<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 1998
REGISTRATION NO. 333-43151
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CUMETRIX DATA SYSTEMS CORP.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 5045 95-4574138
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
957 LAWSON STREET, INDUSTRY, CALIFORNIA 91748
(626) 965-6899
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
MAX TOGHRAIE, CHIEF EXECUTIVE OFFICER
957 LAWSON STREET
INDUSTRY, CALIFORNIA 91748
(626) 965-6899
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
------------------------
COPIES TO:
MURRAY MARKILES, ESQ. RUBI FINKELSTEIN, ESQ.
Jessica Cullen Smith, Esq. Orrick, Herrington & Sutcliffe LLP
Troop Meisinger Steuber & Pasich, LLP 666 Fifth Avenue
10940 Wilshire Boulevard New York, New York 10103
Los Angeles, California 90024 (212) 506-5000
(310) 824-7000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered in 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. / /
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 the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
------------------------
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>
This Preliminary Prospectus and the information contained herein are subject to
completion or amendment. These securities may not be sold nor may offers to buy
be accepted prior to the time the Registration Statement becomes effective.
Under no circumstances shall this Preliminary Prospectus constitute an offer to
sell or a solicitation of an offer to buy, nor shall there be any sale of these
securities, in any jurisdiction in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
such jurisdiction.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 3, 1998
[LOGO]
2,300,000 SHARES
CUMETRIX DATA SYSTEMS CORP.
COMMON STOCK
--------------------
Cumetrix Data Systems Corp., a California corporation ("CUMETRIX" or the
"Company"), is hereby offering (the "Offering") 2,300,000 shares of common
stock, no par value per share (the "Common Stock"). It is currently anticipated
that the initial public offering price of the Common Stock will be between $4.50
and $5.50 per share. Prior to the Offering, there has been no public market for
the Common Stock and there can be no assurance that a trading market will
develop or, if developed, that it will be sustained after the Offering. For
information relating to the factors considered in determining the initial
offering price to the public, see "Underwriting."
The Common Stock has been approved for quotation on The Nasdaq SmallCap
Market ("Nasdaq") under the trading symbol "CDSC" and approved for listing on
the Boston Stock Exchange ("BSE") under the trading symbol "CDS."
-------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS," COMMENCING 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 THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per share....................................... $ $ $
Total(3)........................................ $ $ $
</TABLE>
(1) Does not include additional compensation payable to the Underwriters in the
form of a 3% non-accountable expense allowance or the Company's agreement to
sell to the Underwriters five year warrants to purchase 230,000 shares of
Common Stock at 165% of the initial public offering price per share of
Common Stock (the "Underwriters' Warrants"). See "Underwriting" for
information concerning indemnification and contribution arrangements and
other compensation payable to the Underwriters.
(2) Before deducting expenses estimated at $802,000 payable by the Company
including the Underwriters' non-accountable expense allowance. Of the
Proceeds to the Company, $400,000 is being distributed to certain of the
Company's existing shareholders in payment of notes issued. See "Use of
Proceeds."
(3) The Company has granted the Underwriters an option (the "Over-Allotment
Option"), exercisable for a period of 45 days after the date of this
prospectus, to purchase up to 345,000 additional shares of Common Stock at
the Price to the Public less Underwriting Discounts and Commissions, solely
to cover over-allotments, if any. If such option is exercised in full, the
total Price to the Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $ , $ and $ , respectively. See
"Underwriting."
-------------------
The shares of Common Stock are offered by the Underwriters subject to prior
sale, when, as and if issued by the Company, delivered to and accepted by the
Underwriters and subject to approval of certain legal matters by its counsel and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify the Offering and to reject any order in whole or in
part. It is expected that delivery of the certificates representing the Common
Stock offered hereby will be made against payment therefor at the offices of
Joseph Stevens & Company, Inc., 33 Maiden Lane, New York, New York 10038 on or
about , 1998.
-------------------
JOSEPH STEVENS & COMPANY, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
[Graphic depicting schematically ACSA Solution and Distribution Services in the
center with four arrows pointing outward:
-- System Configuration Services is written on the arrow pointing to
System Integrators
-- Hardware configuration is written on the arrow pointing to Value
Added Resellers
-- Built to order process is written on the arrow pointing to Original
Equipment Manufacturers
-- Software configuration is written on the arrow pointing toward
Independent Software Vendors.]
[Photo of a hard drive]
[Caption: HIGH CAPACITY STORAGE The Company is a distributor of hard drives and
integrates hard drives as components into systems the Company assembles.]
[Graphic depicting three arrows in circular form around the caption, ACSA
Solution
- Customized End-user configuration requirement.
- Automated Mass Custom configuration
- Assembly]
[Caption: Using data gathered by manufacturers, Value Added Resellers and
Systems Integrators, the ACSA Center integrated assembly line will automatically
mass configure hardware and software to each end user's custom requirements.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE MARKET PRICE, PURCHASES OF
THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED BY THE
UNDERWRITER IN THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE STATEMENTS WHICH ARE NOT
HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED UNDER "RISK
FACTORS." PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED BY THIS PROSPECTUS
SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" SECTION, AS WELL AS THE OTHER
INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN
ADJUSTED TO GIVE EFFECT TO A 10.960591-FOR-1 STOCK SPLIT (THE "STOCK SPLIT") OF
THE OUTSTANDING SHARES OF COMMON STOCK EFFECTED IN OCTOBER 1997, AND ASSUMES (I)
THE EXPIRATION OF A CONTINGENT WARRANT (THE "CASI WARRANT") TO PURCHASE SHARES
OF THE COMPANY'S COMMON STOCK, SEE "CERTAIN TRANSACTIONS," (II) NO EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (III) NO GRANT OF ADDITIONAL OPTIONS
UNDER THE COMPANY'S 1997 STOCK PLAN (THE "STOCK INCENTIVE PLAN"), (IV) NO
EXERCISE OF 100,000 WARRANTS (THE "BRIDGE WARRANTS") OF THE COMPANY, EACH
WARRANT EXERCISABLE DURING THE 36-MONTH PERIOD COMMENCING ONE YEAR FROM THE DATE
THE WARRANTS WERE ISSUED TO PURCHASE ONE SHARE OF COMMON STOCK AT AN INITIAL
EXERCISE PRICE OF $3.00 PER SHARE, SUBJECT TO ADJUSTMENT, ISSUED TO THE
PURCHASERS OF 18 MONTH MATURITY PROMISSORY NOTES (THE "BRIDGES NOTES") OF THE
COMPANY BEARING INTEREST AT A RATE OF 10% PER ANNUM ORIGINALLY ISSUED IN A
FINANCING (THE "BRIDGE FINANCING"), SEE "RECENT BRIDGE FINANCING," AND (V) NO
EXERCISE OF THE UNDERWRITERS' WARRANTS, EACH EXERCISABLE TO PURCHASE ONE SHARE
OF COMMON STOCK AT AN INITIAL EXERCISE PRICE EQUAL TO 165% OF THE INITIAL PUBLIC
OFFERING PRICE OF THE COMMON STOCK. SEE "MANAGEMENT--STOCK OPTION PLAN,"
"CERTAIN TRANSACTIONS" AND "UNDERWRITING."
THE COMPANY
The Company distributes computer equipment and related hardware components
and software ("Computer Products") to value added resellers ("VARs"), systems
integrators ("SIs"), original equipment manufacturers ("OEMs"), independent
software vendors ("ISVs") and major government and corporate accounts. In
December 1996, the Company entered the system configuration business. The
Company intends to build upon vendor and customer relationships in the Computer
Products business and the system configuration business to become a leading
provider of software-enabled custom configuration to its target markets both
domestically and internationally. The Company intends to implement a fully
automated systems integration and configuration process, referred to as the
Automated Custom System Assembly Solution, or "ACSA Solution," incorporating
licensed proprietary software. The Company believes the ACSA Solution will
enable the Company to assemble multiple computer systems and custom configure
the software loaded on these systems to each customer's end user's unique
specifications at a fraction of the cost and time required by other commercially
available configuration processes. See "Business--ACSA Growth Strategy--THE ACSA
SOLUTION." The Company has begun initial construction of the first of its ACSA
Solution production lines ("ACSA Centers") located at the Company's facility.
The Company's first ACSA Center is expected to be completed and the Company is
expected to commence offering the ACSA Solution by mid-1998. Future ACSA Centers
may be located at the facilities of its customers. This technology is intended
to enable the Company's customers to outsource their procurement, warehousing,
assembly, staging, and shipping processes. The Company will use a portion of the
proceeds of the Offering to complete the construction of and operate its first
ACSA Center.
The Company's Computer Products business procures and distributes a broad
and comprehensive range of Computer Products including components and systems
networking products. These products include components such as high capacity
storage devices, CD-ROMs and CD Recorders, network adapters, hubs, small
computer systems interface components ("SCSIs"), integrated device enhancement
components ("IDEs") and ZIP drives as well as memory and central processing
units ("CPUs") for desktop and notebook computer products. The Company also
assembles built-to-order computer systems for its target markets.
3
<PAGE>
The Company's net sales have grown from $17,175,071 for the period from
April 2, 1996 (inception) through December 31, 1996, and $25,940,203 for the
Company's first fiscal year ending March 31, 1997 to $49,267,491 for the first
nine months of fiscal 1998 primarily because of development of an experienced
sales management team with strong customer relationships, expansion of the sales
force, quick delivery of a broad selection of Computer Products and competitive
pricing offered by the Company. The Company's gross profit margins have improved
from approximately 3.3% and 3.1% of net sales in the nine month period ending
December 31, 1996 and the year ended March 31, 1997, respectively, to 4.2% for
the nine month period ending December 31, 1997 due to a number of factors
including strong product demand, more favorable direct manufacturer pricing and
an improved sales mix achieved by the Company which favors components with
higher profit margins and computer system sales. The Company expects that
implementation of the ACSA Centers will increase sales of higher margin
built-to-order computer systems and service revenues.
The Company intends to expand through enhancing existing and establishing
additional strategic relationships with leading master distributors and
manufacturers and by developing custom assembly and software configuration
relationships with computer resellers, manufacturers and integrators. The
Company also intends to enter into joint venture or license arrangements with
foreign partners in South America, Mexico and Asia. The Company's strategy is to
access these markets by identifying foreign joint venture partners or licensees
with substantial industry presence capable of effectively utilizing the ACSA
Solution. The Company also intends to utilize management's extensive network of
domestic and foreign contacts to explore possible acquisition opportunities. The
Company is exploring joint ventures with potential partners identified in Asia,
but is not currently negotiating any acquisition opportunities. There can be no
assurance that the Company will successfully establish any joint ventures or
identify any acquisition opportunities or that if such opportunities are
presented that they will be on terms and conditions acceptable to the Company.
The Company was incorporated in California on April 2, 1996 under the name
Data Net International, Inc. On January 6, 1998, the Company changed its name to
Cumetrix Data Systems Corp. The Company's executive offices are located at 957
Lawson Street, Industry, California, 91748; and its telephone number is (626)
965-6899, and its facsimile number is (626) 965-0415.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.................. 2,300,000 shares
Common Stock outstanding before the
Offering............................ 4,750,000 shares(1)
Common Stock outstanding after the
Offering............................ 7,050,000 shares(1)
Repayment of Bridge Notes and other indebtedness; construction
of first ACSA Center; marketing and sales for the ACSA
Solution; development of additional ACSA Centers; expansion of
Computer Products sales and marketing capability; and for
working capital and general corporate purposes. See "Use of
Proceeds."
Use of proceeds.......................
Proposed Nasdaq SmallCap Market
Symbol.............................. CDSC
Proposed Boston Stock Exchange
Symbol.............................. CDS
</TABLE>
- --------------------------
(1) Does not include (i) 383,717 shares of Common Stock issuable upon the
exercise of stock options issued under the Company's 1997 Stock Option Plan
(the "Stock Option Plan"), which have a weighted average exercise price of
$3.06 per share, (ii) 45,000 shares of Common Stock issuable pursuant to the
exercise of outstanding warrants at an exercise price of $3.00 per share,
(iii) 100,000 shares of Common Stock issuable upon the exercise of the
Bridge Warrants which have an exercise price of $3.00 per share, and (iv)
116,283 shares reserved for issuance upon the exercise of options which may
be granted under the Stock Option Plan.
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2, 1996 NINE MONTHS ENDED
(INCEPTION) DECEMBER 31
TO ----------------------
MARCH 31, 1997 1996 1997
-------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................................................. $ 25,940,203 $17,175,071 $49,267,491
Cost of products...................................................... 25,139,001 16,604,294 47,192,956
-------------- ---------- ----------
Gross profit........................................................ 801,202 570,777 2,074,535
Selling, general and administrative expenses.......................... 751,133 501,923 1,029,504
-------------- ---------- ----------
Income from operations................................................ 50,069 68,854 1,045,031
Interest expense...................................................... 9,334 4,500 13,908
Other income (expense), net........................................... (5,871) 10 10,723
-------------- ---------- ----------
Income before provision for income taxes.............................. 34,864 64,364 1,041,846
Provision for income taxes............................................ 9,500 25,745 416,738
-------------- ---------- ----------
Net income.......................................................... $ 25,364 $ 38,619 $ 625,108
-------------- ---------- ----------
-------------- ---------- ----------
Basic and diluted earnings per share.................................. $ 0.01 $ 0.01 $ 0.14
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------
AT MARCH 31, ACTUAL AS ADJUSTED(1)
1997 ----------- --------------
------------ (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $ 154,160 $ 232,529 $ 9,946,580
Total assets........................................................ 1,855,241 10,272,214 18,367,914
Total liabilities................................................... 1,579,877 8,622,542 7,267,342
Retained earnings................................................... 25,364 650,472 553,372(2)
Shareholders' equity................................................ 275,364 1,649,672 11,100,572
</TABLE>
- ------------------------------
(1) As adjusted to reflect (i) the proceeds of the sale of 2,300,000 shares of
Common Stock offered by the Company at an assumed initial public offering
price of $5.00 per share after deducting commissions and estimated offering
expenses (estimated at $1,952,000); and (ii) the application of the net
proceeds of the Offering, including payment of $400,000, $700,000 and
$100,000 due under the Bridge Notes, the CASI Note and the the Datatec Note,
respectively.
(2) As adjusted to reflect a non-recurring interest expense of $97,100 for the
unamortized portion of the original issue discount and financing costs
related to the Bridge Financing.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE PURCHASING
SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
LIMITED OPERATING HISTORY. The Company commenced operations in April 1996;
therefore, there is only limited financial information in existence upon which
an investment decision may be based. Although the Company has achieved
profitability, the ability of the Company to sustain profitability will depend
in part upon the successful and timely introduction and operation of its ACSA
Centers, continuation of the Company's close relationships with its vendors and
customers, successful marketing of existing products and the Company's ability
to finance inventories and growth and to collect trade receivables in a timely
manner. The likelihood of the success of the Company in implementing its ACSA
Centers must be considered in light of the difficulties and risks inherent in a
new business. There can be no assurance that revenues will increase
significantly in the future or that the Company will ever achieve profitable
operations for the ACSA Center business. There can be no assurance that the
Company will be able to generate and sustain profitability in the future. See
"Business--ACSA Growth Strategy."
BROAD DISCRETION OF MANAGEMENT AND THE BOARD OF DIRECTORS IN USE OF
PROCEEDS. Although the Company intends to apply the net proceeds of the
Offering in the manner described herein under "Use of Proceeds," the Company's
management and its Board of Directors have broad discretion within such proposed
uses as to the precise allocation of the net proceeds, the timing of
expenditures and all other aspects of the use thereof. In addition,
approximately 19% of the net proceeds of the Offering will be allocated and used
for working capital and other general corporate purposes. The Company reserves
the right to reallocate the net proceeds of the Offering among the various
categories set forth under "Use of Proceeds" as it, in its sole discretion,
deems necessary or advisable based upon prevailing business conditions and
circumstances. See "Use of Proceeds."
