<PAGE> 1
As filed with the Securities and Exchange Commission on November 4, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
C2i SOLUTIONS, INC.
(Name of small business issuer in its charter)
Delaware 7379 33-0775687
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
JOHN ANTHONY WHALEN, JR.
President and Chief Executive Officer
4747 Morena Blvd., Suite 101
San Diego, CA 92117
(619) 490-1555
(Name, address and telephone number of agent for
service, principal executive offices and principal place of business)
Copies to:
DOUGLAS J. REIN, ESQ. ROBINSON MARKEL, ESQ.
GRAY CARY WARE & FREIDENRICH PIPER & MARBURY L.L.P.
4365 Executive Drive, Suite 1600 1251 Avenue of the Americas, 29th Floor
San Diego, CA 92121-2189 New York, NY 10020-1104
(619) 677-1400 (212) 835-6262
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON
AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
-------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier 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. [ ]
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]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===============================================================================================================
<S> <C> <C> <C> <C>
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
UNIT(1) PRICE
- ---------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value 1,150,000(2) $ 6.00 $ 6,900,000 $2,091.00
Redeemable Warrants(3) 1,150,000(4) $ 0.10 $ 115,000 $ 35.00
Common Stock, $.001 par value(5) 1,150,000(6) $ 7.50 $ 8,625,000 $2,614.00
- ---------------------------------------------------------------------------------------------------------------
Total $15,640,000 $4,740.00
===============================================================================================================
</TABLE>
(Notes appear on following page)
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Includes 150,000 Shares of Common Stock reserved for issuance pursuant to
the Underwriter's Over-Allotment Option.
(3) Each Redeemable Warrant ("Warrant") entitles the holder to purchase one
share of Common Stock.
(4) Includes 150,000 Warrants reserved for issuance pursuant to the
Underwriter's Over-Allotment Option.
(5) Issuable upon exercise of the Warrants.
(6) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of any
future anti-dilution adjustments in accordance with the terms of the
Warrants, as described in the Prospectus.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1997
C2i SOLUTIONS, INC.
[C2i LOGO] 1,000,000 SHARES OF COMMON STOCK
1,000,000 REDEEMABLE WARRANTS
The securities offered hereby by C2i Solutions, Inc. ("C2i" or the
"Company") consist of shares (the "Shares") of Common Stock, par value $.001 per
share (the "Common Stock") and a Redeemable Warrant (the "Warrants")
accompanying each share of Common Stock. The Shares and the Warrants are
transferable separately. Each Warrant entitles the holder to purchase, at an
exercise price of $ _____ (125% of the initial Share offering price) (subject to
adjustment), one share of Common Stock. The Warrants are exercisable during the
four year period commencing one year from the date of this Prospectus. The
Warrants are subject to redemption commencing one year from the date of this
Prospectus by the Company for $.01 per Warrant, on not less than 30 days'
written notice, if the last sale price of the Common Stock is at least 150% of
the then current exercise price of the Warrants for 20 consecutive business days
ending on the third day prior to the date on which notice is given.
Upon completion of this Offering, the officers and directors of the
Company will control approximately 62.4% of the total voting power and will
therefore be able to elect all of the Company's directors and to control the
Company.
Prior to this Offering, there has been no public market for the Company's
securities. The initial public offering price of the Shares, which is estimated
to be between $5.25 and $6.00, and the Warrants, which is estimated to be $0.10,
and the exercise prices and other terms of the Warrants have been determined by
negotiation between the Company and SouthWall Capital Corp., (the
"Underwriter"), and are not necessarily related to the Company's assets, book
value, financial condition or any other recognized criteria of value. The
Company has made application to have the Common Stock and the Warrants included
on the Nasdaq SmallCap Market under the symbols CTWO and CTWOW, respectively.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share......... $________ $________ $________
- --------------------------------------------------------------------------------
Per Warrant....... $________ $________ $________
- --------------------------------------------------------------------------------
Total(3).......... $________ $________ $________
================================================================================
(Notes appear on following page)
-----------------------------
The Shares and Warrants offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice to, delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the Shares
and Warrants will be made at the offices of SouthWall Capital Corp., New York,
New York, on or about ___________________________, 1997.
-----------------------------
SOUTHWALL CAPITAL CORP.
The date of this Prospectus is __________ , 1997
<PAGE> 4
(1) Does not reflect additional compensation to be received by the Underwriter
in the form of: (i) a non-accountable expense allowance equal to 3% of the
gross proceeds of the Offering; and (ii) warrants (the "Underwriter
Warrants") to purchase up to 100,000 Shares and 100,000 Warrants
(collectively, the "Warrant Securities") issued to the Underwriter in
exchange for $100 and exercisable for a period of four years commencing
one year from the date of this Prospectus at $______________ (125% of the
initial public offering price per Share). The Company has also agreed to
indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated expenses of the Offering of $525,000 ($552,000
assuming exercise in full of the Underwriter's Over-Allotment Option)
payable by the Company, including the Underwriter's non-accountable
expense allowance.
(3) The Company has granted the Underwriter a 45-day option to purchase up to
150,000 additional Shares and accompanying Warrants on the same terms and
conditions as set forth above solely to cover over-allotments, if any (the
"Over-Allotment Option"). If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $__________ , $__________ and $__________ , respectively.
See "Underwriting."
Y2k
Tool Shed(TM)
<TABLE>
<CAPTION>
HARDWARE & VAR
SERVICES SYSTEM SOFTWARE TOOLS/OFFERINGS
<S> <C> <C>
- -Project Management IBM P/390 SYSTEM 390
- -Assessment -OS/390 -CA Discovery 2000
- -Remediation -MVS, VSE, VM -COBOL
-COBOL IBM R/390 -CenturySolver/Assembler
-Assembler -OS/390 AS/400
-RPG -MVS, VSE, VM -CenturySolver/400
-Other IBM AS/400 -RPG
- -Testing -OS/400 MULTI-PLATFORM/LANGUAGES
- -Migration SUN MICROSYSTEMS -CenturySolver/Multi
- -Compliance Audit -Solaris -UNIX, VMS, Windows...
</TABLE>
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors. The C2i
logo and Tool Shed are registered trademarks of the Company. All other brand
names or trademarks appearing in this Prospectus are the property of their
respective holders.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, THE
COMMON STOCK AND THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus,
including information under "Risks Factors." The Units offered hereby involve a
high degree of risk and investors should carefully consider the information set
forth in "Risk Factors." Unless otherwise indicated, all information in this
Prospectus (i) gives effect to the Company's conversion to a Delaware
corporation in September 1997 and (ii) assumes no exercise of (a) the
Underwriter's Over-Allotment Option, (b) the Underwriter Warrants, (c) the
Warrants (including Bridge Warrants) or (d) options granted pursuant to existing
stock option agreements or eligible for grant under the stock option plan the
Company anticipates adopting prior to the effective date of this Offering.
THE COMPANY
C2i is a provider of integrated solutions to address the Year 2000
challenge and to transition legacy applications effectively and efficiently. C2i
employs proven methodology, advanced tools and the expertise of dedicated
professionals to offer a wide variety of Year 2000 services. From assessment
through implementation and testing, C2i brings together the elements required
for cost effective implementation of solutions to the Year 2000 problem.
The "Year 2000 problem" arises from the widespread use of computer
programs that rely on two-digit date codes to perform computations and
decision-making functions. Many of these computer programs may fail from an
inability to interpret date codes properly. For example, such programs may
misinterpret "00" as the year 1900 rather than 2000. These "date-dependent"
programs are found in computer hardware, software and embedded systems used in
many businesses.
The Company's experience in analyzing and its strategy for resolving the
Year 2000 problems of business organizations incorporates its access to a number
of tools and approaches, which enables the Company to develop customized
solutions to a client's specific problems. The Company is able to identify,
evaluate and select specific software approaches and tools that would be most
effective in assisting a client with the Year 2000 update process. In addition,
during this process the Company gains knowledge about many areas of the client's
computer environment, positioning it to provide a broad range of computer
consulting services characterized as "Data Re-Engineering," of which the Year
2000 problem is a subset.
The Year 2000 consulting industry consists of a large number and wide
variety of computer consulting and software companies that offer Year 2000
consulting as part of their services. These companies address those aspects of
the Year 2000 problem that cannot be resolved by in-house information services
personnel. The industry is expected to grow rapidly as business organizations
become aware of the Year 2000 problem and accelerate the pace at which they
analyze their computer systems.
The Company's strategy is to focus its resources on business organizations
that process large volumes of automated transactions involving date
computations, to expand both domestically and internationally, and to refine and
enhance its Year 2000 consulting methodology.
Additionally, the Company intends to use the knowledge and relationships
obtained through its Year 2000 consulting services to implement a long-term,
post-2000 strategy of providing a full line of computer consulting services to
current and future clients, based on tools including hardware, software and
consulting services, particularly replacing modified legacy computer software,
replacing closed hardware systems with open systems including client-server
platforms, and providing experienced consulting teams.
C2i was formed as a limited liability company in California in September
1996 and reorganized as a Delaware corporation in September 1997. The Company's
principal executive offices are located at 4747 Morena Blvd., Suite 101, San
Diego, CA 92117 and the telephone number is (619) 490-1555.
3
<PAGE> 6
THE OFFERING
Securities Offered..................... 1,000,000 shares of Common Stock and
1,000,000 Warrants. Each Warrant
entitles the holder to purchase, at an
exercise price of $_____ (125% of the
initial Share offering price) (subject
to adjustment), one share of Common
Stock during the four year period
commencing one year after the date of
this Prospectus. The exercise price of
the Warrants is subject to adjustment
and the Warrants are subject to
redemption in certain circumstances.
See "Description of
Securities--Warrants."
Capital Stock Outstanding
Prior to this Offering............. 2,391,338 shares of Common Stock(1)
After this Offering................ 3,391,338 shares of Common Stock(2)
Warrants Outstanding:
Prior to this Offering............. 600,000(3)
After this Offering................ 1,600,000 (4)
Use of Proceeds........................ Repayment of $600,000 bridge loan, plus
accrued interest, expansion of
operations center, sales and marketing
efforts, product development and
general corporate and working capital
purposes. See "Use of Proceeds."
Risk Factors........................... This Offering involves a high degree
of risk and immediate substantial
dilution and should not be made by
investors who cannot afford the loss of
their entire investment. See "Risk
Factors" and "Dilution."
Proposed Nasdaq Symbols (5):
Common Stock....................... CTWO
Warrants........................... CTWOW
4
<PAGE> 7
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Period from September 17,
1996 (inception) to Six Months Ended
December 31, June 30,
1996 1997
---- ----
STATEMENTS OF
OPERATIONS DATA:
<S> <C> <C>
Revenues ......................... $ 9,798 $ 36,154
Gross profit ..................... 3,498 12,239
Operating loss ................... (44,338) (1,323,296)
Net loss ......................... (44,338) (1,323,296)
Pro forma net loss per share ..... $ (0.02) $ (0.46)
Shares used in computing pro forma
net loss per share(7)............ 2,874,255 2,874,255
June 30, 1997
BALANCE SHEET DATA: ---------------------------------
As
Actual Adjusted(6)
------ -----------
Cash ............................... $ 83,765 $4,931,945
Working capital .................... 163,051 5,011,231
Total assets ....................... 240,490 5,088,670
Total liabilities .................. 42,796 42,796
Total owners' equity................ 197,694 5,045,874
</TABLE>
- ----------
(1) Does not include (i) 82,500 shares of Common Stock reserved for issuance
under the Company's proposed 1997 Stock Option Plan; (ii) 625,000 shares
of Common Stock reserved for issuance on exercise of options issued to
employees, directors and consultants of the Company; and (iii) 600,000
shares of Common Stock issuable upon exercise of the warrants issued in
connection with the Company's Bridge Financing. See "Capitalization-Bridge
Financing," "Management-Stock Plans," "Description of Securities" and
"Underwriting."
(2) Represents the shares of Common Stock included in the securities offered
hereby and currently outstanding Common Stock, and does not include: (i)
200,000 shares of Common Stock issuable upon exercise of the Underwriter
Warrants and the underlying Warrant Securities; (ii) 82,500 shares of
Common Stock reserved for issuance under the Company's proposed 1997 Stock
Option Plan; (iii) 625,000 shares of Common Stock reserved for issuance
upon exercise of options issued to employees, directors and consultants of
the Company, and (iv) 600,000 shares of Common Stock issuable upon
exercise of the warrants issued in connection with the Company's Bridge
Financing. See "Capitalization-Bridge Financing," "Management-Stock
Plans," "Description of Securities" and "Underwriting."
(3) Represents 600,000 warrants issued in connection with the Company's Bridge
Financing. See "Capitalization-Bridge Financing".
(4) Does not include 100,000 Warrants included in the Warrant Securities.
(5) Notwithstanding initial 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.
(6) As adjusted to reflect the net proceeds from the sale of 1,000,000 Shares
and 1,000,000 Warrants offered hereby at an assumed initial public
offering price of $5.90 per Share and $0.10 per Warrant, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses, and the application of a portion of the net proceeds therefrom
to repay the Bridge Notes.
(7) Gives effect to the issuance of Common Stock and Common Stock equivalents
at prices below the offering price per share during the twelve months
preceding the initial filing of the Company's Registration Statement and
through the effective date of the initial public offering, using the
treasury stock method, as if outstanding since the beginning of each
period presented. See Note 1 to Financial Statements.
5
<PAGE> 8
RISK FACTORS
An investment in the securities offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the securities offered by this Prospectus.
Except for the historical information contained herein, the information in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as with respect to the Company's plans, objectives,
expectations, intentions and strategies. The actual results could differ
materially from those discussed herein. The factors that could affect such
results or contribute to such differences include the following items as well as
other information discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; LIMITED EXPERIENCE IN YEAR 2000 SOLUTIONS
The Company was founded in September 1996, has a very limited
operating history and is in the development stage. As a result, the Company's
operations to date have not produced significant revenues, and there can be no
assurance that the Company will generate any future revenues from the sale of
its services or products.
The Company has limited experience in providing Year 2000 solutions.
Although the Company is in the process of completing its initial assessment
projects, the Company has not completed a large scale Year 2000 conversion
project. There can be no assurance that the Company will be successful in
completing large scale conversions, that the Company will not experience delays
or failures in providing its Year 2000 solutions or that the Year 2000 solutions
will be effective. The failure of the Company's Year 2000 solutions to function
properly or the existence of errors or bugs following completion of a Year 2000
conversion project could necessitate significant expenditures by the Company in
order to attempt to remedy the problems. The consequences of failures, errors
and bugs could have a material adverse effect on the Company's business,
operating results and financial condition.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has experienced significant operating losses since its
inception in September 1996. As of June 30, 1997, the Company's accumulated
deficit was approximately $1,368,000, which includes a non-recurring charge of
approximately $1.2 million, as a result of sales of equity securities to key
employees at less than deemed value for financial statement purposes. Such
losses have been principally the result of the various costs associated with the
Company's selling, general and administrative expenses as the Company commenced
operations, acquired its technology rights and began marketing activities. The
Company expects that it will incur operating losses over at least the next year.
The Company believes that the net proceeds from this Offering, together with its
existing capital resources, will enable it to fund its operations for 12 to 18
months following completion of the Offering. The Company will be required to
seek additional capital to continue its operations beyond that time. If
available, the additional capital may result in dilution to the purchasers of
the Shares and Warrants and underlying securities offered hereby. The Company
has no commitments for any future funding, and there can be no assurance that
the Company will be able to obtain additional capital in the future. If the
Company is unable to obtain the necessary capital, it will be required to
significantly curtail its activities or cease operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
INTENSE INDUSTRY COMPETITION; COMPETITIVE DISADVANTAGES
The market for Year 2000 solutions is highly competitive and is
expected to become increasingly competitive as the year 2000 approaches. The
Company's lack of resources and proven results makes it extremely vulnerable to
competition from larger companies, all of which benefit from greater
recognition, larger lists of reference clients and significantly greater
financial, technical and marketing resources. Leading competitors have proven
products which can provide them with a significant advantage over the Company
because the Company's
6
<PAGE> 9
services have not been widely deployed and therefore present potential customers
with uncertainty not associated with existing solutions from larger companies.
In addition, many of the Company's potential clients are reluctant to choose
small companies as key suppliers or service providers due to concerns about long
term viability and, especially with respect to Year 2000 conversion projects,
the consequences to the organization of a failure of a proposed solution. There
can be no assurance that the Company will overcome these disadvantages.
There can be no assurance that competitors will not develop new
products or services or improve their existing products or services which, when
combined with their existing market presence, would make the Company's solutions
obsolete or unmarketable. Any such development would have a material adverse
effect on the Company. The Company also expects that competition will arise from
new competitors and from new technological approaches adopted by new and
existing competitors. Competitive technologies may be developed which could make
the Company's services obsolete or of diminished utility, thereby materially
adversely affecting the Company. If the Company is unable to respond to the
challenges of competition, there can be no assurance that the Company would be
able to achieve or maintain profitability at a level required to support its
survival or growth. See "Business -- Competition."
UNCERTAIN AND UNDEVELOPED MARKET
The primary focus of the Company's services is resolving the Year
2000 problem. Although the Company believes that the demand for Year 2000
consulting services will grow significantly as the year 2000 approaches, there
can be no assurance that this demand will increase to the extent anticipated by
the Company, if at all. Although the public and the business community appear to
be gaining awareness of the scope of the Year 2000 problem, companies may not be
willing or able to allocate the resources to address this problem in a timely
manner. Many companies may attempt to resolve the problem internally rather than
contract with firms such as the Company. As a result, demand for the Company's
Year 2000 solutions is uncertain and unpredictable. If the demand for the
Company's Year 2000 solutions fails to grow, or grows more slowly than
anticipated, the Company's business, operating results and financial condition
could be materially adversely affected.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; CHARGE TO EARNINGS
At least initially, the Company expects to derive a substantial
portion of its revenues from a relatively small number of contracts. As a
result, a small delay during a quarter in the achievement of milestones
triggering payment to the Company could have a material adverse effect on the
Company's revenues and results of operations for that quarter. In addition, the
Company's need to expand its facilities and the need for continued investment by
the Company in research, development, marketing, customer service and support
capabilities will limit the Company's ability to reduce expenses in response to
any such decrease in sales. Moreover, because customer purchase orders are
subject to cancellation or rescheduling by the customer, backlog at any
particular date is not necessarily representative of actual sales for any
succeeding period. If the Company's anticipated level of revenues is not
achieved for a particular period, the Company's operating results could be
adversely affected by its inability to reduce costs. The impact of these and
other factors on the Company's operating results in any future period cannot be
accurately forecast. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Upon completion of the Offering and repayment of the Bridge Notes, a
non-recurring charge representing the combined debt discount and deferred
finance charge of approximately $135,000 will be charged to operations in the
quarter in which the Offering will be completed, anticipated to be the fourth
quarter of 1997. This will result in a significant decrease in earnings which
the Company might have otherwise achieved in this period. See
"Capitalization--Bridge Financing."
7
<PAGE> 10
COMPLEX SALES CYCLE
Sales of the Company's Year 2000 solutions are characterized by a
relatively complex sales cycle due to such factors as the magnitude of the
expenses associated with implementation of a comprehensive solution at most
organizations, the substantial time required by potential customers to evaluate
the Company's solutions and those of competitors, and the potential consequences
to the organization of a wrong decision, all of which suggest that the decision
will ultimately be made at a level in an organization that is relatively higher
than would otherwise be involved in information system matters. As a result, the
Company will likely be required to devote additional sales and marketing efforts
to concluding sales decisions.
NEED TO DEVELOP NEW PRODUCTS AND SERVICES
The Company currently generates substantially all of its revenues
from, and devotes most of its resources to, its Year 2000 solutions. Although
the Company believes that the demand for its Year 2000 solutions will continue
to exist for a limited period of time after the Year 2000, this demand will
diminish significantly over time and will eventually disappear. Therefore, the
Company plans to actively pursue business opportunities unrelated to the Year
2000 problem in the computer software and consulting market, and to develop
products and services to take advantage of those opportunities. The Company
believes that its future success will depend upon its ability to develop and
enhance its relationships with customers so that it will continue to be called
upon to assist in data conversion projects following the year 2000. To the
extent product offerings and services provided by the Company are based upon
anticipated changes, sales of such products and services may be adversely
affected if other technologies become accepted in the industry. If the Company
does not successfully introduce new products or services in a timely manner, any
competitive position the Company may develop would be lost and the Company's
sales, would be reduced. There can be no assurance that the Company will be able
to develop and introduce enhanced or new products or services which satisfy
customer needs and achieve market acceptance. The Company intends to use a
portion of the proceeds of the Offering to finance its own research and
development activities. The failure of the Company to implement a successful
research and development program would have a material adverse effect upon its
business and prospects.
DEPENDENCE ON LICENSES AND THIRD PARTY TECHNOLOGY
Substantially all of the tools that the Company uses to provide its
Year 2000 solutions are licensed from third parties. The Company's proprietary
software, as well as licensed software, is designed to work on or in conjunction
with certain third party hardware and/or software products. If any of these
licensors or third party vendors were to discontinue making their products
available to the Company, or to increase materially the cost to the Company to
acquire, license or purchase the products, or if a material problem were to
arise in connection with the ability of the Company to use and operate with
third party hardware and/or software products, the Company would be required to
redesign its solutions to function with or on alternative third party products
or attempt to develop internally a replacement for the third party products. In
such an event, interruptions in the availability or functioning in the Company's
Year 2000 solutions and delays in the introduction of new products and services
may occur until equivalent technology is obtained. There can be no assurance
that alternative sources of suitable technology would be available or that the
Company would be able to develop an alternative product in sufficient time or at
a reasonable cost. The failure of the Company to obtain or develop alternative
technologies or products on a timely basis and at a reasonable cost could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company relies on trade secret and copyright protection for its
products and technology. The Company believes that its licensors use similar
means of protecting their technologies.
8
<PAGE> 11
In the absence of significant proprietary protection, competitors
may be able to copy the Company's technology or design approaches, replicate its
processes or gain access to its trade secrets. Moreover, there can be no
assurance that competitors will not be able to develop technologies similar to
or more advanced than the Company's or design around any protected aspects of
the Company's technology rights. No assurance can be given that the Company's
current or future products or services will not infringe on the rights of
others.
There has been substantial litigation regarding intellectual
property rights in computer software related industries. In the future,
litigation may be necessary to enforce technological rights of the Company, to
protect trade secrets or know-how owned or licensed by the Company or to defend
the Company against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Any such
litigation would likely result in substantial cost and diversion of effort by
the Company, which by itself could have a material adverse effect on the
Company's business, financial condition and operating results. Further, adverse
determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent the
Company from providing its services, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Intellectual Property Rights."
The Company also relies on trade secrets and proprietary technology
that it seeks to protect, in part, through confidentiality agreements with
employees, consultants and other parties. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by others.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF EXPANDING OPERATIONS
The Company's success will, to a large extent, depend upon the
continued services of its executive officers who have limited experience at
managing a business like the Company's. The loss of services of any of these
executive officers would materially and adversely affect the Company. The
Company's employment agreements with its key personnel may be terminated by
either party, with or without cause, with the exception of Mr. Whalen's. Mr.
Whalen's employment agreement has a term of five years, expiring in May 2002,
and limits the Company's ability to terminate him, except for cause, and
provides for six months severance pay, unless Mr. Whalen voluntarily resigns his
position. The Company is in the process of securing key man life insurance in
the amount of $1,000,000 on Mr. Whalen.
The Company's plans to expand its business are expected to place a
significant strain on the Company's management, operational and financial
resources and systems. To manage its expanding operations, the Company must,
among other things, improve its operational, financial and management
information systems, including its billing, accounts receivable and payable
tracking, fixed assets and other financial management systems. The Company must
also attract, retain and train additional highly qualified management,
technical, sales and marketing and customer support personnel. The process of
locating such personnel with the combination of skills and attributes required
to implement the Company's strategy is often lengthy. The loss of the services
of key personnel, or the inability to attract and train additional qualified
personnel, could have a material adverse effect upon the Company's business and
results of operations.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company plans to acquire assets or businesses complimentary to
its operations, although no specific acquisitions are currently in negotiation
or planned. Any such future acquisitions would be accompanied by the risks
commonly encountered in acquisitions of companies. Such risks include, among
other things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's business, the
inability of the Company's management to maximize the financial and strategic
position of the Company by the incorporation of acquired technology or business
into the Company's service offerings, the difficulty of maintaining uniform
standards, controls, procedures and policies, the potential loss of key
employees of acquired companies, and the impairment of relationships with
employees and customers as a result of changes in management. No assurance can
be given that the Company will undertake acquisition activities, will complete
any
9
<PAGE> 12
acquisitions, or that if an acquisition does occur it will not materially and
adversely effect the Company or will be successful in enhancing the Company's
business. If the Company proceeds with one or more significant acquisitions, a
substantial portion of the Company's available cash, including proceeds of this
Offering, could be used to consummate those transactions. Alternatively,
stockholders of the Company could suffer significant dilution of their ownership
interest in the Company. The accounting for business acquisitions of the type of
businesses that would likely be attractive acquisition candidates for the
Company is likely to involve the recognition of significant goodwill and
intangible assets in connection with the acquisition and, as a result, would
typically result in substantial amortization of the charges against the
Company's reported financial results.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A key component of the Company's strategy is its planned expansion
into international markets. The Company has no previous experience in working
with international customers and there can be no assurance that the Company will
be able to successfully market, sell and deliver its products and services in
these markets. In addition to the uncertainty as to the Company's ability to
create an international presence, there are risks inherent in doing business on
an international level, such as unexpected changes and regulatory requirements,
export restrictions, export controls, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable, political instability, fluctuations
in currency exchange rates, and potential adverse tax consequences that could
adversely effect the Company's international operations, any one of which could
have a material adverse effect on the Company's business, financial conditions
and results of operations.
POTENTIAL LIABILITIES ASSOCIATED WITH YEAR 2000 SERVICES
The Company's Year 2000 solutions involve key aspects of its
client's computer systems. A failure in a client's system could result in a
claim for substantial damages against the Company, regardless of the Company's
responsibility for such failure. The Company attempts to limit by contract, both
with its customers and with the parties that license technology to the Company,
its liability for damages arising in rendering its products and services.
Despite this precaution, there can be no assurance that the limitations of
liabilities set forth in its contracts would be enforceable or would otherwise
protect the Company from liability for damages. There can be no assurance that
the Company will be able to obtain or maintain insurance coverage for such
liabilities, that such coverage will continue to be available on acceptable
terms, or that such coverage will be available in amounts to cover one or more
large claims. The assertion of claims against the Company that exceed available
insurance coverage, or changes in the Company's insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could have a material adverse effect on the Company's business,
financial condition and results of operation. Furthermore, litigation,
regardless of its outcome, could result in substantial cost to the Company and
divert management's attention from the Company's operations. Any contract
liability claim or litigation against the Company could, therefore, have a
material adverse effect on the Company's business, financial condition or
results of operations.
BROAD DISCRETION AS TO USE OF PROCEEDS
With the exception of approximately $610,000 for repayment of the
Bridge Notes and interest accrued thereon, the net proceeds to the Company from
this Offering will be used, as determined by management in its sole discretion,
for expansion of the business, working capital and general corporate purposes,
as well as for the possible acquisition of or investment in complimentary
business and technologies. The Company has not determined the specific
allocation of net proceeds after repayment of the Bridge Notes, among the
various uses described above. Accordingly, investors in this Offering will rely
upon the judgment of the Company's management with respect to the use of
proceeds, with only limited information concerning management's specific
intentions. See "Use of Proceeds."
10
<PAGE> 13
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price of the Shares is substantially
higher than the tangible book value per share of Common Stock. Investors
purchasing Shares in this Offering will therefore incur immediate, substantial
dilution. To the extent that the Warrants, the Underwriter Warrants, or
outstanding stock options are exercised, there will be further dilution. See
"Dilution."
CONCENTRATION OF SHARE OWNERSHIP AND VOTING POWER
Following the Offering, the directors and officers of the Company
will control approximately 62% of the voting power and will be able to elect all
of the Company's directors and, hence, will be able to control the affairs of
the Company. In addition, the directors and officers of the Company will,
subject to certain limitations imposed by applicable law, be able to, among
other things, amend the Company's Certificate of Incorporation and By-laws and
effect or preclude fundamental corporate transactions involving the Company,
including the acceptance or rejection of any proposals relating to a merger of
the Company or an acquisition of the Company by another entity, in each case
without the approval of any of the Company's other stockholders. See "Principal
Stockholders" and "Description of Securities."
POTENTIAL ADVERSE EFFECT OF AUTHORIZED BUT UNISSUED PREFERRED STOCK ON HOLDERS
OF COMMON STOCK; ANTI-TAKEOVER EFFECTS
The Board of Directors has authority to issue up to 1,000,000 shares
of Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of the 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 desirable flexibility in connection with
possible acquisitions 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, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred Stock
may have other rights, including economic rights senior to the Common Stock,
and, as a result, the issuance thereof could have a material adverse effect on
the market value of the Common Stock. The Company has no present plans to issue
shares of Preferred Stock. See "Description of Securities."
NO PRIOR TRADING MARKET; POTENTIAL PRICE VOLATILITY
Prior to the Offering there has been no public market for the
Shares, the Warrants or any of the underlying securities, and there can be no
assurance that an active market will develop or be sustained. The initial public
offering prices of the Shares and Warrants and the terms of the Warrants have
been negotiated between the Company and the Underwriter and are not related to
the Company's asset value, net worth or results of operations, and may not be
indicative of future market prices. See "Underwriting" for information related
to the method of determining the initial public offering prices.
The Company believes factors such as quarterly fluctuations in
results of operations, announcements of new orders by the Company and changes in
either earnings estimates of the Company or investment recommendations by stock
market analysts may cause the market price of the Shares, the Warrants and the
underlying securities to fluctuate, perhaps substantially. In addition, in
recent years the stock market in general, and the shares of technology companies
in particular, have experienced extreme price fluctuations which are likely to
continue. These broad market and industry fluctuations may adversely affect the
market price of the Shares, the Warrants and the underlying securities.
POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET AND MARKET ILLIQUIDITY
While the Company's Common Stock and Warrants are expected to meet
the current Nasdaq SmallCap Market initial listing requirements, there can be no
assurance that such securities will meet the continued listing requirements.
Under criteria that will come into effect in early 1998 for continued inclusion
on the Nasdaq
11
<PAGE> 14
SmallCap Market, (i) the Company will have to maintain at least $2,000,000 in
net tangible assets or $35,000,000 market capitalization or achieve net income
of $500,000 for two of the last three years, (ii) the minimum bid price of the
Common Stock will have to be $1.00 per share, (iii) there must be at least
500,000 shares in the public float valued at $1,000,000 or more, (iv) the Common
Stock must have at least two active market makers, and (v) the Common Stock must
be held by at least 300 holders.
If the Company is unable to satisfy the Nasdaq SmallCap Market's
maintenance requirements, its securities may be delisted from the Nasdaq
SmallCap Market. In such event, trading, if any, in the 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.
The Shares, the Warrants and the underlying securities have not been
qualified or registered in all states and will not be eligible for trading
unless an exemption from the qualification or registration requirements is
available. There can be no assurance that any such exemption will become
available in any jurisdiction.
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S SECURITIES
The Underwriter has advised the Company that SouthWall Capital Corp.
intends to make a market in the Company's securities. Regulation M of the
Securities and Exchange Commission (the "Commission") under the Securities
Exchange Act of 1934, as amended (the "1934 Act") may prohibit SouthWall Capital
Corp. from engaging in any market making activities with regard to the Company's
securities for the period from nine business days (or such other applicable
period as Regulation M may provide) prior to any solicitation by the Underwriter
of the exercise of Warrants until the later of the termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
that the Underwriter may have to receive a fee for the exercise of Warrants
following such solicitation. As a result, SouthWall Capital Corp. may be unable
to provide a market for the Company's securities during certain periods while
the Warrants are exercisable. Any temporary cessation of such market-making
activities could have an adverse effect on the market price of the Company's
securities.
RISK OF LOW-PRICED STOCKS
The Commission has adopted regulations which define a "penny stock"
to be any equity security that has a market price (as therein defined) 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 current quotations for the
securities and about commissions payable to both the broker-dealer and the
registered representative. Finally, broker-dealers must send monthly statements
to purchasers of penny stocks 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 (i) they are listed on the Nasdaq SmallCap Market, (ii)
certain price and volume information is publicly available on a current and
continuing basis, and (iii) 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 the penny stock restrictions. 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.
