker" and _________________________ as "cooperating broker," licensed real
estate broker(s). A "cooperating broker" is defined as any broker other than the
listing broker entitled to a share of any commission arising under the Lease.
Upon execution of this Lease by both parties, Lessor shall pay to said brokers
jointly, or in such separate shares as they may mutually designate in writing, a
fee as set forth in a separate agreement between Lessor and said (broker(s), or
in the event there is no separate agreement between Lessor and said broker(s),
the sum of _______________$, for brokerage service rendered by said broker(s) to
Lessor in this transaction.
(b) Lessee further agrees that (i) if Lessee exercises any Option,
as defined in paragraph 39.1 of this Lease, which is granted to Lessee under
this Lease, or any subsequently granted option which is substantially similar to
an Option granted to Lessee under this Lease, or (ii) if Lessee acquires any
rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (iii) if Lessee remains in possession of
the Premises after the expiration of the term of this Lease after having failed
to exercise an Option, or (iv) if said broker(s) are the procuring cause of any
other lease or sale entered into between the parties pertaining to the Premises
and/or any adjacent property in which Lessor has an interest, or (v) if the Base
Rent is increased, whether by agreement or operation of an escalation clause
contained herein, then as to any of said transactions or rent increases, Lessor
shall pay said broker(s) a fee in accordance with the schedule of said broker(s)
in effect at the time of execution of this Lease. Said fee shall be paid at the
time such increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity having
an ownership interest in said real property or any part thereof, when such fee
is due hereunder. Any transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this paragraph 15. Each listing and
cooperating broker shall be a third party beneficiary of the provisions of this
paragraph 15 to the extent of their interest in any commission arising under
this Lease and may enforce that right directly against Lessor, provided,
however, that all brokers have a right to any part of such total commission
shall be a necessary party to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that
neither has had an dealings with any person, firm broker or finder (other than
the person(s), if any, whose names are set forth in paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or similar party by reason of any dealings or actions of the indemnifying party.
(e) Lessor hereby absolutely assigns, transfers, and sets over to
Broker, all of Lessor's right, title and interest in this Lease by and any
extension, modification, assignment or renewal thereof
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<PAGE>
together with all rents, income and profits arising from this Lease. This
Assignment is made for the purpose of securing the payment of the commission due
to Assignee as Broker. So long as there shall exist no default by the Lessor in
the payment of the principal sum, or interest and/or other indebtedness due to
Broker, Lessor shall have the right to collect at the time of, but not prior to,
the date provided for the payment thereof, all rents, income and profits arising
under this Lease or from the Premises. Upon or at any time after default in the
payment of the principal sum or interest or other indebtedness due, Broker,
without in any way waiving such default may, at its option, without notice and
without regard to the adequacy of security for said principal sum or interest
and/or other indebtedness due under the Listing Agreement, sue for or otherwise
collect and receive all rents, income and profits of the Premises, including
those past due and unpaid, with full power to apply such rents, income and
profit to the payment of the principal sum or interest and/or other indebtedness
due, together with all costs and attorneys' fees.
(f) Upon payment in full of the principal sum, interest and
other indebtedness secured hereby, this Assignment shall become void and of no
effect. Lessor hereby authorizes and directs Tenant or any other or future
sublessee or assignee of Lessee upon receipt from Broker of written notice that
a default exists under this Assignment, to pay over to Broker all rents, income
and profits arising or accruing under this Lease or from the Premises and to
continue to do so until otherwise notified by Broker. Lessor and Lessee agree
that notwithstanding anything to the contrary contained herein, upon any such
default and delivery of such notice, Broker shall be immediately entitled to all
of said rents, income and profits.
(g) Nothing contained in this Assignment and no act done or
omitted by Broker pursuant to the powers and rights granted Broker hereunder
shall be deemed to be a waiver by Broker of its rights and remedies, and this
Assignment is made and accepted without prejudice to any of the rights and
remedies possessed by Broker. The right of Broker to collect said principal sum,
interest and other indebtedness and to enforce any security therefor may be
exercised by Broker either prior to, simultaneously with or subsequent to any
action taken by it hereunder. This Assignment, together with the covenants and
warranties herein contained, shall inure to the benefits of Broker and any
subsequent transferee thereof, and shall be binding upon Lessor, Lessor's heirs,
executors, administrators, successors and assigns and any subsequent owner of
the Premises.