CONTROL BY INSIDERS. Upon completion of the Offering, the executive
officers and directors will beneficially own approximately 62.75% of the
outstanding Common Stock and will be able to elect all the Company's directors
and thereby direct the policies of the Company. See "Principal Shareholders" and
"Management."
DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent upon the
services of Max Toghraie and James Ung, its Chief Executive Officer and
President, respectively. Both James Ung and Max Toghraie are employed pursuant
to five year employment agreements. See "Management--Employment Agreements." The
success of the Company to date has been in part dependent upon their efforts and
abilities, and the loss of the services of either of them for any reason could
have a material adverse effect upon the Company. In addition, the Company's work
force includes executives and employees with significant knowledge and
experience in the Computer Products distribution industry. The Company's future
success will be strongly influenced by its ability to continue to recruit, train
and retain a skilled work force. While the Company believes that it would be
able to locate suitable replacements for its executives or other personnel if
their services were lost to the Company, there can be no assurance that the
Company would be able to do so on terms acceptable to the Company. In
particular, the location and hiring of suitable replacements for Mr. Toghraie
and Mr. Ung could be very difficult. The Company maintains a key-man life
insurance policy on the lives of Messrs. Toghraie and Ung with benefits of
$1,000,000 each, payable to the Company in the event of their death. The
benefits received under these policies would not be sufficient to compensate the
Company for the loss of the services of Mr. Toghraie or Mr. Ung should suitable
replacements not be employed. See "Management."
DEPENDENCE UPON RELATIONSHIPS WITH VENDORS. A key element of the Company's
past success and future business strategy involves the establishment of
relationships with certain major distributors and Computer Product
manufacturers. Purchases from these vendors account for the majority of the
Company's aggregate purchases for fiscal 1997 and for the nine month period
ended December 31, 1997. For the nine months ended December 31, 1997, DSS
Technology Distribution Partners, Inc. ("DSS"), a master distributor of hard
drives to the Company, accounted for 58.3% of the Company's purchases. Certain
of
6
<PAGE>
these vendors provide the Company with substantial incentives in the form of
rebates passed through from the manufacturer, discounts, credits and cooperative
advertising. There can be no assurance that the Company will continue to receive
such incentives in the future. Other than ordinary purchase orders, the Company
does not have written supply, distribution or franchise agreements with any of
its Computer Product vendors. Although the Company believes that it has
established close working relationships with its principal vendors, the
Company's success will depend, in large part, on maintaining these relationships
and developing new vendor relationships for its existing and future product and
service lines. Because the Company does not have written contracts with any of
its vendors, there can be no assurance that the Company will be able to maintain
these relationships. Periodically, Computer Product suppliers consolidate their
distribution networks and otherwise restructure or limit their distribution
channels. There can be no assurance that the Company will continue to be
selected to resell products by its principal vendors. Termination or
interruption of such relationships or modification of the terms the Company
receives from these vendors would materially adversely affect the Company's
financial position, operating results, and cash flows. See "--Asian Market
Instability" and "Business--Vendor Relationships and Procurement."
Certain of the products offered by the Company are subject to manufacturer
allocations, which limit the number of units of such products available to the
Company's vendors, which in turn may limit the number of units available to the
Company. In order to offer the products of most manufacturers, the Company is
required to obtain authorizations from the manufacturers to act as a reseller of
such products, which authorizations may be terminated at the discretion of the
manufacturers at any time. There can be no assurance that the Company will be
able to obtain or maintain authorizations to offer products, directly or
indirectly, from new or existing manufacturers. Termination of the Company's
rights to act as a reseller of the products of one or more significant
manufacturers would have a material adverse effect on the Company's financial
position, operating results, and cash flows.
POSSIBLE ADDITIONAL FINANCING REQUIRED. The Company's business is capital
intensive in that the Company is required to finance the purchase of Computer
Products in order to fill sales orders. In order to obtain necessary capital,
the Company relies primarily on unsecured vendor credit lines and a line of
credit provided by Finova Capital Corporation ("Finova") that is collateralized
by accounts receivable and inventory. As a result, the amount of credit
available to the Company may be adversely affected by factors such as delays in
collection or deterioration in the quality of the Company's accounts receivable,
economic trends in the computer industry, interest rate fluctuations and the
lending or credit policies of the Company's lenders and vendors. Many of these
factors are beyond the Company's control. Further, the Company must obtain
Finova's written permission prior to arranging other financing, and Finova may
require certain acknowledgments and undertakings from other lenders. There can
be no assurance that Finova will permit additional financing or that other
lenders will provide the acknowledgments and undertakings Finova may require.
Any decrease or material limitation on the amount of capital available to the
Company under its financing arrangements or vendor credit lines will limit the
ability of the Company to fill existing sales orders or expand its sales levels
and, therefore, would have a material adverse effect on the Company's financial
position, operating results, and cash flows. In addition, while the Company does
not have significant exposure to interest rate fluctuations under its current
financing, any significant increases in interest rates will increase the cost of
possible future financing to the Company which would have a material adverse
effect on the Company's financial position, operating results, and cash flows.
The Company is dependent on the availability of accounts receivable financing on
reasonable terms and at levels that are high relative to its equity base in
order to maintain and increase its sales. There can be no assurance that such
financing will be available to the Company in the future. The inability of the
Company to have continuous access to such financing at reasonable costs would
severely and adversely impact the Company's financial position, operating
results, and cash flows. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
RISK OF PRODUCT RETURNS. As is typical of the computer industry, the
Company incurs expenses as a result of the return of products by customers. Such
returns may result from defective goods, inadequate performance relative to
customer expectations, distributor shipping errors and other causes which are
7
<PAGE>
outside the Company's control. Although the Company's distributors and
manufacturers have specific return policies that enable the Company to return
certain types of goods for credit, to the extent that the Company's customers
return products which are not accepted for return by the distributor or
manufacturer of such products, the Company will be forced to bear the cost of
such returns. Any significant increase in the rate of product returns coupled
with the unwillingness by the Company's distributors or manufacturers to accept
goods for return could have a material adverse effect on the Company's financial
position, operating results, and cash flows. See "Business--Inventory
Management."
PRODUCT MIX; RISK OF DECLINING PRODUCT MARGINS. The Company's gross profit
margins have increased from 3.3% to 4.2% in the nine months ending December 31,
1996 and 1997, respectively, due to a number of factors, including strong
product demand, the ability of the Company to obtain favorable pricing, and a
sales mix of products with higher profit margins. However, given the significant
levels of competition that characterize the Computer Products market, there can
be no assurance that the Company will maintain the current gross profit margins
or be able to achieve further increases in profit margins. From time to time,
product margins will also be reduced as a result of marketing strategies
implemented by the Company. For instance, introductory pricing implemented by
the Company to develop market awareness of product lines, particularly disk
drives, of vendors new to the Company will have an adverse effect upon gross
profit margins and, potentially, earnings during the period promotional pricing
is offered. Moreover, in order to attract and retain many of its larger
customers, the Company frequently must agree to volume discounts and maximum
allowable mark-ups that serve to limit the profitability of sales to such
customers. Accordingly, to the extent that the Company's sales to such customers
increase, the Company's gross profit margins may be reduced, and therefore any
future increases in net income will have to be derived from continued sales
growth or effective expansion into higher margin business segments, neither of
which can be assured. Furthermore, low margins increase the sensitivity of the
business to increases in costs of financing, because financing costs to carry a
receivable can be very high compared to the low amount of gross profit on the
sale underlying the receivable itself. Any failure by the Company to maintain or
increase its profit margins and sales levels could have a material adverse
effect on the Company's results of operations and prospects for future growth.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAINTY OF COMMERCIALIZATION OF THE ACSA SOLUTION; IMPORTANCE OF ACSA TO
GROWTH. The Company's ability to successfully implement, market and introduce
the ACSA Solution services on a timely basis will be a significant factor in the
Company's ability to improve its operating margins and remain competitive. The
Company's ability to market the ACSA Solution successfully will depend on the
Company convincing potential customers of the benefits of the ACSA Solution. The
Company has only recently commenced marketing the ACSA Solution. The Company is
currently constructing its first ACSA Center located in City of Industry. No
ACSA Center is currently in operation and the Company currently has no sales
revenue attributable to the ACSA Solution or an ACSA Center. Although the
Company is engaged in negotiations and discussions with a number of potential
customers, there can be no assurance that any such discussions will lead to
significant sales of the ACSA Solution, or that the ACSA Solution will attain
market acceptance. Although the Company intends to devote a substantial portion
of the proceeds of this Offering to implementation and marketing of ACSA
Solution services, there can be no assurance that the commitment and use of such
funds will result in successful implementation, marketing and sales of ACSA
Solution services. Any failure by the Company to anticipate or respond in a
cost-effective and timely manner to market trends or customer requirements, or
any significant delays in introduction of ACSA services, could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--ACSA Growth Strategy."
LENGTHY SALES AND IMPLEMENTATION CYCLES FOR ACSA. The Company believes that
the purchase of the Company's ACSA Solution services will entail an
enterprise-wide decision by prospective customers and require the Company to
engage in a lengthy sales cycle, estimated at between three and twelve months,
as the Company will be required to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's ACSA
Solution services and products. Also, the purchase
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of ACSA Solution services will often depend upon the successful coordination of
marketing, system design and installation efforts by the Company, end-user
customers and others with influence over the purchase decisions of the Company's
customers such as consultants, VARs and SIs. Purchase decisions will generally
occur only after significant internal analysis by each customer and will be
subject to competition with other capital spending priorities of certain
customers. As a result, the sales and customer implementation cycles will be
subject to a number of significant delays over which the Company has little or
no control. Delay in the sale or customer implementation of a limited number of
transactions could have a material adverse effect on the Company's business and
results of operations and could cause the Company's operating results to vary
significantly from quarter to quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
DEPENDENCE ON CASI FOR DEVELOPMENT AND ENHANCEMENT OF CONFIGURATION
SOFTWARE. Under the Company's non-exclusive license and reseller agreements
with Computer-Aided Software Integration, Inc. ("CASI"), CASI retains the source
code of the Configurator software required to operate the automated software
configuration functions of the Company's planned ACSA Solution and ACSA Centers,
and retains all rights to modify and enhance the Configurator-TM- software. CASI
has agreed to provide the Company with all enhancements and upgrades to the
Configurator software used internally or distributed by CASI to its customers,
and to develop additional enhancements requested by the Company at the Company's
sole expense. Any enhancements requested by the Company and implemented by CASI
at CASI's expense may be incorporated in the generally distributed version of
CASI's software. If CASI determines not to fund development of an enhancement
then CASI must prepare the enhancement at pre-agreed rates and ownership of the
requested enhancement will belong to the Company. Failure by CASI to promptly
and adequately perform its obligations under its license agreement with the
Company would have a material adverse effect on the Company. Furthermore, there
can be no assurance that CASI will fully comply with its contractual obligations
to the Company, that CASI will dedicate sufficient software development capacity
to satisfy the Company's requirements, or that the Company's remedies in the
event CASI does not perform its obligations will be adequate. The Company has no
capability to internally develop any enhancements or upgrades. Failure or delay
by CASI to fulfill the Company's anticipated needs for enhancement and upgrading
of the Configurator software would adversely affect the Company's ability to
market ACSA services and to become and remain competitive in the software
configuration market. In the event that CASI fails to meet its obligations under
the license, the Company has, among other rights, the contractual right to the
source code underlying the software, but there can be no assurance that the
Company will be able to obtain the source code in a timely manner, if at all,
because CASI is in possession of the only copies of the source code. Even if the
Company is able to obtain the source code under such circumstances, internal
maintenance and enhancement of the source code could place a significant
financial burden on the Company. See "Business--ACSA Growth Strategy" and
"Certain Transactions."
LIMITED MARKETING CAPABILITIES. The Company's operating results will depend
to a large extent on its ability to successfully market the ACSA Solution
services to personal computer manufacturers and multi-user system buyers. The
Company currently has limited marketing capability. The Company intends to use a
portion of the proceeds of the Offering to hire additional sales and marketing
personnel and outside consultants to market the ACSA Solution. There can be no
assurance that any marketing efforts undertaken by the Company will be
successful or will result in any significant sales of the ACSA Solution. See
"Business--ACSA Growth Strategy."
MANAGEMENT OF GROWTH. The Company has grown rapidly since inception in
April 1996, with net sales reaching $25,940,203 in the Company's first fiscal
year and reaching $49,267,491 for the nine months ended December 31, 1997, and
employees increasing from 3 at inception to 23 at January 31, 1998.
Implementation of the Company's business plan, including implementation of ACSA
Solution services and the general strains of the Company's growth will require
that the Company significantly expand its operations in all areas. This growth
in the Company's operations and activities will place a significant strain on
the Company's management, operational, financial and accounting resources.
Successful management of the
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Company's operations will require the Company to continue to implement and
improve its financial and management information systems. The Company's ability
to manage its future growth, if any, will also require it to hire and train new
employees, including management and technical personnel, and motivate and manage
its new employees and integrate them into its overall operations and culture.
The Company recently has made additions to its management team, including
appointing Max Toghraie as Chief Executive Officer in September 1997 and Carl L.
Wood as Chief Financial Officer in February 1998 and is in the process of
expanding its accounting staff and modifying its internal procedures to prepare
to function as a public company, a process which is expected to continue
following the Offering. The Company's failure to manage implementation of its
business plan would have a material adverse effect on the Company's business,
operating results and financial condition.
RISK OF POTENTIAL JOINT VENTURES OR ACQUISITIONS. In the future, the
Company may acquire complementary companies, products or technologies, although
no specific acquisitions currently are pending or under negotiation.
Acquisitions involve numerous risks, including adverse short-term effects on the
combined business' reported operating results, impairments of goodwill and other
intangible assets, the diversion of management's attention, the dependence on
retention, hiring and training of key personnel, the amortization of intangible
assets and risks associated with unanticipated problems or legal liabilities. A
portion of the net proceeds of this Offering may be used to fund such
acquisitions at the broad discretion of the Board of Directors. The Board of
Directors may consummate such acquisitions, if any, without permitting
shareholders to review or vote on such transactions, unless required under
applicable law. See "Use of Proceeds." and "Business--ACSA Growth Strategy."
CONSTRUCTION OF FIRST ACSA CENTER. The Company intends to use approximately
$0.3 million of the net proceeds from the Offering to complete construction of
and to equip its first ACSA Center. It is expected that the construction will
require a substantial time commitment of certain members of management. The
first ACSA Center is expected to be completed by mid-1998. Any delay in
completion of the first ACSA Center could result in delays in the commencement
of sales of assembly and custom software configuration services and adversely
affect the Company's business, operating results and financial condition. There
can be no assurance that the Company will be able to complete the ACSA Center at
the budgeted price. Additionally, there can be no assurance that the ACSA Center
will be available on time or that the Company will be successful in timely
hiring and training engineers and technicians necessary to commence operations
of the ACSA Center. Any such delay would delay the Company's ability to commence
offering the ACSA Solution and have a material adverse effect upon the Company's
business, operating results and financial condition. See "Business--Facilities."
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTIONS. The market for the
Company's ACSA technology is characterized by rapidly changing technology and
frequent new product introductions. Even if the Company's ACSA Solution services
using its licensed Configurator software gains initial market acceptance, the
Company's success will depend, among other things, upon its ability to enhance
the ACSA Solution services and to develop and introduce new products and
services that keep pace with technological developments, respond to evolving
customer requirements and achieve continued market acceptance. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new products or offer new services successfully, that such new
products or services will gain market acceptance, or that the Company will be
able to respond effectively to technological changes or product announcements by
competitors. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements or any significant delays
in product development or introductions could result in a loss of market share
or revenues. See "Business--ACSA Growth Strategy."
INDUSTRY EVOLUTION AND PRICE REDUCTIONS; CHANGING METHODS OF
DISTRIBUTION. The personal computer industry is undergoing significant change.