12
<PAGE> 15
LIMITED OFFERING EXPERIENCE OF UNDERWRITER
The underwriter has been in business since May 1996. Prior to this
Offering, the underwriter has only co-managed one other offering of securities
and has acted as an underwriter in several other offerings. There can be no
assurance that the underwriter's limited offering experience and small size
relative to other broker-dealers will not adversely affect this Offering or the
subsequent development, if any, of a trading market for the Common Stock and
Warrants. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
During the four-year period commencing one year from the date of
this Prospectus, the Warrants may be redeemed by the Company, with the
Underwriter's prior written consent, at a redemption price of $.01 per Warrant
upon not less than 30 days' notice if the closing bid price of the Common Stock
is at least 150% of the then current exercise price of the Warrants for 20
consecutive trading days ending on the third day prior to the Notice of
Redemption. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price therefor at a time when it may be
disadvantageous for the holders to do so, to sell the Warrants at the then
current market price (which will likely be adversely affected by the impending
redemption of the Warrants) when they might otherwise wish to hold the Warrants,
or to accept the redemption price, which, at the time the Warrants are called
for redemption, is likely to be substantially less than the market value of the
Warrants. See "Description of Securities -- Warrants."
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS
Holders of Warrants will only be able to exercise the Warrants if
(i) a current prospectus under the Securities Act of 1933, as amended (the
"Securities Act") relating to the securities underlying the Warrants is then in
effect and (ii) such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company has undertaken to use
its best efforts to maintain the effectiveness of a current prospectus covering
the securities underlying the Warrants, there can be no assurance that the
Company will be able to do so. There also can be no assurance that exemptions
from the registration or qualification requirements of those states in which the
Company's securities are not currently registered or qualified will be available
at the time a Warrant holder wishes to exercise his or her Warrant. The value of
the Warrants may be greatly reduced if a current prospectus, covering the
securities issuable upon the exercise of the Warrants, is not kept effective or
if such securities are not qualified, or exempt from qualification, in the
states in which the holders of Warrants reside. See "Description of Securities
- -- Warrants."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Immediately following this Offering, there will be an aggregate of
3,391,338 shares of Common Stock outstanding. Of these shares, the 1,000,000
shares of Common Stock offered hereby will be freely tradable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), unless such shares are held by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 2,391,338 shares, and any shares issued upon
exercise of the Bridge Warrants or stock options, were or will be sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act and are or will be "restricted" securities within the meaning of
Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or 701 promulgated under the
Securities Act.
Holders of the Warrants will be entitled to purchase an aggregate of
1,000,000 additional shares of Common Stock upon exercise of the Warrants at any
time during the four year period commencing one year from the date of this
Prospectus, provided that the Company satisfies certain securities registration
and qualification requirements with respect to the securities underlying the
Warrants. Any and all shares of Common Stock purchased upon exercise of the
Warrants will be freely tradable, provided such registration requirements are
met.
13
<PAGE> 16
The holders of the Underwriter Warrants have been granted
registration rights with respect to all shares purchased upon exercise of the
Underwriter Warrants and the underlying securities. The sale, or availability
for sale, of substantial amounts of Common Stock in the public market subsequent
to this Offering could adversely affect the prevailing market price of the
Common Stock and could impair the Company's ability to raise additional capital
through the sale of its equity securities. See "Shares Eligible for Future Sale"
and "Underwriting."
NO DIVIDENDS ANTICIPATED
The Company has never paid any cash dividends on its Common Stock.
The Company anticipates that in the future, earnings, if any, will be retained
for use in the business or for other corporate purposes, and it is not
anticipated that cash dividends in respect of the Common Stock will be paid. See
"Dividend Policy."
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000
Shares and 1,000,000 Warrants offered by the Company hereby are estimated to be
approximately $4,875,000 ($5,658,000 if the Underwriters' over-allotment option
is exercised in full) at an assumed public offering price of $5.90 per Share and
$0.10 per Warrant and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company.
The Company intends to use approximately $610,000 of those proceeds
to repay the principal and accrued interest of outstanding Bridge Notes issued
in the Bridge Financing. The Bridge Financing was completed in October 1997,
with the proceeds used to finance operations and provide working capital to the
Company.
The Company intends to use the remaining proceeds to fund the costs
associated with the expansion of its operations center, sales force, marketing
efforts, development of its products and services, including capital
expenditures, working capital and other general corporate purposes required to
support the anticipated growth of the business. A portion of the proceeds may
also be used to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. While from time to time the
Company may evaluate potential acquisitions of such businesses, products or
technologies, there are no present understandings, commitments or agreements
with respect to any acquisition of other businesses, products or technologies.
Any additional proceeds received upon exercise of the Over-Allotment
Option, the Underwriter Warrants or the Warrants will be added to working
capital. Pending utilization, the net proceeds of the Offering will be invested
in short-term, interest-bearing investments.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock. It
is the present policy of the Company to retain earnings to finance the growth
and development of the business and, therefore, the Company does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company (i)
at June 30, 1997, (ii) on a pro forma basis to reflect the new capital structure
of the Delaware corporation and the completion of the Bridge Financing, and
(iii) as adjusted to reflect the sale of the 1,000,000 Shares and 1,000,000
Warrants offered hereby at an assumed public offering price of $5.90 per Share
and $0.10 per Warrant, the application of a portion of the estimated net
proceeds therefrom to repay Bridge Notes, and a charge of approximately $135,000
in connection with the Bridge Notes, after deducting the underwriting discounts
and commissions and estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------
Actual Pro Forma As Adjusted
--------- ----------- -----------
<S> <C> <C> <C>
Bridge Notes payable(1) .......................... $ -- $ 492,000 $ --
Owners' equity:
Owners' equity-capital contributions
2,390,788 units outstanding, actual............. 1,565,328 -- --
Preferred Stock - par value $.001;
1,000,000 shares authorized;
no shares issued and outstanding,
actual, pro forma and as adjusted .............. -- -- --
Common Stock - par value $.001;
10,000,000 shares authorized;
2,390,788 shares issued and
outstanding, pro forma; 3,390,788
shares issued and outstanding as
adjusted(2).................................... -- 2,391 3,391
Additional paid-in capital ....................... -- 1,562,937 6,336,937
Warrants to acquire Common Stock ................. -- 108,000 208,000
Accumulated deficit .............................. (1,367,634) (1,367,634) (1,502,455)
---------- ---------- ----------
Total owners' equity ...................... 197,694 305,694 5,045,873
---------- ---------- ----------
Total capitalization ................. 197,694 797,694 5,045,873
========== ========== ==========
</TABLE>
- ----------
(1) The Bridge Notes were issued in October 1997 and are payable on the
earlier of September 30, 1999 or the completion of the Offering. See Note
4 of the Notes to Financial Statements.
(2) Does not include 2,425,000 shares issuable upon exercise of outstanding
warrants and options, or 82,500 shares reserved for future stock option
grants.
BRIDGE FINANCING
In October 1997, the Company completed the Bridge Financing in which
it sold, to 36 accredited investors, an aggregate of $600,000 principal amount
of Bridge Notes and 600,000 Bridge Warrants and received net proceeds of
approximately $573,000 (after expenses of such offering). The Bridge Warrants
entitle the holders thereof to purchase, during the one year period beginning
one year after completion of this Offering, one share of Common Stock at a
purchase price of the lower of (i) $4.00 per share or (ii) 2/3 of the offering
price to the public of a Share and a Warrant.
For financial statement purposes, the Bridge Financing has been
allocated $108,000 to warrants, $492,000 to Bridge Notes payable and $27,000 to
deferred finance charges. The Bridge Notes are payable, together with interest
at the rate of 10% per annum, on the earlier of September 30, 1999 or the
closing of the Offering. The resulting $135,000 of combined debt discount and
deferred finance charges will be charged to expense using the interest method
over the term of the Bridge Notes or upon the retirement of the Bridge Notes,
currently expected to occur in the fourth quarter of 1997 with the proceeds of
the Offering. See "Use of Proceeds."
16
<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company as of June 30,
1997 was $277,688 or $0.12 per share of Common Stock. "Pro forma net tangible
book value" per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities and divided by the total
number of outstanding shares of Common Stock. The pro forma adjustment to the
historical net book value gives effect to the new capital structure of the
Delaware corporation and the completion of the Bridge Financing. See Notes to
Financial Statements. After giving effect to the sale of 1,000,000 Shares and
1,000,000 Warrants offered hereby at an assumed initial public offering price of
$5.90 per Share and $0.10 per Warrant (after deducting underwriting discounts,
commissions and other estimated offering expenses, anticipated to aggregate
$1,125,000), the net tangible book value of the Company, as adjusted, at June
30, 1997 would have been $5,044,688 or $1.49 per share. This represents an
immediate increase from pro forma net tangible book value per share to pro forma
net tangible book value per share, as adjusted, of $1.37 per share to existing
stockholders and an immediate dilution of $4.51 per share to new investors
purchasing Shares and Warrants in this Offering. The following table illustrates
this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per Share and Warrants ................ $ 6.00
Pro forma net tangible book value per share as of June 30, 1997
before the Offering ................................... $0.12
Increase per share attributable to new investors .............. 1.37
-----
Pro forma net tangible book value per share as of June 30, 1997
after the Offering .................................... 1.49
-----
Dilution per share to new investors ................................. $4.51
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by the new investors at an assumed initial public offering price of $6.00
per Share and Warrant:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders 2,390,788 70.5% $1,565,328 20.7% $ .66
New investors ....... 1,000,000 29.5% 6,000,000 79.3% 6.00
--------- ----- ---------- ------ --------
Total: ....... 3,390,788 100.0% $7,565,328 100.00% $ 2.23
========= ===== ========== ====== ========
</TABLE>
The above computations assume no exercise of options or warrants to
purchase shares of Common Stock. As of November 3, 1997, there were outstanding
options to purchase 625,000 shares of Common Stock at a weighted average
exercise price of $2.96 share and outstanding warrants to purchase 600,000
shares of Common Stock at a weighted average exercise of $4.00 per share. The
above computations also exclude 200,000 shares of Common Stock issuable upon
exercise of the Underwriter Warrants and the Warrants included therein. To the
extent outstanding options or warrants are exercised in the future, there will
be further dilution to new investors. See "Capitalization--Bridge Financing,"
"Management--Stock Plans" and Notes 2 and 4 to Financial Statements.
17
<PAGE> 20
SELECTED FINANCIAL DATA
The selected historical financial data set forth below is qualified
by reference to, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto and the discussion thereof included elsewhere in
this Prospectus.
The following selected statement of operations data for the period
from inception (September 17, 1996) through December 31, 1996 and the balance
sheet data as of December 31, 1996 are derived from the financial statements of
the Company, included elsewhere in this Prospectus, which have been audited by
Ernst & Young LLP, independent auditors. The statement of operations data
presented below for the six months ended June 30, 1997 and the period from
inception (September 17,1996) through June 30, 1997, and the balance sheet data
as of June 30, 1997, are derived from unaudited financial statements included
elsewhere in this Prospectus. The unaudited statement of operations data and
balance sheet data have been prepared by the Company on a basis consistent with
the Company's audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information. The results of operations for the six months
ended June 30, 1997, are not indicative of results to be expected for the year
ending December 31, 1997 or for any future period.
<TABLE>
<CAPTION>
Period from inception Six Months Period from inception
(September 17, 1996) Ended (September 17, 1996)
through December 31, June 30, through June 30,
1996 1997 1997
-------------------- ---------- -------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues ........................ $ 9,798 $ 36,154 $ 45,952
Cost of revenues ................ 6,300 23,915 30,215
----------- ----------- -----------
Gross profit .................... 3,498 12,239 15,737
Selling, general and
administrative expenses......... 47,836 1,335,535 1,383,371
----------- ----------- -----------
Operating loss .................. (44,338) (1,323,296) (1,367,634)
----------- ----------- -----------
Net loss ........................ $ (44,338) $(1,323,296) $(1,367,634)
=========== =========== ===========
Pro forma net loss per share .... $ (0.02) $ (0.46)
=========== ===========
Shares used in computing pro
forma net loss per share....... 2,874,255 2,874,255
=========== ===========
BALANCE SHEET DATA
(AT PERIOD END):
Cash $ 16,467 $ 83,765
Working capital 94,352 163,051
Total assets 144,397 240,490
Total liabilities 31,235 42,796
Total owners' equity 113,162 197,694
</TABLE>
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in such forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the financial statements and notes thereto
included elsewhere in this Prospectus.
OVERVIEW
The Company has developed relationships with leading providers of
Year 2000 software products, two international hardware manufacturers, and a
multinational consulting organization offering solutions to its customers with a
wide variety of service choices and alternatives intended to match their
specific needs in achieving Year 2000 compliance. The Company was founded in
1996, has a very limited operating history and is in the development stage. As a
result, the Company's operations to date have not produced significant revenues.
In view of the early stage of the Company's development and
development costs relating to the Company's Year 2000 solutions, the resulting
change in the Company's product mix and anticipated increases in selling,
general and administrative expenses associated with its anticipated increased
activity levels, the Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Specifically, as the Company increases its workforce in order to
identify, capture and meet the anticipated demand for the Year 2000 solutions,
it expects to incur (i) salary, commission, travel and office expenses
associated with implementing a direct sales force; (ii) training, salary and
other direct service related costs prior to the recognition of related revenues;
and, (iii) personnel, lease and other office expenses and general overhead
associated with the creation of a general and administrative infrastructure
necessary to support the anticipated future growth. The Company also expects to
commence payment in December 1997 of salaries to its officers. Prior to December
1997, the Company had not incurred any significant salary expense for its
officers since inception. Additionally, the Company expects to incur non-cash
compensation expenses related to the granting of stock options at exercise
prices below their fair values, as it hires key employees in anticipation of an
expected increase in business activity. Such expenses are anticipated to be
significant in order to attract qualified individuals in the early stages of the
Company's operations. In addition, most of the Company's revenues are expected
to be derived from a relatively small number of large-scale comprehensive Year
2000 conversion projects provided by the Company and its strategic partners. As
a result, the Company's revenues and operating results are subject to
substantial variations in any given year and from quarter to quarter.
Additionally, during the three months ending December 31, 1997, the Company
expects to recognize a charge to operations arising from the Bridge Financing of
approximately $135,000, representing the combined debt discount and deferred
finance charge. However, there can be no assurance that the Company will be
successful in generating future revenues from the sale of its services,
attracting and retaining qualified personnel or successfully completing an
initial public offering of its securities, as contemplated herein. See "Risk
Factors--Fluctuations in Quarterly Operating Results; Charge to Earnings" and
"Capitalization--Bridge Financing."
The Company believes that the demand for its Year 2000 solution will
continue to exist for some time after the year 2000, although the demand will
diminish significantly over time and will eventually disappear. The Company
plans to continue actively pursuing business opportunities unrelated to the Year
2000 problem in the computer software and consulting market, with a focus on the
conversion marketplace, and to develop products and services to take advantage
of these opportunities. However, there can be no assurance that the Company will
be able to successfully expand its business beyond the Year 2000 conversion
market. The failure to diversify and develop additional computer software and
consulting services would materially adversely affect the Company's business,
operating results and financial condition. See "Risk Factors--Need to Develop
New Products and Technologies."
19
<PAGE> 22
Revenue associated with performance under contracts to provide Year
2000 computer consulting and reengineering services is recognized utilizing the
percentage-of-completion method in the ratio that labor-hours incurred to date
bear to estimated total labor-hours at completion, provided that collection of
the related receivable is probable. Adjustments to contract cost estimates are
made in the periods in which the facts which require such revisions become
known. If the revised estimates indicate a loss, such loss will be provided for
currently in its entirety. The costs of providing warranty and follow-on
customer support related to services performed are currently non-existent. In
the future such costs are not expected to be significant and will be accrued.
The Company recognizes revenue from the sale of software and
hardware products upon delivery of the product to customers, when collection is
assured. Revenues on sales of software products to customers which require
significant continued obligation from the Company are deferred until such
obligations are no longer significant.
RESULTS OF OPERATIONS
The following tables sets forth, for the periods indicated, certain
items from the Company's statements of operations as a percentage of total
revenue:
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION PERIOD FROM
(SEPTEMBER 17, INCEPTION
1996) THROUGH SIX MONTH (SEPTEMBER 17,
DECEMBER 31, PERIOD ENDED 1996) THROUGH
1996 JUNE 30, 1997 JUNE 30, 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Revenues
100.0% 100.0% 100.0%
------- ------- -------
Costs and expenses:
Cost of revenues 64.3% 66.2% 65.8%
Selling, general and administrative 488.2% 3,694.0% 3,010.5%
------- ------- -------
Total costs and expenses 552.5% 3,760.2% 3,076.3%
------- ------- -------
Net loss (452.5)% (3,660.2)% (2,976.3)%
======= ======= =======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997.
Revenues. The Company's revenues of $36,154 consist primarily of fees
received for the sale or use of software and hardware products ($20,250), and
consulting fees for services provided ($15,904) in connection therewith.
Cost of Revenues. Cost of revenues consists primarily of
personnel-related cost of providing software consulting services. Cost of
revenues also includes third party royalties relating to licensed technology,
and costs of products sold. Cost of revenues for the period ended June 30, 1997
was approximately 66% of revenues.
Selling, general and administrative. Selling, general and administrative
expenses were $1,335,535 for the period ended June 30, 1997, which includes a
non-recurring charge of $1,199,999, recognized for financial statement purposes,
as a result of sales of equity securities to key employees at below the deemed
fair value. Other selling, general and administrative expenses primarily related
to employee compensation, overhead costs to support the growth in the Company's
workforce, as well as continued increases in sales and marketing activities. The
Company expects that selling, general and administrative expenses will increase
following the completion of this
20
<PAGE> 23
Offering when three executive officers who are currently waiving their rights to
employment compensation begin to be compensated by the Company.
FISCAL YEAR ENDED DECEMBER 31, 1996.
Revenues. The Company was founded in September 1996 and as a result had
limited revenues and related cost of revenues in the period ended December 31,
1996.
Selling, general and administrative. Selling, general administrative
expenses were $47,836 for the period ended December 31, 1996 and primarily
related to costs incurred to establish the Company's infrastructure and internal
operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through capital contributions and a Bridge Financing in October 1997. See
"Capitalization--Bridge Financing". To date, the Company has raised
approximately $960,000 in total from the sale and issuance of debt and equity
securities, including warrants. Funds from these sources have been and are
expected to continue to be used to fund the expansion of the Company's
infrastructure and internal operations, including purchases of capital equipment
and the hiring of additional personnel.
The Company generated negative cash flow from operating activities of
$41,343 and $110,158 in the period from inception (September 17, 1996) through
December 31, 1996 and for the six months ended June 30, 1997, respectively. The
increase in the net cash used for operating activities in 1997 over 1996 is
primarily attributed to a larger net loss for the six months ended June 30, 1997
as a result of the continued expansion of the Company's operations, only
slightly offset by a modest increase in revenues and collection of accounts
receivable.
The Company's investing activities have consisted primarily of equipment
purchases to support the additional personnel being hired, and amounted to
$23,028 and $20,630 for the periods ended December 31, 1996 and June 30, 1997,
respectively. The Company currently has no significant commitments for capital
expenditures, however, assuming the Company realizes an increased demand for its
services, and a corresponding increase in personnel, future capital expenditures
could be significant.
The Company's financing activities provided $80,838 and $198,086 for the
periods ending December 31, 1996 and June 30, 1997 respectively. The Company
received an advance from a former owner of $45,000 in 1996. In addition, the
Company sold an aggregate of $157,500 of owners' equity in 1996, of which
$60,000 was collected in 1996. In 1997, the remaining $97,500 was collected and
an additional $200,000 of owners' equity was sold, providing the Company with
an additional $100,000 in cash, and capital subscriptions receivable of $100,000
at June 30, 1997.
As of June 30, 1997, the Company had cash of $83,765 and working capital
of $163,051. In October 1997, the Company completed a Bridge Financing of
$600,000, which resulted in net proceeds to the Company of $573,000 (after
deducting selling commissions and expenses of $27,000).
The Company believes that net proceeds from the sale of Common
Stock and Warrants offered hereby, together with existing cash and anticipated
funds from operations will be sufficient to repay its Bridge Financing and to
fund it capital expenditures, working capital and other cash requirements for at
least the next twelve months. However, the Company expects to continue to
experience operating losses and to have negative cash flow from operations for
the foreseeable future. To the extent that the Company's sources of capital are
insufficient to fund the Company's activities in the short or long term, the
Company may need to raise additional funds through public or private financings.
There can be no assurance that additional financings will be available as needed
or, if available, will be on terms acceptable to the Company.
21
<PAGE> 24
The timing and amount of the Company's capital requirements will
depend on a number of factors, including demand for the Company's products and
services, the need to develop new or enhanced products and services, competitive
pressures and the availability of complementary businesses or technologies that
the Company may wish to acquire. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's
stockholders will be diluted and such equity securities may have rights,
preferences or privileges senior to those of the holders of the Company's Common
Stock. There can be no assurance that additional financing will be available
when needed or that, if available, such financing will include terms favorable
to the Company or its stockholders. If adequate funds are not available on
acceptable terms, the Company may be unable to develop or enhance its products
and services, take advantage of opportunities or respond to competition, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
22
<PAGE> 25
BUSINESS
INTRODUCTION
C2i is a provider of integrated solutions including hardware, software
and consulting services to address the Year 2000 challenge and to transition
legacy software applications effectively and efficiently achieving Year 2000
compliance. C2i employs proven methodology, advanced tools and the expertise of
dedicated professionals to offer a wide variety of Year 2000 services. From
assessment through implementation and testing, C2i brings together the elements
required for cost effective implementation of solutions to the Year 2000
problem. C2i began providing Year 2000 related services and products in late
1996, however, the Company has limited experience in providing Year 2000
solutions. As of the date of this Registration Statement, the Company has not
completed a large scale Year 2000 conversion project.
BACKGROUND
Organizations periodically perform complex conversions on their
information systems in order to respond to changing environments. These
conversions can include operating system migrations, programming language
upgrades and application changes, such as data field expansions to accommodate
additional digits in telephone numbers, zip codes and account numbers. The
largest and most immediate conversion need currently facing users of information
systems is caused by the Year 2000 problem, the potential errors and failures
resulting from widespread use of computer programs utilizing two-digit year
codes when calculating dates after December 31, 1999.
As the end of the century approaches, the Year 2000 problem is gaining
increased attention in the media and business community. Although many of the
computer programs recently written are designed to accommodate the year 2000, a
large number of mission critical programs currently in use lack the ability to
properly interpret date codes representing the year 2000 and beyond. For
example, these programs using two-digit year codes may misinterpret "00" as the
year 1900 rather than 2000, resulting in faulty information processing or
reporting and potential failures of related systems controlled by date codes or
date code comparisons.
Businesses which are not ready for the Year 2000 problem will experience
significant operating difficulties. Many software applications depend on the way
dates are compared, used in calculations and sorted. These software applications
include financial services applications, billing, scheduling and planning. The
Company estimates that in many large-scale MVS environments millions of lines of
code will need to be scanned to find all occurrences of date-related
instructions, including data structure definitions and all related processing
instructions. These instructions must then be changed to handle year 2000
calculations correctly. Once these potential problems are addressed, changes to
application software may necessitate a corresponding change to the data used by
that software, including the millions of records often contained in an
organization's database.
The Year 2000 problem is particularly important to large organizations
with mainframe computer systems, such as banks, securities firms, insurance
companies, healthcare providers, government agencies and transportation
companies. Solving the Year 2000 problem is essential in order for these
organizations to conduct their businesses.
The worldwide cost of solving the Year 2000 problem has been estimated
by industry sources to be $300 billion to $600 billion over the next few years.
Much of these costs are expected to relate to conversion solutions for IBM MVS
mainframe systems. As a result of limitations on an organization's internal
resources and expertise, C2i believes it is likely that a substantial portion of
the Year 2000 update process will be outsourced. Thus, the market for conversion
solutions provided by independent consultants is expected to grow rapidly as
business organizations become aware of the Year 2000 problem and recognize their
own limitations in solving the problem internally.
23
<PAGE> 26
As a result of the size of the Year 2000 problem and its critical
importance to many organizations, there are many tools and methodologies, each
with a different approach, that have been developed to address the Year 2000
problem. This has produced a situation where organizations are faced with a
difficult task of selecting from a confusing array of claims and potential
solutions.
THE C2I SOLUTION
C2i has developed relationships with leading providers of Year 2000
tools to provide its customers with a wide variety of service choices and
alternatives. Through its access to a number of tools and approaches, C2i is
able to recommend and select solutions intended to match a customer's specific
needs. C2i's tools scan and analyze software components, assess and evaluate the
software structure, including date-related fields and their respective
processing instructions, produce a range of reports and support semi-automatic
and automatic conversion of most of the information systems components. The
conversion involves both changes in the data and related software through data
field expansion, and if data field expansion is not possible, application logic
changes. By increasing the amount of automation in the conversion process, these
tools reduce overall conversion time and cost. The Company combines its licensed
technology with related consulting services, training and support to deliver
Year 2000 solutions for the IBM MVS mainframe and other platform environments.
STRATEGY
EXPLOIT YEAR 2000 OPPORTUNITIES. The flaw in the programming code of
current legacy systems has produced a threat for many companies of significant
liabilities, business interruption and computer system failure. C2i intends to
employ its hardware, software, programming and consulting skills to satisfy the
market need for its services.
UTILIZE STRATEGIC RELATIONSHIPS TO OBTAIN ASSIGNMENTS. C2i intends
to use the leads generated by the software providers with whom it has
established a VAR relationship to overcome the initial reluctance of customers
to retention of a smaller company, such as C2i, to address critical
organizational needs.
EXPAND CHOICE OF SOFTWARE TOOLS. As new tools and approaches are
developed to address the Year 2000 problem, C2i intends to evaluate those
products and, where appropriate, to enter into agreements with the providers of
those solutions to expand C2i's existing capabilities.
FOCUS ON CLIENT SERVICE. C2i believes that it must be dedicated to
quality improvement and service in order to build the level of customer loyalty
that will allow it to compete with larger organizations and obtain the insight
necessary to expand its service offerings beyond Year 2000 compliance.
LEVERAGE SKILLS AND CONTACTS TO PENETRATE ADDITIONAL MARKETS. By
applying the knowledge it obtains about customers' needs during a Year 2000
project, C2i intends to expand the scope of services it provides to include
other complex data and system reengineering and conversion tasks. The Company
believes that these additional tasks will include operating system migrations,
programming language upgrades, database migrations and application changes. C2i
intends to expand its Year 2000 and reengineering practice into European and
Pacific Rim markets.
SERVICES
The services provided in a Year 2000 conversion project involve a
detailed series of assessment, analysis, conversion, replacement, testing and
implementation steps, all of which must be managed through several different
groups within an organization.
PROJECT MANAGEMENT
Maintaining control of a Year 2000 conversion project requires
project managers to predict and monitor factors affecting resource consumption,
delivery dates and costs throughout the project. Computer time, personnel
24
<PAGE> 27
time and need to work around existing operations are constraints that directly
affect resource availability and costs. C2i's project manager, who is a
specialist in the language(s) used in the customer's information systems,
allocates assignments to project personnel and uses project tracking system to
monitor progress during the complex series of tasks associated with the
conversion.
ENTERPRISE ASSESSMENT
The enterprise assessment phase is an extremely important step that
forms the information-base upon which significant decisions will be made
regarding the nature of the conversion, code renovation and system replacement
efforts. To make a proper decision, a company needs to have accurate data
regarding the cost and manpower requirements of the various options. The "best
decision" must be able to be accomplished in the required time frame with the
available resources.
C2i collects and analyzes customer specific data and reports the
results of its cost estimation and analysis activities to the customer. This
step predicts how much work will be needed to reformat date-related data and
programs for the Year 2000, based on a metric or cost model.
C2i works with representatives of all involved business units in an
organization to compile a comprehensive Enterprise Assessment Report. This
report enables management to select a course of action and deploy resources for
conversion/replacement and compliance.
INVENTORY
C2i assists clients to inventory and review their Data Processing
(DP) and business environment to document the existing topology, currency of
software releases and inter-relationships of systems and subsystems. This
inventory and review becomes the basis for developing an overall methodology to
deal with Year 2000 problems. The DP environment review addresses hardware,
software, staff resources and skills, and current system software plans. The
software inventory organizes operating systems, database systems, programming
languages, measurement and performance tools, utilities and any other
vendor-supplied items that may have Year 2000 implications.
During the enterprise assessment, C2i assists clients to inventory
and review application systems, subsystems and programs to determine their
inter-relationships, as well as age, usefulness, size and appropriateness for
selection as a Pilot Scan and Analysis candidate. The inventory documents the
name, function, size, age, origin (in-house developed or purchased package),
available documentation, and importance of the system or subsystem to the
organization. It is important to understand how the program is stored, backed-up
and called, and to determine which other libraries and data feeds are used in
conjunction with the loading of the program or system.
PILOT SCAN/ANALYSIS
On the basis of the information gathered during the Enterprise
Assessment, C2i and the client may select a small segment of code to be scanned
and analyzed in the Pilot Scan and Analysis phase. This phase consists of
building tables of naming conventions and understanding how dates are used
within the systems. The Pilot Scan and Analysis phase produces reports showing
the number, location and relevance of date-sensitive fields, and highlights
those instances where failure will occur in the year 2000 and beyond. The Pilot
Scan and Analysis phase assists C2i and the client to determine the order and
timing of a comprehensive scan and analysis of programs, subsystems and systems
and to determine the most cost-effective and functionally beneficial remedies
available to the organization.
SCANNING AND ANALYSIS
These processes are accomplished using the Scanning and Analysis
tools. The multi-pass scanning process identifies vulnerable lines of code,
classifies each date reference and procedure reports to assist C2i and the
customer. The date-search process matches language elements
25
<PAGE> 28
and data names against known language elements and date-specific mnemonics. C2i
can scan COBOL, Fortran, Assembler, RPG, PL/1, Mantis, Natural, Focus, APS, CSP,
Easytrieve, SAS, ADS and Culprit. While scanning gives the programmer an
overview of sensitive dates, the analysis tools specify the dates, by line, that
will cause the system to fail. During the analysis steps, C2i search engines
review data-names and comparison and calculation statements and produce
exception reports of data references that fail or that appear to be inaccurate
or misleading. This phase identifies the lines of code that must be addressed by
C2i and the client.
IMPLEMENTATION CONSULTATION
After the Scanning and Analysis steps are completed, C2i gathers all
the data reports and charts and provides client executives with the information
necessary to make the appropriate Year 2000 business decisions. At this point, a
client is in a position to make informed decisions of the cost of solutions and
the consequences of failing to act. A key element of the C2i approach is the
establishment of an overall project management system to assist planning,
tracking and communication regarding all aspects of the Year 2000 compliance
effort throughout the enterprise. The Company believes that it is of utmost
importance for all involved to be able to follow the progress regarding
milestones, manpower issues and costs on an ongoing basis. C2i uses, among other
tools, Microsoft Project with Year 2000 customized templates to insure that a
consistent methodology is followed and standardized reporting is provided to
assist in enterprise-wide communications.
RENOVATION/REPLACEMENT
This stage involves implementing the decisions to solve identified
Year 2000 problems. This phase occurs when a plan has been agreed upon by all
business units and senior management. The adoption of this plan begins the
critical enterprise-wide process of insuring the organization will survive the
date-change implications of the Year 2000. All critical systems, programs,
databases, data feeds, procedures and printed material must meet the change
requirements set out in the Enterprise Alternatives Study Report. Solutions
generally entail fixing the system, replacing with packaged Year 2000-compliant
systems or modules, or abandoning the business function served by the programs
or systems.
Fixes generally fall into one of three categories:
- date-field expansion to create a standard four-digit
year field
- windowing, a procedural solution technique using the
existing two-digit field
- compression to create a four-digit representation in a
two-digit field
TESTING AND IMPLEMENTATION
Testing is a significant and critical element of every successful
Year 2000 effort. All critical systems, programs, data bases, data feeds,
procedures and printed material must meet the change requirements. The Company
believes that testing entails approximately 50% of the entire project. C2i
intends to assist clients to develop and implement testing procedures from unit
test and integration testing through systems and acceptance testing. With
additional storage from date expansion or added logic code for windowing or
workaround, it is vital to conduct full-scale testing with live data in
production volumes. The C2i data center mainframe environment, with a direct
dedicated line or secure Internet connection to the client's production
mainframe system, will provide flexibility for unit and integration testing.