16. ESTOPPEL CERTIFICATE
--------------------
(a) Each party (as "responding party") shall at any time upon not
less than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and (iii)
acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Office Building Project or
of the business of Lessee.
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<PAGE>
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it shall
be conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party, (ii)
there are no uncured defaults in the requesting party's performance, and (iii)
if Lessor is the requesting party, not more than one month's rent has been paid
in advance.
(c) If Lessor desires to finance, refinance, or sell the Office
Building Project, or any part thereof, Lessee hereby agrees to deliver to any
lender or purchaser designated by Lessor such financial statements of Lessee as
may be reasonably required by such lender or purchaser. Such statements shall
include the past three (3) years' financial statements of Lessee. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY: The term "Lessor" as used herein shall mean only
------------------
the owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such title
or interest, Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
18. SEVERABILITY: The invalidity of any provision of this lease as
------------
determined by a court of competent jurisdiction shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS: Except as expressly herein
--------------------------------
provided, any amount due to Lessor not paid when due shall bear interest at the
maximum rate then allowable by law or judgment from the date due. Payment of
such interest shall not excuse or cure any default by Lessee under this Lease;
provided, however, that interest shall not be payable on the charges incurred by
lessee nor on any amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE: Time is of the essence with respect to the
---------------
obligations to be performed under this Lease.
21. ADDITIONAL RENT: All necessary obligations of Lessee to Lessor under
---------------
the terms of this Lease, including but not limited to Lessee's Share of
Operating Expense Increase and any other expenses payable by Lessee hereunder
shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS: This Lease contains all
---------------------------------------------
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this
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<PAGE>
Lease, Lessee hereby acknowledges that neither the real estate broker listed in
paragraph 15 hereof nor any cooperating broker on this transaction nor the
Lessor or any employee or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the conditions or
use by Lessee of the Premises or the Office Building Project and Lessee
acknowledges that Lessee assumes all responsibility regarding the Occupational
Safety Health Act, the legal use and adaptability of the Premises and the
compliance thereof with all applicable laws and regulations in effect during the
term of this Lease.
23. NOTICES: Any notice required or permitted to be given hereunder shall
-------
be in writing and may be given by personal delivery or by certified or
registered mail, and shall be deemed sufficiently given if delivered or
addressed to Lessee or to Lessor at the address noted below or adjacent to the
signature of the respective parties, as the case may be. Mailed notices shall be
deemed given upon actual receipt at the address required, or forty-eight hours
following deposit in the mail, postage prepaid, whichever first occurs. Either
party may by notice to the other specify a different address for notice purposes
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. WAIVERS: No waiver by Lessor of any provision hereof shall be deemed
-------
a waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. RECORDING: Either Lessor or Lessee shall, upon request of the other,
---------
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. HOLDING OVER: If Lessee, with Lessor's consent, remains in possession
------------
of the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provisions of
this lease pertaining to the obligations of lessee, except that the rent payable
shall be one hundred fifty percent (150%) of the rent payable immediately
preceding the termination date of this Lease, and all Options, if any, granted
under the terms of this Lease shall be deemed terminated and be of no further
effect during said month to month tenancy.
27. CUMULATIVE REMEDIES: Each No remedy or election hereunder shall be
-------------------
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
28. COVENANTS AND CONDITIONS: Each provision of this Lease performable by
------------------------
Lessee shall be deemed both a covenant and a condition.
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29. BINDING EFFECT; CHOICE OF LAW: Subject to any provisions hereof
-----------------------------
restricting assignment or subletting by Lessee and subject to the provisions of
paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.
30. SUBORDINATION
-------------
(a) This Lease, and any Option or right of first refusal granted
hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage,
deed of trust, or any other hypothecation or security nor or hereafter placed
upon the Office Building Project and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Lessee's right to quiet possession of the Premises shall not be disturbed if
Lessee is not in default and so long as Lessee shall pay the rent and observe
and perform all of the provisions of this Lease, unless this Lease is otherwise
terminated pursuant to its terms. If any mortgagee, trustee or ground lessor
shall elect to have this Lease and any Options granted hereby prior to the lien
of its mortgage, deed of trust or ground lease, and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
mortgage, deed of trust or ground lease, whether this Lease or such Options are
dated prior or subsequent to the date of said mortgage, deed of trust or ground
lease or the date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be. Lessee's failure to execute such documents within ten (10) days after
written demand shall constitute a material default by lessee hereunder without
further notice to Lessee or, at Lessor's option, Lessor shall execute such
documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby
make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and
in Lessee's name, place and stead, to execute such documents in accordance with
hits paragraph 30(b).