The industry has become more accepting of large volume, cost-effective channels
of distribution such as computer superstores, consumer electronics and office
supply superstores, national direct marketers and mass merchants. In addition,
many traditional computer
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resellers are consolidating operations and acquiring or merging with other
resellers to increase efficiency. This current industry reconfiguration has
resulted in increased pricing pressures. Decreasing prices of Computer Products
require the Company to sell a greater number of products to achieve the same
level of net sales and gross profit. The continuation of such trend would make
it more difficult for the Company to maintain or to increase its net sales and
net income. In addition, it is possible that the historically high rate of
growth of the personal computer industry may slow at some point in the future.
If the growth rate of the personal computer industry were to decrease, the
Company's financial position, operating results, and cash flows could be
materially adversely affected. Furthermore, new methods of distribution and
sales of Computer Products, such as on-line shopping services and catalogs
published on CD-ROM, may emerge in the future. Computer Products and software
manufacturers have sold, and may in the future intensify their efforts to sell,
their products directly to end users. From time to time, certain vendors have
instituted programs for the direct sale of large orders of Computer Products and
software to certain major corporate accounts. These types of programs may
continue to be developed and used by various vendors. While the Company attempts
to anticipate future distribution trends, any of these distribution methods or
competitive programs, if expanded, could have a material adverse effect on the
Company's financial position, operating results, and cash flows.
AVAILABILITY OF COMPONENTS. The computer component and computer assembly
businesses have from time to time experienced periods of extreme shortages in
product supply, generally as the result of demand exceeding available supply.
When these shortages occur, suppliers tend to either slow down shipments or
place their customers "on allocation," reducing the number of units sold to each
customer. While the Company believes that it has well-established relationships
with vendors and that it has not been adversely affected by recent shortages in
certain storage and other computer components, no assurance can be given that
future shortages will not adversely impact the Company. See "Business--Vendor
Relationships and Procurement."
COMPETITION. The Company faces intense competition, both in its selling
efforts and purchasing efforts, from the significant number of companies that
configure and/or assemble personal computers, manufacture or distribute disk
drives and offer software configuration services. Many of these companies, such
as CompuCom Systems, Inc., CDW Computer Centers, Inc., Vanstar Corp. and Inacom,
Inc. in the Computer Products distribution market, large computer manufacturers
such as IBM Corp. and Compaq Computer Corporation, which provide custom
configuration and automated software configuration for standardized systems,
large distributors such as Ingram Micro Inc., Vanstar Corp., En Point
Technologies, Inc., Microwarehouse, Inc. and CompuCom Systems, Inc. in the
systems integration and network services market, have substantially greater
assets and possess substantially greater financial and personnel resources than
those of the Company and may develop software, or services or products which are
comparable to the ACSA Solution. Many competing distributors also carry or offer
brands or product lines which the Company does not carry. Generally, large disk
drive and personal computer component manufacturers and large distributors do
not focus their direct selling efforts on small to medium sized OEMs and
distributors, which constitute the vast majority of the Company's customers;
however, as the Company's customers increase in size, disk drive and component
manufacturers may find it cost effective to focus direct selling efforts on
those customers, which could result in the loss of customers or pressure on
margins. In addition, CASI and/or Datatec Systems Inc. ("Datatec"), formerly
known as Glasgal Communications, Inc., the parent corporation of CASI, may
directly enter into the Company's integration and configuration markets using
the software the Company has licensed from CASI. While no operating division or
subsidiary of Datatec is currently competing in the Company's markets, there can
be no assurance that Datatec will not decide to directly compete with the
Company in the future. Further, the terms of the Company's license agreement
with CASI allows CASI to license the software used in the ACSA Solution and the
ACSA Centers to new or existing direct competitors of the Company. There can be
no assurance that the Company will be able to continue to compete effectively
with existing or potential competitors. See "Business--Competition" and "Certain
Transactions."
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ELECTRONICS INDUSTRY CYCLICALITY. The personal computer component
distribution industry has been affected historically by general economic
downturns, which have had an adverse economic effect upon manufacturers and
corporate end users of personal computers, as well as component distributors
such as the Company. In addition, the life cycle of existing personal computer
products and the timing of new product development and introduction can affect
demand for disk drives and other personal computer components. Any downturns in
the personal computer component distribution industry, or the personal computer
industry in general, could adversely affect the Company's business and results
of operations.
ASIAN MARKET INSTABILITY. Economies and financial markets in Asia have
recently experienced significant turmoil. A non-material portion of the
Company's revenues are derived from sales to businesses which primarily export
Computer Products to Asian customers, and certain of the Company's vendors are
based in Korea, Japan and other Asian countries. The recent turmoil in the Asian
financial markets has not had a material impact on the Company's sales orders or
the Company's ability to obtain products from its Asian vendors. However, the
financial instability in these regions may have an adverse impact on the
financial position of end-users in the region which could impact future orders
from the Company's customers and/or the ability of such end users to pay the
Company's customers, which could also impact the ability of such customers to
pay the Company. If the Company's customers who export into Asia are unable to
maintain export sales or current margins on such export sales, the Company's
sales and/or sales margins may be adversely affected. Additionally, if the
Company's vendors in these regions are unable to continue to supply the Company,
the Company may be adversely impacted.
FOREIGN TRADE REGULATION. A significant number of the products distributed
by the Company are manufactured in Taiwan, China, Korea, Japan and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs and
import and export controls and changes in governmental policies, any of which
could have a material adverse effect on the Company's business and results of
operations. The ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs or
duties, changes in trade treaties, strikes in air or sea transportation,
fluctuation in currency and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. For
example, it is possible that political or economic developments in China, or
with respect to the United States' relationship with China, could have an
adverse effect on the Company's business. The Company's ability to remain
competitive could also be affected by other governmental actions related to,
among other things, anti-dumping legislation and international currency
fluctuations. While the Company does not believe that any of these factors
adversely impact its business at present, there can be no assurance that these
factors will not materially adversely affect the Company in the future. Any
significant disruption in the delivery of merchandise from the Company's
suppliers, substantially all of whom are foreign, would also have a material
adverse impact on the Company's business and results of operations. See
"Business--Vendor Relationships and Procurement."
FLUCTUATIONS IN QUARTERLY EARNINGS. The Company's business is subject to
certain quarterly influences. Net sales and operating profits are generally
higher in the third quarter due to the purchasing patterns of personal computer
integrators and resellers and are generally lower in the second quarter due
primarily to lower industry shipments. Quarterly results may also be adversely
affected by a variety of other factors, including the timing of acquisitions and
related costs, the release of new products, promotions, and component pricing
and availability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CONFLICTS OF INTERESTS. Until March 9, 1998, David Tobey, a director of the
Company, was President, Chief Executive Officer and a significant stockholder of
CASI and an employee of CASI's parent, Datatec. CASI is a vendor and licensor of
the Company. Until March 9, 1998 Mr. Tobey had an employment agreement with CASI
whereby Mr. Tobey was obligated to assign to CASI all ideas, inventions and
designs
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created or developed by Mr. Tobey (alone or with others) relating to computer
integration and development tools. On March 9, 1998, Mr. Tobey resigned from his
positions at CASI and Datatec, and his entire equity interest in CASI was
acquired by Datatec. Although the Company believes that Mr. Tobey's departure
from CASI and Datatec will have no adverse effect on the Company's relationship
with CASI and Datatec, there can be no assurance that Mr. Tobey's resignation
will not adversely effect the Company's working relationship with CASI and
Datatec. During Mr. Tobey's employment at CASI and Datatec, the Company entered
into a licensing agreement (the "CASI License") and a reseller agreement (the
"CASI Reseller Agreement") with CASI relating to the Company's non-exclusive
license to use and resell CASI's Configurator software. As a result, although
the Company believes that the CASI License and the CASI Reseller Agreement were
negotiated on an arms-length basis, conflicts existed between Mr. Tobey's
interests and obligations to CASI and Datatec and his obligations as a Director
of the Company during the period in which the Company negotiated and concluded
the CASI License and the CASI Reseller Agreement. The license fee for the CASI
Configurator software was $1.1 million, of which $150,000 was advanced on the
Company's behalf by an officer of CASI's parent, Datatec and is evidenced by a
promissory note (the "Datatec Note"), and $950,000 was paid by delivery to CASI
of a non-interest bearing promissory note (the "CASI Note"). The Company repaid
$250,000 principal amount of the CASI Note and $50,000 of the principal amount
of the Datatec Note out of the proceeds of the Company's Bridge Financing in
December 1997. The Company intends to repay the outstanding $100,000 principal
amount of the Datatec Note and the $700,000 principal amount of the CASI Note
out of the proceeds of this Offering. The CASI Note provides that the Company
has also issued CASI a contingent warrant (the "CASI Warrant") pursuant to which
CASI may apply any amount then due and unpaid under the CASI Note to the
purchase of the Company's Common Stock at a price of $4.50 per share if the
Company defaults under the CASI Note. The CASI Warrant will expire upon full
payment of the CASI Note. The Company believes that all of these transactions
were on terms no less favorable than were available from unaffiliated third
parties. There can be no assurance that the Company will not enter into
transactions with affiliated parties in the future. See "Certain Transactions."
IMMEDIATE AND SUBSTANTIAL DILUTION. The proposed initial public offering
price is substantially higher than the book value per outstanding share of
Common Stock. Specifically, investors will sustain immediate dilution of $3.43
per share (69%) based on the net tangible book value of the Company at December
31, 1997 of $0.35 per share. Investors in the Offering therefore will bear a
disproportionate part of the financial risk associated with the Company's
business while effective control will remain with the Company's directors and
executive officers. See "Dilution."
REPAYMENT OF INDEBTEDNESS. Approximately thirteen (13%) percent, or an
aggregate of $1,200,000, of the net proceeds of the Offering has been allocated
for the repayment of the Bridge Notes, the CASI Note, and the Datatec Note, and
therefore will not be available for future operations. Approximately seven (7%)
percent, or $700,000, of such net proceeds will be paid to CASI in connection
with the repayment of the CASI Note. See "Use of Proceeds." Until March 9, 1998
David Tobey, a director of the Company, was President, Chief Executive Officer
and a significant stockholder of CASI and an employee of CASI's parent, Datatec.
On March 9, 1998, Mr. Tobey resigned from his positions at CASI and Datatec, and
his entire equity interest in CASI was acquired by Datatec. See "Certain
Transactions."
POTENTIAL BENEFIT TO CERTAIN INVESTORS. The investors who participated in
the Bridge Financing (the "Bridge Holders") acquired an aggregate of 300,000
shares of Common Stock at a stated purchase price of $2.00 per share and 100,000
Bridge Warrants exercisable for the purchase of an aggregate of 100,000 shares
of Common Stock at an exercise price of $3.00 per share. If after the expiration
of the transfer restrictions applicable to the securities sold in the Bridge
Financing the market price for the Common Stock is equal to or exceeds the
initial offering price of the Common Stock, the Bridge Holders will realize a
return which could significantly exceed that which would be realized by the
purchasers of Common Stock in this Offering. See "Shares Eligible for Future
Sale."
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POSSIBLE ISSUANCE OF PREFERRED STOCK; BARRIERS TO TAKEOVER. The Company's
Articles of Incorporation authorize the issuance of up to 2,000,000 shares of
Preferred Stock. Following the Offering, no shares of Preferred Stock of the
Company will be outstanding, and the Company has no present intention to issue
any shares of Preferred Stock. However, because the rights and preferences for
any series of Preferred Stock may be set by the Company's Board of Directors in
its sole discretion, the rights and preferences of any such Preferred Stock are
likely to be superior to those of the Common Stock and thus could adversely
affect the rights of the holders of Common Stock. The Company currently has no
commitments or contracts to issue any additional securities. Any securities
issuances might result in a reduction in the book value or market price of the
outstanding shares. Further, any new issuances could be used for anti-takeover
purposes or might be used as a method of discouraging, delaying or preventing a
change of control of the Company. Additionally, certain provisions of the
Company's Articles of Incorporation and Bylaws could delay or make more
difficult a merger, tender offer or proxy contest involving the Company. See
"Description of Capital Stock."
NO DIVIDENDS ANTICIPATED. The Company has never declared or paid dividends
on its Common Stock. After the consummation of this Offering, the Company does
not intend for the foreseeable future to declare or pay any cash dividends and
intends to retain earnings, if any, for the future operation and expansion of
the Company's business. See "Dividend Policy."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE;
ARBITRARY DETERMINATION OF OFFERING PRICE. Prior to the Offering, there has been
no public market for the Common Stock. Although the Company's Common Stock has
been approved for inclusion of the Common Stock on The Nasdaq SmallCap Market
("Nasdaq") and for listing of the Common Stock on the Boston Stock Exchange,
there can be no assurance that an active trading market for the Common Stock
will develop as a result of the Offering or, if a trading market does develop,
that it will continue. In the absence of such a market, investors may be unable
readily to liquidate their investment in the Common Stock. The trading price of
the Common Stock could be subject to wide fluctuations in response to quarter to
quarter variations in operating results, news announcements relating to the
Company's business (including new product introductions by the Company or its
competitors), changes in financial estimates by securities analysts, the
operating and stock price performance of other companies that investors may deem
comparable to the Company as well as other developments affecting the Company or
its competitors. In addition, the market for equity securities in general has
been volatile and the trading price of the Common Stock could be subject to wide
fluctuations in response to general market trends, changes in general conditions
in the economy, the financial markets or the manufacturing or retail industries
and other factors which may be unrelated to the Company's performance. The
public offering price of the shares of Common Stock has been determined by
negotiations between the Company and the Underwriters and does not necessarily
bear any relationship to the Company's book value, assets, past operating
results, financial condition or any other established criteria of value. There
can be no assurance that the shares offered by this Prospectus will trade at
market prices in excess of the initial public offering price. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of Common Stock by existing
shareholders could adversely affect the prevailing market price of the Common
Stock and the Company's ability to raise capital. Upon completion of the
Offering, the Company will have 7,050,000 shares of Common Stock outstanding. Of
those shares, the 2,300,000 shares of Common Stock offered by this Prospectus
will be freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act ("Rule 144"). The remaining
4,750,000 shares of Common Stock outstanding are "restricted securities," as
that term is defined by Rule 144. Under lock-up agreements with Joseph Stevens &
Company, Inc. ("Joseph Stevens"), each existing shareholder has agreed that he
or it will not, directly or indirectly, sell, assign or otherwise transfer any
shares of Common Stock owned by it for a period of (a) in the case of management
and founding shareholders of the Company who collectively hold 4,450,000 shares
of Common Stock, a period of 18 months after the effective date of the
Registration Statement of which this Prospectus is a part (the "Management
Lock-Up Period") except with the Joseph Stevens' prior written consent and (b)
in the case
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of the holders of 300,000 shares of Common Stock issued in the Company's Bridge
Financing, a period of 12 months after the effective date of the Registration
Statement of which this Prospectus is a part, and thereafter for an additional
six (6) months, without the written consent of the Joseph Stevens (the "Bridge
Holder Lock-Up Period"); provided, however, that (i) the Management Lock-Up
Period shall immediately terminate if the Common Stock is quoted on The Nasdaq
SmallCap Market or The Nasdaq National Market and the average closing bid price
of the Common Stock equals or exceeds $10.00 per share (subject to customary
adjustments for stocksplits, combinations, consolidations and similar
transactions) for any 30 consecutive calendar days, and (ii) for twenty-four
(24) months following the effective date of the Registration Statement any sales
of the Company's securities subject to the lock-up agreements shall be made
through the Joseph Stevens in accordance with its customary brokerage practices
either on a principal or agency basis. Once the lock-up agreements expire, all
of the 4,750,000 shares of Common Stock will become eligible for immediate sale,
subject to compliance with the volume limitations of Rule 144 by the holders of
these shares. See "Shares Eligible for Future Sale" and "Underwriting."