The challenge for all organizations is the on-time completion of
mission-critical compliance efforts to insure that fundamental business systems
will not fail in the year 2000. Many experts predict that there is simply not an
adequate supply of technical and management resources to handle the challenge of
required intervention. This increases the importance of project prioritization
and planning. Complete re-systemization, date-field
26
<PAGE> 29
expansion, and some compliance work will extend well into the year 2000 and
beyond, where temporary fixes and workarounds will require replacement by
permanent solutions.
LICENSES AND RELATIONSHIPS
C2i has entered into several licenses and other relationships to
provide an extensive range of Year 2000 solutions, including hardware, software
and consulting services. Some of the Company's licensors offer conversion
services directly or have licensed other companies to use the technologies
offered by C2i.
HARDWARE
IBM. C2i is an IBM Partner In Development and an IBM Solution
Provider. As a re-seller of IBM hardware and software, C2i offers its clients an
extensive selection of tested and integrated software and tools in a hardware
platform that mirrors the customer's MVS environment and permits secure testing
of date functions without risk of propagating corrupted information into
production data sets.
Sun Microsystems. C2i is a Catalyst Partner with Sun Microsystems.
This relationship enables C2i to develop Year 2000 solutions for UNIX
workstations.
SOFTWARE
Computer Associates International ("CA"). C2i is a Computer
Associates Business Partner and a Value Added Reseller for the CA-Discovery 2000
solution, which helps to formulate a Year 2000 strategy, establish appropriate
guidelines, and deploy needed tools and techniques. The CA-Discovery 2000
solution can be implemented immediately in the existing environment and can be
used to modify all applications, including mission-critical legacy systems
running on MVS platforms. The CA-Discovery 2000 assists in reducing the costs
and resources associated with a Year 2000 solution by providing automated
conversion/replacement and partial testing. The CA-Discovery 2000 solution
provides the user with valuable road map that enhances a Year 2000 project by:
- Defining the scope of the conversion project, including
size,
- cost, resources and timeline Identifying problem areas
with
- impact analysis tools Detecting source code to be
modified
- through code analysis tools Implementing changes and
- converting programs to newer source dialects Managing
and
- controlling the application life cycle Utilizing
automated
- tools for unit and system testing Enhancing quality
assurance
- with automated regression tools Facilitating the
distribution
- and redeployment of converted applications
The inventory and assessment of existing information systems
portfolios is a critical phase of Year 2000 projects. The CA-Discovery 2000
solution includes the CA-Impact/2000 analysis tool, which is executable wherever
the source code resides, whether on the mainframe or on PC workstations. This
eliminates the need to move the code from one platform to another.
CA-Impact/2000 analyzes applications and details the information needed to
accurately estimate and carefully plan the Year 2000 project. The parser-based
technology is tuned for all of the leading data manipulation languages, such as
SQL, CA-IDMS , CA-Datacom and DL/1.
Oracle. C2i has become a Business Alliance Partner (BAP) with Oracle
Corporation and is thus able to offer Oracle solutions and services to its Year
2000 clients. As clients review their business priorities and cost for
renovating or converting their existing legacy applications to achieve Year 2000
compliance, a compelling option in many cases is to abandon certain applications
or replace them outright with packaged solutions that are already Year 2000
compliant. C2i is able to utilize Oracle's products and services based upon
Oracle's relational database management system (RDBMS) Oracle 7 product line.
Oracle offers a number of enterprise wide application solutions such as
Manufacturing, Engineering, Financial and H.R. Systems. In addition many other
software
27
<PAGE> 30
developers have created packaged solution products that utilize the Oracle 7
RDBMS and could replace legacy applications that face expensive Year 2000
renovation costs.
CenturySolver/Assembler Solutions. CenturySolver/Assembler helps
pinpoint the problems associated with finding and fixing date operations in
complex legacy Assembler code. Using the CenturySolver/Assembler automated
analysis capabilities, date variables can be tracked through registers, scratch
(and misused) variables, and offsets into memory areas. The program then
identifies operations carried out on, and using, dates, and provides an
annotated and commented listing of the source-code in machine-readable form and
a set of metrics giving a profile of the code and Year 2000 problem incidence.
Because CenturySolver/Assembler automates the previously manual task
of tracking how and where each date operation is used in a program, it can
achieve substantial productivity and quality improvements over manual methods.
Using conventional manual techniques, an assembler programmer can analyze in
detail only a few hundred lines of code per day. With CenturySolver/Assembler,
hundreds of thousands of lines of complex Assembler code can be analyzed in a
single day, leaving the developer more time to make the identified changes and
test the code. As a result, CenturySolver/Assembler helps to reduce overall
project costs by ensuring that the conversion is completed faster and with a
higher degree of accuracy. Scarce assembler programmer resources can then be
targeted at the key points in the conversion process where they will have the
most impact.
CenturySolver/2000 COBOL Solutions. CenturySolver/2000 identifies
code that needs to be changed, then transforms this code to correctly handle
dates in the beyond the year 2000. It uses advanced data flow analysis
techniques combined with type analysis to accurately identify date-related code
and analyze its type (year, month, day, etc.). CenturySolver/2000 can handle MIS
environment and Year 2000 transformation requirements, including multiple
language dialects and transformation strategies, DBMS operating systems, and
screen generators. CenturySolver/2000 runs on scaleable UNIX platforms
configured for Year 2000 transformation of MVS COBOL.
CenturySolver/Multi-Language Solutions. CenturySolver/Multi-Language
is an innovative, inexpensive, multiple-language, cross-platform solution for
Year 2000 projects. It uses a user-defined sliding-date approach where only date
logic is modified versus expanding the year to four digits. Database date fields
are expanded for century only where required. This solution is uniform for all
software applications and languages. CenturySolver/Multi-Language quickly
pinpoints complexity issues to aide in assigning tasks to appropriate staff
members. It does not require expanding the year to four digits in existing
software applications. No change to records, files, input, historical or
archival data is required, nor are changes to data fields in applications.
Instead, existing applications are utilized without the extensive time-consuming
activities and major expense associated with new computers and/or software, data
conversions, wholesale retraining, etc.
CenturySolver/400 RPG Solutions. CenturySolver/400 is a powerful
software solution designed for modification and maintenance of AS/400 RPG
applications for Year 2000 compliance. Extensive use of AS/400 object
descriptions and source information makes it possible to quickly find and
document all dates within an application. Because the information is derived
directly from the operating system, it is always up-to-date. A cross-reference
database captures detailed relationship information about all programs that
directly or indirectly use a file or data area, all programs that directly or
indirectly call other programs, and all files or programs that use a certain
data field can be captured and stored in the database. The library
administration function provides facilities for managing applications libraries
and the programs, files and other objects they contain. This includes the
implementation of changes and new versions of software applications as well as
the creation and maintenance of test environments.
CONSULTING
Tata Consultancy Services. C2i is in the final stages of completing
an agreement with Tata America International Corporation ("Tata") for the
provision of services by Tata to C2i, both on-site worldwide and by dedicated
communications to Tata's offices in India. Tata has agreed to provide
programming, development, maintenance and enhancement, Year 2000 conversion,
documentation and other services to C2i or its customers,
28
<PAGE> 31
as requested by C2i, on a project by project basis. The scope of the work,
pricing and substantially all other terms of any services performed under this
contract are to be agreed to by both C2i and Tata prior to commencement of the
specific project.
INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trade secret
laws and contractual provisions to establish and protect its rights in its
software products and proprietary technology. Despite these precautions, it may
be possible for unauthorized parties to copy certain portions of the Company's
technologies or to reverse engineer to obtain and use information that the
Company regards as proprietary. The Company has no patents and existing
copyright and trade secret laws offer only limited protection. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States.
The Company's competitive position may be affected by its ability to
protect its proprietary information. However, because the software industry is
characterized by rapid technological change, the Company believes that patent,
trademark, copyright, trade secret and other legal protection are less
significant to the Company's success than other factors such as the knowledge,
ability and experience of the Company's personnel, new product and service
development, frequent product enhancements, customer service and ongoing product
support.
CUSTOMERS
During 1997, the Company has been engaged to provide assessment
projects to agencies of two states, a hotel chain, a major money center bank and
a large savings and loan. The Company is in the process of completing agreements
with several institutions to provide remediation and testing of code.
SALES AND MARKETING
C2i's sales and marketing strategy is designed to promote and
enhance recognition that C2i's services provide turnkey solutions to a major
problem. The Company anticipates that many of its sales leads will come through
referrals from major accounting firms, systems integrators, service providers
and the parties who have entered into VAR relationships with C2i. Once a lead is
identified, C2i uses the technical capabilities of its services and the reduced
interference with customer operations made possible by C2i's ability to conduct
most of the required processes off-site to complete the selling process.
C2i intends to use a direct sales force to follow up on potential
customers as well as telemarketing and direct mail to increase name recognition
and generate additional inquiries from prospective customers in the strategic
partners' existing client basis. The direct sales force will initially focus on
education of strategic partners and pre- and post-sales support.
C2i intends to advertise in trade magazines targeted to individuals
who would influence an organization's Year 2000 compliance efforts as well as
referral sources. C2i also plans to participate in trade shows where potential
customers or referral sources are expected to be present.
As the number of competitors providing Year 2000 services increases,
it is more likely that substantially similar tools and methodologies will be
used in providing such services. Although the Company's services have never been
the subject of an infringement claim, there can be no assurance that third
parties will not assert infringement claims against the Company in the future,
that the assertion of such claims will not result in litigation or that the
Company would prevail in such litigation or be able to obtain a license for the
use of any infringed intellectual property from a third party on commercially
reasonable terms. Furthermore, litigation, regardless of its outcome, could
result in substantial cost to the Company and divert management's attention from
the Company's
29
<PAGE> 32
operations. Any infringement claim or litigation against the Company could,
therefore, materially adversely affect the Company's business, operating results
and financial condition.
COMPETITION
The market for services relating to the Year 2000 problem is highly
competitive and will become increasingly competitive as the Year 2000
approaches. The anticipated growth in this industry is expected to attract
additional competitors, many of whom may offer additional products and services.
Existing competitors for Year 2000 conversions and related software tools
include Coopers & Lybrand LLP, Electronic Data Services Corporation, Ernst &
Young LLP, Zitel Corp., Viasoft, Inc., Computer Horizons, Inc., Data Dimensions,
Inc., Crystal System Solutions, Ltd., Platinum Technology Inc., Acceler8
Technology Corporation, TSR, Inc. and Peritus Software Services, Inc. Most of
the competitors providing software tools and services for Year 2000 conversion
projects are more established, benefit from greater name recognition and have
substantially greater financial, technical and marketing resources than the
Company. As a result, there can be no assurance that the Company will be able to
compete effectively.
The principal competitive factors affecting the market for the
Company's services include product performance and reliability, product
functionality, availability of experienced personnel and price, ability to
respond in a timely manner to changing customer needs, project management
capabilities, ease of use, training and quality of support.
EMPLOYEES
As of September 30, 1997, the Company had 8 full-time employees.
Competition for qualified software personnel is intense and there
are a limited number of professionals with the level of knowledge and experience
required by the Company. There can be no assurance that the Company will be
successful in attracting, integrating, training, and retaining such personnel in
accordance with the Company's needs.
LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
FACILITIES
The Company occupies approximately 2,250 square feet of space in San
Diego, California under a lease that expires on December 31, 1997. The Company
anticipates that it will be required to move to larger facilities in the next
three months and it believes that it will be able to obtain such new space
without difficulty and at commercially reasonable prices.
30
<PAGE> 33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John Anthony Whalen, Jr. 55 Chairman of the Board of Directors;
President and Chief Executive Officer
Frank J. Vukmanic 51 Senior Vice President, Sales and Marketing
Clyde Wooten 54 Senior Vice President, Operations and Chief
Technology Officer
Diane E. Hessler 37 Vice President, Finance, Secretary and Chief
Financial Officer
Hal H. Beretz (2) 61 Director
Kim P. Goh (1)(2) 54 Director
David Tendler (1) 59 Director
</TABLE>
- -----------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Whalen founded the Company in 1996. Prior to joining the Company
he served from February 1994 through October 1994 as President and Chief
Operating Officer of NETCOM On-line Communication Services, Inc., an Internet
service provider and software developer, and from October 1986 through May 1990
as Executive Vice President of Optimum Care Corporation, a company operating
behavioral medicine programs in healthcare facilities. From May 1990 to February
1994 and from October 1994 to February 1996, Mr. Whalen was a private investor.
Mr. Whalen holds a B.A. in English literature and American History from St.
Mary's College of California and an M.B.A. from California State University. Mr.
Whalen was licensed as a Certified Public Accountant by the State of California.
Mr. Vukmanic joined the Company in June 1997 as Senior Vice
President, Sales and Marketing. From May 1994 through June 1997, Mr. Vukmanic
served in various executive sales and marketing positions with Zitel
Corporation, a Year 2000 service provider and mid-range software, services and
data storage company, and from April 1989 through February 1994, he served as
Senior Vice President, Sales & Marketing at Amperif Corporation, a manufacturer
of high-end storage systems and provider of systems integration services. Prior
to that he served for a total of 19 years in various sales, marketing and
executive positions, first with Burroughs Corporation and later with Unisys
Corporation. Mr. Vukmanic holds a B. Sc. degree in Education: Social Sciences
and History from Shippensburg University.
Mr. Wooten joined the Company in June 1997 as Senior Vice President,
Operations and Chief Technology Officer. From July 1995 through May 1997, Mr.
Wooten served as Vice President of Image Products of Excalibur
31
<PAGE> 34
Technologies, a software company, and from October 1992 to June 1995 he served
as Senior Director of New Technology Development at Knight-Ridder Information,
an electronic publishing company. Prior to that he served for a total of 26
years in various software and product development management positions with IBM
Corporation, Reference Technology, Inc., and Amdahl Corporation. Mr. Wooten
holds a B.Sc. degree in Aerospace Engineering and a M.S. degree in Aerospace
Engineering from Massachusetts Institute of Technology.
Ms. Hessler joined the Company in September 1997 as Chief Financial
Officer. From May 1994 through March 1997, Ms. Hessler served in various senior
financial and accounting positions with AlphaNet Telecom, Inc., a
telecommunications company. From June 1991 through February 1994 she served as
Chief Financial Officer and Controller at Bluebird Systems, a software
development company, and from August 1989 through May 1991 she served as a
Manager of Accounting and Business Consulting at Steres, Alpert & Carne, a
public accounting firm. Prior to that, she served for a total of eight years in
various positions with public accounting firms, including Deloitte Haskins &
Sells, Breedlove & Co., P.C. and Fairall, Quindt & Cummins, Inc., P.C. Ms.
Hessler holds a B.B.A. in Accountancy from Western Michigan University, and is
licensed as a Certified Public Accountant by the State of Texas.
Mr. Beretz was elected to the Board in September 1997. Mr. Beretz
has been a partner in the international consulting firm of Tendler Beretz LLC
since January 1985. Prior to forming Tendler Beretz LLC, Mr. Beretz served as
President and Chief Operating Officer of Phibro--Salomon, Inc., currently known
as Salomon, Inc., and was also a Director from May 1981 until leaving the firm
in December 1984. Mr. Beretz serves on the Boards of several institutions and is
active in various philanthropic organizations. Mr. Beretz holds a B.B.A. from
City College of New York.
Mr. Goh was elected to the Board in September 1997. Mr. Goh is an
independent consultant for Merck/Medco, a managed healthcare company. From 1993
to 1996, he was Executive Vice President of MIS at Merck/Medco. From 1988 to
1993, Mr. Goh was Senior Vice President, Head of GeoService Technology and
Senior Vice President, Head of Retail Operations Division for Chemical Banking
Corporation, New York. From 1970 to 1988 he held several senior executive
positions at Citibank, N.A., New York, including several of Citicorp's
information business subsidiaries. Mr. Goh has a B.A. from Southhampton College
of Long Island University, an M.A. in Economics from the New School for Social
Research, New York, and an AMP from Harvard University Business School.
Mr. Tendler was elected to the Board in September 1997. Mr. Tendler
has been a partner in the international consulting firm of Tendler Beretz LLC
since January 1985. Prior to forming Tendler Beretz LLC, Mr. Tendler served as
Co-Chairman and Chief Executive Officer of Phibro-Salomon, Inc., currently known
as Salomon, Inc. Mr. Tendler has almost forty years of experience in the
commodity and investment banking industries, including twenty years in senior
executive positions. Mr. Tendler serves as Chairman of V.I. Technologies, Inc.
and as a director of Bio-Technology General Corporation. Mr. Tendler has also
served on the Boards of various philanthropic organizations. Mr. Tendler holds a
B.B.A. from City College of New York.
Currently, all directors hold office until the next annual meeting
of stockholders and until their successors have been duly elected and qualified.
However, the Company's Certificate of Incorporation provides that upon the
effective date of the Offering, the Board of Directors, without further action
by the stockholders, will be divided into three classes. Each class of directors
will consist of one or two directors, who will serve for a one, two or three
year period or until their successors are elected and qualified. Thereafter,
directors will serve staggered three year terms. See "Description of Securities
- -- Delaware Law and Certain Charter Provisions." As of the effective date of the
Offering, the Class I directors, whose terms will end in 1998, will be Mr.
Beretz and Mr. Goh; the Class II director, whose term will end in 1999, will be
Mr. Tendler; and the Class III director, whose term will end in 2000, will be
Mr. Whalen.
Officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors or officers of
the Company.
32
<PAGE> 35
EMPLOYMENT ARRANGEMENTS
On June 1, 1997, the Company entered into an employment agreement
with Mr. Whalen, its President and Chief Executive Officer. Under the agreement,
Mr. Whalen receives an annual base salary of $150,000 and may receive a bonus
determined in the discretion of the Board of Directors.
Currently, Messrs. Whalen, Vukmanic and Wooten, executive officers
of the Company, have agreed to waive their right to employment compensation by
the Company. The waiver of rights to employment compensation has been given by
Messrs. Whalen, Vukmanic and Wooten on a month-by-month basis, and the Company
expects that such waivers will not be sought by the Company, nor given by
Messrs. Whalen, Vukmanic or Wooten, following the completion of this Offering.
EXECUTIVE COMPENSATION
The following table sets forth certain information for the period
from September 17, 1996 (inception) through December 31, 1996 regarding the
compensation of the Company's Chief Executive Officer.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Securities
---------------------- Underlying All other
Name and Principal Position Salary Bonus Options Compensation
- --------------------------- ------ ----- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
John Anthony Whalen, Jr. $ 0 $ 0 0 $ 0
President and CEO
</TABLE>
Option Grants in Last Fiscal Year. The following table sets forth, as to the
Named Officers, information concerning stock options granted during the period
from inception (September 17, 1996) through December 31, 1996.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------
Potential Realization Value at
Assumed Annual Rates of Stock
Number of Percent of Purchase Appreciation for
Securities Total Options Option Term
Underlying Granted to Exercise ---------------------------
Options Employees in Price Per Expiration
Name Granted Fiscal Year Share Date 5% 10%
------------ ------- ----------- ----------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
John Anthony Whalen, Jr. 0 0% $ -- -- $-- $--
</TABLE>
33
<PAGE> 36
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values.
The following table sets forth, as to the Named Officers, certain
stock option information concerning the number of shares subject to both
exercisable and unexercisable stock options and the value of unexercised options
as of December 31, 1996. No options were exercised by Named Officers during the
period from inception (September 17, 1996) through December 31, 1996.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End ($)
------------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John Anthony Whalen, Jr. none none $-- $--
</TABLE>
STOCK PLANS
1997 Stock Option Plan. The Board of Directors is currently
reviewing a Stock Option Plan which the Company anticipates will be adopted
prior to the effective date of this Offering, with an initial share reserve of
82,500 shares of Common Stock (the "Option Plan"). Under the Option Plan,
options may be granted to employees, including officers, consultants, advisors
and directors, although only employees and directors and officers who are also
employees may receive "incentive stock options" intended to qualify for certain
tax treatment. The exercise price of all nonqualified stock options must equal
at least 85% of the fair market value of the Common Stock on the date of grant,
and the exercise price of incentive stock options must be no less than the fair
market value on the date of grant. Options granted under the Option Plan are
generally immediately exercisable, vest over periods ranging from one to four
years and must be exercised within ten years.
Prior to the adoption of the Option Plan, the Company has granted
nonqualified options to purchase an aggregate of 625,000 shares to employees,
directors and consultants. Options to purchase 100,000 shares vest ratably
over twelve months, options to purchase 262,500 shares vest ratably over three
years and options to purchase the remaining 262,500 shares vest ratably over
four years. These options have exercise prices ranging from $2.50 to $5.40 per
share and expire five to ten years from the date of grant or earlier in the
event of termination of employment, directorship or consulting engagement.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company do not
receive any compensation for attending meetings of the Board of Directors,
although directors are reimbursed for their expenses in attending such meetings.
From time to time, directors have received grants of options to purchase the
Company's Common Stock. The Company does not pay additional amounts for
committee participation or special assignments of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the fiscal year completed December 31, 1996, the Managing
Owners of the Company fulfilled all functions of the Compensation Committee
with regard to the compensation of executive officers of the Company. John
Anthony Whalen, Jr. was an executive officer and a Managing Owner during 1996.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law,
the Company has adopted provisions in its Certificate of Incorporation which
provide that directors of the Company shall not be personally liable for
monetary damages to the Company or its stockholders for a breach of fiduciary
duty as a director, except for liability as a result of (i) a breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law; (iii) an act
34
<PAGE> 37
related to the unlawful stock repurchase or payment of a dividend under Section
174 of Delaware General Corporation Law; and (iv) transactions from which the
director derived an improper personal benefit. Such limitation of liability does
not affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Certificate of Incorporation also authorizes the
Company to indemnify its officers, directors and other agents, by bylaws,
agreements or otherwise, to the full extent permitted under Delaware law. The
Company has entered into separate indemnification agreements with its directors
and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a 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.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
35
<PAGE> 38
CERTAIN TRANSACTIONS
During the period from inception to December 31, 1996, the Company
sold Owner Units to certain of its officers, directors and holders of 5% of the
outstanding equity of the Company, as described below.
In September 1996, the Company issued 350,000 Owner Units to John
A. Whalen, Jr., Chairman, President and Chief Executive Officer, and a
co-founder of the Company for cash consideration of $.15 per Unit, for total
consideration of $52,500.
In June 1997, the Company issued 666,666 Owner Units to John A.
Whalen, Jr., for cash consideration of $.15 per Owner Unit, for total cash
consideration of $100,000. An additional $599,999 has been recorded as
compensation expense in the accompanying statement of operations for the six
months ended June 30, 1997, reflecting the additional deemed fair value of such
Units on the date of issuance.
In June 1997, the Company issued 333,333 Owner Units to Frank J.
Vukmanic, Senior Vice President, Sales and Marketing for $.15 per Owner Unit,
for total consideration of $50,000. Mr. Vukmanic gave the Company a promissory
note as consideration for these Owner Units. Mr. Vukmanic paid this promissory
note in full in August, 1997. An additional $300,000 has been recorded as
compensation expense in the accompanying statement of operations for the six
months ended June 30, 1997, reflecting the additional deemed fair value of such
Units on the date of issuance.
In June 1997, the Company issued 333,333 Owner Units to Clyde
Wooten, Senior Vice President, Operations and Chief Technology Officer for $.15
per Owner Unit, for total consideration of $50,000. Mr. Wooten gave the Company
a promissory note as consideration for these Owner Units. Mr. Wooten paid this
promissory note in full in September, 1997. An additional $300,000 has been
recorded as compensation expense in the accompanying statement of operations for
the six months ended June 30, 1997, reflecting the additional deemed fair value
of such Units on the date of issuance.
In August and September 1997, the Company agreed to pay to each of
David Tendler, Hal Beretz and Kim Goh, directors of the Company, referral fees
of four and one-half percent for sales by the Company that are consummated
without the Company participating in a "Request for Proposal" process (an "RFP")
with a customer, provided the engagement of the Company by the customer resulted
from an introduction by the director, and two percent of sales by the Company
that are consummated following the participation in an RFP with a customer, if
the entrance of the Company in the RFP resulted from an introduction by the
director. These referral fees are payable by the Company on all revenue
generated from such customers during the period that the director serves as a
director. Such fees are payable within 30 days after receipt of payment from the
customer.
Also in August 1997, the Company issued to each of Messrs. Tendler
and Beretz options to purchase 87,500 Owner Units of the Company at an exercise
price of $2.50 per Unit. Mr. Goh was granted options to purchase 87,500 Owner
Units of the Company, at an exercise price of $2.50 per Unit. Such options vest
in equal monthly amounts over a four year period, for as long as they remain
directors.
On September 30, 1997, the Company exchanged each Owner Unit for
one share of its Common Stock, and converted options to acquire Owner Units to
options to acquire Common Stock, in connection with its reorganization from a
California LLC to a Delaware corporation.
In October 1997, Mr. Vukmanic, an executive officer of the Company,
participated in the Bridge Financing and was issued a Bridge Note in the
principal amount of $17,304 and Bridge Warrants to acquire 17,304 shares of
Common Stock.
The Company believes that all transactions with affiliates described
above were made on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties.
36
<PAGE> 39
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock as of September 30, 1997,
and as adjusted to reflect the sale of the Shares and Warrants offered hereby,
assuming no exercise of the Underwriter's over-allotment option, (i) by each
person who is known by the Company to own beneficially more than 5% of the
Company's capital stock, (ii) by each of the executive officers named in the
tables under "Executive Compensation" and by each of the Company's directors,
and (iii) by all officers and directors as a group.
<TABLE>
<CAPTION>
Number of
Shares Beneficially
Owned Before and Percentage Beneficially
Beneficial Owner After the Offering (1) Owned(2)
---------------- ---------------------- --------
Before the After the
Offering Offering
-------- --------
<S> <C> <C> <C>
John Anthony Whalen, Jr.(3) 1,462,694 60.8% 42.9%
Frank Vukmanic(4) 345,333 14.4% 10.1%
Konrad Witt 267,750 11.2% 7.9%
Clyde Wooten(5) 345,333 14.4% 10.1%
Hal H. Beretz(6) 10,938 * *
Kim P. Goh(7) 6,094 * *
David Tendler(8) 10,938 * *
All directors and executive
officers as a group (7 persons) 2,186,886 88.8% 63.1%
</TABLE>
- -----------------------
* Represents less than one percent.
(1) Except pursuant to applicable community property laws or as otherwise
noted, all shares are beneficially owned and sole voting and investment
power is held by the persons named.
(2) Based on 2,391,338 shares of Common Stock outstanding before this
Offering and 3,391,338 shares of Common Stock outstanding after this
Offering.
(3) Mr. Whalen is the President and Chief Executive Officer of the Company.
Includes 13,778 shares subject to options exercisable within 60 days of
the date of this Offering.
(4) Mr. Vukmanic is the Senior Vice President, Sales and Marketing, of the
Company. Includes 12,000 shares subject to options exercisable within 60
days of the date of this Offering.
(5) Mr. Wooten is the Senior Vice President, Operations and Chief Technology
Officer of the Company. Includes 12,000 shares subject to options
exercisable within 60 days of the date of this Offering.
(6) Mr. Beretz is a director of the Company. Includes 10,938 shares subject
to options exercisable within 60 days of the date of this Offering.
(7) Mr. Goh is a director of the Company. Includes 6,094 shares subject to
options exercisable within 60 days of the date of this Offering.
(8) Mr. Tendler is a director of the Company. Includes 10,938 shares subject
to options exercisable within 60 days of the date of this Offering.
37
<PAGE> 40
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 10,000,000 shares
of Common Stock, par value $.001 per share, and 1,000,000 shares Preferred
Stock, par value $.001 per share (the "Preferred Stock").
COMMON STOCK
As of September 30, 1997, there were 2,391,338 shares of Common
Stock outstanding held of record by eight stockholders. 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 holders of Common Stock. All outstanding shares of
Common Stock are fully paid and nonassessable, and the shares of Common Stock to
be issued upon completion of the Offering will be fully paid and non assessable.
The Certificate does not provide for cumulative voting, and accordingly, the
holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
WARRANTS
The holder of each Warrant is entitled, upon payment of the
exercise price of $_____ (125% of the initial Share offering price), to purchase
one share of Common Stock. The exercise price of the Warrant will be reduced by
$0.25 per share for every $200,000 that the Company's pre-tax earnings from
operations for the year ending December 31, 1998 are less than $3,000,000, but
in no event will this reduction result in an exercise price of less than $2.00
per share. Unless previously redeemed, the Warrants are exercisable at any time
during the four year period commencing one year after the date of this
Prospectus, provided that at such time a current prospectus relating the
underlying Common Stock is in effect and the underlying shares of Common Stock
are qualified for sale or exempt from qualification under applicable state
securities laws. The Warrants are subject to redemption, as described below.
Redemption. Commencing one year from the date of this Prospectus,
the Warrants are subject to redemption by the Company, on not less than 30 days
written notice, at a price of $.01 per Warrant, if the closing bid price of the
Common Stock is at least 150% of the then current exercise price of the Warrants
for any 20 consecutive business days ending on the third day prior to the date
on which the notice of redemption is given. 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, except for the Underwriter
Warrants, 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,
except for those underlying the Underwriter Warrants, by first class mail,
postage prepaid. 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.
General. The Warrants may be exercised upon surrender of the
certificate(s) therefor on or prior to the earlier of their expiration or the
redemption date (as explained above) at the offices of the Company's warrant
agent (the "Warrant Agent") with the form of "Election to Purchase" on the
reverse side of the certificate(s) filled out and executed as indicated,
accompanied by payment (in the form of 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 in certain events, such as
stock dividends, stock splits, mergers, sale of substantially all of the
Company's assets, and for other extraordinary events in order to enable the
holders of the Warrants to obtain the same or equivalent rights which they would
have obtained if the Warrants had been exercised prior to the event.
38
<PAGE> 41
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 a Warrant will not possess
any rights as a stockholder of the Company unless and until he exercises the
Warrant.
UNDERWRITER WARRANTS
The Company has agreed to grant to the Underwriter, upon the closing
of the Offering, the Underwriter Warrants to purchase up to 100,000 Shares and
Warrants. These Shares and Warrants will be identical to the Shares and Warrants
offered hereby except that the Underwriter Warrants and the Warrants included in
the Underwriter Warrants will not be subject to redemption by the Company. The
Underwriter Warrants cannot be transferred, sold, assigned or hypothecated for
one year, except to any officer or partner of the Underwriter or members of the
selling group. The Underwriter Warrants are exercisable during the four-year
period commencing one year from the date of this Prospectus at an exercise price
of $______ per Share and Warrant (125% of the initial Share offering price)
subject to adjustment in certain events to protect against dilution. The holders
of the Underwriter Warrants and underlying securities have certain demand and
piggyback registration rights. The existence of the Underwriter Warrants and the
inability of the Company to redeem the Warrants included therein may hinder the
Company's future financing or business transactions. See "Underwriting."
BRIDGE WARRANTS
Each Bridge Warrant issued by the Company in connection with the
Bridge Financing entitles the holder to purchase one share of Common Stock of
the Company at an exercise price of the lower of (i) $4.00 per share, or (ii)
two-thirds (2/3) of the price to the public in this Offering of a Share and a
Warrant. The Bridge Warrants are exercisable for a one year period beginning
one year after the closing of this Offering.
PREFERRED STOCK
The Preferred Stock may be issued in series, and shares of each
series will have such rights and preferences as are fixed by the Board in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board may, without further action by the
holders of Common Stock, fix the number of shares constituting that series and
fix the dividend rights, dividend rate, conversion rights, voting rights (which
may be greater or lesser than the voting rights of the Common Stock), rights and
terms of redemption (including any sinking fund provisions), and the liquidation
preferences of the series of Preferred Stock. It is to be expected that the
holders of any series of Preferred Stock, when and if issued, will have priority
claims to dividends and to any distributions upon liquidation of the Company,
and that they may have other preferences over the holders of the Common Stock.
The Board may issue series of Preferred Stock without action of the
stockholders of the Company. Accordingly, the issuance of Preferred Stock may
adversely affect the rights of the holders of the Common Stock. In addition, the
issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the stockholders. Issuance of Preferred Stock may
dilute the voting power of holders of Common Stock (such as by issuing Preferred
Stock with super-voting rights) and may render more difficult the removal of
current management, even if such removal may be in the stockholders' best
interests. The Company has no current plans to issue any of the Preferred Stock.