31. ATTORNEYS' FEES
---------------
31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the same
or separate suit, and whether or not such action is pursued to decision or
judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
31.2 Lessor shall be entitled to reasonable attorneys' fees and all
other costs and expenses incurred in the preparation and service of notice of
default and consultations in connection therewith, whether or not a legal
transaction is subsequently commenced in connection with such default.
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<PAGE>
31.3 Lessor shall be entitled to reasonable attorneys' fees and other
costs and expenses incurred in the preparation and service of notice of default
and consultations in connection therewith, whether or not a legal transaction is
subsequently commenced in connection with such default.
32. LESSOR'S ACCESS
---------------
32.1 Lessor and Lessor's agents shall have the right to enter the
Premises at reasonable times for the purpose of inspecting the same, performing
any services required of Lessor, showing the same to prospective purchasers,
lenders, or lessees, taking such safety measures, erecting such scaffolding or
other necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises so long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last one
hundred twenty (120) days of the term hereof place on or about the Premises any
ordinary "For Lease" signs.
32.2 All activities of Lessor pursuant to this paragraph shall be
without statement of rent, nor shall Lessor have any liability to Lessee for the
same.
32.3 Lessor shall have the right to retain keys to the Premises and
to unlock all doors in or upon the Premises other than to files, vaults and
safes, and in the case of emergency to enter the Premises by any reasonably
appropriate means, and any such entry shall not be deemed a forcible or unlawful
entry or detainer of the Premises or an eviction. Lessee waives any charges for
damages or injuries or interference with Lessee's property or business in
connection therewith.
33. AUCTIONS: Lessee shall not conduct, nor permit to be conducted,
--------
either voluntarily or involuntarily, any auction upon the Premises or the Common
Areas without first having obtained Lessor's prior written consent.
Notwithstanding anything to the contrary in this Lease, Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
grant such consent. The holding of any auction on the Premises or Common Areas
in violation of this paragraph shall constitute a material default of this
Lease.
34. SIGNS: Lessee shall not place any sign upon the Premises or the
-----
Office Building Project without Lessor's prior written consent. Under no
circumstances shall Lessee place a sign on any roof of the Office Building
Project.
35. MERGER: The voluntary or other surrender of this lease by Lessee, or
------
a mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
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<PAGE>
36. CONSENTS: Except for paragraph 33 (auctions) and 34 (signs) hereof,
--------
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. GUARANTOR: In the event that there is a guarantor of this Lease, said
---------
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION: Upon Lessee paying the rent for the Premises and
----------------
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Office Building Project.
39. OPTIONS
-------
39.1 Definition: As used in this paragraph the word "Option" has the
----------
following meaning: (i) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor, (2) the option of right of first refusal to lease the
Premises or the right of first offer to lease the premises or the right of first
refusal to lease other space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor, (3) the right or option to
purchase the Premises or the Office Building Project, or the right of first
refusal to purchase the Premises or the Office Building Project or the right of
first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor or the right of first offer to
purchase other property of Lessor.
39.2 Options Personal: Each Option granted to Lessee in this Lease
----------------
is personal to the original Lessee and may be exercised only by the original
Lessee while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of
this Lease. The Options, if any, herein granted to Lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either by reservation or otherwise.
39.3 Multiple Options: In the event that Lessee has any multiple
----------------
options to extend or renew this Lease a later option cannot be exercised unless
thee prior option to extend to renew this Lease has been so exercised.
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<PAGE>
39.4 Effect of Default on Options:
----------------------------
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i) during
the time commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance
alleged in said notice of default is cured, or (ii) during the period of time
commencing on the day after a monetary obligation to Lessor is due from Lessee
and unpaid (without any necessity for notice thereof to Lessee) and continuing
until the obligation is paid, or (iii) in the event that Lessor has given to
Lessee three or more notices of default under paragraph 13.1(c), or paragraph
13.1(d), whether or not the defaults are cured, during the twelve (12) month
period of time immediately prior to the time that Lessee attempts to exercise
the subject Option, (iv) if Lessee has committed any non-curable breach,
including without limitation those described in paragraph 13.1(d), or is
otherwise in default of any of the terms, covenants or conditions of this Lease.