DELISTING FROM THE NASDAQ SMALLCAP MARKET; POTENTIAL PENNY STOCK
CLASSIFICATION. The Company has been approved for quotation of the Common Stock
on The Nasdaq SmallCap Market and for listing of the Common Stock on the Boston
Stock Exchange. However, there can be no assurance that a trading market for the
Common Stock will develop, or if developed, that it will be maintained. No
assurance can be given that the Company will be able to satisfy the criteria for
continued quotation on The Nasdaq SmallCap Market or the criteria for continued
listing on the Boston Stock Exchange following this Offering. Failure to meet
the maintenance criteria in the future may result in the Common Stock not being
eligible for quotation or listing. If the Company were removed from The Nasdaq
SmallCap Market and the Boston Stock Exchange, trading, if any, in the Common
Stock would thereafter have to be conducted in the over-the-counter market in
so-called "pink sheets" or, if then available, the OTC Bulletin Board. As a
result, holders of the Common Stock would find it more difficult to dispose of,
or to obtain accurate quotations as to the market value of, the Common Stock.
In addition, if the Common Stock is delisted from trading on Nasdaq and the
Boston Stock Exchange and the trading price of the Common Stock is less than
$5.00 per share, trading in the Common Stock would also be subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
regulations adopted by the Securities Exchange Commission (the "Commission"),
any equity security not traded on an exchange or quoted on Nasdaq that has a
market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
Such requirements could severely limit the market liquidity of the Common Stock
and the ability of purchasers in this Offering to sell their securities in the
secondary market. There can be no assurance that the Common Stock will not be
delisted or treated as a penny stock.
ELIMINATION OF CUMULATIVE VOTING. The Articles of Incorporation of the
Company provide that at such time as the Company has (i) shares listed on the
New York Stock Exchange or the American Stock Exchange, (ii) securities
designated for trading as a national market security on the National Association
of Securities Dealers Automatic Quotation System (or any successor national
market system) if the Company has at least 800 or more holders of its Common
Stock as of the record date of the Company's most recent annual meeting of
shareholders, the cumulative voting rights of shareholders will cease. Upon
closing of this Offering the Company believes that it will have more than 800
holders. If the Company has shares listed on the New York Stock Exchange or the
American Stock Exchange, or designated for trading as
15
<PAGE>
national market securities on The Nasdaq National Market System, cumulative
voting rights of shareholders will cease. Elimination of cumulative voting will
have the effect of making it more difficult for minority shareholders to obtain
representation on the Board of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION. The Company's Articles of
Incorporation, as amended, (the "Articles") include a provision that eliminates
the personal liability of its directors to the Company for monetary damages for
breach of their fiduciary duties (subject to certain limitations) as a director
to the fullest extent permissible under California law. The Company's Articles
and Bylaws allow the Company to provide for indemnification of its Directors the
fullest extent permitted by law. The Bylaws allow the Company to enter into
indemnity agreements with individual directors, officers, employees and other
agents. The Company has entered into indemnification agreements designed to
provide the maximum indemnification permitted by law with all the directors of
the Company. These agreements, together with the Company's Bylaws and Articles,
may require the Company, among other things, to indemnify these directors
against certain liabilities that may arise by reason of their status or service
as directors (other than liabilities resulting from willful misconduct of a
culpable nature), to advance expenses to them as they are incurred, provided
that they undertake to repay the amount advanced if it is ultimately determined
by a court that they are not entitled to indemnification, and to obtain
directors' and officers' insurance if available on reasonable terms. The Company
intends to purchase and maintain directors' and officers' liability insurance.
As a result of the provisions in the Company's Articles and in the
indemnification agreements, it may be more difficult for shareholders to obtain
relief against a director for breaches of such director's fiduciary duty than if
these provisions were not included in the Company's Articles and Bylaws. See
"Management--Limitation of Liability and Indemnification Matters."
UNDERWRITERS' POTENTIAL INFLUENCE ON THE MARKET. It is anticipated that a
significant portion of the Common Stock offered hereby will be sold to customers
of the Underwriters. Although the Underwriters have advised the Company that
they intend to make a market in the Common Stock, they will have no legal
obligation to do so. The price and the liquidity of the Common Stock may be
significantly affected by the degree, if any, of the Underwriters' participation
in the market. Moreover, if the Underwriters sell the securities issuable upon
exercise of the Underwriters' Warrants, they may be required under the Exchange
Act, as amended, to temporarily suspend their market-making activities. No
assurance can be given that any market activities of the Underwriters, if
commenced, will be continued. See "Underwriting."
NO EARTHQUAKE INSURANCE. The Company's executive office, warehouse and
assembly facility is located in a Company-leased facility in City of Industry,
California, an area which experienced damage in the 1994 Northridge, California
earthquake. The Company does not currently carry insurance against earthquake-
related risks.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS. This Prospectus includes
"forward-looking statements." All statements other than statements of historical
fact included in this Prospectus, including, without limitation, the statements
under "Offering Summary," "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," regarding the
Company's strategies, plans, objectives and expectations; the Company's ability
to provide custom assembly, configuration and distribution services of computer
equipment and peripherals to technology companies; the ability of the Company to
establish and operate an ACSA Center and to automate its custom configuration
process and systems integration solutions for its customers; the ability of the
Company to successfully market the ACSA Solution; the ability of the Company to
develop processes to position itself as a low-cost leader for outsourcing system
assembly and distribution services; the Company's future operating results; and
other matters are all forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable at this time, it can give no assurance that those expectations will
prove to be correct. Important factors that could cause actual results to differ
materially from the Company's expectations are set forth in these "Risk
Factors," as well as elsewhere in this Prospectus. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by these "Risk Factors."
16
<PAGE>
RECENT BRIDGE FINANCING
On December 23, 1997, the Company completed a financing (the "Bridge
Financing") consisting of the sale of 20 units, each comprised of: (i) an
unsecured promissory note (each a "Bridge Note") of the Company in the principal
amount of $20,000, bearing interest at a rate of 10% per annum payable upon the
earlier of the closing of the Offering or 18 months from the date of issuance;
(ii) 15,000 shares of Common Stock of the Company, and (iii) 5,000 warrants of
the Company, each warrant exercisable to purchase one share of Common Stock at
an initial exercise price of $3.00 per share, subject to adjustment, during the
36-month period commencing one year from the date the warrants were issued (the
"Bridge Warrants"). Each unit was sold for $50,000 generating gross proceeds to
the Company of $1,000,000 and net proceeds of $740,000. The investors in the
Bridge Financing were brokerage customers of Joseph Stevens, who acted as
placement agent for the Bridge Financing, but were not otherwise related to or
affiliated with the Company or the Underwriters. The Company repaid $250,000 of
the principal amount of the CASI Note and $50,000 of the Datatec Note out of the
proceeds of the Bridge Financing. The Company intends to repay the remainder of
its indebtedness under the CASI Note and the Datatec Note with the proceeds of
this Offering. See "Risk Factors--Repayment of Indebtedness" and "--Potential
Benefit to Certain Investors" and "Use of Proceeds."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of the 2,300,000 shares of
Common Stock offered by this Prospectus (at an assumed initial public offering
price of $5.00 per share), after deducting the estimated underwriting discounts
and offering expenses, are estimated to be approximately $9,548,000 ($11,048,750
if the Over-Allotment Option is exercised in full).
The Company anticipates allocating the net proceeds of the Offering among
the foregoing uses approximately as follows:
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
APPLICATION NET PROCEEDS NET PROCEEDS
- -------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Repayment of the Bridge Notes, Datatec Note and CASI Note........... $ 1,200,000 13%
Construction of first ACSA Center................................... 300,000 3
Sales and marketing of ACSA Solution for first ACSA Center.......... 1,000,000 10
Construction, sales and marketing of additional ACSA Centers........ 2,550,000 27
Expansion of Computer Products sales and marketing capability....... 2,700,000 28
Working capital..................................................... 1,798,000 19
------------ ---
------------ ---
Total........................................................... $ 9,548,000 100%
------------ ---
------------ ---
</TABLE>
The Company is also conducting the Offering to create a market for its
Common Stock, to facilitate future access by the Company to the public equity
markets and to enhance the Company's public image and credibility to support its
marketing efforts.
The CASI Note is non-interest bearing and is due and payable on February 28,
1998, or the closing of the Offering, whichever is sooner. Until March 9, 1998,
David Tobey, a director of the Company, was the President, Chief Executive
Officer and a significant stockholder of CASI and an employee of CASI's parent
Datatec. The Datatec Note bears interest at the rate of 10% per annum, and is
required to be repaid on February 28, 1998, or the closing of the Offering,
whichever is sooner. The Bridge Notes bear interest at a rate of 10% per annum
and are payable upon the earlier of the closing of the Offering or 18 months
from the date of issuance. As of December 31, 1997 (excluding interest), the
balance of the CASI Note was $700,000, the balance of the Datatec Note was
$100,000 and the aggregate balance of the Bridge Notes was $400,000.
The Company believes that the proceeds of the Offering, funds from
operations and available lines of credit will be sufficient to support the
Company's capital needs for the next 12 months. The Company intends to maintain
flexibility in the use of the proceeds of the Offering (other than amounts to
retire the Bridge Notes, the Datatec Note and the CASI Note). The amounts
actually expended for each use of the proceeds, if any, are at the discretion of
the Company and may vary significantly depending upon a number of factors,
including requirements for launching new product lines, marketing, advertising
and working capital to support growth. Accordingly, management reserves the
right to reallocate the proceeds of the Offering as it deems appropriate. The
Company may also use a portion of the net proceeds to acquire businesses,
products or proprietary rights, or to enter into joint ventures; however, the
Company currently has no commitments or agreements relating to any of these
types of transactions other than those disclosed in this Prospectus. Until the
net proceeds of the Offering are used, the Company intends to invest them in
United States government securities, short-term certificates of deposit, money
market funds or other short-term interest bearing investments.
18
<PAGE>
DIVIDEND POLICY
The Company has not and does not currently intend to pay dividends on its
Common Stock following the Offering and plans to follow a policy of retaining
earnings to finance the growth of its business. Any future determination to pay
dividends will be at the discretion of the Company's Board of Directors and will
depend on the Company's results of operations, financial condition, contractual
and legal restrictions and other factors deemed relevant by the Board of
Directors at that time.
DILUTION
The net tangible book value of the Company's Common Stock at December 31,
1997 was $1,649,672, or $0.35 per share. Net tangible book value per common
share represents the book value of the Company's tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding.
Dilution per share to new investors represents the difference between the amount
per share paid by purchasers of Common Stock of the Company pursuant to the
Offering and the as adjusted net tangible book value per share of Common Stock
immediately after completion of the Offering. After giving effect to the sale of
the 2,300,000 shares of Common Stock offered hereby and the application of the
net proceeds therefrom, the as adjusted net tangible book value of the Common
Stock at December 31, 1997 would have been $11,100,572 or $1.57 per share. This
represents an immediate increase in pro forma net tangible book value of $1.22
per share of Common Stock to existing shareholders and an immediate dilution of
$3.43 (69%) per share of Common Stock to new investors purchasing Common Stock
pursuant to this Offering. The following table illustrates the per share effect
of this dilution on an investor's purchase of shares:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price........................................ $ 5.00
Net tangible book value per share as of December 31, 1997.................. $ 0.35
Increase in net tangible book value per share attributable to new
investors................................................................ $ 1.22
---------
As adjusted net tangible book value per share................................ $ 1.57
---------
Dilution per share to new investors.......................................... $ 3.43
---------
---------
</TABLE>
The following table summarizes, as of December 31, 1997, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid, and the average price per share paid by existing
shareholders and by new investors purchasing shares of Common Stock pursuant to
this Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders............. 4,750,000 67.4% $ 1,150,000 9.1% $ 0.24
New investors..................... 2,300,000 32.6 11,500,000 90.9 5.00
---------- ----- ------------- ----- -----
Total......................... 7,050,000 100.0% $ 12,650,000 100.0% $ 1.79
---------- ----- ------------- ----- -----
---------- ----- ------------- ----- -----
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options and warrants. At December 31, there were an aggregate of 452,717 shares
of Common Stock issuable upon exercise of outstanding options and warrants at a
weighted average exercise price of $2.80 per share comprised of (i) 307,717
shares of Common Stock issuable upon the exercise of stock options issued under
the Company's Stock Option Plan, which have an exercise price of $2.70 per
share, (ii) 45,000 shares of Common Stock issuable pursuant to the exercise of
outstanding warrants at an exercise price of $3.00 per share, (iii) 100,000
shares of Common Stock issuable upon the exercise of the Bridge Warrants which
have an exercise price of $3.00 per share.
19
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of December 31, 1997 (unaudited), and (ii) as adjusted to give effect to the
sale of the 2,300,000 shares of Common Stock offered by the Company hereby at
the assumed initial public offering price of $5.00 per share, after deducting
underwriting discounts and commissions and the estimated offering expenses
payable by the Company, and the application of the net proceeds thereof as set
forth in "Use of Proceeds." This table should be read in conjunction with the
Financial Statements and related notes contained therein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus. The following unaudited as adjusted
financial data may not represent the results of operations or financial position
which actually would have been obtained if the transactions described above had
been completed as of the date indicated or which may be obtained in the future.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
(UNAUDITED)
---------------------------
AS
ACTUAL ADJUSTED(1)
------------ -------------
<S> <C> <C>
Debt.......................................................................... $ 1,213,448 $ 13,448
------------ -------------
Shareholders' equity
Preferred Stock, no par value:
Authorized--2,000,000 shares
Issued and outstanding: None.............................................. -- --
Common Stock, no par value:
Authorized--20,000,000 shares
Issued and outstanding: (2)
Actual: 4,750,000
As adjusted: 7,050,000.................................................. 999,200 10,547,200
Retained earnings............................................................. 650,472 553,372(3)
------------ -------------
Total shareholders' equity.................................................... 1,649,672 11,100,572
------------ -------------
Total capitalization.......................................................... $ 2,863,120 $11,114,020
------------ -------------
------------ -------------
</TABLE>
- --------------------------
(1) As adjusted to reflect (i) the proceeds of the sale of 2,300,000 shares of
Common Stock offered by the Company at an assumed initial public offering
price of $5.00 per share after deducting commissions and estimated offering
expenses (estimated at $1,952,000); and (ii) the application of the net
proceeds of the Offering, including payment of $400,000, $700,000 and
$100,000 due under the Bridge Notes, the CASI Note and the the Datatec Note,
respectively.
(2) Does not include (i) 307,717 shares of Common Stock issuable upon the
exercise of stock options issued under the Company's Stock Option Plan,
which have an exercise price of $2.70 per share, (ii) 45,000 shares of
Common Stock issuable pursuant to the exercise of outstanding warrants at an
exercise price of $3.00 per share, (iii) 100,000 shares of Common Stock
issuable upon the exercise of the Bridge Warrants which have an exercise
price of $3.00 per share, and (iv) 192,283 shares reserved for issuance upon
the exercise of options which may be granted under the Stock Option Plan.
(3) As adjusted to reflect a non-recurring interest expense of $97,100 for the
unamortized portion of the original issue discount and deferred financing
costs related to the Bridge Financing.
20
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below with respect to the year
ended March 31, 1997 and the balance sheet data at March 31, 1997 are derived
from, and are qualified by reference to, the audited financial statements
included elsewhere in this Prospectus. The statement of operations data set
forth below with respect to the nine months ended December 31, 1996 and 1997 are
derived from the unaudited financial statements prepared on the same basis as
the audited financial statements. In the opinion of management, all unaudited
financial information includes all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the information presented. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes and other financial information appearing elsewhere
in this Prospectus. The statement of operations data for the nine months ended
December 31, 1997 are not necessarily indicative of the results for the entire
year.