DELAWARE SECTION 203
As a Delaware corporation, the Company is subject to Section 203 of
the Delaware General Corporation Law ("Section 203"), which regulates large
accumulations of shares, including those made by tender offers. Section 203 may
have the effect of significantly delaying a purchaser's ability to acquire the
entire interest in the Company if such acquisition is not approved by the
Company's Board. In general, Section 203 prevents an "Interested Stockholder"
(defined generally as a person with 15% or more of a corporation's outstanding
voting stock) from engaging in a "Business Combination" (defined below) with a
Delaware corporation for three years
39
<PAGE> 42
following the date such person became an Interested Stockholder. For purposes of
Section 203, the term "Business Combination" is defined broadly to include
mergers and certain other transactions with or caused by the Interested
Stockholder; sales or other dispositions to the Interested Stockholder (except
proportionately with the corporation's other stockholders) of assets of the
corporation or a subsidiary equal to ten percent or more of the aggregate market
value of the corporation's consolidated assets or its outstanding stock; the
issuance or transfer by the corporation or a subsidiary of stock of the
corporation or such subsidiary to the Interested Stockholder (except for
transfers in a conversion or exchange or a pro rata distribution or certain
other transactions, none of which increase the Interested Stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); or receipt by the Interested Stockholder (except
proportionately as a stockholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation or a subsidiary.
The three-year moratorium imposed on Business Combinations by
Section 203 does not apply if: (a) prior to the date on which a stockholder
becomes an Interested Stockholder, the Board approves either the Business
Combination or the transaction which resulted in the person becoming an
Interested Stockholder; (b) the Interested Stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an Interested Stockholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (c) on or after
the date a person becomes an Interested Stockholder, the Board approves the
Business Combination, and it is also approved at a stockholder meeting by
sixty-six and two-thirds percent (66-2/3%) of the voting stock not owned by the
Interested Stockholder.
Under Section 203, the restrictions described above do not apply if,
among other things, the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203. The
Company's Certificate of Incorporation does not contain such a provision. The
restrictions described above also do not apply to certain Business Combinations
proposed by an Interested Stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an Interested Stockholder during the previous three
years or who became an Interested Stockholder with the approval of a majority of
the corporation's directors.
TRANSFER AND WARRANT AGENT.
The Transfer Agent for the Common Stock and Warrants and the Warrant
Agent for the Warrants is American Stock Transfer & Trust Company.
40
<PAGE> 43
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
3,391,338 shares of Common Stock. Of these shares, the 1,000,000 shares of
Common Stock offered hereby will be freely tradable without restriction or
further registration under the Securities Act, unless such shares are held by
"Affiliates."
Holders of the Warrants offered hereby will be entitled to purchase
an aggregate of 1,000,000 additional shares of Common Stock upon exercise of the
Warrants at any time during the four-year period commencing one year from the
date of this Prospectus, provided that the Company satisfies certain securities
registration and qualification requirements with respect to the securities
underlying the Warrants. Any and all shares of Common Stock purchased upon
exercise of the Warrants will be freely tradable, provided such registration
requirements are met.
Up to 200,000 additional shares of Common Stock may be purchased by
the Underwriter through the exercise of the Underwriter Warrants and the
Warrants that may be purchased with the Underwriter Warrant. Until five years
from the date of this Prospectus, holders of such securities will have the
right, subject to certain conditions, to require the Company to register all or
a portion of such securities at the Company's expense beginning one year after
the date of this Prospectus.
The 2,391,338 shares of Common Stock outstanding prior to this
Offering and any shares of Common Stock issuable upon exercise of outstanding
Bridge Warrants and stock options were sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
"restricted" securities within the meaning of Rule 144 under the Securities Act
(the "Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or 701 promulgated under the Securities Act. The Company's officers,
directors and shareholders owning five percent (5%) or more of the outstanding
shares of Common Stock, who hold an aggregate of 2,383,332 shares of Common
Stock have agreed that they will not sell such Common Stock for a period ending
eighteen months from the effective date of the Offering without the prior
written consent of the Underwriter. The Underwriter may agree upon request to
release for resale some or all of the shares subject to lock-up agreements. When
determining whether to release shares from the lock-up agreements, the
Underwriter will consider, amount other factors, the stockholder's reasons for
requesting the release, the number of shares for which the release is being
requested and market conditions at the time. Following expiration of the
foregoing lock-up agreements, all such Restricted Shares will be available for
sale in the public market subject to compliance with Rule 144 or Rule 701.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated), including a person who may be deemed to be
an "affiliate" of the Company as that term is defined under the Securities Act,
is entitled to sell, within any three month period, a number of shares
beneficially owned for at least one year that does not exceed the greater of (i)
one percent of the number of then outstanding shares of Common Stock, or (ii)
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. Furthermore, a person who is not deemed to
have been an affiliate of the Company during the ninety days preceding a sale by
such person and who has beneficially owned such shares for at least two years is
entitled to sell such shares without regard to the volume, manner of sale or
notice requirements of Rule 144.
Prior to the Offering, there has been no public market for the
Company's securities. Following the Offering, the Company cannot predict the
effect, if any, that market sales of the Common Stock, or the availability of
such shares for sale, will have on the market price prevailing from time to
time. Nevertheless, sales by the existing stockholders of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices for the Common Stock. In addition, the availability for sale of
substantial amounts of Common Stock acquired through the exercise of the
Warrants or the Underwriter Warrants could adversely affect prevailing market
prices for the Company's securities.
41
<PAGE> 44
UNDERWRITING
SouthWall Capital Corp., the Underwriter, has agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase
1,000,000 Shares and 1,000,000 Warrants from the Company. The Underwriter is
committed to purchase and pay for all of the Shares and Warrants offered hereby
if any are purchased. The Shares and Warrants are being offered by the
Underwriter subject to prior sale, when, as and if delivered to and accepted by
the Underwriter and subject to approval of certain legal matters by counsel and
to certain other conditions, such as no adverse changes in the Company and
market conditions. It is expected that the Underwriter will distribute
substantially all of the Shares and Warrants offered hereby.
The Underwriter has advised the Company that it proposes to offer
the Shares and Warrants to the public at the initial public offering prices set
forth on the cover page of this Prospectus. The Underwriter may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD") concessions, not in excess of $.___ per Share, of which not in
excess of $.___ per Share may be reallowed to other dealers who are members of
the NASD. After the initial public offering, the public offering price,
concessions and reallowances may be changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable
for 45 days from the date of this Prospectus, to purchase up to 150,000
additional Shares and 150,000 additional Warrants at the initial public offering
prices set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriter may exercise this option in whole,
or, from time to time, in part, solely for the purpose of covering
over-allotments, if any, made in connection with the sale of the Shares and
Warrants offered hereby.
The Company has agreed to pay to the Underwriter a nonaccountable
expense allowance equal to 3% of the gross proceeds of this Offering, of which
$45,000 has been paid. The Company has also agreed to pay all expenses in
connection with qualifying the Shares and Warrants offered hereby for sale under
the laws of such states as the Underwriter may designate, including expenses of
counsel retained for such purpose by the Underwriter.
The Company has agreed to sell to the Underwriter and its designees,
for an aggregate of $100.00, the Underwriter Warrants to purchase up to 100,000
Shares and 100,000 Warrants at an exercise price of $______ per Share and
accompanying Warrant. The Underwriter Warrants may not be transferred for one
year except to the officers of the Underwriter or members of the selling group,
and are exercisable during the four-year period commencing one year after the
date of this Prospectus. Subject to certain limitations and exclusions, the
Company has agreed, at the request of the holders of a majority of the
Underwriter Warrants or underlying securities to register the Underwriter
Warrants and the underlying securities under the Securities Act (at the
Company's expense) during such four-year period and to include such Underwriter
Warrants and underlying securities in any appropriate registration statement
which is filed by the Company during that period.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
The Underwriter has been in business since May 1996. Prior to this
Offering, the Underwriter has only co-managed one other offering of securities
and has acted as an underwriter in several other offerings. There can be no
assurance that the Underwriter's limited offering experience and small size
relative to other broker-dealers will not adversely affect this Offering or the
subsequent development, if any, of a trading market for the Common Stock and
Warrants.
The Company's officers, directors and shareholders owning five
percent or more of the outstanding shares of Common Stock, who hold an aggregate
of 2,383,332 shares of Common Stock, have agreed that they will not sell such
Common Stock for a period ending eighteen months from the effective date of this
Offering without the prior written consent of the Underwriter.
42
<PAGE> 45
The Company has agreed, in connection with the exercise of Warrants
pursuant to solicitation by the Underwriter, to pay to the Underwriter a fee of
4% of the Warrant exercise price, a portion of which may be reallowed to any
dealer who is a member of the NASD who solicited the exercise (which may also be
the Underwriter) for each Warrant exercised, if (i) the market price of the
Common Stock of the Company at the time of exercise is higher than the exercise
price of the Warrants; (ii) the Warrants are not held in any discretionary
account; (iii) disclosure of compensation arrangements was made both at the time
of this Offering and in documents provided to holders of the Warrants at the
time of exercise; (iv) the exercise of the Warrants is solicited by a member of
the NASD as designated in writing on the Warrant Certificate Subscription Form;
and (v) the solicitation of exercise of the Warrants was not in violation of
Regulation M promulgated under the 1934 Act.
Regulation M of the Securities and Exchange Commission under the
1934 Act may prohibit the Underwriter from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Regulation M may provide)
prior to any solicitation by the Underwriter of the exercise of Warrants until
the later of the termination of such solicitation activity or the termination
(by waiver or otherwise) of any right that the Underwriter may have to receive a
fee for the exercise of Warrants following such solicitation. As a result, the
Underwriter may be unable to provide a market for the Company's securities
during certain periods while the Warrants are exercisable.
During the five-year period from the date of this Prospectus, in the
event the Underwriter originates a merger, acquisition, joint venture 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 sliding percentage of the total value of the transaction.
During the three year period from the date of this Prospectus, the
Underwriter will have a right of first refusal to underwrite, on terms
acceptable to the Underwriter, any public sale of debt or equity securities
(excluding sales to employees) of the Company or its subsidiaries, successors or
shareholders owning five percent or more of the Company's outstanding stock. The
Company must notify the underwriter of any such proposed financing and the
Underwriters will have 30 days to determine whether it wishes to proceed with
the financing and to present a proposal of all terms pursuant to which the
Underwriter would be willing to proceed. If the Underwriter presents such a
proposal and the Company elects to proceed with a financing with another
underwriter, for whatever reason, then, prior to executing a letter of intent
with such other underwriter, the Company shall pay the Underwriter $35,000, and
this right of first refusal will terminate.
During the four year period following the date of this Prospectus,
the Underwriter will have the right of first refusal to purchase for the
Underwriter's account or to sell for the account of the Company's Affiliates any
securities sold by Affiliates to the public pursuant to Rule 144 under the
Securities Act. Each of the Affiliates will agree to consult with the
Underwriter and offer the exclusive opportunity to purchase or sell such
securities on terms at least as favorable to the Affiliates as they can secure
from a third party. If the Underwriter fails to accept in writing any such
proposal for sale by the Affiliates within one business day of receiving such
notice, then the Underwriter will have no claim or right with respect to any
such sales contained in such notice. If the proposal is later modified in any
material respect, the Affiliates must again notify and offer the exclusive
opportunity to purchase or sell their securities to the Underwriter.
The Company has agreed, during the five year period from the date of
this Prospectus, to recommend and use its best efforts to elect a designee of
the Underwriter, at the option of the Underwriter, either as a member of or a
non-voting advisor to its Board of Directors. If the Underwriter's designee is
elected or appointed, the designee will attend meetings of the Board and receive
no more or less compensation than is paid to other non-management directors of
the Company for board attendance, and shall be entitled to receive reimbursement
for reasonable costs incurred in attending such meetings. To the extent
permitted by law, the Company will indemnify the Underwriter and its designee
for the actions of such designee as a director of the Company, and if the
Company maintains a liability insurance policy affording coverage for the acts
of its officers and directors, it will include each of the Underwriter and its
designee as an insured under such policy.
43
<PAGE> 46
The initial public offering price of the Shares and Warrants and the
exercise prices of the Warrants have been determined by negotiations between the
Company and the Underwriter. Among the facts considered in determining these
terms were the Company's present state of development, products and prospects,
the Company's management, the Company's financial condition, demand for
securities of comparable companies and the general condition of the securities
market.
LEGAL MATTERS
The validity of the Shares and Warrants offered hereby has been
passed upon by Gray Cary Ware & Freidenrich, A Professional Corporation. Certain
legal matters relating to the Offering will be passed upon by Piper & Marbury
L.L.P. on behalf of the Underwriter.
EXPERTS
The financial statements of C2i Solutions, Inc. (formerly Challenge
2000 International LLC) as of December 31, 1996, and for the period from
inception (September 17, 1996) through December 31, 1996, appearing in this
Prospectus and the Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement (which term shall include any amendments thereto) on Form
SB-2 under the Securities Act with respect to the Shares and Warrants offered
hereby. This Prospectus, which constitutes a part of the Registration Statement
does not contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits to the Registration Statement
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Shares and Warrants offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such report
and other information filed with the Commission, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Room 1228, 75 Park Place, New
York, New York 10007 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof may be
obtained from the Commission upon the payment of certain fees prescribed by the
Commission.
44
<PAGE> 47
Challenge 2000 International LLC
(a development stage company)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................F-2
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)...............F-3
Statements of Operations for the period from inception (September 17, 1996)
through December 31, 1996, six month period ended June 30, 1997 (unaudited) and
for the period from inception (September 17, 1996) through June 30, 1997
(unaudited)........................................................................F-4
Statements of Owners' Equity for the periods ended December 31, 1996
and June 30, 1997 (unaudited) .....................................................F-5
Statements of Cash Flows for the period from inception (September 17, 1996)
through December 31, 1996, six month period ended June 30, 1997 (unaudited) and
for the period from inception (September 17, 1996) through June 30, 1997
(unaudited)........................................................................F-6
Notes to Financial Statements......................................................F-7
</TABLE>
F-1
<PAGE> 48
Report of Ernst & Young LLP, Independent Auditors
The Managing Board Members
Challenge 2000 International LLC
We have audited the accompanying balance sheet of Challenge 2000 International,
LLC (a development stage company) as of December 31, 1996 and the related
statements of operations, owners' equity and cash flows for the period from
inception (September 17, 1996) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Challenge 2000 International,
LLC at December 31, 1996, and the results of its operations and its cash flows
for the period from inception (September 17, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles.
As more fully described in Note 1, at December 31, 1996 the Company has limited
working capital and will require additional sources of financing to complete the
commercialization of its services and products. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
February 28, 1997
except for the first and second paragraphs of Note 1
and all of Note 4, as to which the date is November 3, 1997
F-2
<PAGE> 49
Challenge 2000 International LLC
(a development stage company)
Balance Sheets
<TABLE>
DECEMBER 31, JUNE 30,
1996 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 16,467 $ 83,765
Accounts receivable 9,797 5,520
Capital subscriptions receivable from owners 97,500 100,000
Deposits 1,823 16,562
----------- -----------
Total current assets 125,587 205,847
----------- -----------
Property and equipment, at cost:
Computer equipment and purchased software 13,988 29,786
Furniture and fixtures 7,645 11,847
----------- -----------
21,633 41,633
Accumulated depreciation (4,148) (8,736)
----------- -----------
17,485 32,897
----------- -----------
Other assets 1,325 1,746
----------- -----------
Total assets $ 144,397 $ 240,490
=========== ===========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable $ 2,955 $ 6,592
Accrued payroll and related taxes 1,142 1,328
Accrued royalty due to former owner 6,300 13,452
Advance from former owner 20,838 21,424
----------- -----------
Total current liabilities 31,235 42,796
----------- -----------
Commitments [Note 3]
Owners' equity:
Owners' contributions 157,500 1,565,328
Deficit accumulated during the development stage (44,338) (1,367,634)
----------- -----------
Total owners' equity 113,162 197,694
----------- -----------
Total liabilities and owners' equity $ 144,397 $ 240,490
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 50
Challenge 2000 International LLC
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(SEPTEMBER 17, SIX MONTH (SEPTEMBER 17,
1996) THROUGH PERIOD ENDED 1996) THROUGH
DECEMBER 31, 1996 JUNE 30, 1997 JUNE 30, 1997
--------------- ------------ ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues $ 9,798 $ 36,154 $ 45, 952
----------- ----------- -----------
Costs and expenses:
Cost of revenues paid to former owner 6,300 11,352 17,652
Cost of revenues -- 12,563 12,563
Selling, general and administrative 47,836 1,335,535 1,383,371
----------- ----------- -----------
Total costs and expenses 54,136 1,359,450 1,413,586
----------- ----------- -----------
Net loss $ (44,338) $(1,323,296) $(1,367,634)
=========== =========== ===========
Pro forma net loss per share $ (.02) $ (.46)
=========== ===========
Shares used in computing pro forma net loss
per share 2,874,255 2,874,255
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 51
Challenge 2000 International LLC
(a development stage company)
Statements of Owners' Equity
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT OWNERS'
AMOUNT STAGE EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balance at inception, September 17, 1996 $ -- $ -- $ --
Owners' contributions 157,500 -- 157,500
Net loss -- (44,338) (44,338)
------------ ------------ ------------
Balance at December 31, 1996 157,500 (44,338) 113,162
Owners' contributions of cash, services
rendered, and capital subscriptions 1,399,999 -- 1,399,999
receivable (unaudited)
Issuance of equity for services
rendered (unaudited) 7,829 -- 7,829
Net loss (unaudited) -- (1,323,296) (1,323,296)
------------ ------------ ------------
Balance at June 30, 1997 (unaudited) $ 1,565,328 $ (1,367,634) $ 197,694
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 52
Challenge 2000 International LLC
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(SEPTEMBER 17, (SEPTEMBER 17,
1996) THROUGH SIX MONTH PERIOD 1996) THROUGH
DECEMBER 31, 1996 ENDED JUNE 30, 1997 JUNE 30, 1997
----------------- ------------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (44,338) $(1,323,296) $(1,367,634)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and amortization 4,218 4,797 9,015
Non-cash compensation -- 1,207,828 1,207,828
Changes in operating assets
and liabilities:
Accounts receivable (9,797) 4,277 (5,520)
Deposits (1,823) (14,739) (16,562)
Accounts payable 2,955 3,637 6,592
Accrued payroll 1,142 186 1,328
Accrued royalty 6,300 7,152 13,452
----------- ----------- -----------
Net cash used for operating activities (41,343) (110,158) (151,501)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (21,633) (20,000) (41,633)
Other assets (1,395) (630) (2,025)
----------- ----------- -----------
Net cash used for investing activities (23,028) (20,630) (43,658)
----------- ----------- -----------
FINANCING ACTIVITIES
Capital contribution from owners 60,000 100,000 160,000
Advance from former owner 45,000 586 45,586
Repayment of advance from former owner (24,162) -- (24,162)
Collection of capital subscriptions
receivable from owners -- 97,500 97,500
----------- ----------- -----------
Net cash provided by financing activities 80,838 198,086 278,924
----------- ----------- -----------
Net increase in cash 16,467 67,298 83,765
Cash at beginning of period -- 16,467 --
----------- ----------- -----------
Cash at end of period $ 16,467 $ 83,765 $ 83,765
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
NON-CASH FINANCING ACTIVITIES:
Capital subscriptions receivable
from owners $ 97,500 $ 100,000 $ 197,500
</TABLE>
See accompanying notes.
F-6
<PAGE> 53
Challenge 2000 International LLC
(a development stage company)
Notes to Financial Statements
(Information as of June 30, 1997, for the six months ended
June 30, 1997, and for the period from inception (September 17, 1996)
through June 30, 1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Challenge 2000 International LLC (the "Company") was organized as a California
limited liability company on September 17, 1996. On September 30, 1997, the
Company reorganized as a Delaware corporation and changed its name to C2i
Solutions, Inc. On September 30, 1997, all LLC Owner Units were converted into
2,391,338 shares of the Delaware corporation's common stock and all Owner
options were converted into options to acquire 625,000 shares of common stock.
Concurrent with the formation of C2i Solutions, Inc., the Delaware corporation,
the California limited liability company was dissolved.
C2i Solutions, Inc.'s authorized capital stock consists of 10,000,000 shares of
common stock, with a par value of $.001 per share, and 1,000,000 shares of
preferred stock, with a par value of $.001 per share. The Board may issue series
of preferred stock without action of the stockholders of the Company.
Accordingly, the issuance of preferred stock may adversely affect the rights of
the holders of the common stock. In addition, the issuance of preferred stock
may be used as an "anti-takeover" device without further action on the part of
the stockholders. Issuance of preferred stock may dilute the voting power of
holders of common stock (such as by issuing preferred stock with super-voting
rights) and may render more difficult the removal of current management, even if
such removal may be in the stockholders' best interests. The Company has no
current plans to issue any of the preferred stock.
The Company is a provider of integrated solutions for organizations to assess,
manage and implement required changes to computer applications for the "Year
2000 Problem." In addition to shrink-wrapped products, the Company intends to
offer its customers a complete range of consulting services, including project
management, out-sourcing and testing in connection with Year 2000 projects.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. Since inception, the Company has been
primarily engaged in organizational activities, including raising capital,
recruiting personnel and the marketing of its products and services. As of June
30, 1997, the Company has not realized significant revenues and therefore is
considered to be in the development stage.
The Company's ability to transition from the development stage and ultimately to
attain profitable operations is dependent upon its ability to raise additional
capital through debt or equity financing and the successful market acceptance of
its products and services. There can be no assurances that the Company's
products and services or its efforts to raise additional capital will be
successful. The accompanying financial statements do not
F-7
<PAGE> 54
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
INTERIM PERIODS
The financial statements for the six months ended June 30, 1997 and for the
period from inception (September 17, 1996) through June 30, 1997 are unaudited,
but include all adjustments (consisting only of normal recurring adjustments)
which the Company considers necessary for a fair presentation of the financial
position as of such date and the operating results and cash flows for such
periods. Results for the interim period and period since inception are not
necessarily indicative of results to be expected for the entire year or for any
future period.
FISCAL YEAR END
The Company's fiscal year end is December 31.
CONCENTRATION OF CREDIT RISK
Credit is extended based on an evaluation of the customer's financial condition
and generally collateral is not required.
SIGNIFICANT CUSTOMERS
Revenue from one customer accounted for 100% of the Company's total revenue for
the period ended December 31, 1996. Revenue from three customers accounted for
44%, 42% and 14%, respectively, of the Company's total revenue for the six
months ended June 30, 1997. At December 31, 1996, all of the accounts receivable
related to the customer which represented 100% of total revenue was outstanding,
and represented 100% of the accounts receivable balance. At June 30, 1997, all
of the accounts receivable related to the customer which represented 14% of
total revenue was outstanding, and represented 100% of the accounts receivable
balance.
F-8
<PAGE> 55
Challenge 2000 International LLC
(a development stage company)
Notes to Financial Statements (continued)
(Information as of June 30, 1997, for the six months ended June
30, 1997, and for the period from inception (September 17, 1996) through
June 30, 1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT SUPPLIERS
Purchases from a single supplier, who is also a former owner, accounted for 100%
of the Company's cost of revenues for the period ended December 31, 1996. At
December 31, 1996, all $6,300 of these costs were outstanding and have been
included as accrued royalty due to former owner in the accompanying balance
sheet. Purchases from three suppliers, one of whom is a former owner, accounted
for 47%, 31% and 20% of the Company's total cost of revenues for the six months
ended June 30, 1997. At June 30, 1997, $13,452, $0 and $4,825 of these costs
were outstanding and have been included in accrued royalty due to former owner
and accounts payable in the accompanying balance sheet.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is being depreciated using the
straight-line method over the estimated useful life of the property and
equipment, which is three to seven years.
INTANGIBLE ASSETS
Organization costs totaling $1,395, which are included in other assets, are
amortized using the straight-line method over five years. Accumulated
amortization totaled $70 and $209 at December 31, 1996 and June 30, 1997,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance sheet. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Revenue associated with performance under contracts to provide Year 2000
computer consulting and reengineering services is recognized utilizing the
percentage-of-completion method in the ratio that labor-hours incurred to date
bear to estimated total labor-hours at completion, provided that collection of
the related receivable is probable. Adjustments to
F-9
<PAGE> 56
Challenge 2000 International LLC
(a development stage company)
Notes to Financial Statements (continued)
(Information as of June 30, 1997, for the six months ended June
30, 1997, and for the period from inception (September 17, 1996) through
June 30, 1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contract cost estimates are made in the periods in which the facts which require
such revisions become known. When the revised estimates indicate a loss, such
loss is provided for currently in its entirety. The costs of providing warranty
and follow-on customer support related to services performed are not significant
and have been accrued.
The Company recognizes revenue from the sale of software and hardware products
upon delivery of the product to the customers when collection is assured.
Revenues on sales of software products to customers which require significant
continued obligation from the Company are deferred until such obligations are no
longer significant.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Awards by the Company of stock options are accounted for in accordance with
Accounting Principles Board Opinion No. 25 and related interpretations ("APB
25"). The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for
Stock-Based Compensation" (Note 2).
INCOME TAXES
The Company's owners elected to be treated as an Limited Liability Corporation
("LLC") for tax purposes. In lieu of corporate income taxes, all taxable income
or loss of the Company is included in the income tax returns of the individual
owners. Accordingly, the accompanying historical financial statements do not
include a provision for federal income taxes, but reflect a provision for the
California minimum franchise tax. On September 30, 1997, the owners of the
Company elected to terminate their LLC status and thereafter become taxable as a
"C" Corporation.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during that
period, adjusted to reflect the conversion from a limited liability company to a
Delaware corporation, on a retroactive basis.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
common stock equivalents, regardless of their anti-dilutive impact, issued at
prices below
F-10
<PAGE> 57
Challenge 2000 International LLC
(a development stage company)
Notes to Financial Statements (continued)
(Information as of June 30, 1997, for the six months ended June 30, 1997,
and for the period from inception (September 17, 1996) through June 30,
1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the offering price per share during the twelve months preceding the initial
filing of the Company's Registration Statement and through the effective date of
the initial public offering of the Company's common stock have been included in
the calculation of pro forma net loss per share using the treasury stock method
as if outstanding since the beginning of each period presented.
Supplemental net loss per share, giving effect to the use of a portion of the
net proceeds of this offering to repay the Bridge Notes payable, is not
presented since it does not differ materially from pro forma net loss per share.
2. OWNERS' EQUITY
As of December 31, 1996, the Company had issued 1,050,000 Owner Units to three
individuals. In accordance with the Operating Agreement these individuals are
required to contribute total capital of $157,500 of which $60,000 had been
received by the Company as of December 31, 1996. The Company recorded the
remaining $97,500 to be received under the Agreement as capital subscriptions
receivable in the accompanying balance sheet. The subscription amounts were
received in January 1997.
In June 1997, the Company issued an additional 1,333,332 Owner Units to existing
and new owners. In exchange for these Units, the Company received a $100,000
cash payment and $100,000 was recorded as capital subscriptions receivable in
the accompanying balance sheet. The Company recognized $1,199,999 of
compensation expense in the accompanying statement of operations related to the
issuance of these Owner Units, which represents the difference between the
deemed value of the Owner Units and the consideration received. In addition, the
Company issued 7,456 Owner Units valued at $7,829 to consultants in exchange for
services received.
Unit Options
During June 1997, the Company's Managing Owners granted nonqualified options to
purchase 62,000 of the Company's Owner Units, with an exercise price of $2.50
per unit, to the Company's Majority Owner, who is also the President. The
Company also granted nonqualified options to purchase 108,000 of the Company's
Owner Units, with an exercise price of $2.50 per unit, to Owners of the Company
who are also senior officers of the Company. These options vest over a
three-year period, are exercisable at various dates and expire ten years from
the date of grant or earlier in the event of termination of
F-11
<PAGE> 58
Challenge 2000 International LLC
(a development stage company)
Notes to Financial Statements (continued)
(Information as of June 30, 1997, for the six months ended June
30, 1997, and for the period from inception (September 17, 1996) through
June 30, 1997 is unaudited)
2. OWNER'S EQUITY (CONTINUED)
employment. None of these options have been exercised.
<TABLE>
<CAPTION>
Weighted average
Units exercise price
---------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Outstanding at beginning of period 0 $ --
Granted 170,000 2.50
Exercised 0 --
Forfeited 0 --
---------- ----------
Outstanding at end of period 170,000 2.50
========== ==========
Options exercisable at end of period -0- --
========== ==========
</TABLE>
The following summarizes information regarding options outstanding at June 30,
1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------ -------------------------------------------
Weighted Weighted
average Weighted average
remaining average remaining Weighted
Exercise Number contractual exercise Number contractual average
Price Outstanding life (years) price exercisable life (years) exercise price
- --------- ------------ ----------- --------- -------------- ----------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
$2.50 170,000 10 $2.50 -- -- $ --
</TABLE>
F-12
<PAGE> 59
Challenge 2000 International LLC
(a development stage company)
Notes to Financial Statements (continued)
(Information as of June 30, 1997, for the six months ended June
30, 1997, and for the period from inception (September 17, 1996) through
June 30, 1997 is unaudited)
2. OWNER'S EQUITY (CONTINUED)
In accordance with APB 25, the Company did not recognize any compensation
expense during the six month period ended June 30, 1997 related to the grant of
options, as the exercise price of options granted exceeded the fair value on the
date of value grant. Had compensation cost related to the options been
determined based upon the fair value of options at their grant dates, as
prescribed in SFAS 123, the Company's net loss would have been the same.
The fair value of options at date of grant was estimated using the minimum value
method with the following weighted average assumptions:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
-----------------
(Unaudited)
<S> <C>
Expected life (years)................................................... 5.0
Risk-free interest rate................................................. 6.0%
Dividend yield.......................................................... 0.0%
Fair value of option grants--exercise price equal to
the fair value of the related stock................................... 0
Fair value of option grants--exercise price greater
than the fair value of the related stock.............................. 0
</TABLE>
Because options vest over several years and additional option grants are
expected to be made in future years, the above pro forma results applying the
provisions of SFAS 123 are not representative of pro forma results for future
years.
F-13
<PAGE> 60
Challenge 2000 International LLC
(a development stage company)
Notes to Financial Statements (continued)
(Information as of June 30, 1997, for the six months ended June
30, 1997, and for the period from inception (September 17, 1996) through
June 30, 1997 is unaudited)
3. COMMITMENTS
Licensing Agreements
In 1996, the Company entered into an exclusive technology licensing agreement
with a former Owner through which it obtained world-wide marketing rights to
certain software products sold by the Company. Under this agreement, the Company
was obligated to pay a royalty on sales of the product ranging from 50% to 70%.
The accompanying balance sheets include $6,300 and $13,452 of accrued royalties
due under this agreement at December 31, 1996 and June 30, 1997, respectively.
In 1997, the Company terminated this licensing agreement and no longer uses
these software products.
Subsequent to December 31, 1996, the Company entered into several non-exclusive
license agreements. These agreements generally allow the Company to utilize and
resell to its customers certain software products, in exchange for royalty
payments by the Company which generally range from 10% to 50%.
Officers Salaries
The Operating Agreement for the Company specifies that officers' salaries are
only payable from monthly profits as calculated prior to the consideration of
such salaries. In the event monthly profits are not sufficient to pay all
amounts owed, such salaries will be paid on a pro-rata basis with any remaining
unpaid amount payable in later profitable periods. As of June 30, 1997, the
Company had not realized any profits and as such no amount of compensation had
been paid to its officers. As of June 30, 1997, the officers have agreed to
forgo claims to unpaid salaries owed for services rendered in the period from
inception. The Company expects to commence payment of salaries to these officers
in December 1997, upon completion of its initial public offering.
F-14
<PAGE> 61
Challenge 2000 International LLC
(a development stage company)
Notes to Financial Statements (continued)
(Information as of June 30, 1997, for the six months ended June
30, 1997, and for the period from inception (September 17, 1996) through
June 30, 1997 is unaudited)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lease Commitments
The Company leases its office facilities and certain computer equipment under
lease agreements which are classified as operating leases.
Future minimum payments under these noncancelable operating leases are
summarized as follows:
Year Ending December 31:
<TABLE>
<S> <C> <C>
1997 $ 15,129
1998 6,030
1999 --
2000 --
2001 --
Thereafter --
---------
Total future minimum lease payments $ 21,159
=========
</TABLE>
Rent expense amounted to $5,643, $12,425, and $18,068 for the period from
inception (September 17, 1996) through December 31, 1996, the six months ended
June 30, 1997, and for the period from inception (September 17, 1996) through
June 30, 1997, respectively, and has been included in selling, general and
administrative expenses in the accompanying statements of operations.