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding Lessee's
due and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessee fails to commence to cure a default specified in paragraph 13.1(d) within
thirty (30) days after the date that Lessor gives notice to Lessee of such
default and/or Lessee fails thereafter to diligently prosecute said cure to
completion, or (iii) Lessor gives to Lessee three or more notices of default
under paragraph 13.1(c) or paragraph 13.1(d), or is otherwise in default of any
of the terms, covenants and conditions of this Lease.
40. SECURITY MEASURES - LESSOR'S RESERVATIONS
-----------------------------------------
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option,
from providing security protection for the Office Building Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Operating Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office
Building Project or building in which the Premises are located upon not less
than ninety (90) days prior written notice;
-31-
<PAGE>
(b) To, at Lessee's expense, provide and install Building
standard graphics on the door of the Premises and such portions of the Common
Areas as Lessor shall reasonably deem appropriate;
(c) To place such signs, notices or displays as Lessor
reasonably deems necessary or advisable upon the roof, exterior of the buildings
or the Office Building Project or on pole signs in the Common Areas.
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the
Building or the Office Building Project or their name(s) in connection with
Lessee's business:
(b) Suffer or permit anyone, except in emergency to go upon
the roof of the Building.
41. EASEMENTS
---------
41.1 Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
and to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this lease by Lessee without the need for
further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
42. PERFORMANCE UNDER PROTEST: If at any time a dispute shall arise as to
-------------------------
any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party agrees whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment, and there shall survive the right
on the part of said party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said party
to pay such sum or any part thereof, said party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
43. AUTHORITY: If Lessee is a corporation, trust, or general or limited
---------
partnership, Lessee, and each individual executing this Lease on behalf of such
entity represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
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<PAGE>
44. CONFLICT: Any conflict between the printed provisions, Exhibits or
--------
Addenda of this Lease and the typewritten or handwritten provisions, if any,
shall be controlled by the typewritten or handwritten provisions.
45. NO OFFER: Preparation of this Lease by Lessor or Lessor's agent and
--------
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
46. LENDER MODIFICATION: Lessee agrees to make such reasonable
-------------------
modifications to this Lease as may be reasonably required by an institutional
lender in connection with the obtaining of normal financing or refinancing of
the Office Building Project.
47. MULTIPLE PARTIES: If more than one person or entity is named as
----------------
either Lessor or Lessee herein, except as otherwise expressly provided herein,
the obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.
48. WORK LETTER: This lease is supplemented by that certain Work Letter
-----------
of even date executed by Lessor and Lessee, attached hereto as Exhibit C, and
incorporated herein by this reference.
49. ATTACHMENTS: Attached hereto are the following documents which
-----------
constitute a part of this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL
ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
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<PAGE>
TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES
OF THIS LEASE.
LESSOR LESSEE
By: C.C. Poon By: Gerald Rice
------------------------------ -----------------------------
Its: Owner Its: CFO
------------------------------ -----------------------------
By: By:
------------------------------ -----------------------------
Its: Its:
------------------------------ -----------------------------
Executed at S. San Francisco Executed at San Jose
----------------------- ----------------------
On Mar. 21, '97 On April 4, 1997
-------------------------------- -------------------------------
Address 383 Allerton Address 1054 S. De Anza Blvd. #115
--------------------------- --------------------------
S. San Francisco, CA 94080 San Jose, CA 95129
--------------------------- --------------------------
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<PAGE>
EXHIBIT 11.1
NOTIFY CORPORATION
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
SIX-
MONTH PERIOD ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- --------------------
1995 1996 1996 1997
------------ ------------- --------- ---------
<S> <C> <C> <C> <C>
Net loss..................... $(426,062) $(1,657,219) $(680,746) $(769,695)
=========== ============= ========= =========
Weighted average common
shares outstanding (1)...... 205,998 224,595 220,760 279,246
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). 213,458 213,458 213,458 213,458
----------- ------------- --------- ---------
Shares used in computing net
loss per share.............. 419,456 438,052 434,217 492,703
=========== ============= ========= =========
Net loss per share........... $ (1.02) $ (3.78) $ (1.57) $ (1.56)
=========== ============= ========= =========
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.......... 790,594 858,010
============= =========
Pro forma net loss per share. $ (2.10) (0.90)
============= =========
</TABLE>
- --------
(1) Excludes shares and warrants to be placed into escrow according to the
"Escrow Agreement."