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
APRIL 2, 1996 DECEMBER 31
(INCEPTION) TO ----------------------
MARCH 31, 1997 1996 1997
-------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales:
Nonaffiliates......................................................... $ 25,407,403 $16,838,795 $47,876,191
Affiliate(1).......................................................... 532,800 336,276 1,391,300
-------------- ---------- ----------
25,940,203 17,175,071 49,267,491
Cost of products:
Nonaffiliates......................................................... 24,615,411 16,270,620 45,878,548
Affiliate(1).......................................................... 523,590 333,674 1,314,408
-------------- ---------- ----------
25,139,001 16,604,294 47,192,956
Gross profit:
Nonaffiliates....................................................... 791,992 568,175 1,997,643
Affiliate(1)........................................................ 9,210 2,602 76,892
-------------- ---------- ----------
801,202 570,777 2,074,535
Selling, general and administrative expenses............................ 751,133 501,923 1,029,504
-------------- ---------- ----------
Income from operations.................................................. 50,069 68,854 1,045,031
Interest expense........................................................ 9,334 4,500 13,908
Other income (expense,) net............................................. (5,871) 10 10,723
-------------- ---------- ----------
Income before provision for income taxes................................ 34,864 64,364 1,041,846
Provision for income taxes.............................................. 9,500 25,745 416,738
-------------- ---------- ----------
Net income ........................................................... $ 25,364 $ 38,619 $ 625,108
-------------- ---------- ----------
-------------- ---------- ----------
Basic and diluted earnings per share.................................... $ 0.01 $ 0.01 $ 0.14
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
AT MARCH 31, 1997 1996 1997
----------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................... $ 154,160 $ 221,402 $ 232,529
Total assets......................................................... 1,855,241 1,636,743 10,272,214
Total liabilities.................................................... 1,579,877 1,398,124 8,622,542
Retained earnings.................................................... 25,364 38,619 650,472
Shareholders' equity................................................. 275,364 238,619 1,649,672
</TABLE>
- ------------------------------
(1) Relates to sales at fair market value made to Samax Technology Inc., a
company controlled by the mother of Mr. Max Toghraie. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED FINANCIAL DATA, FINANCIAL STATEMENTS AND NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. MOREOVER, THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS."
OVERVIEW
The Company was founded in April 1996, and until December of 1996 operated
entirely as a distributor and value added reseller of computer equipment and
related hardware components and software peripherals. In December of 1996, the
Company entered the system configuration business. This process required certain
organizational and operational changes to effectively position the Company as a
provider of configuration and integration solutions to various levels within the
distribution, integration and end-user markets. In February 1997, the Company
began negotiations on its first systems integration and configuration order and
by April 1997 had secured a non-binding (7,000 Unit PC systems) configuration
order on a twelve-month delivery schedule, under which approximately 2,500
systems have been shipped.
In order to enhance its competitive advantage in the systems integration
market, the Company has entered into a perpetual non-exclusive licensing
agreement with Computer Aided Software Integration, Inc. ("CASI") to license
CASI's Configurator software for use in the development and commercialization of
Company's ACSA Solution. The Company paid CASI a one-time license fee of $1.1
million. The license fee was paid (i) by delivering to CASI a non-interest
bearing promissory note in the principal amount of $950,000 (the "CASI Note"),
and (ii) a cash payment of $150,000 funded by the Datatec Note. The payments
under the CASI Note will be capitalized and amortized over the useful life of
the software, which, for accounting purposes, is currently estimated to be
between three and five years.
The Company believes that the ACSA Solution will operate as a fully
automated systems integration and configuration process. When operational, the
ACSA Solution will enable the Company to assemble systems and custom configure
the software loaded on the systems to each customer's varied end user
specifications. The Company anticipates that the ACSA Solution will enable it to
deliver multi-unit assembled hardware systems with pre-loaded software custom
configured to suit each end user at a lower cost and time required by other
commercially available configuration processes. The Company anticipates a
portion of the proceeds from this Offering will be used to finance construction
of the Company's initial ACSA Center and to fund ACSA Solution marketing
activities. Costs incurred in connection with the construction of the ACSA
Center will be capitalized and amortized over the useful life of the ACSA
Center, which is expected to be between three and five years for accounting
purposes.
This discussion summarizes the significant factors affecting the operating
results, financial condition and liquidity/cash flows of the Company for the
year ended March 31, 1997, and for the nine month periods ended December 31,
1996 and 1997. The Company has a limited history of operations.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1997.
SALES. Sales are currently generated from the sale of components and
systems. Systems include ready-to-use computers that have been assembled and
have software already installed. Components sales consist of individual hardware
items. Net sales consists of gross sales (invoice price) less sales returns.
Sales are recognized upon product shipment. Net sales for the year ended March
31, 1997 were $25,940,203 (net of returns of $62,751) which consisted entirely
of components sales. Gross sales for the year ended March 31, 1997 were
$26,002,954. This revenue was achieved by growth of the Company's sales force
from
22
<PAGE>
2 persons at inception to 4 persons at the end of the first fiscal year and
financed by the initial capitalization and the Company's available vendor credit
of approximately $2.0 million at March 31, 1997. Net sales to an affiliate
represents sales at fair market value made to Samax Technology, Inc. ("Samax"),
a company controlled by the mother of Mr. Max Toghraie.
COST OF PRODUCTS. Cost of products consists primarily of product costs,
freight charges, and labor cost, and includes cost incurred at the time of
purchase, freight in and outside warehouse cost. Cost of products was
$25,139,001, representing 96.9% of net sales for the period. The cost of
products for the year ended March 31, 1997 is almost entirely attributable to
product purchase costs, with freight, labor and outside warehouse costs in the
aggregate representing less than 1% of the total cost of products.
Except for a limited inventory maintained to satisfy anticipated systems
assembly and integration orders, the Company generally does not place orders for
product purchases until it has received a customer purchase order for the
product. The merchandise is then shipped to either the customer or the Company's
warehouse. The distributor typically ships its products within one or two days
of receipt of a purchase order and consequently, substantially all of the
Company's revenues in any quarter result from orders received in that quarter.
The Company records as inventory merchandise being configured, its limited
inventory for the systems configuration business, and merchandise purchased from
vendors but not yet shipped to customers. As a result, the Company generally
reflects five to seven days of cost of products as inventory.
GROSS PROFITS. Gross profits for the year ended March 31, 1997 were
$801,202. Gross profits as a percentage of net sales was 3.1% for the period
ended March 31, 1997. The Company's gross profit ratio is mainly attributable to
strong product demand, the ability of the Company to purchase inventory at
favorable prices, and management's focus on a sales mix which favors products
with higher profit margins and computer system integration sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling expenses includes
costs for marketing activities to promote the Company's products and services
throughout its distribution channels, marketing personnel costs, advertising,
promotions, brochures, travel and trade shows. General and administrative
expenses include salaries of management and administrative personnel ($323,649),
commissions ($77,411) rent expense ($49,096), bad debt expense ($50,329) and
other costs. Selling, general and administrative expenses for the period ended
March 31, 1997 were $751,133 and are expected to increase as the Company expands
in anticipation of growth and commences focusing the business on marketing the
ACSA Solution.
NET INCOME. Net income for fiscal year ended March 31, 1997 was $25,364.
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996.
NET SALES. Gross sales for the nine months ended December 31, 1997 were
$49,617,539 compared to $17,193,211 for the Company's first nine months of
operations from inception through December 31, 1996. Net sales for the nine
months ended December 31, 1997 were $49,267,491 (net of returns of $350,048)
compared to $17,175,071 (net of returns of $18,140) for the nine months ended
December 31, 1996. This increase of approximately $32,092,420 in net sales is
attributable to growth of the Company's sales force from 4 to 8 individuals at
the end of each period, and an increase in the Company's available combined
credit (including its vendor credit and the Finova Line), from $1.3 million to
$16.5 million (as a 90 day average available credit for the respective periods)
which allowed the Company to increase its ability to purchase product to fulfill
more sales orders. In addition, at the beginning of the nine month period ending
December 31, 1997, the Company retained new management and implemented a
commission structure concurrent with a significant increase in sales quotas and
minimum margin policies. During the same period, the Company also began
marketing its integration and configuration services, which resulted in net
system sales of approximately $1,395,439 for the nine month period ended
December 31, 1997. Net sales to an affiliate represents sales at fair market
value made to Samax. For the nine month period ended December 31, 1997, the
Company had sales of approximately $1.39 million to Samax. At December 31, 1997,
the Company had approximately $146,500 included in trade receivables attributed
to Samax.
23
<PAGE>
COST OF PRODUCTS. Cost of products increased $30,588,662 from $16,604,294
to $47,192,956 for the nine months ended December 31, 1996 and 1997,
respectively. This increase is mainly attributable to the increase in net sales.
Cost of products represented 96.7% and 95.8% of net sales for the nine months
ended December 31, 1996 and 1997, respectively. The decrease in cost of products
as a percentage of net sales is primarily due to management's focus on a sales
mix which favors products with higher profit margins and computer system
integration sales.
GROSS PROFITS. Gross profits for nine months ended December 31, 1997 were
$2,074,535 compared to $570,777 in the nine month ended December 31, 1996. Gross
profits as a percentage of net sales were 4.2% for the nine months ended
December 31, 1997 compared to 3.3% for the nine months ended December 31, 1996.
This represents a 27% increase in gross profit ratios, and is mainly
attributable to strong product demand, the ability of the Company to purchase
inventory at favorable prices, management's focus on a sales mix which favors
products with higher profit margins and computer system integration sales, a
more efficient shipping process implemented in the first quarter, tighter
control and management of labor costs and implementation of operational
objectives requiring management to focus on increasing efficiency. See "Risk
Factors--Product Mix; Risk of Declining Product Margins."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for nine months ended December 31, 1997 were $1,029,504
compared to $501,923 for the nine months ended December 31, 1996, the Company's
first nine months of operations.
The major components of selling, general and administrative expenses for the
periods include the following:
<TABLE>
<CAPTION>
12/31/96 12/31/97
---------- ------------
<S> <C> <C>
Payroll............................................................. $ 227,754 $ 506,676
Commissions......................................................... 52,681 168,726
Rent................................................................ 39,469 35,712
Write off of related party receivable............................... -- 100,000
Bad debt............................................................ 17,000 56,310
Other (under 5%).................................................... 165,019 162,080
---------- ------------
Total............................................................. $ 501,923 $ 1,029,504
---------- ------------
---------- ------------
</TABLE>
The increase of $527,581 in selling, general and administrative expenses is
attributable primarily to the Receivable Write-Off of $100,000 incurred in the
first quarter and to increased staff and overhead to support the higher levels
of sales and marketing activity. The Company also increased the salaries of
executive officers during this period to levels the Company believes to be
commensurate with current market levels. These salary increases represent, in
the aggregate, an increase in expense to the Company of approximately $30,000
per quarter. Direct costs associated with increased marketing activities to
promote the Company's products and services throughout its distribution channels
as well as a significant increase in sales and marketing personnel costs account
for approximately $146,300 of this increase. The Company intends to continue its
sales force expansion and to increase its spending on advertising and joint
marketing promotions and trade shows for the remainder of the current fiscal
year. In addition, the Company hired additional personnel in finance and
administration to facilitate growth of the Company's infrastructure and revenue
expansion costing approximately $28,340, year-end audit and printing and
consulting fees of $23,700. Selling, general and administrative expenses
(excluding the Receivable Write-Off of $100,000) as a percentage of net sales
decreased by 34.5% from 2.9% for nine months ended December 31, 1996 to 1.9% for
nine months ended December 31, 1997. This decrease is a result of economies of
scale achieved through significant increases in sales volume as well as
employment of various operational controls and organizational efficiencies. The
Company intends to continue strict monitoring of all its fixed and variable cost
structure to achieve optimum operational performance. See "Certain Transactions"
and Note 7 to the Financial Statements.
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NET INCOME
Net income for the nine-month period ended December 31, 1996 was $38,619
compared to $625,108 for the nine-month period ended December 31, 1997. The
increase of $586,489 is mainly attributable to an increase of net sales of
$32,092,420 and economies of scale.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its working capital and capital expenditure
requirements through a combination of cash flows from operations, bank
financing, vendor credit lines, the sale of equity and the Bridge Financing. At
February 2, 1998, the Company had vendor credit lines and a credit facility
aggregating $16.5 million, consisting of a $7.5 million credit line provided by
Finova (the "Finova Line") and approximately $9.0 million in unsecured vendor
credit. Under the Finova Line, the Company orders product from vendors approved
by Finova and agrees to pay Finova within 30 days of purchase of the ordered
products. Unless the Company fails to pay Finova within this 30 day period, all
finance costs associated with this line are charged by Finova to the Company's
vendor. The Finova line is terminable at Finova's discretion at any time without
notice. The Company believes that it can currently obtain similar financing on
comparable terms from competitors of Finova. However, if Finova terminates the
Finova Line and the Company for any reason fails to replace the Finova line with
comparable financing, the business of the Company would be materially adversely
effected. The Company also believes that expansion of its infrastructure to
accommodate its current expected growth rate will require a substantially higher
level of liquidity and capital. Specifically, the Company's planned ACSA
operations are expected to require significant capital expenditure over the next
twelve months. The Company believes that the proceeds of the Offering, and funds
from operations and available lines of credit, will be sufficient to support the
Company's short term capital needs for the next twelve (12) months. The Company
believes that if currently expected growth rates are achieved the Company may
require additional financing commencing in twelve to eighteen months from the
time of the Offering. The Company would seek to obtain additional funding
through additional vendor credit, expanded lines of credit and other sources.
Although the Company believes that it will be able to obtain sufficient
financing, no assurance can be given that such financing will be available. See
"Risk Factors--Possible Additional Financing Required."
On November 26, 1997, December 16, 1997 and December 23, 1997, the Company
sold 12.0, 7.5, and 0.5 units, respectively, each unit comprised of: (i) an
unsecured promissory Bridge Note of the Company in the principal amount of
$20,000, bearing interest at a rate of 10% per annum payable upon the earlier of
the closing of the Offering or 18 months from the date of issuance; (ii) 15,000
shares of Common Stock of the Company, and (iii) 5,000 Bridge Warrants of the
Company, each exercisable to purchase one share of Common Stock at an initial
exercise price of $3.00 per share, subject to adjustment, during the 36-month
period commencing one year from the date the Bridge Warrants were issued. Each
unit was sold for $50,000 generating gross proceeds to the Company of $1,000,000
and net proceeds of $740,000. The Company repaid $250,000 of the principal
amount of the CASI Note and $50,000 of the Datatec Note out of the proceeds of
the Bridge Financing. The Company intends to repay the remainder of its
indebtedness under the CASI Note and the Datatec Note using proceeds of the
Offering. See "Recent Bridge Financing" and "Use of Proceeds."
In the normal course of business, the Company evaluates potential
acquisitions and joint ventures that may complement the Company's business.
While the Company has no present plans, commitments or agreements with respect
to any potential acquisitions or joint ventures, the Company may consummate
acquisitions or enter into joint ventures, which may require the Company to make
additional capital expenditures. Such expenditures may be significant and
require external sources of funding.
INCOME TAXES
The Company provides for income taxes using the liability method in
accordance with the Statement of Financial Accounting Standards No. 109 entitled
"Accounting for Income Taxes." The Company provides for federal and state income
taxes based on statutory rates. The provision for income taxes differ
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from the amounts computed by applying the statutory federal income tax rate to
income before taxes primarily due to the effect of state income taxes net of the
related federal tax benefit.
Deferred income taxes are provided for income/expense items reported in
different periods for income tax and financial statement purposes. Deferred
income taxes are primarily attributable to temporary differences resulting from
depreciation, state income taxes and various accrued expenses. The Company has
no current "tax loss carry forwards."
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations. There can be no assurance, however, that the Company's
business will not be affected by inflation in the future.
BACKLOG
The Company's backlog is not meaningful due to short turnaround cycles in
its core distribution operations and only one order received as of the date
hereof in its developing systems configuration business.