4. SUBSEQUENT EVENTS
Collection of Subscriptions Receivable
In August 1997, the Company received $50,000 as payment on an Owner's capital
subscriptions receivable account. In September 1997, the Company received the
remaining balance of $50,000 of capital subscriptions receivable which was
outstanding at June 30, 1997.
Bridge Financing
In October 1997, the Company completed a $600,000 Bridge Financing. This debt
consists of $600,000 face value promissory notes bearing 10% interest, due at
the earlier
F-15
<PAGE> 62
Challenge 2000 International LLC
(a development stage company)
Notes to Financial Statements (continued)
(Information as of June 30, 1997, for the six months ended June
30, 1997, and for the period from inception (September 17, 1996) through
June 30, 1997 is unaudited)
4. SUBSEQUENT EVENTS (CONTINUED)
of completion of an initial public offering or September 30, 1999 and 600,000
warrants which initially enable the holder to purchase shares of Common Stock at
$4.00 per share or two-thirds of the public offering price per unit, if less.
The Company received net proceeds of $573,180 (after deducting selling
commission and expenses), which have been allocated $108,000 to warrants,
$492,000 to Bridge Notes payable and $26,820 to deferred finance changes. The
resulting $134,820 of combined debt discount and deferred finance charges will
be charged to expense using the interest method over the term of the notes.
Stock Options
Subsequent to June 30, 1997, the Company granted options for the purchase of
Owner Units to certain employees, directors, and consultants, which totaled
455,000 units. Of these options, 355,000 have an exercise price of $2.50 per
unit and vest over periods ranging from three to four years. The remaining
100,000 options have an exercise price of $5.40 per unit and vest over a
twelve-month period. The 355,000 options expire ten years from the date of
grant, or earlier in certain cases, in the event of termination of employment,
directorship or consulting relationship. The 100,000 options expire five years
from the date of grant. All of these options are exercisable at various dates as
determined by the Managing Owners.
Initial Public Offering
In October 1997, the Board of Directors authorized management of the Company to
file a registration statement with the Securities and Exchange Commission,
permitting the Company to sell up to 1,150,000 securities (consisting of one
share of Common Stock and one Warrant for the purchase of one share of Common
Stock) to the public.
F-16
<PAGE> 63
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................
Risk Factors............................................................
Use of Proceeds.........................................................
Dividend Policy.........................................................
Capitalization..........................................................
Dilution................................................................
Selected Financial Data.................................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................................
Business................................................................
Management..............................................................
Certain Transactions....................................................
Principal Stockholders..................................................
Description of Securities...............................................
Shares Eligible for Future Sale.........................................
Underwriting............................................................
Legal Matters...........................................................
Experts.................................................................
Additional Information..................................................
Index to Financial Statements........................................... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS
================================================================================
1,000,000 SHARES OF COMMON STOCK
AND
1,000,000 REDEEMABLE WARRANTS
[C2i LOGO]
C2i SOLUTIONS, INC.
--------------------
PROSPECTUS
--------------------
SOUTHWALL CAPITAL CORP.
___________, 1997
================================================================================
<PAGE> 64
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits
indemnification of officers, directors, and other corporate agents under certain
circumstances and subject to certain limitations. The Registrant's Certificate
of Incorporation and By-Laws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant has entered into separate indemnification agreements with its
directors and officers which require the Registrant, among other things, to
indemnify them against certain liabilities which may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature) and to maintain directors' and officers' liability insurance,
if available on reasonable terms.
These indemnification provisions and the indemnification agreement
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Shares and Warrants being registered. All amounts shown are estimates
except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee ............................................ $ 4,740
NASD filing fee ............................................. 2,064
Nasdaq SmallCap Market fee .................................. 10,000
Blue sky qualification fees and expenses .................... 35,000
Printing and engraving expenses ............................. 20,000
Legal fees and expenses ..................................... 150,000
Accounting fees and expenses ................................ 50,000
Transfer agent and registrar fees ........................... 5,000
Directors and Officers insurance coverage ................... 55,000
Non-Accountable Underwriter Expense Allowance ............... 180,000
Miscellaneous ............................................... 13,196
--------
Total ....................................................... $525,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In the last three years the Registrant has sold and issued the following
unregistered securities:
1. Owner Units (Common Stock)
In September 1996, the Company issued an aggregate of 1,050,000 Owner
Units to three founders of the Company at a price of $.15 per Unit, for
aggregate consideration of $157,500.
In June 1997, the Company issued 1,333,332 Owner Units to three
executive officers of the Company at a price of $.15 per unit, for aggregate
consideration of $200,000.
II-1
<PAGE> 65
In the months of June through September 1997, the Company issued an
aggregate of 8,006 Owner Units to three consultants to the Company as
consideration for services rendered to the Company by these consultants valued
in the aggregate at $8,710.
On September 30, 1997, the Company exchanged each Owner Unit for one
share of its Common Stock in connection with its reorganization from a
California limited liability company to a Delaware corporation.
2. Bridge Notes and Bridge Warrants
In October 1997, the Company issued Bridge Notes having an aggregate
principal of $600,000, as well as 600,000 Bridge Warrants, to 36 accredited
investors for aggregate consideration of $600,000.
3. Option Issuances to Employees, Consultants and Directors
From June 1, 1997 to the present, the Company issued options to purchase
an aggregate of 625,000 shares of Common Stock at exercise prices ranging from
$2.50 to $5.40 per share to ten employees and consultants and three outside
directors. No consideration was paid to the Company by any recipient of any of
the foregoing options for the grant of any such options.
There were no underwriters employed in connection with any of the
transactions set forth in Item 26.
The issuances described in Items 26(1) through 26(2) were exempt from
registration under the Securities Act because they did not involve a public
offering. The issuances described in Item 26(3) were exempt from registration
under the Securities Act in reliance on Rule 701 promulgated thereunder and on
Section 4(2) thereof as transactions pursuant to compensatory benefit plans and
contracts relating to compensation and transactions not involving a public
offering. 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 affixed to the share certificates and other instruments issued in
such transactions.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
1.1 Proposed Form of Underwriting Agreement
*1.2 Form of Underwriter Warrant
*1.3 Form of Future Services Agreement, to be dated as of the
effective date, between the Underwriter and the Company
3.1 Certificate of Incorporation
3.2 Bylaws
*4.1 Form of Warrant Agreement between the Company and the
Warrant Agent, including the form of Warrants
*5.1 Opinion and Consent of Gray Cary Ware & Freidenrich
10.1 Form of Indemnity Agreement for officers and directors
10.2 Form of Proposed Stock Option Plan and Agreements
thereunder
10.3 Form of Bridge Note and accompanying Bridge Warrant
*10.4 Employment Agreement dated June 1, 1997 between the Company
and John Anthony Whalen, Jr.
*10.5 Letter Agreement dated August 4, 1997 between the Company,
David Tendler and Hal Beretz
*10.6 Letter Agreement dated September 24, 1997 between the
Company and Kim Goh
11.1 Calculation of Earnings Per Share
*23.1 Consent of Independent Accountants
</TABLE>
II-2
<PAGE> 66
<TABLE>
<S> <C>
*23.2 Consent of Gray Cary Ware & Freidenrich (included in
Exhibit 5.1)
24.1 Power of Attorney (contained on Page II-5)
27.1 Financial Data Schedule
</TABLE>
- ----------
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
All required information is set forth in the financial statements
included in the Prospectus constituting part of this Registration Statement.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement 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, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, 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) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 67
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 County of San
Diego, City of San Diego, California, on the 3rd day of November 1997.
C2i SOLUTIONS, INC.
By: /s/ JOHN ANTHONY WHALEN, JR.
---------------------------------------
John Anthony Whalen, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
II-4
<PAGE> 68
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints John Anthony Whalen, Jr. and Diane
E. Hessler and each of them acting individually, as his or her attorney-in-fact,
each with full power of substitution, for him or her in any and all capacities,
to sign any and all amendments to this Registration Statement, including
post-effective amendments, and any and all new registration statements filed
pursuant to Rule 462 under the Securities Act of 1933 in connection with or
related to the offering contemplated by this Registration Statement, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all said
Registration Statements and amendments thereto.
In accordance with the requirements of the Securities Act, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JOHN ANTHONY WHALEN, JR. Chief Executive Officer and November 3, 1997
- ----------------------------- Director (Principal Executive
John Anthony Whalen, Jr. Officer)
/s/ DIANE E. HESSLER Chief Financial Officer November 3, 1997
- ----------------------------- (Principal Financial
Diane E. Hessler and Accounting Officer)
/s/ HAL H. BERETZ Director November 3, 1997
- -----------------------------
Hal H. Beretz
/s/ KIM P. GOH Director November 3, 1997
- -----------------------------
Kim P. Goh
/s/ DAVID TENDLER Director November 3, 1997
- -----------------------------
David Tendler
</TABLE>
II-5
GARK
<PAGE> 69
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
1.1 Proposed Form of Underwriting Agreement
*1.2 Form of Underwriter Warrant
*1.3 Form of Future Services Agreement, to be dated as of the
effective date, between the Underwriter and the Company
3.1 Certificate of Incorporation
3.2 Bylaws
*4.1 Form of Warrant Agreement between the Company and the
Warrant Agent, including the form of Warrants
*5.1 Opinion and Consent of Gray Cary Ware & Freidenrich
10.1 Form of Indemnity Agreement for officers and directors
10.2 Form of Proposed Stock Option Plan and Agreements
thereunder
10.3 Form of Bridge Note and accompanying Bridge Warrant
*10.4 Employment Agreement dated June 1, 1997 between the Company
and John Anthony Whalen, Jr.
*10.5 Letter Agreement dated August 4, 1997 between the Company,
David Tendler and Hal Beretz
*10.6 Letter Agreement dated September 24, 1997 between the
Company and Kim Goh
11.1 Calculation of Earnings Per Share
*23.1 Consent of Independent Accountants
*23.2 Consent of Gray Cary Ware & Freidenrich (included in
Exhibit 5.1)
24.1 Power of Attorney (contained on Page II-5)
27.1 Financial Data Schedule
- ----------
* To be filed by amendment.
<PAGE> 1
Exhibit 1.1
C2i SOLUTIONS, INC.
One Million Shares of Common Stock ($.001 Par Value)
-and-
One Million Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
_______________, 1997
South Wall Capital Corp.
110 Wall Street
New York, New York 10005
Gentlemen:
C2i Solutions, Inc., a Delaware corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representative (the
"Representative)" shares of the Company's Common Stock, $.001 par value ("Common
Stock") and Redeemable Warrants ("Warrants") to purchase such shares to be
issued pursuant to a Warrant Agreement between the Company and ______ dated
________, 1997 ("Warrant Agreement"). The aggregate number of such shares that
the Company proposes to sell is One Million (the "Firm Shares") and the
aggregate number of such warrants that the Company proposes to sell is likewise
One Million (the "Firm Warrants"). These are collectively referred to in this
agreement as the "Firm Securities." The respective amounts of the Firm
Securities to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company also proposes to sell at the
Underwriters' option an aggregate of up to 150,000 additional shares and a like
number of warrants (the "Option Shares" and "Option Warrants" respectively) as
set forth below, and these are collectively referred to in this agreement as the
"Option Securities."
As the Representative, you have advised the Company that (a) you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) the several Underwriters are willing, acting severally and not jointly,
to purchase the numbers of Firm Securities set forth opposite their respective
names in Schedule I, plus their pro rata portion of the Option Securities if you
elect to exercise the over-allotment option in whole or in part for the accounts
of the several Underwriters. The Firm Shares and the Option Shares (to the
extent the aforementioned option is
-1-
<PAGE> 2
exercised) are herein collectively called the "Shares." The Firm Warrants and
the Option Warrants (to the extent the aforementioned option is exercised) are
herein collectively called the "Warrants."
In consideration of the mutual agreements contained herein and of
the interests of the parties in the transactions contemplated hereby, the
parties hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form SB-2 (File No. 333-______) with
respect to the Shares and Warrants has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. The Company has complied with the conditions for the
use of Form SB-2. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses (meeting the requirements of
the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement, together with any
registration statement filed by the Company pursuant to Rule 462 (b) of the Act,
herein referred to as the "Registration Statement," which shall be deemed to
include all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, has become effective under the
Act and no post-effective amendment to the Registration Statement has been filed
as of the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed prior to the
time it becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares and Warrants, together with the term sheet or abbreviated term sheet
filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each
preliminary prospectus included in the Registration Statement prior to the time
it becomes effective is herein referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement.
(c) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; the
Common Stock and Warrants to be issued and sold by the Company have been duly
authorized and when issued and paid for as contemplated herein will be validly
issued, fully paid and non-assessable; the shares of Common Stock issuable upon
exercise of the Warrants have been duly authorized and reserved for issuance
upon exercise of the Warrants and will when issued as contemplated by the
instrument
-2-
<PAGE> 3
evidencing the Warrants be validly issued, fully paid and non-assessable; and no
preemptive rights of stockholders exist with respect to any shares of Common
Stock or the issue and sale thereof.
(d) The Warrant Agreement and Warrants have been duly authorized;
and when the Warrants are delivered and paid for pursuant to this Agreement, the
Warrant Agreement and the Warrants will have been duly executed and delivered.
(e) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares and Warrants conform to
the description thereof contained in the Registration Statement. The form of
certificates for the Shares and Warrants conform to the corporate law of the
jurisdiction of the Company's incorporation. There are no securities of the
Company convertible into, or exchangeable for, shares of the Company's capital
stock, nor is the Company obligated to issue any such shares or securities,
except as disclosed in the Prospectus.
(f) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares and
Warrants nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and will
conform, to the requirements of the Act and the Rules and Regulations. The
Registration Statement and any amendment thereto do not contain, and will not
contain, any untrue statement of a material fact and do not omit, and will not
omit, to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus and any amendments
and supplements thereto do not contain, and will not contain, any untrue
statement of material fact; and do not omit, and will not omit, to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no representations or
warranties as to information contained in or omitted from the Registration
Statement or the Prospectus, or any such amendment or supplement, in reliance
upon, and in conformity with, written information furnished to the Company by or
on behalf of any Underwriter through the Representative, specifically for use in
the preparation thereof.
(g) The financial statements of the Company, together with related
notes and schedules as set forth in the Registration Statement, present fairly
the financial position and the results of operations and cash flows of the
Company, at the indicated dates and for the indicated periods. Such financial
statements and related schedules have been prepared in accordance with generally
accepted principles of accounting, consistently applied throughout the periods
involved, except as disclosed herein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The pro forma financial
statements and other pro forma financial information included in the
Registration Statement and the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been properly
compiled on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are
-3-
<PAGE> 4
reasonable and the adjustments used therein are appropriate to give effect to
the transactions or circumstances referred to therein.
(h) Ernst & Young LLP, who have certified certain of the financial
statements filed with the Commission as part of, or incorporated by reference
in, the Registration Statement, are independent public accountants as required
by the Act and the Rules and Regulations.
(i) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company before any court or
administrative agency or otherwise which if determined adversely to the Company
might result in any material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company or to prevent the consummation of the
transactions contemplated hereby, except as set forth in the Registration
Statement.
(j) The Company has good and marketable title to all of the
properties and assets reflected in the financial statements (or as described in
the Registration Statement) described above, subject to no lien, mortgage,
pledge, charge or encumbrance of any kind except those reflected in such
financial statements (or as described in the Registration Statement) or which
are not material in amount. The Company occupies its leased properties under
valid and binding leases.
(k) The Company has filed all Federal, State, local and foreign
income tax returns which have been required to be filed and has paid all taxes
indicated by said returns and all assessments received by it to the extent that
such taxes have become due. All tax liabilities have been adequately provided
for in the financial statements of the Company.
(l) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise), or
prospects of the Company, whether or not occurring in the ordinary course of
business, and there has not been any material transaction entered into or any
material transaction that is probable of being entered into by the Company,
other than transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be amended or
supplemented. The Company has no material contingent obligations that are not
disclosed in the Company's financial statements which are included in the
Registration Statement.
(m) The Company is not, and with the giving of notice or lapse of
time or both, will not be, in violation of or in default under its Certificate
of Incorporation or By-Laws or under any agreement, lease, contract, indenture
or other instrument or obligation to which it is a party or by which it, or any
of its properties, is bound and which default is of material significance in
respect of the condition, financial or otherwise of the Company or the business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company. The
-4-
<PAGE> 5
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof will
not conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company is a party, or of the Certificate
of Incorporation or By-Laws of the Company or any order, rule or regulation,
applicable to the Company, of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(n) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Shares and Warrants for
public offering by the Underwriters under state securities or Blue Sky laws) has
been obtained or made and is in full force and effect.
(o) The Company holds all material licenses, certificates and
permits from governmental authorities which are necessary to the conduct of its
business; and the Company has not infringed any patents, patent rights, trade
names, trademarks or copyrights, which infringement is material to the business
of the Company. The Company knows of no material infringement by others of
patents, patent rights, trade names, trademarks or copyrights owned by or
licensed to the Company.
(p) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the Shares and Warrants to facilitate the sale or resale thereof. The
Company acknowledges that the Underwriters may engage in passive market making
transactions in the Shares on The Nasdaq Stock Market in accordance with Rule
10b-6A under the Exchange Act.
(q) The Company is not an "investment company" within the meaning of
such term under the Investment Company Act of 1940 and the rules and regulations
of the Commission thereunder.
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with
-5-
<PAGE> 6
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(r) The Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of its business and the
value of its properties and as is customary for companies engaged in similar
industries.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(t) No holder of any outstanding securities issued by the Company
has any right (i) to require the Company to register such securities under the
Act at any time prior to the end of the eighteenth month following the month
that includes the date on which the Registration Statement becomes effective
("Effective Date"), or (ii) to elect to participate in any registration by the
Company of such securities.
(u) The Company is not obligated to pay a fee (such as a finders'
fee or consulting fee) to any person in connection with the introduction of the
Company to the Representative, or to any other person who will purchase
securities directly from the Company in connection with the offering to which
the Registration Statement relates.
(v) During the period of twelve months ending on the date of this
Agreement, the Company has not paid any compensation of any nature to any person
other than the Representative in consideration of obtaining or arranging funding
for the Company from any source, or rendering consulting services to it.
(w) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure of doing Business with Cuba, and the Company
further agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the
Registration Statement becomes or has become effective with the Commission or
with the Florida Department of Banking and Finance (the "Department"), whichever
date is later, or if the information reported or incorporated by reference in
the Prospectus, if any, concerning the
-6-
<PAGE> 7
Company's business with Cuba or with any person or affiliate located in Cuba
changes in any material way, the Company will provide the Department notice of
such business or change, as appropriate, in a form acceptable to the Department.
3. PURCHASE, SALE AND DELIVERY OF THE FIRM SECURITIES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $6.00 per Share and $0.10 per Warrant,
less an underwriting discount of 10% in each case, the number of Firm Securities
set forth opposite the name of each Underwriter in Schedule I hereof, subject to
adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Securities to be sold hereunder is to be
made in same day funds via wire transfer to the order of the Company against
delivery of certificates therefor to the Representative for the several accounts
of the Underwriters. Such payment and delivery are to be made at the offices of
SouthWall Capital Corp., 110 Wall Street, 15th Floor, New York, New York, at
10:00 a.m., New York time, on the third business day after the date of this
Agreement or at such other time and date not later than five business days
thereafter as you and the Company shall agree upon, such time and date being
herein referred to as the "Closing Date." (As used herein, "business day" means
a day on which the New York Stock Exchange is open for trading and on which
banks in New York are open for business and not permitted by law or executive
order to be closed.) The certificates for the Firm Securities will be delivered
in such denominations and in such registrations as the Representative requests
in writing not later than the second full business day prior to the Closing
Date, and will be made available for inspection by the Representative at least
one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares and/or Option Warrants at the price per Share and per Warrant as
set forth in the first paragraph of this Section 3. The option granted hereby
may be exercised in whole or in part by giving written notice at any time before
the close of business on the 45th day after the date of this Agreement, by you,
as Representative of the several Underwriters, to the Company, setting forth the
number of Option Shares and/or Option Warrants as to which the several
Underwriters are exercising the option, the names and denominations in which the
Option Shares and/or Option Warrants are to be registered and the time and date
at which such certificates are to be delivered. The time and date at which
certificates for Option Securities are to be delivered shall be determined by
the Representative but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the
-7-
<PAGE> 8
date of exercise of the option is three or more days before the Closing Date,
the notice of exercise shall set the Closing Date as the Option Closing Date.
The number of Option Shares and/or Option Warrants to be purchased by each
Underwriter shall be in the same proportion to the respective total numbers
thereof being purchased as the respective numbers of Firm Shares and/or Firm
Warrants being purchased by such Underwriter bears to the respective total
numbers thereof, adjusted by you in such manner as to avoid fractional Shares or
Warrants. The option with respect to the Option Shares and/or Option Warrants
granted hereunder may be exercised only to cover over-allotments in the sale of
the Firm Shares and/or Firm Warrants by the Underwriters. You, as Representative
of the several Underwriters, may cancel such option at any time prior to its
expiration by giving written notice of such cancellation to the Company. To the
extent, if any, that the option is exercised, payment for the Option Shares
and/or Option Warrants shall be made on the Option Closing Date in New York
Clearing House funds by certified or bank cashier's check drawn to the order of
the Company against delivery of certificates therefor at the offices of
SouthWall Capital Corp., 110 Wall Street, New York, New York.
2. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Securities as soon as the Representative deems it advisable
to do so. The Firm Securities are to be initially offered to the public at the
initial public offering price set forth in the Prospectus. The Representative
may from time to time thereafter change the public offering price and other
selling terms. To the extent, if at all, that any Option Securities are
purchased pursuant to Section 2 hereof, the Underwriters will offer them to the
public on the foregoing terms.
It is further understood that you will act as the Representative for
the Underwriters in the offering and sale of the Shares and Warrants in
accordance with a Master Agreement Among Underwriters entered into by you and
the several other Underwriters.
3. COVENANTS OF THE COMPANY .
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representative containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representative shall not
previously have been advised and furnished with a copy or to which the
Representative shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
-8-
<PAGE> 9
(b) The Company will advise the Representative promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representative in
endeavoring to qualify the Shares and Warrants for sale under the securities
laws of such jurisdictions as the Representative may reasonably have designated
in writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided the
Company shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representative may reasonably request for distribution of the Shares and
Warrants.
(d) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary Prospectus
as the Representative may reasonably request. The Company will deliver to, or
upon the order of, the Representative during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representative may
reasonably request. The Company will deliver to the Representative at or before
the Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representative such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representative
may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"), and
the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares and Warrants as contemplated in
this Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission an appropriate amendment to the Registration Statement or
supplement to the
-9-
<PAGE> 10
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(g) The Company will, within 120 days after the Registration
Statement becomes effective, file Form 8-A or another appropriate form with the
Securities and Exchange Commission to register the Common Stock under the
Securities Exchange Act of 1934, as amended. The Company will use its best
efforts to maintain that registration in effect for at least five years, to
comply with the reporting requirements of Section 15 of that Act, and otherwise
to make available current public information about the Company within the
meaning of Rule 15c(2)(11) under that Act.
(h) The Company will, for a period of five years from the Closing
Date, deliver to the Representative copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Securities
Exchange Act of 1934, as amended.
(i) The Company will, for a period of two years from the Closing
Date, provide to the Representative on a timely basis copies of all internal
financial and operating reports that are made available to Company management on
a regular basis.
(j) No offering, sale, short sale or other disposition of any Common
Stock or other securities convertible into or exchangeable or exercisable for,
or derivative of, Common Stock (or agreement for such) will be made for a period
of [180] days after the date of this Agreement, directly or indirectly, by the
Company otherwise than hereunder or with the prior written consent of SouthWall
Capital Corp.
(k) The Company will use its best efforts, subject to notice of
issuance, to arrange that the Shares and Warrants be listed for trading on the
NASDAQ National Market or the NASDAQ Small-Cap Market.
(l) The Company will use its best efforts to register with the
Corporate Record Savings and Annual Report Information Service published by
Standard & Poor's Corporation, and maintain that registration until at least the
fifth anniversary of the Effective Date.
-10-
<PAGE> 11
(m) The Company has caused each officer and director and specific
shareholders of the Company to furnish to you, on or prior to the date of this
agreement, a letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which each such person shall agree not to offer, sell,
sell short or otherwise dispose of any Common Stock or other capital stock of
the Company, or any other securities convertible, exchangeable or exercisable
for or derivative of Common Stock owned by such person or request the
registration for the offer or sale of any of the foregoing (or as to which such
person has the right to direct the disposition of) for a period of 18 months
after the date of this Agreement, directly or indirectly, except with the prior
written consent of SouthWall Capital Corp. ("Lockup Agreements").
(n) The Company shall apply the net proceeds of its sale of the
Shares and Warrants as set forth in the Prospectus.
(o) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Securities in such a manner as
would require the Company to register as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act").
(p) The Company will, during the five-year period following the date
on which the Registration Statement becomes effective, maintain a transfer agent
reasonably satisfactory to the Underwriter and, if necessary under the
jurisdiction of incorporation of the Company, a registrar for the Common Stock.
At the Underwriter's request, the Company will instruct the transfer agent to
provide copies of the Company's stock transfer sheets to the Underwriter once
each month.
(q) The Company shall retain as its independent certified public
accountants the firm of Ernst & Young LLP or another accounting firm of
recognized national standing acceptable to the Representative, and as its legal
counsel the firm of Gray Cary Ware & Freidenrich or another firm acceptable to
the Representative expert in securities law matters and in regulatory matters
applicable to the Company's business. The accounting firm so retained shall have
responsibility for preparation of the financial statements and financial
exhibits to be included in the Registration Statement. The Company shall at its
expense cause that accounting firm to review (but not audit) the Company's
regularly prepared financial statements for each of its first three fiscal
quarters in each fiscal year, prior to the time at which the Company makes any
public announcement of quarterly operating results and prior to the time the
Company files its Quarterly Report on Form 10-Q or 10-QSB.
(r) Upon request of the Representative, the Company will use its
best efforts to (i) cause the election of a person designated by the
Representative to serve as a member of the Company's Board of Directors, or (ii)
cause a person so designated to be appointed as a non-voting advisor to the
Company who is invited to attend all meetings of the Board of Directors,
whichever is requested by the Representative. The Company shall not be obligated
to maintain the
-11-
<PAGE> 12
service of any such person in either capacity beyond the fifth anniversary of
the Effective Date. In the case of the person serving as a Director, the Company
will cause that person to be covered by the same officers' and directors'
liability insurance policy as covers the other members of the Company's Board of
Directors.
(s) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
(t) Until the Effective Date, the Company will not, without the
prior written consent of the Representative (which consent may be withheld at
the sole discretion of the Representative) issue any shares of Common Stock, or
any security convertible into or exchangeable or exercisable for such shares,
except as the same may be issued in connection with a transaction as to which
the Representative has been advised in advance is being undertaken in order to
provide necessary operational financing for the Company.
(u) Prior to the first anniversary of the Effective Date, the
Company will not file a registration statement under the Securities Act on Form
S-8 (or a similar or successor form) in respect of any shares of Common Stock,
options or warrants to acquire shares of the Common Stock or securities
exchangeable or exercisable for or convertible into shares of Common Stock.
(v) Prior to the second anniversary of the Effective Date, the
Company will not sell, offer for sale or offer to sell any securities of which
it is the issuer in reliance on the exemption from registration under the Act
afforded by Regulation S promulgated under the Act.
(w) The Company will obtain, and maintain in effect at all times
until at least the second anniversary of the Effective Date, a policy of
"key-man" life insurance on the life of John Anthony Whalen, Jr. providing a
death benefit to the Company of at least $100,000.
4. COSTS AND EXPENSES.
The Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limitation (i) all
expenses incident to the issuance and delivery of the Shares and Warrants
(including all printing and engraving costs), (ii) all fees and expenses of the
registrar and transfer agent of the Common Stock, (iii) all necessary issue,
transfer and other stamp taxes in connection with the issuance and sale of the
Shares and Warrants to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the printing,
-12-
<PAGE> 13
filing, shipping and distribution of the Registration Statement (including
financial statements, exhibits, schedules, consents and certificates of
experts), each preliminary prospectus and the Prospectus, and all amendments and
supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters (including fees and
disbursements of the Representative's legal counsel) in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the Blue Sky laws, and, if requested by the Representatives, preparing and
printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to, and the reasonable fees and expenses of
counsel for the Underwriters in connection with, the NASD's review and approval
of the Underwriters' participation in the offering and distribution of the
Shares and Warrants, (viii) the listing fees of the Nasdaq Stock Market, if
applicable, and (ix) all other fees, costs and expenses referred to in Item 25
of Part II of the Registration Statement. Except as provided in this Section 4
and in Section 7 hereof, the Underwriters shall pay their own expenses,
including the fees and disbursements of their counsel, provided that if this
Agreement shall not be consummated because the conditions in Section 5 hereof
are not satisfied, or because this Agreement is terminated by the Representative
pursuant to Section 10 hereof, or by reason of any failure, refusal or inability
on the part of the Company to perform any undertaking or satisfy any condition
of this Agreement or to comply with any of the terms hereof on its part to be
performed, unless such failure to satisfy said condition or to comply with said
terms be due to the default or omission of any Underwriter, for all
out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Common Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
5. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Securities on the Closing Date and the Option Securities, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the Option
Closing Date, as the case may be, of the representations and warranties of the
Company contained herein, and to the performance by the Company of its covenants
and obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any
-13-
<PAGE> 14
nature by a Federal or state court of competent jurisdiction shall have been
issued as of the Closing Date which would prevent the issuance of the Common
Stock or Warrants.
(b) The Representative shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Gray Cary Ware &
Freidenrich, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement; the Company is duly qualified to transact
business in all jurisdictions in which the conduct of its business
requires such qualification, or in which the failure to qualify
would have a materially adverse effect upon its business.
(ii) The Company has authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the
Prospectus; the authorized shares of Common Stock have been duly
authorized; the outstanding shares thereof have been duly authorized
and validly issued and are fully paid and non-assessable; the Common
Stock and Warrants conform to the description thereof contained in
the Prospectus; the certificates for the Common Stock and Warrants,
assuming they are in the form filed with the Commission, are in due
and proper form; the Firm Shares, and the Option Shares if any, have
been duly authorized and will be validly issued, fully paid and
non-assessable when issued and paid for as contemplated by this
Agreement, and the shares of Common Stock issuable upon exercise of
the Warrants have been duly authorized and will when issued as
contemplated by the instrument evidencing the Warrants be validly
issued, fully paid and non-assessable; and no preemptive rights of
stockholders exist with respect to any shares of Common Stock or the
issue or sale thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no
outstanding securities of the Company convertible or exchangeable
into or evidencing the right to purchase or subscribe for any shares
of capital stock of the Company and there are no outstanding or
authorized options, warrants or rights of any character obligating
the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right
to purchase or subscribe for any shares of such stock; and except as
described in the Prospectus, to the knowledge of such counsel, no
holder of any securities of the Company or any other person has the
right, contractual or otherwise, which has not been satisfied or
effectively waived, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, any shares of
Common Stock or the right to have any Common Stock or other
securities of the Company included in the Registration Statement or
the right, as a result of
-14-
<PAGE> 15
the filing of the Registration Statement, to require registration
under the Act of any shares of Common Stock or other securities of
the Company.
(iv) The Registration Statement has become effective
under the Act and, to the best of the knowledge of such counsel, no
stop order proceedings with respect thereto have been instituted or
are pending or threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto and document incorporated by
reference therein comply as to form in all material respects with
the requirements of the Act and the applicable rules and regulations
thereunder (except that such counsel need express no opinion as to
the financial statements and related schedules therein).
(vi) The statements under the captions "Description of
Securities" and "Shares Eligible for Future Sale" in the Prospectus,
insofar as such statements constitute a summary of documents
referred to therein or matters of law, fairly summarize in all
material respects the information called for with respect to such
documents and matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration
Statement or described in the Registration Statement or the
Prospectus which are not so filed or described as required, and such
contracts and documents as are summarized in the Registration
Statement or the Prospectus are fairly summarized in all material
respects.
(viii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company
except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated do not and
will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Certificate of
Incorporation or By-Laws of the Company, or any agreement or
instrument known to such counsel to which the Company is a party or
by which the Company may be bound.
(x) This Agreement has been duly authorized, executed
and delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body is necessary in connection
with the execution and delivery of this Agreement and the
consummation of the transactions herein contemplated (other than as
may be required by the NASD or as required by State securities and
Blue Sky laws as to which such counsel need express no opinion)
except such as have been obtained or made, specifying the same.
-15-
<PAGE> 16
(xii) The Company is not, and will not become, as a
result of the consummation of the transactions contemplated by this
Agreement, and application of the net proceeds therefrom as
described in the Prospectus, required to register as an investment
company under the 1940 Act.
In rendering such opinion Gray Cary Ware & Freidenrich may rely as
to matters governed by the laws of states other than Delaware or Federal laws on
local counsel in such jurisdictions, provided that in each case Gray Cary Ware &
Freidenrich shall state that they believe that they and the Underwriters are
justified in relying on such other counsel. In addition to the matters set forth
above, such opinion shall also include a statement to the effect that nothing
has come to the attention of such counsel which leads them to believe that (i)
the Registration Statement, at the time it became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant to Rule
430A under the Act) and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein). With respect to such statement, Gray Cary Ware & Freidenrich may state
that their belief is based upon the procedures set forth therein, but is without
independent check and verification.
(c) The Representative shall have received from Piper & Marbury
L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, substantially to the effect specified
in subparagraphs (ii), (iii), (iv) and (x) of Paragraph (b) of this Section 6,
and that the Company is a duly organized and validly existing corporation under
the laws of the State of Delaware. In rendering such opinion, Piper & Marbury
L.L.P. may rely as to all matters governed other than by the laws of the State
of Delaware or Federal laws on the opinion of counsel referred to in Paragraph
(b) of this Section 6. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective under
the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements,
-16-
<PAGE> 17
schedules and statistical information therein). With respect to such statement,
Piper & Marbury L.L.P. may state that their belief is based upon the procedures
set forth therein, but is without independent check and verification.
(d) The Representative shall have received at or prior to the
Closing Date from a memorandum or summary, in form and substance satisfactory to
the Representative, with respect to the qualification for offering and sale by
the Underwriters of the Common Stock and Warrants under the State securities or
Blue Sky laws of such jurisdictions as the Representative may reasonably have
designated to the Company.
(e) The Representative shall have received, on each of the dates
hereof, the Closing Date and the Option Closing Date, as the case may be, a
letter dated the date hereof, the Closing Date or the Option Closing Date, as
the case may be, in form and substance satisfactory to the Representative, of
Ernst & Young LLP confirming that they are independent public accountants within
the meaning of the Act and the applicable published Rules and Regulations
thereunder and stating that in their opinion the financial statements and
schedules examined by them and included in the Registration Statement comply in
form in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such other
statements and information as is ordinarily included in accountants' "comfort
letters" to Underwriters with respect to the financial statements and certain
financial and statistical information contained in the Registration Statement
and Prospectus.
(f) The Representative shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company to
the effect that, as of the Closing Date or the Option Closing Date, as the case
may be, each of them severally represents as follows:
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for such
purpose have been taken or are, to his knowledge, contemplated by
the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to
Rules 424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of the
effective date of the Registration Statement, the statements
contained in the Registration Statement were true and correct, and
such Registration Statement and Prospectus did not omit to state a
material fact required to be
-17-
<PAGE> 18
stated therein or necessary in order to make the statements therein
not misleading, and since the effective date of the Registration
Statement, no event has occurred which should have been set forth in
a supplement to or an amendment of the Prospectus which has not been
so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not
been any material adverse change or any development involving a
prospective material adverse change in or affecting the condition,
financial or otherwise, of the Company or the earnings, business,
management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company, whether or not
arising in the ordinary course of business.
(g) The Company shall have furnished to the Representative such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as the
Representative may reasonably have requested.
(h) The Firm Securities and Option Securities, if any, have been
approved for designation upon notice of issuance on the Nasdaq Stock Market.
(i) The Lockup Agreements described in Section 3 (m) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representative and to Piper & Marbury
L.L.P., counsel for the Underwriters.
If any of the conditions in this Section 6 shall not have been
fulfilled when and as required by this Agreement to be fulfilled, the
obligations of the Underwriters hereunder may be terminated by the
Representative by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under
any obligation to each other (except to the extent provided in Sections 4 and 7
hereof).
6. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the Common Stock
and Warrants to be delivered as and when specified in this Agreement are subject
to the conditions that at the Closing Date or the Option Closing Date, as the
case may be, no stop order suspending the effectiveness of the Registration
Statement shall have been issued and in effect or proceedings therefor initiated
or threatened.
7. INDEMNIFICATION.
-18-
<PAGE> 19
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon (i) 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 (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Common Stock and Warrants, whether or not such
Underwriter or controlling person is a party to any action or proceeding;
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 the Registration Statement, any Preliminary Prospectus, the
Prospectus, or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or through the
Representative specifically for use in the preparation thereof. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, 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 to which the Company or any such director, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) 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 (ii) 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 the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representative
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
-19-
<PAGE> 20
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 7, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 7(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 7(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 7(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 7(a) and by the Company in the case of parties indemnified pursuant to
Section 7(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each
-20-
<PAGE> 21
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Common Stock and Warrants.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(d). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 7(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the shares of
Common Stock and Warrants purchased by such Underwriter, and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this Section
7(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 7 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process
-21-
<PAGE> 22
and agrees that any other contributing party may join him or it as an additional
defendant in any such proceeding in which such other contributing party is a
party.
(f) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Common Stock and/or Warrants and
payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
7.
8. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may
be, any Underwriter shall fail to purchase and pay for the portion of the Common
Stock and/or Warrants which such Underwriter has agreed to purchase and pay for
on such date (otherwise than by reason of any default on the part of the
Company), you, as Representative of the Underwriters, shall use your reasonable
efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as may be
agreed upon and upon the terms set forth herein, the Firm Securities or Option
Securities, as the case may be, which the defaulting Underwriter or Underwriters
failed to purchase. If during such 36 hours you, as such Representative, shall
not have procured such other Underwriters, or any others, to purchase the Firm
Securities or Option Securities, as the case may be, agreed to be purchased by
the defaulting Underwriter or Underwriters, then (a) if the aggregate number of
shares of Common Stock or Warrants with respect to which such default shall
occur does not exceed 10% respectively of the Firm Shares or Firm Warrants, or
of the Option Shares or Option Warrants, as the case may be, covered hereby, the
other Underwriters shall be obligated, severally, in proportion to the
respective numbers of Firm Securities or Option Securities, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Securities
or Option Securities, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the 10% limitation in clause (a) is
exceeded, the Company or you as the Representative of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company except to the extent provided
in Section 7 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 8, the Closing Date or Option Closing
Date, as the case may be, may be postponed for such period, not exceeding seven
days, as you, as Representative, may determine in order that the required
changes in the Registration Statement or in the Prospectus or in any other
documents or arrangements may be effected. The term
-22-
<PAGE> 23
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 8 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
9. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: If to the Underwriters, to SouthWall Capital Corp, 110
Wall Street, 15th Floor, New York, New York 10005, with a copy to Piper &
Marbury L.L.P., attention: Robinson Markel, Esq., 1251 Avenue of the Americas,
1251 Avenue of the Americas, New York, New York 10020-1104; if to the Company,
to C2i Solutions, Inc., attention: President, 4747 Morena Boulevard, Suite 101,
San Diego, California 92117, with a copy to Gray Cary Ware & Freidenrich,
attention: Douglas J. Rein, Esq., 4365 Executive Drive, Suite 1600, San Diego,
California 92121-2189.
10. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Firm Shares
and Firm Warrants are released by you for sale by notice to the Underwriters, or
(ii) 11:30 a.m. on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following
has occurred: (i) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse change or
any development involving a prospective material adverse change in or affecting
the condition, financial or otherwise, of the Company or the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company, whether or not arising in the ordinary
course of business; (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, escalation, declaration, emergency, calamity, crisis or change
on the financial markets of the United States would, in your reasonable
judgment, make it impracticable to market the Common Stock or Warrants or to
enforce contracts for the sale thereof; (iii) suspension of trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange or limitation on prices (other than limitations on hours or numbers of
days of trading) for securities on either such Exchange; (iv) the enactment,
publication, decree or other promulgation of any statute, regulation, rule or
order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company; (v) declaration of a banking moratorium
by United States or New York State authorities, (vi) the suspension by the
Commission of trading in the Common Stock or (vii) the taking of any action by
any governmental body or agency in respect of its monetary or fiscal affairs
-23-
<PAGE> 24
which in your reasonable opinion has a material adverse effect on the securities
markets in the United States; or
(c) as provided in Sections 5 and 8 of this Agreement.
11. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any shares of Common Stock or Warrants
from any Underwriter shall be deemed a successor or assign merely because of
such purchase.
12. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
13. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Common Stock
and Warrants under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York.
If the foregoing letter is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
NAME OF ISSUER
-24-
<PAGE> 25
By
---------------------------------
President
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the first above written.
SOUTHWALL CAPITAL CORP.
- ---------------------------------------
- ---------------------------------------
As Representative[s] of the several
Underwriters listed on Schedule I
By:
------------------------------------------
Authorized Officer
-25-
<PAGE> 26
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
and Firm Warrants
Underwriter to be Purchased
- ----------- ---------------
SouthWall Capital Corp.
----------
Total ----------
-26-
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION OF
C2i SOLUTIONS, INC.
The undersigned, for purposes of incorporating and organizing a
corporation under the General Corporation Law of the State of Delaware, does
hereby execute this Certificate of Incorporation and does hereby certify as
follows:
FIRST: The name of the Corporation is C2i Solutions, Inc.
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange
Street, Wilmington, New Castle County, Delaware, 19801, and
the name of the registered agent therein and in charge
thereof, upon whom process against the Corporation may be
served is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the
General Corporation Law of Delaware.
FOURTH:
A. Classes of Stock. The Corporation is authorized to issue two
classes of shares to be designated respectively "Preferred Stock" and "Common
Stock." The total number of shares of Common Stock authorized is ten million
(10,000,000), each with the par value of $0.001 per share, and the total number
of shares of Preferred Stock authorized is one million (1,000,000), each with
the par value of $0.001 per share.
B. Preferred Stock. The Preferred Stock may be issued in from time to
time in one or more series. The Board of Directors of this corporation is
authorized to fix or alter the rights, preferences, privileges and restrictions
granted to or imposed upon wholly unissued series of Preferred Stock, and the
number of shares constituting any such series and the designation thereof, or
any of them. The Board of Directors is also authorized to increase or decrease
the number of shares of any series of Preferred Stock prior or subsequent to the
issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status that they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
FIFTH: The following provisions are inserted for the management of
the business and the conduct of the affairs of the
Corporation, and for further definition, limitation and
regulation of the powers of the Corporation and of its
directors and stockholders:
1
<PAGE> 2
A. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors. In
addition to the powers and authority expressly conferred upon
them by statute or by this Certificate of Incorporation or the
Bylaws of the Corporation, the directors are hereby empowered
to exercise all such powers and do all such acts and things as
may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
C. On and after the closing date of the first sale of the
Corporation's Common Stock pursuant to a firmly underwritten
registered public offering (the "IPO"), any action required or
permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders. Prior to such sale,
unless otherwise provided by law, any action which may
otherwise be taken at any meeting of the stockholders may be
taken without a meeting and without prior notice, if a written
consent describing such actions is signed by the holders of
outstanding shares having not less than the minimum number of
votes which would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote
thereon were present and voted.
D. Special meetings of stockholders of the Corporation may be
called only (1) by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any such
resolution is presented to the Board for adoption) or (2) by
the holders of not less than ten percent (10%) of all of the
shares entitled to cast votes at the meeting.
SIXTH:
A. The number of directors shall initially be set at four (4)
and, thereafter, shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is
presented to the Board for adoption). Subject to the rights of
the holders of any series of Preferred Stock then outstanding,
a vacancy resulting from the removal of a director by the
stockholders as provided in Article SIXTH, Section C below may
be filled at a special meeting of the stockholders held for
that purpose.
B. Newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board
of Directors resulting
2
<PAGE> 3
from death, resignation or other cause (other than removal
from office by a vote of the stockholders) may be filled only
by a majority vote of the directors then in office, though
less than a quorum, and directors so chosen shall hold office
for a term expiring at the next annual meeting of stockholders
at which the term of office to which they have been elected
expires, and until their respective successors are elected,
except in the case of the death, resignation, or removal of
any director. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of
any incumbent director.
C. Any directors, or the entire Board of Directors, may be
removed from office at any time, with or without cause, but
only by the affirmative vote of the holders of at least a
majority of the voting power of all of the then outstanding
shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a
single class. Vacancies in the Board of Directors resulting
from such removal may be filled by a majority of the directors
then in office, though less than a quorum, or by the
stockholders as provided in Article SIXTH, Section A above.
Directors so chosen shall hold office for a term expiring at
the next annual meeting of stockholders at which the term of
office to which they have been elected expires, and until
their respective successors are elected, except in the case of
the death, resignation, or removal of any director.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend
or repeal Bylaws of the Corporation. Any adoption, amendment
or repeal of Bylaws of the Corporation by the Board of
Directors shall require the approval of a majority of the
total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at
the time any resolution providing for adoption, amendment or
repeal is presented to the Board). The stockholders shall also
have power to adopt, amend or repeal the Bylaws of the
Corporation. Any adoption, amendment or repeal of Bylaws of
the Corporation by the stockholders shall require, in addition
to any vote of the holders of any class or series of stock of
the Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power
of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
3
<PAGE> 4
EIGHTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involved intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the
liability of a director, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so
amended.
Any repeal or modification of the foregoing provisions of this
Article EIGHTH by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or
modification.
NINTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the
manner prescribed by the laws of the State of Delaware and all
rights conferred upon stockholders are granted subject to this
reservation; provided, however, that, notwithstanding any other
provision of this Certificate of Incorporation or any provision
of law which might otherwise permit a lesser vote or no vote,
but in addition to any vote of the holders of any class or
series of the stock of this Corporation required by law or by
this Certificate of Incorporation, the affirmative vote of the
holders of at least 66-2/3% of the voting power of all of the
then outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend or
repeal this Article NINTH, Article FIFTH, Article SIXTH,
Article SEVENTH or Article EIGHTH.
TENTH: The incorporator of the corporation is Douglas J. Rein, whose
mailing address is 4365 Executive Drive, Suite 1600, San Diego,
CA 92121-2189.
The undersigned incorporator hereby acknowledges that the foregoing
Certificate of Incorporation is his act and deed on this 30th day of September,
1997.
------------------------------
Incorporator
4
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
C2I SOLUTIONS, INC.
<PAGE> 2
INDEX Page
ARTICLE I STOCKHOLDERS..................................................... 1
1.1. Annual Meeting............................................ 1
1.2. Special Meetings.......................................... 1
1.3. Notice of Meetings........................................ 1
1.4. Quorum.................................................... 1
1.5. Organization.............................................. 2
1.6. Conduct of Business....................................... 2
1.7. Notice of Stockholder Business............................ 2
1.8. Proxies and Voting........................................ 3
1.9. Stock List................................................ 3
1.10. Stockholder Action by Written Consent..................... 3
ARTICLE II BOARD OF DIRECTORS.............................................. 4
2.1. Number and Term of Office................................. 4
2.2. Vacancies and Newly Created Directorships................. 4
2.3. Removal................................................... 4
2.4. Regular Meetings.......................................... 4
2.5. Special Meetings.......................................... 4
2.6. Quorum.................................................... 5
2.7. Participation in Meetings by Conference Telephone......... 5
2.8. Conduct of Business....................................... 5
2.9. Powers.................................................... 5
2.10. Compensation of Directors................................. 6
2.11. Nomination of Director Candidates......................... 6
ARTICLE III COMMITTEES..................................................... 6
3.1. Committees of the Board of Directors...................... 6
3.2. Conduct of Business....................................... 6
ARTICLE IV OFFICERS........................................................ 7
4.1. Generally................................................. 7
4.2. Chairman of the Board..................................... 7
4.3. President................................................. 7
4.4. Vice President............................................ 7
4.5. Chief Financial Officer................................... 7
4.6. Secretary................................................. 8
4.7. Delegation of Authority................................... 8
4.8. Removal................................................... 8
4.9. Action With Respect to Securities of Other Corporations... 8
2
<PAGE> 3
ARTICLE V STOCK............................................................ 8
5.1. Certificates of Stock..................................... 8
5.2. Transfers of Stock........................................ 8
5.3. Record Date............................................... 9
5.4. Lost, Stolen or Destroyed Certificates.................... 9
5.5. Regulations............................................... 9
ARTICLE VI NOTICES......................................................... 9
6.1. Notices................................................... 9
6.2. Waivers................................................... 9
ARTICLE VII MISCELLANEOUS................................................. 10
7.1. Facsimile Signatures..................................... 10
7.2. Corporate Seal............................................ 10
7.3. Reliance Upon Books, Reports and Records.................. 10
7.4. Fiscal Year............................................... 10
7.5. Time Periods.............................................. 10
ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS..................... 10
8.1. Right to Indemnification.................................. 10
8.2. Right of Claimant to Bring Suit........................... 11
8.3. Non-Exclusivity of Rights................................. 12
8.4. Indemnification Contracts................................. 12
8.5. Insurance................................................. 12
8.6. Effect of Amendment....................................... 12
ARTICLE IX AMENDMENTS...................................................... 12
<PAGE> 4
BYLAWS
OF
C2i Solutions, Inc.
ARTICLE I
STOCKHOLDERS
Section 1.1. Annual Meeting. An annual meeting of the stockholders of
C2i Solutions, Inc. (the "Corporation"), for the election of directors and for
the transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen months
subsequent to the later of the date of incorporation or the last annual meeting
of stockholders.
Section 1.2. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes prescribed in the notice of the meeting, may be called
by (1) the Board of Directors pursuant to a resolution adopted by a majority of
the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such resolution
is presented to the Board for adoption), (2) the Chairman of the Board, (3) the
President or (4) the holders of shares entitled to cast not less than ten
percent (10%) of the votes at the meeting, and shall be held at such place, on
such date, and at such time as they shall fix. Business transacted at special
meetings shall be confined to the purpose or purposes stated in the notice.
Section 1.3. Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 1.4. Quorum. At any meeting of the stockholders, the holders of
a majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law or by the Certificate of Incorporation or Bylaws of this
Corporation.
4
<PAGE> 5
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 1.5. Organization. Such person as the Board of Directors may
have designated or, in the absence of such a person, the chief executive officer
of the Corporation or, in his absence, such person as may be chosen by the
holders of a majority of the shares entitled to vote who are present, in person
or by proxy, shall call to order any meeting of the stockholders and act as
chairman of the meeting. In the absence of the Secretary of the Corporation, the
secretary of the meeting shall be such person as the chairman appoints.
Section 1.6. Conduct of Business. The chairman of any meeting of
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him in order.
Section 1.7. Notice of Stockholder Business. At an annual or special
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before a
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
properly brought before the meeting by or at the direction of the Board of
Directors, (c) properly brought before an annual meeting by a stockholder, or
(d) properly brought before a special meeting by a stockholder, but if, and only
if, the notice of a special meeting provides for business to be brought before
the meeting by stockholders. For business to be properly brought before a
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation. To be timely, a stockholder
proposal to be presented at an annual meeting shall be received at the
Corporation's principal executive offices not less than 120 calendar days in
advance of the date that the Corporation's (or the Corporation's predecessor's)
proxy statement was released to stockholders in connection with the previous
year's annual meeting of stockholders, except that if no annual meeting was held
in the previous year or the date of the annual meeting has been changed by more
than 30 calendar days from the date contemplated at the time of the previous
year's proxy statement, or in the event of a special meeting, notice by the
stockholder to be timely must be received not later than the close of business
on the tenth day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual or special meeting (a) a brief description of the
business desired to be brought before the annual or special meeting and the
reasons for conducting such business at the annual or special meeting, (b) the
name and address, as they appear on the Corporation's books, of the stockholder
proposing such business, (c) the class and number of shares of the Corporation
which are beneficially owned by the stockholder,
5
<PAGE> 6
and (d) any material interest of the stockholder in such business.
Notwithstanding anything in the Bylaws to the contrary, no business shall be
conducted at an annual or special meeting except in accordance with the
procedures set forth in this Section 1.7. The chairman of an annual or
special meeting shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting and in
accordance with the provisions of this Section 1.7, and if he should so
determine, he shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
Section 1.8. Proxies and Voting. At any meeting of the stockholders,
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing filed in accordance with the procedure established for
the meeting.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his name on the record date for the meeting,
except as otherwise provided herein or required by law.
All voting, except where otherwise required by law, may be by a voice
vote; provided, however, that upon demand therefor by a stockholder entitled to
vote or by his or her proxy, a stock vote shall be taken. Every stock vote shall
be taken by ballots, each of which shall state the name of the stockholder or
proxy voting and such other information as may be required under the procedure
established for the meeting. Every vote taken by ballots shall be counted by an
inspector or inspectors appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or these Bylaws, all other matters shall be
determined by a majority of the votes cast.
Section 1.9. Stock List. A complete list of stockholders entitled to
vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in his or her name, shall be open to the examination of any
such stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or if not so specified, at the
place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 1.10. Stockholder Action by Written Consent. Any action which
may be taken at any annual or special meeting of stockholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the actions so taken, is signed by the holders of outstanding shares
having not less than the minimum number of votes which would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were
6
<PAGE> 7
present and voted. All such consents shall be filed with the secretary of the
Corporation and shall be maintained in the corporate records. Prompt notice of
the taking of a corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1. Number and Term of Office. The number of directors shall
initially be four, and, thereafter, shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any such resolution is
presented to the Board for adoption). Each director shall hold office until his
successor is elected and qualified or until his earlier death, resignation,
retirement, disqualification or removal.
Section 2.2. Vacancies and Newly Created Directorships. Newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, or other cause (other then removal from office by
a vote of the stockholders) may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the next annual meeting of
stockholders. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 2.3. Removal. Subject to the limitations stated in the
Certificate of Incorporation, any director, or the entire Board of Directors,
may be removed from office at any time, with or without cause, but only by the
affirmative vote of the holders of at least a majority of the voting power of
all of the then outstanding shares of stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
Vacancies in the Board of Directors resulting from such removal may be filled by
(i) a majority of the directors then in office, though less than a quorum, or
(ii) the stockholders at a special meeting of the stockholders properly called
for that purpose, by the vote of the holders of a majority of the shares
entitled to vote at such special meeting. Directors so chosen shall hold office
until the next annual meeting of stockholders.
Section 2.4. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such place or places, on such date or dates, and at
such time or times as shall have been established by the Board of Directors and
publicized among all directors. A notice of each regular meeting shall not be
required.
Section 2.5. Special Meetings. Special meetings of the Board of
Directors may be called by one-half of the directors then in office (rounded up
to the nearest whole number), by the chairman of the board or by the chief
executive officer and shall be held at such place, on such date, and at such
time as they or he shall fix. Notice of the place, date, and time of each such
special meeting shall be given each director by whom it is not waived by mailing
written notice
7
<PAGE> 8
not less than five (5) days before the meeting (one (1) day before the meeting
if delivered by an overnight courier service or facsimile transmission and two
(2) days before the meeting if by overseas courier service) or by telephoning,
telecopying, telegraphing or personally delivering the same not less than
twenty-four (24) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Section 2.6. Quorum. At any meeting of the Board of Directors, a
majority of the total number of authorized directors shall constitute a quorum
for all purposes. If a quorum shall fail to attend any meeting, a majority of
those present may adjourn the meeting to another place, date, or time, without
further notice or waiver thereof.
Section 2.7. Participation in Meetings by Conference Telephone. Members
of the Board of Directors, or of any committee of the Board of Directors, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 2.8. Conduct of Business. At any meeting of the Board of
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
required by law. Action may be taken by the Board of Directors without a meeting
if all members thereof consent thereto in writing, and the writing or writings
are filed with the minutes of proceedings of the Board of Directors.
Section 2.9. Powers. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance
with law;
(2) To purchase or otherwise acquire any property, rights
or privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the Corporation with or
without cause, and from time to time to pass on the powers and duties of any
officer upon any other person for the time being;
(5) To confer upon any officer of the Corporation the power
to appoint, remove and suspend subordinate officers, employees and agents;
8
<PAGE> 9
(6) To adopt from time to time such stock option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement,
and other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not
inconsistent with these Bylaws, for the management of the Corporation's business
and affairs.
Section 2.10. Compensation of Directors. Directors, as such, may
receive, pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 2.11. Nomination of Director Candidates. Nominations for the
election of directors may be made by the Board of Directors or a proxy committee
appointed by the Board of Directors or by any stockholder entitled to vote in
the election of directors.
ARTICLE III
COMMITTEES
Section 3.1. Committees of the Board of Directors. The Board of
Directors, by a vote of a majority of the whole Board, may from time to time
designate committees of the Board, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a director or
directors to serve as the member or members, designating, if it desires, other
directors as alternate members who may replace any absent or disqualified member
at any meeting of the committee. Any committee so designated may exercise the
power and authority of the Board of Directors to declare a dividend, to
authorize the issuance of stock or to adopt an agreement of merger or
consolidation if the resolution which designates the committee or a supplemental
resolution of the Board of Directors shall so provide. In the absence or
disqualification of any member of any committee and any alternate member in his
place, the member or members of the committee present at the meeting and not
disqualified from voting, whether or not he or she or they constitute a quorum,
may by unanimous vote appoint another member of the Board of Directors to act at
the meeting in the place of the absent or disqualified member.
Section 3.2. Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings;
one-third of the authorized members shall constitute a quorum unless the
committee shall consist of one or two members, in which event one member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken
9
<PAGE> 10
by any committee without a meeting if all members thereof consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of such committee.
ARTICLE IV
OFFICERS
Section 4.1. Generally. The officers of the Corporation shall consist of
a President, a Secretary and a Chief Financial Officer. The Corporation may also
have, at the discretion of the Board of Directors, a Chairman of the Board, one
or more Vice Presidents, and such other officers as may from time to time be
appointed by the Board of Directors. Each officer shall hold office until his or
her successor is elected and qualified or until his or her earlier resignation
or removal. Any number of offices may be held by the same person.
Section 4.2. Chairman of the Board. The Chairman of the Board, if there
shall be such an officer, shall, if present, preside at all meetings of the
Board of Directors, and exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors or as provided by
these Bylaws.
Section 4.3. President. Subject to such supervisory powers, if any, as
may be given by the Board of Directors to the Chairman of the Board, if there be
such an officer, the President shall be the general manager and chief executive
officer of the Corporation and shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
officers of the Corporation. He shall preside at all meetings of the
stockholders. He shall be ex officio a member of all the standing committees,
including the executive committee, if any, and shall have the general powers and
duties of management usually vested in the office of president of a Corporation,
and shall have such other powers and duties as may be prescribed by the Board of
Directors or by these Bylaws.
Section 4.4. Vice President. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Director, shall perform the duties of the President, and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or these Bylaws.
Section 4.5. Chief Financial Officer. The Chief Financial Officer shall
keep and maintain or cause to be kept and maintained, adequate and correct books
and records of account in written form or any other form capable of being
converted into written form.
The Chief Financial Officer shall deposit all monies and other valuables
in the name and to the credit of the Corporation with such depositaries as may
be designated by the Board of Directors. He shall disburse all funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
President and directors, whenever they request it, an account of all of his
transactions as Chief Financial Officer and of the financial condition of the
Corporation, and
10
<PAGE> 11
shall have such other powers and perform such other duties as may be prescribed
by the Board of Directors or by these Bylaws.
Section 4.6. Secretary. The Secretary shall keep, or cause to be kept, a
book of minutes in written form of the proceedings of the Board of Directors,
committees of the Board, and stockholders. Such minutes shall include all
waivers of notice, consents to the holding of meetings, or approvals of the
minutes of meetings executed pursuant to these Bylaws or the Delaware General
Corporation Law. The Secretary shall keep, or cause to be kept at the principal
executive office or at the office of the Corporation's transfer agent or
registrar, a record of its stockholders, giving the names and addresses of all
stockholders and the number and class of shares held by each.
The Secretary shall give or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors required by these Bylaws or by
law to be given, and shall keep the seal of the Corporation in safe custody, and
shall have such other powers and perform such other duties as may be prescribed
by the Board of Directors or these Bylaws.
Section 4.7. Delegation of Authority. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 4.8. Removal. Any officer of the Corporation may be removed at
any time, with or without cause, by the Board of Directors.
Section 4.9. Action With Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
Section 5.1. Certificates of Stock. Each stockholder shall be entitled
to a certificate signed by, or in the name of the Corporation by, the President
or a Vice President, and by the Secretary or an Assistant Secretary, or the
Chief Financial Officer, certifying the number of shares owned by him or her.
Any of or all the signatures on the certificate may be facsimile.
Section 5.2. Transfers of Stock. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 5.4
of these Bylaws, an outstanding certificate for the number of shares involved
shall be surrendered for cancellation before a new certificate is issued
therefor.
11
<PAGE> 12
Section 5.3. Record Date. The Board of Directors may fix a record date,
which shall not be more than sixty (60) nor fewer than ten (10) days before the
date of any meeting of stockholders, nor more than sixty (60) days prior to the
time for the other action hereinafter described, as of which there shall be
determined the stockholders who are entitled: to notice of or to vote at any
meeting of stockholders or any adjournment thereof; to receive payment of any
dividend or other distribution or allotment of any rights; or to exercise any
rights with respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
Section 5.4. Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5.5. Regulations. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
NOTICES
Section 6.1. Notices. Except as otherwise specifically provided herein
or required by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and may in every
instance be effectively given by hand delivery to the recipient thereof, by
depositing such notice in the mails, postage paid, or by sending such notice by
prepaid telegram, mailgram, telecopy or commercial courier service. Any such
notice shall be addressed to such stockholder, director, officer, employee or
agent at his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or by telegram, courier or mailgram.
Section 6.2. Waivers. A written waiver of any notice, signed by a
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver. Attendance of a person at a meeting shall constitute a waiver
of notice for such meeting, except when the person attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
12
<PAGE> 13
ARTICLE VII
MISCELLANEOUS
Section 7.1. Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 7.2. Corporate Seal. The Board of Directors may provide a
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the Chief
Financial Officer or by an Assistant Secretary or other officer designated by
the Board of Directors.
Section 7.3. Reliance Upon Books, Reports and Records. Each director,
each member of any committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation, including reports made to the Corporation by any of its
officers, by an independent certified public accountant, or by an appraiser.
Section 7.4. Fiscal Year. The fiscal year ending of the Corporation
shall be December 31st of each year, unless otherwise established by the Board
of Directors.
Section 7.5. Time Periods. In applying any provision of these Bylaws
which require that an act be done or not done a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer or employee or in any other capacity
while serving as a director, officer or employee, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said Law
permitted the Corporation to provide prior to such amendment) against all
expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or
13
<PAGE> 14
penalties, amounts paid or to be paid in settlement and amounts expended in
seeking indemnification granted to such person under applicable law, this Bylaw
or any agreement with the Corporation) reasonably incurred or suffered by such
person in connection therewith and such indemnification shall continue as to a
person who has ceased to be a director, officer or employee and shall inure to
the benefit of his or her heirs, executors and administrators; provided,
however, that, except as provided in Section 8.2, the Corporation shall
indemnify any such person seeking indemnity in connection with an action, suit
or proceeding (or part thereof) initiated by such person only if (a) such
indemnification is expressly required to be made by law, (b) the action, suit or
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation, (c) such indemnification is provided by the Corporation, in its
sole discretion, pursuant to the powers vested in the Corporation under the
Delaware General Corporation Law, or (d) the action, suit or proceeding (or part
thereof) is brought to establish or enforce a right to indemnification under an
indemnity agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law. Such right shall be a
contract right and shall include the right to be paid by the Corporation
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the Delaware General Corporation Law
then so requires, the payment of such expenses incurred by a director or officer
of the Corporation in his or her capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of such proceeding, shall be
made only upon delivery to the Corporation of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
indemnified under this Section or otherwise.
Section 8.2. Right of Claimant to Bring Suit. If a claim under Section
8.1 is not paid in full by the Corporation within ninety (90) days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if such suit is not frivolous or brought in bad faith, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any, has been tendered
to this Corporation) that the claimant has not met the standards of conduct
which make it permissible under the Delaware General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that a claimant has not
met such applicable standard of conduct.
14
<PAGE> 15
Section 8.3. Non-Exclusivity of Rights. The rights conferred on any
person by Sections 8.1 and 8.2 shall not be exclusive of any other right which
such persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 8.4. Indemnification Contracts. The Board of Directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determines, greater than, those provided for in this
Article VIII.