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BUSINESS
GENERAL
The Company distributes computer equipment and related hardware components
and software ("Computer Products") to value added resellers ("VARs"), systems
integrators ("SIs"), original equipment manufacturers ("OEMs"), independent
software vendors ("ISVs") and major government and corporate accounts. In
December 1996, the Company entered the system configuration business. The
Company intends to build upon vendor and customer relationships in the Computer
Products and system configuration business to become a leading provider of
software-enabled custom configuration to its target markets both domestically
and internationally. The Company intends to implement a fully automated systems
integration and configuration process, referred to as the Automated Custom
System Assembly Solution, or "ACSA Solution," incorporating licensed proprietary
software. The Company believes the ACSA Solution will enable the Company to
assemble multiple computer systems and custom configure the software loaded on
these systems to each customer's end user's unique specifications at a fraction
of the cost and time required by other commercially available configuration
processes. See "--ACSA Growth Strategy--THE ACSA SOLUTION". The Company has
begun initial construction of the first of its ACSA Solution production lines
("ACSA Centers") located at the Company's facility. The Company's first ACSA
center is expected to be completed and the Company is expected to commence
offering the ACSA Solution by mid-1998. Future ACSA Centers may be located at
the facilities of its customers. This technology is intended to enable the
Company's customers to outsource their procurement, warehousing, assembly,
staging, and shipping processes. The Company will use a portion of the proceeds
of the Offering to complete the construction of and operate its first ACSA
Center.
The Company's Computer Products business procures and distributes a broad
and comprehensive range of Computer Products including components and systems
networking products. These products include components such as high capacity
storage devices, CD-ROMs and CD Recorders, network adapters, hubs, small
computer systems interface components ("SCSIs"), integrated device enhancement
components ("IDEs") and ZIP drives as well as memory and central processing
units ("CPUs") for desktop and notebook computer products. The Company also
assembles built-to-order computer systems for its target markets.
The Company's net sales have grown from $17,175,071 for the period from
April 2, 1996 (inception) through December 31, 1996, and $25,940,203 for the
Company's first fiscal year ending March 31, 1997 to $49,267,491 for the first
nine months of fiscal 1998 primarily because of development of an experienced
sales management team with strong customer relationships, expansion of the sales
force, quick delivery of a broad selection of Computer Products and competitive
pricing offered by the Company. The Company's gross profit margins have improved
from approximately 3.3% and 3.1% of net sales in the nine month period ending
December 31, 1996 and the year ended March 31, 1997, respectively, to 4.2% for
the nine month period ending December 31, 1997 due to a number of factors
including strong product demand, more favorable direct manufacturer pricing and
an improved sales mix achieved by the Company which favors components with
higher profit margins and computer system sales. The Company expects that
implementation of the ACSA Centers will increase sales of higher margin
built-to-order computer systems and service revenues.
The Company intends to expand through enhancing existing and establishing
additional strategic relationships with leading master distributors and
manufacturers and by developing custom assembly and software configuration
relationships with computer resellers, manufacturers and integrators. The
Company also intends to enter into joint venture or license arrangements with
foreign partners in South America, Mexico and Asia. The Company's strategy is to
access these markets by identifying foreign joint venture partners or licensees
with substantial industry presence capable of effectively utilizing the ACSA
Solution. The Company also intends to utilize management's extensive network of
domestic and foreign contacts to explore possible acquisition opportunities. The
Company is exploring joint ventures with potential partners
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identified in Asia, but is not currently negotiating any acquisition
opportunities. There can be no assurance that the Company will successfully
establish any joint ventures or identify any acquisition opportunities or that
if such opportunities are presented that they will be on terms and conditions
acceptable to the Company.
The Company was incorporated in California on April 2, 1996 under the name
Data Net International, Inc. On January 6, 1998, the Company changed its name to
Cumetrix Data Systems Corp. The Company's executive offices are located at 957
Lawson Street, Industry, California 91748; and its telephone number is (626)
965-6899, and its facsimile number is (626) 965-0415.
COMPUTER PRODUCTS BUSINESS
The Company's principal business upon which its growth strategy is built is
the procurement and distribution of a broad and comprehensive range of Computer
Products. These products include, components such as high capacity storage
devices, CD-ROMs and CD Recorders, network adapters, hubs, SCSIs, IDEs and ZIP
drives as well as memory and CPU's for desktop and notebook products. The
Company also assembles built-to-order computer systems for its target market.
Two significant strengths of the Company are its well-developed vendor
relationships and its ability to effectively manage its cash and inventory.
COMPUTER PRODUCTS MARKET
The computer hardware and component market is heavily dependent on worldwide
personal computer demand and shipments. According to a Hambrecht & Quist
research report dated August 19, 1997 on the PC Hardware Market entitled, "VIEW
FROM THE CHANNEL," worldwide personal computer unit shipments have increased
from 47 million units in 1994 to 83 million scheduled shipments for the 1997
calendar year, and unit volume is expected to grow to an estimated 112 million
by the 1999 calendar year. The Computer Products market is generally segmented
between top-level warehousing master distributors, who distribute to VARs, OEMs,
SIs and other distributors. Master distributors are required to purchase
significant volumes of Computer Products to obtain their manufacturer
relationships and pricing. The Company generally procures its components from
these master distributors and distributes these products to medium sized VARs,
SIs, ISVs and OEMs. The Company believes that a valuable asset of the Company is
its position in the distribution channel, between that of master distributors
and lower level VARs, SIs and ISVs because unlike master distributors, the
Company, without maintaining large inventories, can focus its procurement on
only those components which it has expertise in marketing to its target markets.
COMPUTER PRODUCTS BUSINESS STRATEGY
The Company has structured its Computer Products business in a manner
designed to maximize net profit margins while competing on the basis of price
and service. The Company generated approximately 98.6% and 97.2% of net sales in
the fiscal year ended March 31, 1997 and the nine months ended December 31,
1997, respectively, from its Computer Product distribution and procurement
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The remainder of the Company's revenues in each period
were derived primarily from system assembly and sale. The Company's net sales
have grown from approximately $17,175,000, to approximately $49,267,500 for the
nine months ended December 31, 1996, and 1997, respectively, primarily because
of the development of an experienced sales management team with strong customer
relationships, expansion of the sales force, quick delivery of a broad selection
of Computer Products and competitive pricing offered by the Company.
Although the Company is seeking to expand into higher margin, value-added
services, the Company believes that the gross profit on its core distribution
operations will remain relatively stable. Therefore, management's primary
objective remains gross profit improvement through strategic implementation of
its planned ACSA operations. The Company's gross profit margins have improved
from approximately 3.3% and 3.1% of net sales in the nine month period ended
December 31, 1996 and the fiscal year ended
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March 31, 1997, respectively, to 4.2% for the nine month period ended December
31, 1997 due to a number of factors, including strong product demand, more
favorable direct manufacturing pricing, and an improved sales mix achieved by
the Company which favors components with higher profit margins and computer
system integration sales.
COMPUTER PRODUCT CUSTOMERS AND SALES
The Company has more than 700 active customers, including Alpha Computers,
East Gate Micro, Inc. and Data Impressions Inc. For the fiscal year ended March
31, 1997 no customer accounted for more than 10% of net sales. During the nine
months ended December 31, 1997, Alpha Systems Inc. accounted for 10.9% of net
sales. During fiscal 1997, the Company had net sales of approximately $532,800
to Samax, a company owned by the mother of Mr. Max Toghraie. For the nine month
period ended December 31, 1997, the Company had sales of approximately $1.39
million to Samax. At December 31, 1997, the Company had approximately $146,500
in trade receivables attributed to Samax. During the three month period
commencing September 30, 1997 and ending December 31, 1997, the Company had no
sales to Samax. Although the Company is not currently making sales to Samax, if
the Company determines that resuming sales to Samax in the future would be in
the best interests of the Company, any such future transactions would be
negotiated on an arms-length basis and on terms and conditions at least as
favorable to the Company as those which would be obtained from competitors of
Samax. See "Certain Transactions." The cessation of business with Samax has not
had a material adverse effect on the Company's business, and the Company does
not believe that the loss of Alpha Systems, Inc. or any other individual
customer would have a material adverse effect on the Company's business.
The Company currently markets its distribution services via a direct sales
staff, with use of telemarketing techniques to identify, qualify and close
business. At the beginning of the 1997 calendar year, the Company began an
aggressive campaign to develop a channel program to sell its Computer Products
through OEMs, SIs, and ISVs. As of December 31, 1997, 44% of the Company's
accounts have been originated through this channel program, and they provide the
majority of revenues to the Company.
As of January 31, 1998, the Company employed eight sales representatives.
All sales representatives are managed by the Company's President. The Company's
sales representatives have been highly effective in developing and maintaining
customer relationships, averaging approximately $8.2 million of sales per
representative on an annualized basis based on the nine months ended December
31, 1997. The Company believes that sales per representative of $8.2 million,
would, if achieved for fiscal 1998, compare very favorably with its competitors.
See "Risk Factors--Limited Operating History."
The Company's representatives compete for sales on the basis of product
knowledge, product selection targeted to the Company's customer base and
competitive pricing. The Company offers an aggressive return merchandise policy
("RMA") that is attractive to its customers. The Company is able to offer such a
policy because of RMA allowances it has negotiated from its vendors. The Company
experienced loss on returns of less than one percent of shipments in the fiscal
year ended March 31, 1997 and the nine months ended December 31, 1997,
respectively, because it was able to return substantially all of the returned
products to manufacturers for immediate cash refunds or credits. See "Risk
Factors--Risk of Product Returns."
VENDOR RELATIONSHIPS AND PROCUREMENT
The Company has relationships with a large number of manufacturers and
distributors around the world. The Company is a reseller of selected product
lines and single components from major manufacturers, including Western Digital
Corporation, Adaptec Inc., Fujitsu Computer Products of America, Samsung
Electronics Co. Ltd., Quantum Corporation, Maxtor Corporation, 3Com Corporation,
Creative Labs Corporation, Matrox Electronics Systems, Ltd., Goldstar L.G.
Electronics, Intel Corporation, Toshiba Corporation, Pioneer Electronics Corp.
and Sony Electronics. In the distribution channel, major suppliers
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include DSS Technology Distribution Partners, Inc. ("DSS"), Maxtor Corporation,
Canara Technologies, Alpha Computers, DTK Computer, Tech Data Computer, Merisel
Incorporated and Toshiba Corporation. For the nine months ended December 31,
1997, DSS, a master distributor of hard drives to the Company, accounted for
58.3%, of the Company's purchases. For the nine month period ended December 31,
1997, the Company had purchases of approximately $598,000 from Samax. Although
the Company is not currently making purchases from Samax, if the Company
determines that resuming purchases from Samax in the future would be in the best
interests of the Company, any such future transactions would be negotiated on an
arms-length basis and on terms and conditions at least as favorable to the
Company as those which would be obtained from competitors of Samax. See "Certain
Transactions." The Company believes that its relationships with DSS and its
other vendors is satisfactory and does not believe that the loss of its
relationship with DSS or any other of its vendors would materially adversely
affect its business. See "Risk Factors--Dependence Upon Relationships with
Vendors."
The Company receives discounts from major Computer Product manufacturers and
master distributors as a result of its volume purchases. The Company routinely
negotiates stock rotation and price protection privileges with certain of its
major vendors. Additionally, DSS has featured the Company in its national
advertising campaigns.
The Company also benefits from its ability to effectively dispose of excess
inventory of major manufacturers and master distributors due to the Company's
well developed sales channel. In this way, major distributors and manufacturers
rely on the Company as a release valve for inventory when excess supplies must,
due to contractual commitments, be shipped by such manufacturers to the
Company's master distributor vendors. In return for the Company's willingness to
accept such excess inventory, the Company is afforded pricing concessions and
rebates by the vendor. As a result, the Company receives favorable pricing from
master distributors who desire to reduce inventory growth or to be assured of
satisfying volume purchase commitments to manufacturers without adversely
impacting downstream pricing. Also, because the Company is relied upon by its
vendors to take their excess inventory, the Company is rewarded with
preferential allocation, allowing the Company to maintain availability and
increase its margins during component shortages. These arrangements with respect
to purchases of excess inventory from vendors are informal, are not subject to
any written agreements and may be discontinued by the Company at the Company's
discretion. See "Risk Factors--Availability of Components," "--Foreign Trade
Regulation," and "--Dependence Upon Relationships with Vendors."
The Company promptly pays its vendors, typically paying within 30 days from
receipt of invoice. This policy also encourages the Company's vendors to
expedite shipments to the Company as these shipments can be quickly converted to
cash flow.
INVENTORY MANAGEMENT
The Company's strong vendor relationships enable it to receive prompt and
consistent deliveries. As a result, the Company, unlike many resellers of
Computer Products, maintains a very limited inventory, and avoids many of the
costs associated with the traditional distribution model, including capital
costs associated with the warehousing of products, obsolescence costs, inventory
finance costs, the costs of computer inventory and tracking systems, and the
costs associated with the need to employ personnel for stocking and shipping
duties.
Unlike master warehousing distributors who supply the Company, the Company
has the added flexibility of not being required to maintain large inventories to
achieve its favored pricing. The Company believes that although the pricing it
receives is not as favorable as the pricing received by master warehousing
distributors, the Company benefits by avoiding the need to stock and finance
often rapidly depreciating Computer Products. In the Company's judgment, it is
often more cost effective to purchase Computer Products from its vendors on an
as-needed basis than to stock the quantities of parts required to receive volume
discounts available to the Company's vendors.
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The Company is leanly staffed and focuses on rapid inventory turns. The
Company's warehouse is 4,000 square feet and, as of December 31, 1997, employed
3 people. In the nine months ended December 31, 1997, the Company shipped $47.2
million of Computer Products, turning inventory at an annualized rate of
approximately 41 times.
Rather than merely focusing on price discounts from vendors, the Company has
negotiated favorable RMA terms with its vendors permitting rapid replacement of
parts returned by customers. Rapid replacement of such parts, allows the Company
to reduce inventory costs (by increasing the speed of inventory turns) and
improves customer satisfaction. See "Risk Factors--Risk of Product Returns."
The Company also closely coordinates its sales efforts and procurement,
particularly in the area of high volume parts such as computer drives. In many
cases, entire shipments of products are already sold or under order by the
Company's customers prior to their purchase by the Company.
CASH MANAGEMENT
The Company has traditionally collected its receivables in 21 days or less
while generally paying its key vendors and the Company's Finova Line in 30 days,
thereby allowing the Company to finance its growth at low cost. At February 2,
1998, the Company had vendor credit lines and a credit facility aggregating
$16.5 million, consisting of a $7.5 million under the Finova Line and
approximately $9.0 million in unsecured vendor credit. Under the Finova Line,
the Company orders product from vendors approved by Finova and agrees to pay
Finova within 30 days of purchase of the ordered products. Unless the Company
fails to pay Finova within this 30 day period, all finance costs associated with
this line are charged by Finova to the Company's vendor. The Company also
maintains its margins by carefully screening the credit records of its new and
existing customers and by requiring check guarantees from almost all smaller
customers who pay by check.
ACSA GROWTH STRATEGY
The Company intends to create a new high volume, custom system and software
configuration solution attractive to major computer system sellers, installers
and end-users both domestically and internationally. The ACSA Solution is
intended to replace a manual process with an automated assembly line. The
Company intends to complete construction of and to equip its first ACSA Center
with a portion of proceeds of this Offering. The Company's planned ACSA Centers
will introduce its integrated, rapid, low-cost, automated custom software
configuration solution to a market burdened by slow, high-cost, labor-intensive
manual software configuration methods. The Company's first ACSA Center is
expected to be completed and the Company is expected to commence offering the
ACSA Solution by mid-1998.
The Company intends to market the ACSA Solution to the Company's base of
Computer Products customers and vendors and create strategic alliances with
joint venture partners and licensees in domestic and overseas markets.
Establishing joint ventures with well positioned partners is expected to benefit
the Company by reducing capital expenditures required from the Company for each
ACSA Center launch, as well as by providing the Company with market presence
established by the Company's selected partners. This initiative also is expected
to result in increased volume to the Company's systems sales, thereby providing
the Company's traditional business with a more favorable sales mix and improved
operating results. The Company also intends to utilize management's extensive
network of domestic and foreign contacts to explore possible acquisition
opportunities. The Company is exploring joint ventures with potential partners
identified in Asia, but is not currently negotiating any acquisition
opportunities. There can be no assurance that the Company will successfully
establish any joint ventures or identify any acquisition opportunities or that
if such opportunities are presented that they will be on terms and conditions
acceptable to the Company. In addition, recent economic and political
developments in Asia, may lead the Company to defer establishment of joint
ventures or partnerships with such potential partners. See "Risk Factors--Asian
Market Instability."