Section 8.5. Insurance. The Corporation may maintain insurance to the
extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under Delaware
General Corporation Law.
Section 8.6. Effect of Amendment. Any amendment, repeal or modification
of any provision of this Article VIII by the stockholders or the directors of
the Corporation shall not adversely affect any right or protection of a director
or officer of the Corporation existing at the time of such amendment, repeal or
modification.
ARTICLE IX
AMENDMENTS
The Board of Directors is expressly empowered to adopt, amend or repeal
Bylaws of the Corporation, subject to the right of the stockholders to adopt,
amend, alter or repeal the Bylaws of the Corporation. Any adoption, amendment or
repeal of Bylaws of the Corporation by the Board of Directors shall require the
approval of a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any resolution providing for adoption, amendment or repeal is presented to the
Board). The stockholders shall also have power to adopt, amend or repeal the
Bylaws of the Corporation.
15
<PAGE> 16
SECRETARY'S CERTIFICATE OF ADOPTION OF
BYLAWS
OF C2i Solutions, Inc.
I hereby certify:
That I am the duly elected Secretary of C2i Solutions, Inc., a Delaware
corporation;
That the foregoing Bylaws, constitute the Bylaws of said corporation as
duly adopted by the Board of Directors of the Corporation on October 6, 1997.
IN WITNESS WHEREOF, I have hereunder subscribed my name this 6th day of
October, 1997.
-----------------------------
Diane E. Hessler, Secretary
16
<PAGE> 1
EXHIBIT 10.1
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of _____________, 1997 is made by and
between Challenge 2000 International, a Delaware corporation (the "Company"),
and __________________ ("Indemnitee").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers
and agents and the directors, officers and agents of its subsidiaries to assume
the risk of huge judgments and other expenses which may occur in cases in which
the director, officer or agent received no personal profit and in cases where
the director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such director, officer or agent with the result
that he, after retirement or in the event of his death, his spouse, heirs,
executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
<PAGE> 2
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to encourage such individuals to take
the business risks necessary for the success of the Company and its
subsidiaries, it is necessary for the Company to contractually indemnify its
directors, officers and agents and the directors, officers and agents of its
subsidiaries, and to assume for itself maximum liability for expenses and
damages in connection with claims against such directors, officers and agents in
connection with their service to the Company and its subsidiaries, and has
further concluded that the failure to provide such contractual indemnification
could result in great harm to the Company and its subsidiaries and the Company's
stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions.
(a) Agent. For the purposes of this Agreement, "agent" of the Company
means any person who is or was a director, officer, employee or other agent of
the Company or a subsidiary of the Company; or is or was serving at the request
of, for the convenience of, or to represent the interests of the Company or a
subsidiary of the Company as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
-2-
<PAGE> 3
(b) Expenses. For purposes of this Agreement, "expenses" include all
direct and indirect costs of any type or nature whatsoever (including, without
limitation, all attorneys' fees and related disbursements, other out-of-pocket
costs actually and reasonably incurred by the Indemnitee in connection with
either the investigation, defense or appeal of a proceeding or establishing or
enforcing a right to indemnification under this Agreement or Section 145 or
otherwise; provided, however, that "expenses" shall not include any judgments,
fines, ERISA excise taxes or penalties, or amounts paid in settlement of a
proceeding.
(c) Proceeding. For the purposes of this Agreement, "proceeding"
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. Liability Insurance.
(a) Maintenance of D&O Insurance. The Company hereby covenants and
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
-3-
<PAGE> 4
(c) Limitation on Required Maintenance of D&O Insurance.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. Mandatory Indemnification. Subject to Section 9 below, the Company
shall indemnify the Indemnitee as follows:
(a) Successful Defense. To the extent the Indemnitee has been
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) Third Party Actions. If the Indemnitee is a person who was or is
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is a
party or is threatened to be made a party to any proceeding by reason of the
fact that he is or was an agent of the Company, or by reason of anything done or
not done by him in any such capacity, the Company shall indemnify the Indemnitee
against any amounts paid in settlement of any such proceeding and all expenses
actually and reasonably incurred by him in connection with the investigation,
defense, settlement, or appeal of such proceeding, provided the Indemnitee acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company and its stockholders. The Company shall
indemnify the Indemnitee against judgments, fines, and ERISA excise taxes and
penalties to the same extent and subject to the same conditions as described in
the immediately preceding sentence. Notwithstanding the foregoing, no
indemnification under this subsection 4(c) shall be made in respect to any
claim,
-4-
<PAGE> 5
issue or matter as to which such person shall have been finally adjudged to be
liable to the Company by a court of competent jurisdiction unless and only to
the extent that the court in which such proceeding was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is a
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement) for which payment is actually made to
Indemnitee under a valid and collectible insurance policy of D&O Insurance, or
under a valid and enforceable indemnity clause, by-law or agreement.
5. Partial Indemnification. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.
6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the
Company shall advance all expenses incurred by the Indemnitee in connection with
the investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.
-5-
<PAGE> 6
7. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense, or (C) the Company shall not, in fact, have employed counsel
to assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that the proceeding was not brought by the Indemnitee in
good faith or was frivolous; or
-6-
<PAGE> 7
(c) Unauthorized Settlements. To indemnify the Indemnitee under this
Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
9. Non-exclusivity. The provisions for indemnification and advancement
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. Enforcement. Any right to indemnification or advances granted by
this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee
in any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement (other
than an action brought to enforce a claim for expenses pursuant to Section 6
hereof, provided that the required undertaking has been tendered to the Company)
that Indemnitee is not entitled to indemnification because of the limitations
set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation
(including its Board of Directors or its stockholders) to have made a
determination prior to the commencement of such enforcement action that
indemnification of Indemnitee is proper in the circumstances, nor an actual
determination by the Company (including its Board of Directors or its
stockholders) that such indemnification is improper, shall be a defense to the
action or create a presumption that Indemnitee is not entitled to
indemnification under this Agreement or otherwise.
11. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
-7-
<PAGE> 8
12. Survival of Rights.
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. Interpretation of Agreement. It is understood that the parties
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. Severability. If any provision or provisions of this Agreement shall
be held to be invalid, illegal or unenforceable for any reason whatsoever, (i)
the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
15. Modification and Waiver. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
16. Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written notice.
17. Governing Law. This Agreement shall be governed exclusively by and
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
-8-
<PAGE> 9
The parties hereto have entered into this Indemnity Agreement effective
as of the date first above written.
CHALLENGE 2000 INTERNATIONAL
By
---------------------------
Title
------------------------
Address: 4747 Morena Blvd., Suite 101
San Diego, California 92117
INDEMNITEE:
-----------------------------
[Indemnitee's Printed Name]
Address:
-----------------------------
-----------------------------
-9-
<PAGE> 1
EXHIBIT 10.2
C2I SOLUTIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made
and entered into as of ________________, 199__ , by and between C2i ____________
Solutions, Inc. and (the "OPTIONEE").
The Company has granted to the Optionee pursuant to the C2i Solutions,
Inc. 1997 Stock Option Plan (the "PLAN") an option to purchase certain shares of
Stock, upon the terms and conditions set forth in this Option Agreement (the
"OPTION").
DEFINITIONS AND CONSTRUCTION.
DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
"DATE OF OPTION GRANT" means ________________, 199__ .
"NUMBER OF OPTION SHARES" means ___________shares of Stock,
as adjusted from time to time pursuant to Section 9.
"EXERCISE PRICE" means $ _________per share of Stock, as
adjusted from time to time pursuant to Section 9.
"INITIAL VESTING DATE" means the date occurring one year
after (check one):
[ ] the Date of Option Grant.
[ ] __________________, 199 , the date the Optionee's
Service commenced.
"VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, provided the 1/4
Optionee's Service has not
terminated prior to such date
</TABLE>
<PAGE> 2
Plus
For each full month of the Optionee's 1/48
continuous Service from the Initial
Vesting Date until the Vested Ratio
equals 1/1, an additional
"OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
BOARD means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).
CODE means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
COMMITTEE means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
COMPANY means C2i Solutions, Inc., a Delaware corporation,
or any successor corporation thereto.
CONSULTANT means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
DIRECTOR means a member of the Board or of the board of
directors of any other Participating Company.
DISABILITY means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company group because
of the sickness or injury of the Optionee.
EMPLOYEE means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of this Option Agreement.
EXCHANGE ACT means the Securities Exchange Act of 1934, as
amended.
<PAGE> 3
FAIR MARKET VALUE means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
INCENTIVE STOCK OPTION means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
INSIDER means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
PARENT CORPORATION means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
PARTICIPATING COMPANY means the Company or any Parent
Corporation or Subsidiary Corporation.
PARTICIPATING COMPANY GROUP means, at any point in time,
all corporations collectively which are then Participating Companies.
RULE 16B-3 means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
SECURITIES ACT means the Securities Act of 1933, as
amended.
"SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a
<PAGE> 4
change in the capacity in which the Optionee renders Service to the
Participating Company Group or a change in the Participating Company for which
the Optionee renders such Service, provided that there is no interruption or
termination of the Optionee's Service. Furthermore, the Optionee's Service with
the Participating Company Group shall not be deemed to have terminated if the
Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company; provided, however, that if any such leave
exceeds ninety (90) days, on the ninety-first (91st) day of such leave the
Optionee's Service shall be deemed to have terminated unless the Optionee's
right to return to Service with the Participating Company Group is guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise designated
by the Company or required by law, a leave of absence shall not be treated as
Service for purposes of determining the Optionee's Vested Ratio. The Optionee's
Service shall be deemed to have terminated either upon an actual termination of
Service or upon the corporation for which the Optionee performs Service ceasing
to be a Participating Company. Subject to the foregoing, the Company, in its
sole discretion, shall determine whether the Optionee's Service has terminated
and the effective date of such termination. (NOTE: If the Option is exercised
more than three (3) months after the date on which the Optionee ceased to be an
Employee (other than by reason of death or a permanent and total disability as
defined in Section 22(e)(3) of the Code), the Option will be treated as a
Nonstatutory Stock Option and not as an Incentive Stock Option to the extent
required by Section 422 of the Code.)
STOCK means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
SUBSIDIARY CORPORATION means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall include the
singular. Use of the term "or" is not intended to be exclusive, unless the
context clearly requires otherwise.
TAX STATUS OF OPTION.
This Option is intended to be an Incentive Stock Option within the
meaning of Section 422(b) of the Code, but the Company does not represent or
warrant that this Option qualifies as such. The Optionee should consult with the
Optionee's own tax advisor regarding the tax effects of this Option and the
requirements necessary to obtain favorable income tax treatment under Section
422 of the Code, including, but not limited to, holding period requirements.
(NOTE: If the aggregate Exercise Price of the Option (that is, the Exercise
Price multiplied by the Number of Option Shares) plus the aggregate exercise
price of any other Incentive Stock Options held by the Optionee (whether granted
pursuant to the Plan or any other stock option plan of the Participating Company
Group) is greater than One Hundred Thousand Dollars ($100,000), the Optionee
should contact the Chief Financial Officer of the Company to ascertain whether
the entire Option qualifies as an Incentive Stock Option.)
<PAGE> 5
ADMINISTRATION.
All questions of interpretation concerning this Option Agreement
shall be determined by the Board. All determinations by the Board shall be final
and binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
EXERCISE OF THE OPTION.
RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Vesting Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares multiplied by the Vested Ratio less the
number of shares previously acquired upon exercise of the Option. In no event
shall the Option be exercisable for more shares than the Number of Option
Shares.
METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased. The
Option shall be deemed to be exercised upon receipt by the Company of such
written notice and the aggregate Exercise Price.
PAYMENT OF EXERCISE PRICE. Full payment of the aggregate
Exercise Price for the number of shares of Stock being purchased. The Option
shall be deemed to be exercised upon receipt by the Company of such written
notice and the aggregate Exercise Price.
FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any
combination of the foregoing.
TENDER OF STOCK. Notwithstanding the foregoing, the Option
may
<PAGE> 6
not be exercised by tender to the Company of shares of Stock to the extent such
tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is vested, and the Company shall have
no obligation to issue a certificate for such shares.
CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with
<PAGE> 7
the terms of an applicable exemption from the registration requirements of the
Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED
UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT
BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED.
The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares subject to the Option
shall relieve the Company of any liability in respect of the failure to issue or
sell such shares as to which such requisite authority shall not have been
obtained. As a condition to the exercise of the Option, the Company may require
the Optionee to satisfy any qualifications that may be necessary or appropriate,
to evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be requested by the
Company.
FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
NONTRANSFERABILITY OF THE OPTION.
The Option may be exercised during the lifetime of the Optionee only
by the Optionee or the Optionee's guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of
descent and distribution. Following the death of the Optionee, the Option, to
the extent provided in Section 7, may be exercised by the Optionee's legal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
TERMINATION OF THE OPTION.
The Option shall terminate and may no longer be exercised on the
first to occur of (a) the Option Expiration Date, (b) the last date for
exercising the Option following termination of the Optionee's Service as
described in Section 7, or (c) a Change in Control to the extent provided in
Section 8.
EFFECT OF TERMINATION OF SERVICE.
OPTION EXERCISABILITY.
DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date. (NOTE: If the Option
is exercised more than three (3) months after the date on which the Optionee's
Service as an Employee terminated as a result of a Disability other than a
permanent and total disability as defined in Section 22(e)(3) of the Code, the
Option will be treated as a Nonstatutory Stock Option and not
<PAGE> 8
as an Incentive Stock Option to the extent required by Section 422 of the Code.)
DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date. The Company makes no representation as to
the tax consequences of any such delayed exercise. The Optionee should consult
with the Optionee's own tax advisor as to the tax consequences of any such
delayed exercise.
EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date. The Company makes no representation as to the tax consequences of any such
delayed exercise. The Optionee should consult with the Optionee's own tax
advisor as to the tax consequences of any such delayed exercise.
CHANGE IN CONTROL.
DEFINITIONS.
An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent (50%) of the
<PAGE> 9
voting stock of the Company;
a merger or consolidation in which the Company is a
party;
the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or
a liquidation or dissolution of the Company.
A "CHANGE IN CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change
in Control, the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"),
may either assume the Company's rights and obligations under the Option or
substitute for the Option a substantially equivalent option for the Acquiring
Corporation's stock. For purposes of this Section 8.2, the Option shall be
deemed assumed if, following the Change in Control, the Option confers the right
to purchase in accordance with its terms and conditions, for each share of Stock
subject to the Option immediately prior to the Change in Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the Change in Control was
entitled. The Option shall become fully exercisable for a period of 30 days
prior to the Change of Control and shall terminate and cease to be outstanding
effective as of the date of the Change in Control to the extent that the Option
is neither assumed or substituted for by the Acquiring Corporation in connection
with the Change in Control nor exercised as of the date of the Change in
Control. Notwithstanding the foregoing, shares acquired upon exercise of the
Option prior to the Change in Control and any consideration received pursuant to
the Change of Control with respect to such shares shall continue to be subject
to all applicable provisions of this Option Agreement except as otherwise
provided herein. Furthermore, notwithstanding the foregoing, if the corporation
the stock of which is subject to the Option immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Change in Control is
the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another
<PAGE> 10
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate unless
the Board otherwise provides in its sole discretion.
ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
In the event of any stock dividend, stock split, reverse stock
split, recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a
majority of the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to
provide that the Option is exercisable for New Shares. In the event of any such
amendment, the Number of Option Shares and the Exercise Price shall be adjusted
in a fair and equitable manner, as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 9 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the
Exercise Price be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 9 shall be final, binding and conclusive.
RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT.
The Optionee shall have no rights as a stockholder with respect to
any shares covered by the Option until the date of the issuance of a certificate
for the shares for which the Option has been exercised (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends, distributions
or other rights for which the record date is prior to the date such certificate
is issued, except as provided in Section 9. If the Optionee is an Employee, the
Optionee understands and acknowledges that, except as otherwise provided in a
separate, written employment agreement between a Participating Company and the
Optionee, the Optionee's employment is "at will" and is for no specified term.
Nothing in this Option Agreement shall confer upon the Optionee any right to
continue in the Service of a Participating Company or interfere in any way with
any right of the Participating Company Group to terminate the Optionee's Service
as an Employee or Consultant, as the case may be, at any time.
NOTICE OF SALES UPON DISQUALIFYING DISPOSITION.
The Optionee shall dispose of the shares acquired pursuant to the
Option only in accordance with the provisions of this Option Agreement. In
addition, the Optionee shall promptly notify the Chief Financial Officer of the
Company if the Optionee disposes of any of the shares acquired pursuant to the
Option within one (1) year after the date of the Optionee exercises all or part
of the Option or within two (2) years after the Date of Option Grant. Until such
time as the Optionee disposes of such shares in a manner consistent with the
provisions of this Option Agreement, unless otherwise expressly authorized by
the Company, the Optionee shall
<PAGE> 11
hold all shares acquired pursuant to the Option in the Optionee's name (and not
in the name of any nominee) for the one-year period immediately after the
exercise of the Option and the two-year period immediately after Date of Option
Grant. At any time during the one-year or two-year periods set forth above, the
Company may place a legend on any certificate representing shares acquired
pursuant to the Option requesting the transfer agent for the Company's stock to
notify the Company of any such transfers. The obligation of the Optionee to
notify the Company of any such transfer shall continue notwithstanding that a
legend has been placed on the certificate pursuant to the preceding sentence.
LEGENDS.
The Company may at any time place legends referencing any applicable
federal, state or foreign securities law restrictions on all certificates
representing shares of stock subject to the provisions of this Option Agreement.
The Optionee shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to the
Option in the possession of the Optionee in order to carry out the provisions of
this Section.
RESTRICTIONS ON TRANSFER OF SHARES.
No shares acquired upon exercise of the Option may be sold,
exchanged, transferred (including, without limitation, any transfer to a nominee
or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed
of, including by operation of law, in any manner which violates any of the
provisions of this Option Agreement and any such attempted disposition shall be
void. The Company shall not be required (a) to transfer on its books any shares
which will have been transferred in violation of any of the provisions set forth
in this Option Agreement or (b) to treat as owner of such shares or to accord
the right to vote as such owner or to pay dividends to any transferee to whom
such shares will have been so transferred.
<PAGE> 12
BINDING EFFECT.
Subject to the restrictions on transfer set forth herein, this
Option Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns.
TERMINATION OR AMENDMENT.
The Board may terminate or amend the Plan or the Option at any time;
provided, however, that except as provided in Section 8.2 in connection with a
Change in Control, no such termination or amendment may adversely affect the
Option or any unexercised portion hereof without the consent of the Optionee
unless such termination or amendment is necessary to comply with any applicable
law or government regulation or is required to enable the Option to qualify as
an Incentive Stock Option. No amendment or addition to this Option Agreement
shall be effective unless in writing.
NOTICES.
Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given (except to the extent that this Option
Agreement provides for effectiveness only upon actual receipt of such notice)
upon personal delivery or upon deposit in the United States Post Office, by
registered or certified mail, with postage and fees prepaid, addressed to the
other party at the address shown below that party's signature or at such other
address as such party may designate in writing from time to time to the other
party.
INTEGRATED AGREEMENT.
This Option Agreement constitutes the entire understanding and
agreement of the Optionee and the Participating Company Group with respect to
the subject matter contained herein and there are no agreements, understandings,
restrictions, representations, or warranties among the Optionee and the
Participating Company Group with respect to such subject matter other than those
as set forth or provided for herein. To the extent contemplated herein, the
provisions of this Option Agreement shall survive any exercise of the Option and
shall remain in full force and effect.
APPLICABLE LAW.
This Option Agreement shall be governed by the laws of the State of
California as such laws are applied to agreements between California residents
entered into and to be performed entirely within the State of California.
C2i SOLUTIONS, INC.
<PAGE> 13
By:
Title:
Address:
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement, and hereby accepts the Option subject
to all of the terms and provisions thereof. The Optionee hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Option Agreement.
OPTIONEE
Date:
Optionee Address:
------------------------------------
------------------------------------
<PAGE> 14
C2I SOLUTIONS, INC.
1997 STOCK OPTION PLAN
ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
ESTABLISHMENt. The C2i Solutions, Inc. 1997 Stock Option Plan
(the "PLAN") is hereby established effective as of _______________, 1997.
PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its stockholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options
shall be granted, if at all, within ten (10) years from the earlier of the date
the Plan is adopted by the Board or the date the Plan is duly approved by the
stockholders of the Company.
DEFINITIONS AND CONSTRUCTION.
DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
BOARD means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).
CODE means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
COMMITTEE means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
COMPANY means C2i Solutions, Inc., a Delaware corporation,
or any successor corporation thereto.
CONSULTANT means any person, including an advisor, engaged
by a
<PAGE> 15
Participating Company to render services other than as an Employee or a
Director.
DIRECTOR means a member of the Board or of the board of
directors of any other Participating Company.
EMPLOYEE means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company and, with respect to any Incentive Stock
Option granted to such person, who is an employee for purposes of Section 422 of
the Code; provided, however, that neither service as a Director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of the
Plan.
EXCHANGE ACT means the Securities Exchange Act of 1934, as
amended.
FAIR MARKET VALUE means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
INCENTIVE STOCK OPTION means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
INSIDER means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
NONSTATUTORY STOCK OPTION means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
<PAGE> 16
OPTION means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
OPTION AGREEMENT means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
OPTIONEE means a person who has been granted one or more
Options.
PARENT CORPORATION means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
PARTICIPATING COMPANY means the Company or any Parent
Corporation or Subsidiary Corporation.
PARTICIPATING COMPANY GROUP means, at any point in time,
all corporations collectively which are then Participating Companies.
RULE 16b-3 means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
SECTION 162(m) means Section 162(m) of the Code, as
amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66).
SECURITIES ACT means the Securities Act of 1933, as
amended.
SERVICE means an Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. Furthermore, an Optionee's Service
with the Participating Company Group shall not be deemed to have terminated if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company; provided, however, that if any such leave
exceeds ninety (90) days, on the ninety-first (91st) day of such leave the
Optionee's Service shall be deemed to have terminated unless the Optionee's
right to return to Service with the Participating Company Group is guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise designated
by the Company or required by law, a leave of absence shall not be treated as
Service for purposes of determining vesting under the Optionee's Option
Agreement. The Optionee's Service shall be deemed to have terminated either upon
an actual termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its sole discretion, shall determine whether the
Optionee's Service has terminated
<PAGE> 17
and the effective date of such termination.
STOCK means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
SUBSIDIARY CORPORATION means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
TEN PERCENT OWNER OPTIONEE means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
ADMINISTRATION.
ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board. All questions of interpretation of the Plan or of any Option shall be
determined by the Board, and such determinations shall be final and binding upon
all persons having an interest in the Plan or such Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.
ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.
POWERS OF THE BOARD. In addition to any other powers set forth
in the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
to determine the Fair Market Value of shares of Stock or
other
<PAGE> 18
property;
to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
to approve one or more forms of Option Agreement;
to amend, modify, extend, cancel, renew, reprice or
otherwise adjust the exercise price of, or grant a new Option in substitution
for, any Option or to waive any restrictions or conditions applicable to any
Option or any shares acquired upon the exercise thereof;
to accelerate, continue, extend or defer the exercisability
of any Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee's termination of
Service with the Participating Company Group;
to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating
Company is a "publicly held corporation" within the meaning of Section 162(m),
the Board may establish a Committee of "outside directors" within the meaning of
Section 162(m) to approve the grant of any Option which might reasonably be
anticipated to result in the payment of employee remuneration that would
otherwise exceed the limit on employee remuneration deductible for income tax
purposes pursuant to Section 162(m).
SHARES SUBJECT TO PLAN.
<PAGE> 19
MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Two Hundred Twenty-Five Thousand (225,000)
and shall consist of authorized but unissued or reacquired shares of Stock or
any combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan. Notwithstanding
the foregoing, at any such time as the offer and sale of securities pursuant to
the Plan is subject to compliance with Section 260.140.45 of Title 10 of the
California Code of Regulations (SECTION 260.140.45), the total number of
shares of Stock issuable upon the exercise of all outstanding Options (together
with options outstanding under any other stock option plan of the Company) and
the total number of shares provided for under any stock bonus or similar plan of
the Company shall not exceed thirty percent (30%) (or such other higher
percentage limitation as may be approved by the stockholders of the Company
pursuant to Section 260.140.45) of the then outstanding shares of the Company as
calculated in accordance with the conditions and exclusions of Section
260.140.45.
ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options and in the exercise price per
share of any outstanding Options. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Options are exchanged
for, converted into, or otherwise become (whether or not pursuant to an
Ownership Change Event, as defined in Section 8.1) shares of another corporation
(the NEW SHARES), the Board may unilaterally amend the outstanding Options to
provide that such Options are exercisable for New Shares. In the event of any
such amendment, the number of shares subject to, and the exercise price per
share of, the outstanding Options shall be adjusted in a fair and equitable
manner as determined by the Board, in its sole discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded up or down to the nearest whole number, as
determined by the Board, and in no event may the exercise price of any Option be
decreased to an amount less than the par value, if any, of the stock subject to
the Option. The adjustments determined by the Board pursuant to this Section 4.2
shall be final, binding and conclusive.
ELIGIBILITY AND OPTION LIMITATIONS.
PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
EMPLOYEES, CONSULTANTS and DIRECTORS shall include prospective Employees,
prospective Consultants and prospective Directors to whom Options are granted in
connection with written offers of an employment or other service relationship
with the Participating Company Group. Eligible persons may be granted more than
one Option.
<PAGE> 20
OPTION GRANT RESTRICTIONS. Any person who is not an Employee on
the effective date of the grant of an Option to such person may be granted only
a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
FAIR MARKET VALUE LIMITATION. To the extent that options
designated as Incentive Stock Options (granted under all stock option plans of
the Participating Company Group, including the Plan) become exercisable by an
Optionee for the first time during any calendar year for stock having a Fair
Market Value greater than One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.3, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of stock shall be determined as of the time the option
with respect to such stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.3, such different
limitation shall be deemed incorporated herein effective as of the date and with
respect to such Options as required or permitted by such amendment to the Code.
If an Option is treated as an Incentive Stock Option in part and as a
Nonstatutory Stock Option in part by reason of the limitation set forth in this
Section 5.3, the Optionee may designate which portion of such Option the
Optionee is exercising. In the absence of such designation, the Optionee shall
be deemed to have exercised the Incentive Stock Option portion of the Option
first. Separate certificates representing each such portion shall be issued upon
the exercise of the Option.
TERMS AND CONDITIONS OF OPTIONS.
Options shall be evidenced by Option Agreements specifying the
number of shares of Stock covered thereby, in such form as the Board shall from
time to time establish. No Option or purported Option shall be a valid and
binding obligation of the Company unless evidenced by a fully executed Option
Agreement. Option Agreements may incorporate all or any of the terms of the Plan
by reference and shall comply with and be subject to the following terms and
conditions:
EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Option granted
to a Ten Percent Owner Optionee shall have an exercise price per share less than
one hundred ten percent (110%) of the Fair Market Value of a share of Stock on
the effective date of grant of the Option. Notwithstanding the foregoing, an
Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
<PAGE> 21
EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Option shall be exercisable after the expiration of ten (10) years
after the effective date of grant of such Option, (b) no Incentive Stock Option
granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the effective date of grant of such Option,
(c) no Option granted to a prospective Employee, prospective Consultant or
prospective Director may become exercisable prior to the date on which such
person commences Service with a Participating Company, and (d) with the
exception of an Option granted to an officer, Director or Consultant, no Option
shall become exercisable at a rate less than twenty percent (20%) per year over
a period of five (5) years from the effective date of grant of such Option,
subject to the Optionee's continued Service. Subject to the foregoing, unless
otherwise specified by the Board in the grant of an Option, any Option granted
hereunder shall have a term of ten (10) years from the effective date of grant
of the Option.
PAYMENT OF EXERCISE PRICE.
FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
CASHLESS EXERCISE), (iv) by such other consideration as may be approved by the
Board from time to time to the extent permitted by applicable law, or (v) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
<PAGE> 22
TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
STANDARD FORMS OF OPTION AGREEMENT.
INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board
at the time the Option is granted, an Option designated as an INCENTIVE STOCK
OPTION shall comply with and be subject to the terms and conditions set forth
in the form of Incentive Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as a NONSTATUTORY
STOCK OPTION shall comply with and be subject to the terms and conditions set
forth in the form of Nonstatutory Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement shall be in
accordance with the terms of the Plan.
CHANGE IN CONTROL.
DEFINITIONS.
An OWNERSHIP CHANGE EVENT shall be deemed to have occurred
if any of the following occurs with respect to the Company:
the direct or indirect sale or exchange in a single or
series of
<PAGE> 23
related transactions by the stockholders of the Company of more than fifty
percent (50%) of the voting stock of the Company;
a merger or consolidation in which the Company is a
party;
the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or
a liquidation or dissolution of the Company.
A CHANGE IN CONTROL shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the TRANSACTION)
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the TRANSFEREE
CORPORATION(S)), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change
in Control, the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof, as the case may be (the ACQUIRING CORPORATION),
may either assume the Company's rights and obligations under outstanding Options
or substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock. For purposes of this Section 8.2, an Option shall
be deemed assumed if, following the Change in Control, the Option confers the
right to purchase in accordance with its terms and conditions, for each share of
Stock subject to the Option immediately prior to the Change in Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the Change in Control was
entitled. Any Options which are neither assumed or substituted for by the
Acquiring Corporation in connection with the Change in Control nor exercised as
of the date of the Change in Control shall become fully exercisable thirty (30)
days prior to the Change of Control and shall terminate and cease to be
outstanding effective as of the date of the Change in Control. Notwithstanding
the foregoing, shares acquired upon exercise of an Option prior to the Change in
Control and any consideration received pursuant to the Change in Control with
respect to such shares shall continue to be subject to all applicable provisions
of the Option Agreement evidencing such Option except as otherwise provided in
such Option Agreement. Furthermore, notwithstanding the foregoing, if the
corporation the stock of which is subject to the outstanding Options immediately
prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a
Change in Control is the surviving or continuing corporation and
<PAGE> 24
immediately after such Ownership Change Event less than fifty percent (50%) of
the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Board otherwise provides in its sole discretion.
PROVISION OF INFORMATION.
At least annually, copies of the Company's balance sheet and income
statement for the just completed fiscal year shall be made available to each
Optionee and purchaser of shares of Stock upon the exercise of an Option. The
Company shall not be required to provide such information to persons whose
duties in connection with the Company assure them access to equivalent
information.
NONTRANSFERABILITY OF OPTIONS.
During the lifetime of the Optionee, an Option shall be exercisable
only by the Optionee or the Optionee's guardian or legal representative. No
Option shall be assignable or transferable by the Optionee, except by will or by
the laws of descent and distribution.
COMPLIANCE WITH SECURITIES LAW.
The grant of Options and the issuance of shares of Stock upon
exercise of Options shall be subject to compliance with all applicable
requirements of federal, state and foreign law with respect to such securities.
Options may not be exercised if the issuance of shares of Stock upon exercise
would constitute a violation of any applicable federal, state or foreign
securities laws or other law or regulations or the requirements of any stock
exchange or market system upon which the Stock may then be listed. In addition,
no Option may be exercised unless (a) a registration statement under the
Securities Act shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (b) in the opinion
of legal counsel to the Company, the shares issuable upon exercise of the Option
may be issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares hereunder shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of any
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
INDEMNIFICATION.
In addition to such other rights of indemnification as they may have
as members of the Board or officers or employees of the Participating Company
Group, members of the Board
<PAGE> 25
and any officers or employees of the Participating Company Group to whom
authority to act for the Board or the Company is delegated shall be indemnified
by the Company against all reasonable expenses, including attorneys' fees,
actually and necessarily incurred in connection with the defense of any action,
suit or proceeding, or in connection with any appeal therein, to which they or
any of them may be a party by reason of any action taken or failure to act under
or in connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
TERMINATION OR AMENDMENT OF PLAN.
The Board may terminate or amend the Plan at any time. However,
subject to changes in applicable law, regulations or rules that would permit
otherwise, without the approval of the Company's stockholders, there shall be
(a) no increase in the maximum aggregate number of shares of Stock that may be
issued under the Plan (except by operation of the provisions of Section 4.2),
(b) no change in the class of persons eligible to receive Incentive Stock
Options, and (c) no other amendment of the Plan that would require approval of
the Company's stockholders under any applicable law, regulation or rule. In any
event, no termination or amendment of the Plan may adversely affect any then
outstanding Option or any unexercised portion thereof, without the consent of
the Optionee, unless such termination or amendment is required to enable an
Option designated as an Incentive Stock Option to qualify as an Incentive Stock
Option or is necessary to comply with any applicable law, regulation or rule.