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THE ACSA MARKET
The market for fully-configured computer systems is both diverse and
expanding. Distribution channels are already established and include:
- VARs and SIs
VARs and SIs are the primary distribution channel for new PCs. An IDC
study cited in EDP Weekly on December 15, 1997 stated that the overall PC
market in the U.S. is expected to grow in 1998 by 17%, "outpacing the
worldwide rate of 13.5%." In addition, Computer Reseller News reported in
June of 1996 that the top ten domestic SIs generated revenues of over $40
billion dollars in 1995. VARs and SIs represent a major focus of the
Company's ongoing program in targeting potential configuration services
customers through its existing distribution and procurement operations.
- OEMs and ISVs
These vendors provide solutions to vertical markets and must provide
turnkey systems that are heavily customized to their marketplace
requirements. These vendors have historically provided integration
services in addition to their primary products to ensure delivery of the
complete product to their customer. However, due to their small size and
scope of services, these vendors find it very difficult to offer
cost-effective, quality integration services and often provide these
services at a loss. The Company intends to offer these vendors a more
profitable, higher quality alternative.
- International Emerging Markets
ASIA/PACIFIC REGIONAL MARKETS. A recent IDC study found that almost 17
million systems were shipped in the Asia/Pacific Region in 1996, "which
allowed the region to substantially outpace worldwide PC market growth by
16%." A January 27, 1998 report in Newsbytes, citing an IDC study, found
that, although a slowdown occurred in Southeast Asia in 1997, "three of
the five largest regional markets, China, India and Australia, buoyed the
region's growth." China, for example, "chalked up a 43% year-on-year
growth rate in the fourth quarter." EDP Weekly reported on December 15,
1997, however, that IDC had reduced its sales forecast for PC demand in
1998 in the region from 12.93 million to 12.36 million units. Recent
economic and political developments in Asia, however, may slow or
eliminate this growth potential. See "Risk Factors--Asian Market
Instability."
LATIN AMERICAN MARKETS. A recent study by Software Publishers Association
found that unit sales in Latin America grew by 78% in 1996, with growth in
the fourth quarter exceeding 110%. Another study by IDC confirmed that
Latin America is undergoing unprecedented growth in system demand.
According to this study, Latin American users are seeking lower-cost ways
to increase network capacity and flexibility. The study also found that
growth in the market is expected to remain in the double-digits through
the end of the millennium, stimulated from continued corporate network
re-engineering, the move to client/server and multimedia applications, and
with increasing impetus coming from the Internet. The strongest country in
both studies was Brazil, which accounted for approximately 35%-40% of all
unit sales.
THE ACSA OPPORTUNITY
The Company believes that ACSA Solution and the automated methodology it
represents will enable it to successfully expand on its existing systems and
Computer Products sales and achieve higher margin sales of the ACSA services as
an increasing percentage of total revenues. Currently, most SIs and VARs are
unable to offer, and most corporate and institutional buyers with large numbers
of networked servers, PCs or workstations are unable to procure, systems with
non-uniform preconfigured software. For instance, a hypothetical purchaser of
1,000 workstations cannot presently specify diverse software configurations for
each workstation without incurring the potentially prohibitive cost of
labor-intensive custom software installation and configuration. The Company
estimates that a typical manual assembly and software configuration process for
custom systems requires three to five hours per workstation, excluding
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time required for re-builds due to inexperienced labor or accidental
typographical errors. Consequently, these enterprises either specify uniform
software configurations for each workstation, thereby depriving some end users
of valuable software applications while unnecessarily purchasing licenses for
others, or bear the high cost of manual software configuration for each
non-standard setup. As a result, many computers are installed with less than
optimal software configuration and any necessary custom software configuration
is provided by high cost consultants or management information systems staff.
The Company believes that the ACSA Solution will enable the Company to
successfully offer the first single-sourced, high volume, fully automated
computer assembly and custom software configuration service that uniquely
configures each workstation.
In marketing system assembly and integration services to VARs, OEMs, SIs and
ISVs, the Company expects that the planned ACSA Solution will enable the Company
to enjoy a significant advantage over traditional system configurators who
currently offer automated software configuration for only a limited subset of
business software applications and who are presently unable to offer custom
software configuration services. See "Risk Factors--Lengthy Sales and
Implementation Cycles for ACSA" and "-- Competition."
The Company believes that its relationships with customers and vendors in
the Computer Products channel provides it with an ideal platform to aggressively
explore and successfully market the ACSA Solution to OEMs, ISVs, VARs and SIs.
Historically the systems integration market has been heavily dependent on these
vendors for its computer and software procurement needs. The Company expects
such dependence to increase as corporate and government information technology
departments are under increasing pressure to outsource their network and
personal computer configuration operations to shorten customer delivery time,
reduce labor cost, better manage the uncertainties of component pricing and
improve the quality control process.
THE ACSA SOLUTION
The Company is assembling technologies to automate the process of custom
configuration and integration in ACSA Centers of entire system solutions for its
customers. The technology to be employed by each ACSA Center is based upon
successful systems in use in flexible manufacturing environments. The ACSA
Center automation process will move components to each unskilled worker to be
assembled and loaded using the Integrator's Workbench Product Series ("IWPS")
software created by CASI and licensed by the Company. See "Risk
Factors--Dependence on CASI for Developments and Enhancement of Configuration
Software" "--Conflicts of Interests." The IWPS "Configurator" component
automates the loading and personalized setup of workstations, servers and
network devices, saving significant labor costs and ensuring accurate and
consistent installations. The Company believes, based on case studies published
by CASI, that units coming off the automated assembly line can be uniquely
configured at the rate of up to 18 units per hour. The ACSA Centers are expected
to enable the Company to:
- Meet customer demands for custom systems utilizing the latest technologies
where the assembly is outsourced but the customer closely controls the
design and software configuration
- Shorten the time required to assemble complex, custom solutions
- Eliminate up to 80% of the costs of manual labor normally associated with
custom software loading and configuration.
- Obtain ISO 9000 certification for systems assembly processes
- Construct or have joint venture partners construct permanent or temporary
ACSA Centers for customers
Even assuming that manual laborers are able to produce consistent,
error-free configurations, the ACSA Center is expected by the Company to be able
to provide significant increases in productivity. The Company believes that a
fully operational ACSA Center will be able to configure up to 72 machines in the
time a manual laborer takes to configure one. This technology is intended to
enable the Company's customers to outsource their procurement, warehousing,
assembly, staging, and shipping processes. By
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implementing manufacturing processes that automate the assembly of custom
systems, the Company intends to position itself as a low cost, high value
provider of outsourcing services to the systems distribution and end user
markets. The Company has commenced construction of two assembly lines at its
first ACSA Center located in the City of Industry, California which can support
up to 16 assembly lines. Construction of its first ACSA Center is expected to be
completed in mid-1998. See "Facilities," and "Risk Factors--Construction of
First ACSA Center."
Each ACSA Center assembly line is modularly designed to enable the Company
and its customers to realize high productivity and profits from varying job lot
size and location. Highest optimization is reached in configurations of eight
assembly lines, however these may be combined to create larger facilities, or
scaled back to create smaller ones with corresponding increases or decreases in
labor and productivity. ACSA Centers can be located in a central facility, or be
constructed at a customer's location in a few weeks.
COMPETITION
The markets for the Company's products and services are extremely
competitive and is characterized by rapid and constantly changing market
conditions, price fluctuations and technological change. Pricing is very
aggressive and the Company expects pricing pressures to continue. The Company
competes with a large number and wide variety of resellers of Computer Products,
including traditional personal computer retailers, computer superstores,
consumer electronics and office supply superstores, mass merchandisers, national
direct marketers (including VARs and specialty retailers, distributors,
franchisers, manufacturers and national computer retailers which have commenced
their own direct marketing operations to end-users). Many of these companies
compete principally on the basis of price and may have lower costs than the
Company. Many of the Company's competitors are larger, have substantially
greater resources and offer a broader range of services than does the Company.
The Company competes with, among others, CompuCom Systems, Inc., En Point
Technologies, Inc. and Vanstar Corp. in the Computer Products distribution
market.
Competitive factors in the Computer Products market include price, service
and support, the variety of products offered, and marketing and sales
capabilities. While the Company believes that it competes successfully with
respect to most if not all of these factors, there can be no assurance that it
will continue to do so in the future. The industry has come to be characterized
by aggressive price cutting, and the Company expects that pricing pressures will
continue to increase in the foreseeable future. In addition, the Computer
Products industry is characterized by rapid changes in technology and associated
inventory and product obsolescence, rapid changes in consumer preferences, short
product life cycles and evolving industry standards. The Company will need to
continually provide competitive prices, superior product selection and delivery
response time in order to remain competitive. If the Company were to fail to
compete favorably with respect to any of these factors, the Company's business
and operating results would be adversely affected.
CASI and/or Datatec may directly enter into the Company's integration and
configuration markets using the software the Company has licensed from CASI.
While no operating division or subsidiary of Datatec is currently competing in
the Company's markets, there can be no assurance that Datatec will not decide to
directly compete with the Company in the future. Further, the terms of CASI's
license allow CASI to license the software used in the ACSA Solution and the
ACSA Centers to new or existing direct competitors of the Company. See "Risk
Factors--Conflicts of Interest."
The primary competition for the ACSA Centers will most likely be large
computer manufactures such as IBM Corp. and Compaq Computer, Inc. which provide
custom configuration and automated software configuration for standardized
systems, large distributors such as Ingram Micro Inc., Vanstar Corp., Tech Data
Computer and CompuCom Systems, Inc. in the systems integration and network
services market, network software and equipment providers such as Cisco Systems
Inc. that sell networking hardware and offer automated software configuration to
ensure compatibility between networks and hardware, and the
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internal departments within the target markets currently performing hardware
and/or software configuration, and consulting and integration companies which
offer manual software configuration services. There are also retail chains such
as Comp USA and MicroAge that offer configuration and distribution services.
These competitors currently offer configuration services primarily for
STANDARDIZED solutions, based upon generic configurations for limited numbers of
products. While some of these competitors offer the high level of customization
available from a ACSA Center, they do so at high hourly rates. Although no
assurance can be given, the Company believes that leveraging its manufacturing
process and licensed proprietary software will enable it to offer increased
variety and customization with significant improvements in response times at
prices below these competitors standardized solutions. There can be no assurance
that the Company will be able to compete successfully against existing
competitors or future entrants into the market. See "Risk Factors--Competition."
EMPLOYEES
As of January 31, 1998, the Company had 23 full time employees. At that
time, the Company employed eight sales, two technical support, five
administrative and finance, three customer service and four warehousing and
delivery related personnel. The Company does not have any unionized employees
and believes its relationship with its employees is satisfactory.
The Company's expansion may significantly strain the Company's management,
financial and other resources. Any failure to expand these areas in an efficient
manner could have a material adverse effect on the Company's operating results.
The Company believes its future success will depend in large part on the
Company's ability to recruit and retain qualified employees, particularly those
highly skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense. There can be no assurances that the
Company will be successful in retaining or recruiting key personnel. See "Risk
Factors--Management of Growth."
FACILITIES
The Company's corporate headquarters is located in City of Industry,
California. Until March 23, 1998 the Company was headquartered in a leased
facility of approximately 6,200 square feet of office and warehousing space,
which lease expires on April 30, 1998.
The Company has entered into a lease for approximately 21,900 square feet of
office and warehouse space, located in the City of Industry. The Company began
to move its operations into its new premises on February 1, 1998 and completed
the move on March 23, 1998. The Company believes the increased space will more
adequately meet the Company's current needs. The Company believes that if
needed, additional office space will be available on acceptable terms in the
future.
The Company intends to use approximately $300,000 of the net proceeds from
the Offering to complete construction of and to equip its first ACSA Center at
this facility. It is expected that the construction will require a substantial
time commitment of certain members of management. The Company expects to
complete the first ACSA Center in mid-1998. Any delays in completion of the
first ACSA Center could result in delays in the commencement of sales of
assembly and custom software configuration services. There can be no assurance
that the Company will be able to complete the ACSA Center at the budgeted price.
Additionally, there can be no assurance that the ACSA Center will be available
on time or that the Company will be successful in timely hiring and training
engineers and technicians necessary to commence operations of the ACSA Center.
Any such delays would have a material adverse effect upon the Company's
business, operating results and financial condition. See "Risk
Factors--Construction of First ACSA Center."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS.
The executive officers and directors of the Company, their ages and present
positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------------------------------ --- ---------------------------------
<S> <C> <C>
Max Toghraie.......................................... 35 Chief Executive Officer, Director
James Ung............................................. 36 President, Director
Mei Yang.............................................. 35 Secretary, Treasurer, Director
Carl L. Wood.......................................... 45 Chief Financial Officer
David Tobey........................................... 37 Director
Nancy Hundt........................................... 29 Director
Philip J. Alford...................................... 44 Director
</TABLE>
- --------------------------
MAX TOGHRAIE, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Toghraie has served
as the Chief Executive Officer of the Company since September 1997, and as a
director since April 1997. He has also served as a consultant to the Company
since its inception in April of 1996. Mr. Toghraie served as a trading group
manager for D'Argent Inc., an international trading company from 1992 through
December 1996. During the past 5 years, he has been involved with various
privately held development stage companies as a director and/or a consultant.
Mr. Toghraie is a member of the Audit Committee of the Board of Directors.
JAMES UNG, PRESIDENT AND DIRECTOR. Mr. Ung is a co-founder of the Company
and has served as its President since April 1997 and as a director since the
Company's inception in April of 1996. From February 1992 until joining the
Company, Mr. Ung was Director of Operations of American Systec Corporation, a
privately held systems distribution and configuration company in Brea,
California. From 1989 to 1992, Mr. Ung served as Vice President of Marketing at
PC Systems Design, a California based systems integration and distribution
company. James Ung is married to Mei Yang.
MEI YANG, SECRETARY, TREASURER AND DIRECTOR. Ms. Yang has served as a
director of the Company since its inception in April of 1996. Ms. Yang has
served as a secretary and treasurer of the Company since March 1997. From 1990
to 1996, Ms. Yang was the Chief Operating Officer of American Systec
Corporation. At American Systec Corporation, she was responsible for the
accounting department and the development of the domestic sales and marketing
infrastructure. Ms. Yang was the accounting manager at the Business Integration
Group from 1987 to 1990. Mei Yang is married to James Ung.
CARL L. WOOD, CHIEF FINANCIAL OFFICER. Mr. Wood has served as the Chief
Financial Officer since February 6, 1998. From September 1996 to June 1997, Mr.
Wood served as Corporate Controller and Director of Management Information
Systems at Murad, Inc. in El Segundo, California, a cosmetic retail business
specializing in high-end skin care products. From 1989 to September 1996, Mr.
Wood was Corporate Controller and Vice President, Finance, and subsequently the
Chief Financial Officer of 99 Cents Only Stores in Los Angeles, California, a
deep discount retailer of general merchandise, which is listed on the New York
Stock Exchange.
DAVID TOBEY, DIRECTOR. Mr. Tobey has served as a director of the Company
since July 1997. Mr. Tobey was the founder and has served as President and CEO
of CASI from February 1995 to March 9, 1998 and was a significant stockholder of
CASI, a subsidiary of Datatec Systems, Inc. ("Datatec") (formerly known as
Glasgal Communications, Inc.), a Nasdaq traded company. CASI is a supplier of
configuration management software for system deployment and customization. On
March 9, 1998, Mr. Tobey sold his entire equity interest in CASI to Datatec. He
also founded and served as the Executive Director of the Integrating Technology
Consortium, an integration standards, certification, and education organization
focused on the hospitality industry from June 1994 to October 1997. Prior to
founding CASI in February 1995, Mr. Tobey was the Senior Vice President of
Corporate Services from April 1993 to April 1995 for Hotel Information Systems
where he was responsible for articulating and managing the development of
strategic initiatives and corporate operations in marketing, product
development, and professional services. From September 1986 to April 1993, Mr.