STOCKHOLDER APPROVAL.
The Plan or any increase in the maximum number of shares of Stock
issuable thereunder as provided in Section 4.1 (the MAXIMUM SHARES) shall be
approved by the stockholders of the Company within twelve (12) months of the
date of adoption thereof by the Board. Options granted prior to stockholder
approval of the Plan or in excess of the Maximum Shares previously approved by
the stockholders shall become exercisable no earlier than the date of
stockholder approval of the Plan or such increase in the Maximum Shares, as the
case may be.
IN WITNESS WHEREOF, the undersigned Secretary of the Company
certifies that the foregoing C2i Solutions, Inc. 1997 Stock Option Plan was duly
adopted by the Board on ___________________, 1997.
Secretary
<PAGE> 26
PLAN HISTORY
______________, 1997 Board adopts Plan, with an initial reserve of 225,000
shares.
______________, 1997 Stockholders approve Plan, with an initial reserve
of 225,000 shares.
<PAGE> 27
C2I SOLUTIONS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is
made and entered into as of ___________________, 199 __, by and between C2i
Solutions, Inc. and _____________________________(the "OPTIONEE").
The Company has granted to the Optionee pursuant to the C2i
Solutions, Inc. 1997 Stock Option Plan (the "PLAN") an option to purchase
certain shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION").
DEFINITIONS AND CONSTRUCTION.
DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
"DATE OF OPTION GRANT" means __________________, 199 __.
"NUMBER OF OPTION SHARES" means
______________________shares of Stock, as adjusted from time to time pursuant to
Section 9.
"EXERCISE PRICE" means $________ per share of Stock, as
adjusted from time to time pursuant to Section 9.
"INITIAL VESTING DATE" means the date occurring one year
after (check one):
[ ] the Date of Option Grant.
[ ] __________________, 199__, the date the
Optionee's Service commenced.
"VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, provided the 1/4
Optionee's Service has not
terminated prior to such date
</TABLE>
<PAGE> 28
Plus
For each full month of the Optionee's 1/48
continuous Service from the Initial
Vesting Date until the Vested Ratio equals
1/1, an additional
"OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.
BOARD means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).
CODE means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
COMMITTEE means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
COMPANY means C2i Solutions, Inc., a Delaware
corporation, or any successor corporation thereto.
CONSULTANT means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
DIRECTOR means a member of the Board or of the board
of directors of any other Participating Company.
DISABILITY means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company group because
of the sickness or injury of the Optionee.
EMPLOYEE means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of this Option Agreement.
EXCHANGE ACT means the Securities Exchange Act of
1934, as amended.
<PAGE> 29
FAIR MARKET VALUE means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
INSIDER means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
PARENT CORPORATION means any present or future parent
corporation of the Company, as defined in Section 424(e) of the Code.
PARTICIPATING COMPANY means the Company or any Parent
Corporation or Subsidiary Corporation.
PARTICIPATING COMPANY GROUP means, at any point in time,
all corporations collectively which are then Participating Companies.
RULE 16b-3 means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
SECURITIES ACT means the Securities Act of 1933, as
amended.
SERVICE means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. Furthermore,
the Optionee's Service with the Participating Company Group shall not be deemed
to have terminated if the
<PAGE> 30
Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company; provided, however, that if any such leave
exceeds ninety (90) days, on the ninety-first (91st) day of such leave the
Optionee's Service shall be deemed to have terminated unless the Optionee's
right to return to Service with the Participating Company Group is guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise designated
by the Company or required by law, a leave of absence shall not be treated as
Service for purposes of determining the Optionee's Vested Ratio. The Optionee's
Service shall be deemed to have terminated either upon an actual termination of
Service or upon the corporation for which the Optionee performs Service ceasing
to be a Participating Company. Subject to the foregoing, the Company, in its
sole discretion, shall determine whether the Optionee's Service has terminated
and the effective date of such termination.
STOCK means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
SUBSIDIARY CORPORATION means any present or future
subsidiary corporation of the Company, as defined in Section 424(f) of the
Code.
CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall include the
singular. Use of the term or is not intended to be exclusive, unless the
context clearly requires otherwise.
TAX STATUS OF OPTION.
This Option is intended to be a nonstatutory stock option and shall
not be treated as an incentive stock option within the meaning of Section 422(b)
of the Code.
ADMINISTRATION.
All questions of interpretation concerning this Option Agreement
shall be determined by the Board. All determinations by the Board shall be final
and binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
EXERCISE OF THE OPTION.
RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Vesting Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares multiplied by the Vested Ratio less the
number of shares previously acquired upon exercise of the Option. In no event
shall the Option be exercisable for more shares than the Number of Option
Shares.
<PAGE> 31
METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased. The
Option shall be deemed to be exercised upon receipt by the Company of such
written notice and the aggregate Exercise Price.
PAYMENT OF EXERCISE PRICE. Full payment of the aggregate
Exercise Price for the number of shares of Stock being purchased. The Option
shall be deemed to be exercised upon receipt by the Company of such written
notice and the aggregate Exercise Price.
FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any
combination of the foregoing.
TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes
<PAGE> 32
withholding from payroll and any other amounts payable to the Optionee, and
otherwise agrees to make adequate provision for (including by means of a
Cashless Exercise to the extent permitted by the Company), any sums required to
satisfy the federal, state, local and foreign tax withholding obligations of the
Participating Company Group, if any, which arise in connection with the Option,
including, without limitation, obligations arising upon (i) the exercise, in
whole or in part, of the Option, (ii) the transfer, in whole or in part, of any
shares acquired upon exercise of the Option, (iii) the operation of any law or
regulation providing for the imputation of interest, or (iv) the lapsing of any
restriction with respect to any shares acquired upon exercise of the Option. The
Optionee is cautioned that the Option is not exercisable unless the tax
withholding obligations of the Participating Company Group are satisfied.
Accordingly, the Optionee may not be able to exercise the Option when desired
even though the Option is vested, and the Company shall have no obligation to
issue a certificate for such shares.
CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
NONTRANSFERABILITY OF THE OPTION.
<PAGE> 33
The Option may be exercised during the lifetime of the Optionee only
by the Optionee or the Optionee's guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of
descent and distribution. Following the death of the Optionee, the Option, to
the extent provided in Section 7, may be exercised by the Optionee's legal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
TERMINATION OF THE OPTION.
The Option shall terminate and may no longer be exercised on the
first to occur of (a) the Option Expiration Date, (b) the last date for
exercising the Option following termination of the Optionee's Service as
described in Section 7, or (c) a Change in Control to the extent provided in
Section 8.
EFFECT OF TERMINATION OF SERVICE.
OPTION EXERCISABILITY.
DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.
DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3)
<PAGE> 34
months after the date the Optionee is notified by the Company that the Option is
exercisable, but in any event no later than the Option Expiration Date.
EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
CHANGE IN CONTROL.
DEFINITIONS.
An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
a merger or consolidation in which the Company is a
party;
the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or
a liquidation or dissolution of the Company.
A "CHANGE IN CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change
in
<PAGE> 35
Control, the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"),
may either assume the Company's rights and obligations under the Option or
substitute for the Option a substantially equivalent option for the Acquiring
Corporation's stock. For purposes of this Section 8.2, the Option shall be
deemed assumed if, following the Change in Control, the Option confers the right
to purchase in accordance with its terms and conditions, for each share of Stock
subject to the Option immediately prior to the Change in Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the Change in Control was
entitled. The Option shall become fully exercisable for a period of thirty (30)
days prior to the Change of Control and shall terminate and cease to be
outstanding effective as of the date of the Change in Control to the extent that
the Option is neither assumed or substituted for by the Acquiring Corporation in
connection with the Change in Control nor exercised as of the date of the Change
in Control. Notwithstanding the foregoing, shares acquired upon exercise of the
Option prior to the Change in Control and any consideration received pursuant to
the Change of Control with respect to such shares shall continue to be subject
to all applicable provisions of this Option Agreement except as otherwise
provided herein. Furthermore, notwithstanding the foregoing, if the corporation
the stock of which is subject to the Option immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Change in Control is
the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the Option
shall not terminate unless the Board otherwise provides in its sole discretion.
ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
In the event of any stock dividend, stock split, reverse stock
split, recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a
majority of the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to
provide that the Option is exercisable for New Shares. In the event of any such
amendment, the Number of Option Shares and the Exercise Price shall be adjusted
in a fair and equitable manner, as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 9 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the
Exercise Price be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 9 shall be final, binding and conclusive.
RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT.
The Optionee shall have no rights as a stockholder with respect to
any shares covered by the Option until the date of the issuance of a certificate
for the shares for which the Option has been exercised (as evidenced by the
appropriate entry on the books of the Company or
<PAGE> 36
of a duly authorized transfer agent of the Company). No adjustment shall be made
for dividends, distributions or other rights for which the record date is prior
to the date such certificate is issued, except as provided in Section 9. If the
Optionee is an Employee, the Optionee understands and acknowledges that, except
as otherwise provided in a separate, written employment agreement between a
Participating Company and the Optionee, the Optionee's employment is "at will"
and is for no specified term. Nothing in this Option Agreement shall confer upon
the Optionee any right to continue in the Service of a Participating Company or
interfere in any way with any right of the Participating Company Group to
terminate the Optionee's Service as an Employee or Consultant, as the case may
be, at any time.
LEGENDS.
The Company may at any time place legends referencing any applicable
federal, state or foreign securities law restrictions on all certificates
representing shares of stock subject to the provisions of this Option Agreement.
The Optionee shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to the
Option in the possession of the Optionee in order to carry out the provisions of
this Section.
RESTRICTIONS ON TRANSFER OF SHARES.
No shares acquired upon exercise of the Option may be sold,
exchanged, transferred (including, without limitation, any transfer to a nominee
or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed
of, including by operation of law, in any manner which violates any of the
provisions of this Option Agreement and any such attempted disposition shall be
void. The Company shall not be required (a) to transfer on its books any shares
which will have been transferred in violation of any of the provisions set forth
in this Option Agreement or (b) to treat as owner of such shares or to accord
the right to vote as such owner or to pay dividends to any transferee to whom
such shares will have been so transferred.
BINDING EFFECT.
Subject to the restrictions on transfer set forth herein, this
Option Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns.
TERMINATION OR AMENDMENT.
The Board may terminate or amend the Plan or the Option at any time;
provided, however, that except as provided in Section 8.2 in connection with a
Change in Control, no such termination or amendment may adversely affect the
Option or any unexercised portion hereof without the consent of the Optionee
unless such termination or amendment is necessary to comply with any applicable
law or government regulation. No amendment or addition to this Option Agreement
shall be effective unless in writing.
NOTICES.
<PAGE> 37
Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given (except to the extent that this Option
Agreement provides for effectiveness only upon actual receipt of such notice)
upon personal delivery or upon deposit in the United States Post Office, by
registered or certified mail, with postage and fees prepaid, addressed to the
other party at the address shown below that party's signature or at such other
address as such party may designate in writing from time to time to the other
party.
INTEGRATED AGREEMENT.
This Option Agreement constitutes the entire understanding and
agreement of the Optionee and the Participating Company Group with respect to
the subject matter contained herein and there are no agreements, understandings,
restrictions, representations, or warranties among the Optionee and the
Participating Company Group with respect to such subject matter other than those
as set forth or provided for herein. To the extent contemplated herein, the
provisions of this Option Agreement shall survive any exercise of the Option and
shall remain in full force and effect.
APPLICABLE LAW.
This Option Agreement shall be governed by the laws of the State of
California as such laws are applied to agreements between California residents
entered into and to be performed entirely within the State of California.
C2i, INC.
By:
Title:
Address:
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement, and hereby accepts the Option subject
to all of the terms and provisions thereof. The Optionee hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Option Agreement.
OPTIONEE
<PAGE> 38
Date:
Optionee Address:
-----------------------------------
-----------------------------------
<PAGE> 1
EXHIBIT 10.3
PROMISSORY NOTE
____________, 1997
$_____________ San Diego, California
1. Obligation. For value received, C2i Solutions, Inc., a Delaware
corporation ("Payor") promises to pay to the order of _______________, an
individual ("Holder"), the principal sum equal to ____________________ Dollars
($___________), plus accrued interest. Interest will accrue at an annual rate
equal to ten percent (10%). Interest shall commence with the date hereof and
shall continue on the outstanding principal until paid in full. Payment of
principal and interest shall be due on the earlier of (i) the closing of an
underwritten initial public offering by Payor of its equity securities or (ii)
September 30, 1999.
2. Prepayment. This Note may be prepaid by Payor, in whole or in
part, at any time without penalty or premium.
3. Waiver. Presentment, demand, protest, notices of protest,
dishonor and non-payment of this Note and all notices of every kind are hereby
waived. No single or partial exercise of, or forbearance from exercising, any
power hereunder shall preclude other or further exercises thereof or the
exercise of any other power. No delay or omission on the part of Holder in
exercising any right hereunder shall operate as a waiver of such right or of any
other right under this Note.
4. Maximum Rate. All agreements which either are now or which shall
become agreements between Payor and Holder are expressly limited so that in no
contingency or event whatever, whether by reason of deferment or advancement of
the indebtedness represented by this Note, acceleration of the maturity date of
this Note, or otherwise, shall the amount paid or agreed to be paid to Holder
for the use, forbearance or detention of the indebtedness evidenced hereby
exceed the maximum amount of interest permissible under applicable law. If at
any time, from any circumstance whatsoever, fulfillment of any provision of this
Note or any other agreement between Payor and Holder, shall result in or involve
payments or performance which would exceed the maximum legal interest rate,
then, ipso facto, the obligation to be fulfilled shall be reduced so as not to
exceed said maximum legal interest rate.
5. Governing Law. Principal and interest are payable in lawful money
of the United States. This Note shall be governed by and construed in accordance
with the laws of the State of California. In any action brought under or arising
out of this Note, Holder hereby consents to the jurisdiction of any competent
court within the State of California and consents to service of process by any
means authorized by California law.
C2i SOLUTIONS, INC.
By:
---------------------------------------
John A. Whalen, Jr.
President and Chief Executive Officer
<PAGE> 2
Common Stock Warrant
Number ___
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE
ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
Void after September 30, 1999
C2i SOLUTIONS, INC.
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, __________________ is
entitled to purchase _________________ (______) shares of Common Stock ("Warrant
Shares") of C2i SOLUTIONS, INC., a Delaware corporation (the "Company"), at a
price per share equal to four dollars ($4.00) per share ("Warrant Price"),
subject to adjustments and all other terms and conditions set forth in this
Warrant, provided, however, that in the event the Company completes an
underwritten initial public offering of the equity securities of the Company
(the "IPO") prior to September 30, 1998, the Warrant Price shall be equal to
two/thirds (2/3's) of the price to the public of the securities offered in the
IPO, as set forth on the cover page of the final prospectus for that offering.
1. Definitions. As used herein, the following terms, unless the
context otherwise requires, shall have the following meanings:
(a) "Act" shall mean the Securities Act of 1933, as amended, or
any successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
(b) "Commission" shall mean the Securities and Exchange
Commission, or any other Federal agency at the time administering the Act.
(c) "Common Stock" shall mean shares of the Company's presently
or subsequently authorized Common Stock, and any stock into which such Common
Stock may hereafter be exchanged.
1
<PAGE> 3
(d) "Company" shall mean C2i SOLUTIONS, INC., a Delaware
corporation, and any corporation which shall succeed to or assume the
obligations of C2i SOLUTIONS, INC., under this Warrant.
(e) "Date of Grant" shall mean October 22, 1997.
(f) "Exercise Date" shall mean the effective date of the delivery
of the Notice of Exercise pursuant to Sections 4 and 11 below.
(g) "Holder" shall mean any person who shall at the time be the
registered holder of this Warrant.
(h) "Notes" shall mean the Promissory Notes of the Company dated
October 22,1997, in the aggregate principal amount of up to $1,000,000, issued
to the initial Holder and other security holders of the Company concurrently
with the issuance of this Warrant.
(i) "Shares" shall mean shares of the Company's Common Stock, as
described in the Company's Certificate of Incorporation.
2. Issuance of Warrant and Consideration Therefor. This Warrant is
issued in consideration of the Holder's loan to the Company as described in the
Notes issued concurrently with this Warrant.
3. Term. The purchase right represented by this Warrant is
exercisable only during the period commencing one year from the closing of the
IPO and ending on the date two years from the closing of the IPO.
4. Method of Exercise and Payment.
(a) Method of Exercise. Subject to Section 3 hereof and
compliance with all applicable Federal and state securities laws, the purchase
right represented by this Warrant may be exercised, in whole or in part and from
time to time, by the Holder by (i) surrender of this Warrant and delivery of the
Notice of Exercise (the form of which is attached hereto as Exhibit A), duly
executed, at the principal office of the Company and (ii) payment to the Company
of an amount equal to the product of the then applicable Warrant Price
multiplied by the number of Shares then being purchased pursuant to one of the
payment methods permitted under Section 4(b) below.
(b) Method of Payment. Payment shall be made either (1) by check
drawn on a United States bank and for United States funds made payable to the
Company, or (2) by wire transfer of United States funds for the account of the
Company.
(c) Net Issue Exercise. Notwithstanding any provisions herein to
the contrary, in lieu of exercising this Warrant for cash, the Holder may elect
to receive shares equal to the value (as determined below) of this Warrant (or
the portion thereof being canceled) by surrender
2
<PAGE> 4
of this Warrant at the principal office of the Company together with a properly
endorsed notice of exercise and notice of such election in which event the
Company shall issue to the Holder a number of shares of Common Stock computed
using the following formula:
Y (A-B)
X =
-----------------
A
Where X = the number of shares of Common Stock to be issued to the
Holder,
Y = the number of shares of Common Stock purchasable under
the Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being canceled (at
the date of such calculation),
A = the fair market value of one share of the Company's
Common Stock (at the date of such calculation), and
B = the Warrant Price (as adjusted to the date of such
calculation).
For purposes of the above calculation, fair market value of one share of Common
Stock shall be determined by the Company's Board of Directors in good faith;
provided, however, that where there exists a public market for the Company's
Common Stock at the time of such exercise, fair market value shall mean the
average over the preceding ten (10) trading days (or such fewer number of days
as such public market has existed) of the mean of the closing bid and asked
prices on the over-the-counter market as reported by Nasdaq, or if the Common
Stock is then traded on a national securities exchange or the Nasdaq National
Market, the average over the preceding ten trading days (or such fewer number of
days as the Common Stock has been so traded) of the closing sale prices on the
principal national securities exchange or the National Market on which it is so
traded.
(d) Delivery of Certificate. In the event of any exercise of
the purchase right represented by this Warrant, certificates for the Shares so
purchased shall be delivered to the Holder within thirty days of delivery of the
Notice of Exercise and, unless this Warrant has been fully exercised or has
expired, a new warrant representing the portion of the Shares with respect to
which this Warrant shall not then have been exercised shall also be issued to
the Holder within such thirty day period.
(e) No Fractional Shares. No fractional shares shall be
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor upon the basis of the fair
market value per Share as of the date of exercise.
(f) Company's Representations.
(i) All Shares which may be issued upon the exercise of
the purchase right represented by this Warrant shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer
3
<PAGE> 5
provided for herein or under applicable federal and state securities laws.
During the period within which the purchase right represented by this Warrant
may be exercised, the Company shall at all times have authorized, and reserved
for the purpose of issuance upon exercise of the purchase right represented by
this Warrant, a sufficient number of Shares to provide for the exercise of the
purchase right represented by this Warrant;
(ii) This Warrant has been duly authorized and executed
by the Company and is a valid and binding obligation of the Company enforceable
in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting the
enforcement of creditors' rights;
(iii) The execution and delivery of this Warrant are not,
and the issuance of the Shares upon exercise of this Warrant in accordance with
the terms hereof will not be inconsistent with the Company's Certificate of
Incorporation or Bylaws, do not and will not contravene any law, governmental
rule or regulation, judgment or order applicable to the Company, and do not and
will not conflict with or contravene any provision of, or constitute a material
default under, any material indenture, mortgage, contract or other instrument of
which the Company is a party or by which it is bound or, assuming the accuracy
of the initial Holder's representations and warranties in the Subscription
Agreement and Investor Questionnaire executed by the initial Holder, require the
consent or approval of, the giving of notice to, the registration or filing with
or the taking of any action in respect of or by, any federal, state or local
government authority or agency (other than such consents, approvals, notices,
actions, filings, etc., as have already been obtained or made, as the case may
be).
5. Adjustment of Warrant Price and Number of Shares. The number of
securities issuable upon the exercise of this Warrant and the Warrant Price
shall be subject to adjustment from time to time upon the occurrence of certain
events, as follows:
(a) Adjustment for Dividends in Stock. In case at any time or
from time to time on or after the date hereof the holders of the Common Stock of
the Company (or any shares of stock or other securities at the time receivable
upon the exercise of this Warrant) shall have received or, on or after the
record date fixed for the determination of eligible stockholders, shall have
become entitled to receive, without payment therefor, other or additional stock
of the Company by way of dividend then, and in each case, the Holder of this
Warrant shall, upon the exercise hereof, be entitled to receive, in addition to
the number of shares of Common Stock receivable thereupon, and without payment
of any additional consideration therefor, the amount of such other or additional
stock of the Company which such Holder would hold on the date of such exercise
had it been the holder of record of such Common Stock on the date hereof and had
thereafter, during the period from the date hereof to and including the date of
such exercise, retained such shares and/or all other additional stock receivable
by it as aforesaid during such period, giving effect to all adjustments called
for during such period by subsections (b) and (c) of this Section 5.
(b) Adjustment for Reclassification or Reorganization. In case of
any reclassification or change of the outstanding securities of the Company or
of any reorganization of the Company on or after the date hereof, then and in
each such case the Holder of this Warrant,
4
<PAGE> 6
upon the exercise hereof at any time after the consummation of such
reclassification, change, or reorganization, shall be entitled to receive, in
lieu of or in addition to the stock or other securities and property receivable
upon the exercise hereof prior to such consummation, the stock or other
securities to which such Holder would have been entitled upon such consummation
if such Holder had exercised this Warrant immediately prior thereto, all subject
to further adjustment as provided in subsections (a) and (c); in each such case,
the terms of this Section 5 shall be applicable to the shares of stock or other
securities property receivable upon the exercise of this Warrant after such
consummation.
(c) Stock Splits and Reverse Stock Splits. If, at any time on or
after the date hereof, the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares, the Warrant Price in effect
immediately prior to such subdivision shall thereby be proportionately reduced
and the number of shares receivable upon exercise of this Warrant shall thereby
be proportionately increased; and, conversely, if at any time on or after the
date hereof the outstanding number of shares of Common Stock shall be combined
into a smaller number of shares, the Warrant Price in effect immediately prior
to such combination shall thereby be proportionately increased and the number of
shares receivable upon exercise of the Warrant shall be proportionately
decreased.
6. Notices of Record Date, Etc. In the event of (a) any taking by
the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution (the "Distribution"), (b) any capital
reorganization or reclassification of the stated capital of the Company or any
consolidation or merger of the Company with any other corporation or
corporations (other than a wholly-owned subsidiary), or the sale or distribution
of all or substantially all of the Company's property and assets (the
"Reorganization Event"), or (c) any proposed filing of a registration statement
under the Act in connection with a primary public offering of the Company's
Common Stock (the "Registration Event"), the Company will mail or cause to be
mailed to the Holder a notice specifying (i) the date of any such Distribution
stating the amount and character of such Distribution, (ii) the date on which
any such Reorganization Event or Registration Event is expected to become
effective, and (iii) the time, if any, that is to be fixed as to when the
holders of record of the Company's securities shall be entitled to exchange
their shares of the Company's securities for securities or other property
deliverable upon such Reorganization Event. Such notice shall be mailed at least
thirty (30) days prior to the date therein specified.
5
<PAGE> 7
7. Compliance with Act; Transferability and Negotiability of
Warrant; Disposition of Shares.
(a) Compliance with Act. The Holder, by acceptance hereof, agrees
that this Warrant and the Shares to be issued upon the exercise hereof are being
acquired solely for its own account (or a trust account if the Holder is a
trust) and not as a nominee for any other party and not with a view toward the
resale or distribution thereof and that it will not offer, sell or otherwise
dispose of this Warrant or any Shares to be issued upon the exercise hereof
except under circumstances which will not result in a violation of the Act. Upon
the exercise of this Warrant, the Holder shall confirm in writing, in a form
satisfactory to the Company, that the Shares so issued are being acquired solely
for its own account (or a trust account if the Holder is a trust) and not as a
nominee for any other party and not with a view toward resale or distribution
thereof. This Warrant and the Shares to be issued upon the exercise hereof
(unless registered under the Act) shall be imprinted with a legend in
substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
In addition, this Warrant and the Shares to be issued upon the
exercise hereof shall bear any legends required by the securities laws of any
applicable states.
(b) Transferability and Negotiability of Warrant. This Warrant
may not be transferred or assigned in whole or in part without compliance with
all applicable federal and state securities laws by the transferor and the
transferee (including the delivery of investment representation letters and
legal opinions satisfactory to the Company, if requested by the Company and the
transfer is to a person other than a general partner of the initial Holder).
Subject to the provisions of this Warrant with respect to compliance with the
Act, title to this Warrant may be transferred by endorsement and delivery in the
same manner as a negotiable instrument transferable by endorsement and delivery;
provided, however, that neither this Warrant nor the Shares purchasable with
this Warrant may be transferred to any entity or person which the Company
reasonably determines to be an actual or potential competitor of the Company.
The Company shall act promptly to record transfers of this Warrant on its books,
but the Company may treat the registered holder of this Warrant as the absolute
owner of this Warrant for all purposes, notwithstanding any notice to the
contrary.
(c) Disposition of Shares. With respect to any offer, sale,
transfer or other disposition of any Shares acquired pursuant to the exercise of
this Warrant prior to registration of such Shares, except for any such offer,
sale, transfer or other disposition of Shares to a general
6
<PAGE> 8
partner of the initial Holder, the Holder and each subsequent holder of this
Warrant agrees to give written notice to the Company prior thereto, describing
briefly the manner thereof, together with a written opinion of legal counsel for
such holder, reasonably satisfactory to the Company and its legal counsel, if
requested by the Company, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the Act
or any other Federal or state securities laws) of such Shares and indicating
whether or not under the Act, certificates for such Shares to be sold or
otherwise disposed of require any restrictive legend as to the applicable
restrictions on transferability in order to insure compliance with the Act.
Promptly upon receiving such written notice and reasonably satisfactory opinion,
if so requested, the Company, as promptly as practicable, shall notify such
holder that such holder may sell or otherwise dispose of such Shares, all in
accordance with the terms of the notice delivered to the Company. If a
determination has been made pursuant to this subsection (c) that the opinion of
legal counsel for the holder is not reasonably satisfactory to the Company and
its legal counsel, the Company shall so notify the holder promptly after such
determination has been made. Notwithstanding the foregoing, such Shares may be
offered, sold or otherwise disposed of in accordance with Rule 144, provided
that the Company shall have been furnished with such information as the Company
may reasonably request to provide a reasonable assurance that the provisions of
Rule 144 have been satisfied. Each certificate representing the Shares thus
transferred (except a transfer pursuant to Rule 144(k)) shall bear a restrictive
legend as to the applicable restrictions on transferability in order to insure
compliance with the Act, unless in the aforesaid opinion of legal counsel for
the holder, such legend is not required in order to insure compliance with the
Act. The Company may issue stop transfer instructions to its transfer agent in
connection with such restrictions.
8. Rights of Shareholders. No Holder shall be entitled to vote or
receive dividends or be deemed the holder of Shares or any other securities of
the Company which may at any time be issuable on the exercise of this Warrant
for any purpose, nor shall anything contained herein be construed to confer upon
the Holder, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, consolidation, merger, transfer of assets or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been exercised
and the Shares issuable upon exercise hereof shall have become deliverable, as
provided herein.
9. Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
10. Exchange of Warrant. Subject to the other provisions of this
Warrant, on surrender of this Warrant for exchange, properly endorsed and
subject to the provisions of this Warrant with respect to compliance with the
Act, the Company at its expense shall issue to or on the order of the Holder a
new warrant or warrants of like tenor, in the name of the Holder or as
7
<PAGE> 9
the Holder (on payment by the Holder of any applicable transfer taxes) may
direct, for the number of Shares issuable upon exercise thereof.
11. Notices. All notices and other communications from the Company
to the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
12. Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
13. Governing Law. This Warrant shall be governed by and construed
in accordance with the laws of the State of California, as such laws are applied
to agreements entered into in California and to be performed solely by
California residents.
14. Titles and Subtitles; Forms of Pronouns. The titles of the
Sections and Subsections of this Warrant are for convenience only and are not to
be considered in construing this Warrant. All pronouns used in this Warrant
shall be deemed to include masculine, feminine and neuter forms.
15. Expiration. Subject to earlier termination pursuant to Section 3
above, the right to exercise this Warrant shall expire at 5:00 P.M. California
time, on September 30, 1999.
Dated: October ___, 1997
C2I SOLUTIONS, INC.
By:
---------------------------------
John A. Whalen, Jr.
Chief Executive Officer
8
<PAGE> 10
EXHIBIT A
NOTICE OF EXERCISE
TO: C2i SOLUTIONS, INC.
1. The undersigned Holder of the attached original, executed Common
Stock Purchase Warrant hereby elects to exercise its purchase right under such
Warrant with respect to ________________ Shares, as defined in the Warrant, of
C2i Solutions, Inc.
2. The undersigned Holder elects to pay the aggregate Warrant Price
for such Shares (the "Exercise Shares") in the following manner:
[ ] by the enclosed check drawn on a United States bank and
for United States funds made payable to the Company in the
amount of $_____________; or
[ ] by wire transfer of United States funds to the account
of the Company in the amount of $___________, which
transfer has been made before or simultaneously with the
delivery of this Notice pursuant to the instructions of
the Company.
[ ] pursuant to the Net Exercise provisions set forth in
Section 4(c) of the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of Shares in the name of the undersigned or in such other
names as is specified below;
Name:
------------------------------------------------
Address:
---------------------------------------------
Tax Ident. No.:
--------------------------------------
HOLDER:
By:
--------------------------------------------------
Title:
-----------------------------------------------
Date:
-------------------
9
<PAGE> 1
Exhibit 11.1
C2i Solutions, Inc.
Statement re: Computation of Per Share Losses
<TABLE>
<CAPTION>
Period from
inception
(September 17,
1996) through Six Months
December Ended June 30,
31, 1996 1997
-------------- -------------
<S> <C> <C>
Net loss (44,338) (1,323,296)
Common stock 1,050,000 1,050,000
Shares related to SAB No. 83 1,824,255 1,824,255
--------- ---------
Shares used in computing pro
forma net loss per share 2,874,255 2,874,255
========= =========
Pro forma net loss per share $(0.02) $(0.46)
========= =========
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, 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 February 28, 1997,
except for the first and second paragraphs of Note 1 and all of Note 4, as to
which the date is November 3, 1997, in the Registration Statement on Form SB-2
and related Prospectus of C2i Solutions, Inc. (a development stage company)
expected to be filed on or about November 4, 1997.
/s/ ERNST & YOUNG LLP
San Diego, California
November 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FROM INCEPTION (SEPTEMBER 17, 1996) THROUGH DECEMBER 31, 1996 FOR
THE SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH INFORMATION CONTAINED IN THE REGISTRATION STATEMENT FILED ON
FORM SB-2.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> OTHER 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> SEP-17-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 16,476 83,765
<SECURITIES> 0 0
<RECEIVABLES> 9,797 5,520
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 125,587 205,847
<PP&E> 21,633 41,633
<DEPRECIATION> 4,148 8,736
<TOTAL-ASSETS> 144,397 240,490
<CURRENT-LIABILITIES> 31,235 42,796
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 157,500 1,565,328
<TOTAL-LIABILITY-AND-EQUITY> 144,397 240,490
<SALES> 9,798 20,250
<TOTAL-REVENUES> 9,798 36,154
<CGS> 6,300 16,177
<TOTAL-COSTS> 54,136 1,359,450
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (44,338) (1,323,296)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (44,338) (1,323,296)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (44,338) (1,323,296)
<EPS-PRIMARY> (.02) (.46)
<EPS-DILUTED> (.02) (.46)
</TABLE>