Tobey was the founder and served as Chairman/CEO of
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Stratcon, a systems integration company in the legal market and later as CTO of
automation Partners, into which Stratcon merged in 1990. Mr. Tobey has also
consulted with numerous technology and service companies and is a frequent
speaker at international conferences on technology and management topics.
NANCY HUNDT, DIRECTOR. Ms. Hundt has served as a director of the Company
since its inception in April of 1996. Ms. Hundt is a co-founder of the Company.
She has a background in the optical industry and has served as a representative
of the American Board of Opticianery, an optical industry retail group. Ms.
Hundt acts as a consultant to the optical industry and has served over the last
five years as Chief Operating Officer of Academy Optical, Inc. Ms. Hundt is a
member of the Audit Committee of the Board of Directors.
PHILIP J. ALFORD, DIRECTOR. Mr. Alford has served as a director of the
Company since February, 1998. Mr. Alford is the co-founder and Chairman and
acting Chief Financial Officer of Verix Software, a position he has held since
July, 1997. Prior to joining Verix Software, a business software developer, Mr.
Alford was employed by Tekelec, a publicly traded company, from 1985 to December
1996, where he served primarily as its Chief Financial Officer and from 1994 to
1996 as its President, Chief Executive Officer and Director. Tekelec is a
supplier of diagnostic and switching systems to the communications industry.
After leaving Tekelec, Mr. Alford served as an independent management
consultant. Mr. Alford is a member of the Audit Committee of the Board of
Directors.
INDEPENDENT DIRECTORS
Directors are elected for one year terms which expire at the next annual
meeting of Shareholders. Officers are elected annually by the Board of Directors
to hold office until the first meeting of the Board following the next annual
meeting of shareholders and until their successors have been elected and
qualified. If, following consummation of the Offering the Company's has shares
listed on the New York Stock Exchange or the American Stock Exchange or
designated for trading as national market securities on The Nasdaq National
Market System, the Company's Bylaws provide that the Board of Directors will be
divided into two classes, Class 1 and Class 2, Class 1 to be comprised of three
directors, and Class 2 to be comprised of four directors. If the Board of
Directors is divided into two classes, at each annual meeting of shareholders,
successors of the class of directors whose term expires at that annual meeting
would be elected for a two-year term or until their successors have been elected
and qualified.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during the fiscal year
ended March 31, 1997, to the Company's former President and Vice President of
Operations. No other officer, director, or employee earned more than $100,000
for the fiscal year ended March 31, 1997. The Company operated without a Chief
Executive Officer in the fiscal year ended March 31, 1997. In September 1997,
the Company hired Max Toghraie to serve as Chief Executive Officer at an annual
salary of $192,000. See "--Employment Agreements."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
------------------------------------------------------------
ANNUAL COMPENSATION
FISCAL YEAR ---------------------------------------------
ENDED OTHER ANNUAL
NAME AND PRINCIPAL POSITION MARCH 31, SALARY BONUS COMPENSATION(1)
- ---------------------------------------------------------------- ------------- --------- ----------- ---------------------
<S> <C> <C> <C> <C>
Tommy Tang(2), President........................................ 1997 $ 132,000 $ 0 $ 0
Sherry Haynes(3), Vice President-Operations..................... 1997 $ 70,000 $ 0 $ 0
</TABLE>
- --------------------------
(1) The named executive officers did not receive any annual compensation not
properly categorized as salary or bonus, including stock options, restricted
stock awards, stock appreciation rights, long term incentive plan payouts,
or any perquisites or other personal benefits, securities or property that
exceeded the lesser of $50,000 or 10% of the salary and bonus for such
officer during the fiscal year ended March 31, 1997.
(2) Mr. Tang resigned from the Company in May 1997 and his position was assumed
by Mr. Ung, who is being compensated at a rate of $192,000 per annum. See
"--Employment Agreements"
(3) Ms. Haynes resigned from the Company in June 1997 and her duties were
assumed by Mei Yang, who is being compensated at a rate of $72,000 per
annum. See "--Employment Agreements."
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<PAGE>
BOARD COMMITTEES
AUDIT COMMITTEE. Mr. Toghraie, Ms. Hundt and Mr. Alford are members of the
Audit Committee of the Board of Directors. The Audit Committee's functions
include recommending to the Board of Directors the engagement of the Company's
independent certified public accountants, reviewing with those accountants the
plan and results of their audit of the financial statements and determining the
independence of the accountants.
COMPENSATION. Following the Offering, the Company's Board of Directors
intends to establish a Compensation Committee. The Compensation Committee will
review and makes recommendations with respect to compensation of officers and
key employees, and will be responsible for the grant of options and other awards
under the Company's Stock Option Plan. The current executive's salaries were set
by the Board. See "--Stock Option Plan."
DIRECTOR COMPENSATION
Nonemployee directors of the Company currently are paid $500 for their
personal attendance at any meeting of the Board and $100 for attendance at any
telephonic meeting of the Board or at any meeting of a committee of the Board.
Directors also are reimbursed for their reasonable travel expenses incurred in
attending Board or committee meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Max Toghraie to
serve as Chief Executive Officer. The agreement is for an initial term of five
years commencing July 1, 1997 and will automatically be extended for consecutive
periods of one year unless the Company elects to terminate the agreement. Mr.
Toghraie is entitled to an annual base salary of $192,000 and has been issued
options to to purchase 126,046 shares of the Company's Common Stock at $2.70 per
share pursuant to the Company's Stock Option Plan. The Company will also provide
Mr. Toghraie with other customary benefits, including health, life and
disability insurance, an automobile allowance and reimbursement for ordinary
business expenses. If Mr. Toghraie's employment is terminated "without cause,"
all of his options immediately vest, and he will be entitled to receive a
payment equal to the then effective base salary for the lesser of the remainder
of the term of the agreement, and 24 months.
The Company has entered into an employment agreement with James Ung to serve
as President. The agreement is for an initial term of five years commencing July
1, 1997 and will automatically be extended for consecutive periods of one year
unless the Company elects to terminate the agreement. Mr. Ung's base salary from
July 1, 1997 until September 30, 1997 was $144,000 per annum, and effective
September 30, 1997 increased to $192,000. Mr. Ung has been issued options to
purchase 98,645 shares of the Company's Common Stock at $2.70 per share pursuant
to the Company's Stock Option Plan. The Company will also provide Mr. Ung
customary benefits, including health, life and disability insurance, an
automobile allowance and reimbursement for ordinary business expenses. If Mr.
Ung's employment is terminated "without cause" he will be entitled to receive a
payment equal to the then effective base salary for the lesser of the remainder
of the term of the agreement and six (6) months.
The Company has entered into an employment agreement with Mei Yang to serve
as Secretary and Treasurer. The agreement is for an initial term of five years
commencing July 1, 1997 and will automatically be extended for consecutive
periods of one year unless the Company elects to terminate the agreement. Ms.
Yang's base salary from June 1, 1997 until September 30, 1997 was $40,000 per
annum, and, effective September 30, 1997 increased to $72,000. Ms. Yang has been
issued options to purchase 27,404 shares of the Company's Common Stock at $2.70
per share pursuant to the Company's Stock Option Plan. The Company will also
provide Ms. Yang customary benefits, including health, life and disability
insurance, an automobile allowance and reimbursement for ordinary business
expenses.
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STOCK OPTION PLAN
The Company adopted the 1997 Stock Option Plan (the "Stock Option Plan") in
July 1997. Each officer, other employee, director or consultant of the Company
or any of its future subsidiaries is eligible to be considered for the grant of
awards under the Stock Option Plan. A maximum of 500,000 shares of Common Stock
may be issued pursuant to awards granted under the Stock Option Plan, subject to
certain adjustments to prevent dilution. Any shares of Common Stock subject to
an award which for any reason expires or terminates unexercised are again
available for issuance under the Stock Option Plan. The Stock Option Plan
terminates in 2007 and no option may be granted under the Stock Option Plan
after July 1, 2007, although options previously granted may be thereafter
amended consistent with the Stock Option Plan.
ADMINISTRATION. The Stock Option Plan will be administered by the Company's
Board of Directors or by a committee whose members serve at the pleasure of the
Board. The Board intends to appoint the Company's Compensation Committee to
administer the Plan after the Offering. Subject to the provisions of the Stock
Option Plan, the Board has full and final authority to select to whom awards
will be granted, to grant the awards and to determine the terms and conditions
of the awards and the number of shares to be issued pursuant thereto.
The Stock Option Plan authorizes the Board to enter into any type of
arrangement with an eligible award and recipient that, by its terms, involves or
might involve the issuance of (i) shares of Common Stock, (ii) an option,
warrant, convertible security, stock appreciation right or similar right with an
exercise or conversion privilege at a price related to the Common Stock, or
(iii) any similar security or benefit with a value derived from the value of the
Common Stock. No person may receive awards representing more than 40% of the
number of shares of Common Stock covered by the Stock Option Plan (i.e., 200,000
shares).
EXERCISE AND PAYMENT. The Board shall determine the extent to which awards
shall be payable in cash, shares of Common Stock or any combination thereof. The
exercise price of future options will be at least 85% of the fair market value
of the Common Stock on the date of grant.
AWARDS. Stock awards under the Stock Option Plan are not restricted to any
specified form or structure and may include arrangements such as sales, bonuses
and other transfers of stock, restricted stock, stock options, reload stock
options, stock purchase warrants, other rights to acquire stock or securities
convertible into or redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares. An award
may consist of one such arrangement or two or more such arrangements in tandem
or in the alternative. An award may provide for the issuance of Common Stock for
any lawful consideration, including cash payment, services rendered, or the
cancellation of indebtedness.
The Board may amend or terminate the Stock Option Plan at any time and in
any manner, subject to the following: (i) no recipient of any award may, without
his or her consent, be deprived of the award or of any of his or her rights
under or relating to the award as a result of the amendment or termination; and
(ii) if any rule or regulation promulgated by the Securities and Exchange
Commission (the "Commission"), the Internal Revenue Service, other applicable
law, or any national securities exchange or quotation system upon which any of
the Company's securities are listed requires that the amendment be approved by
the Company's shareholders, then the amendment will not be effective until it
has been approved by the Company's shareholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation, as amended, (the "Articles")
include a provision that eliminates the personal liability of its directors to
the Company and its shareholders for monetary damages to the fullest extent
permissible under California law. This limitation has no effect on a director's
liability
39
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(i) for acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law, (ii) for acts or omissions that a director believes
to be contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derives an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of a serious injury to the Company or its shareholders, (v)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, (vi) under Section 310 of the California Corporations Code (the
"California Code") (concerning contracts or transactions between the Company and
a director) or (vii) under Section 316 of the California Code (concerning
directors' liability for improper dividends, loans and guarantees). The
provision does not extend to acts or omissions of a director in his capacity as
an officer. Further, the provision will not affect the availability of
injunctions and other equitable remedies available to the Company's shareholders
for any violation of a director's fiduciary duty to the Company or its
shareholders.
The Company's Articles also include an authorization for the Company to
indemnify its agents (as defined in Section 317 of the California Code), through
bylaw provisions, by agreement or otherwise, to the fullest extent permitted by
law. Pursuant to this provision, the Company's Bylaws, as amended, provide for
indemnification of the Company's directors, officers, employees and other
agents. In addition, the Company, at its discretion, may indemnify persons whom
the Company is not obligated to indemnify. The Bylaws also allow the Company to
enter into indemnity agreements with individual directors, officers, employees
and other agents. The Company has entered into indemnification agreements
designed to provide the maximum indemnification permitted by law with all the
directors and executive officers of the Company. These agreements, together with
the Company's Bylaws and Articles, may require the Company, among other things,
to indemnify these directors and executive officers against certain liabilities
that may arise by reason of their status or service as directors or executive
officers (other than liabilities resulting from willful misconduct of a culpable
nature), to advance expenses to them as they are incurred, provided that they
undertake to repay the amount advanced if it is ultimately determined by a court
that they are not entitled to indemnification, and to obtain directors' and
officers' insurance if available on reasonable terms. The Company intends to
purchase and maintain directors' and officers' liability insurance.
Section 317 of the California Code, the Company's Bylaws and the Company's
indemnification agreements with its directors and executive officers make
provision for the indemnification of officers, directors and other corporate
agents in terms sufficiently broad to indemnify those persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
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CERTAIN TRANSACTIONS
Until March 9, 1998 David Tobey, a director of the Company, was the founder,
and the President, Chief Executive Officer and a principal stockholder of CASI.
CASI is a subsidiary of Datatec Systems, Inc. ("Datatec"), formerly known as
Glasgal Communications, Inc. On March 9, 1998, Mr. Tobey resigned all positions
with CASI and Datatec and sold his entire equity interest in CASI to Datatec.
Although the Company believes that Mr. Tobey's departure from CASI and Datatec
will have no adverse effect on the Company's relationship with CASI and Datatec,
there can be no assurance that Mr. Tobey's resignation will not adversely effect
the Company's working relationship with CASI and Datatec. During his employment
at CASI and Datatec during which Mr. Tobey was a principal stockholder of CASI,
the Company and CASI entered into (i) a license agreement (the "CASI License")
pursuant to which the Company received a worldwide, perpetual, royalty-free,
nonexclusive (except as to the countries comprising South America (excluding
Central America) and Malaysia where the license is exclusive for a term of five
years) and non-transferable license to reproduce and use CASI's IWPS software
including CASI's Configurator and router software products, and (ii) a reseller
agreement (the "Reseller Agreement") pursuant to which the Company may market,
distribute and support CASI's products throughout the world. The Company paid
CASI a one-time license fee of $1,100,000. The license fee was paid (i) by
delivering to CASI a non-interest bearing promissory note in the principal
amount of $950,000 (the "CASI Note"), and (ii) a cash payment of $150,000 funded
by a loan to the Company in such amount by an officer of Datatec (the "Datatec
Loan") described below. In connection with its license of the Configurator
software from CASI, the Company issued to CASI a contingent warrant (the "CASI
Warrant") exercisable if the Company defaults on payment of the $950,000
principal amount due under the CASI Note. Under the CASI Note, CASI's sole
remedy for a payment default is to apply any amount then due and unpaid under
the CASI Note to the purchase of the Company's Common Stock at a price of $4.50
per share. The CASI Note bears default interest at a rate of 5% per annum. The
exercise price of the CASI Warrant was determined by negotiation between the
Company and CASI and should not be construed to be predictive of or to imply
that any price increases in the Company's securities will occur. The CASI
Warrant does not confer upon the Warrant holder any voting or other rights of a
shareholder of the Company. The Company will fully repay the Datatec Loan and
the CASI Note, out of the proceeds of this Offering. Upon delivery to CASI of
the CASI Note, the CASI License was fully paid and the Company has no further
license fee obligations. Under the CASI License, the Company is entitled to
receive maintenance for the Configurator software for a fee of $25,000 per
annum, payable in equal quarterly installments. Maintenance is limited to
debugging and delivery to the Company of any enhancements or upgrades to the
Configurator software used internally by CASI or released by CASI to its
customer base. The Company is also entitled to request that CASI provide
enhancements and additional features on CASI's licensed Configurator system
specified by the Company. CASI may develop such enhancements and features at
CASI's expense and incorporate them as part of CASI's generally released
Configurator software, or, if CASI declines to develop the enhancements and
features at its own expense, the Company is able to require CASI to perform such
development services at preferential rates and any resulting work product of
CASI will be owned by the Company. If CASI ceases to provide support or
enhancements or otherwise fails to perform its obligations to the Company, the
Company's remedies include access to CASI's source code for the Configurator
software. The Company's license to the Configurator software includes a license
to modify and maintain the source code from and after such time, if any, as the
Company receives access to the Configurator software source code. See "Risk
Factors--Conflicts of Interests."
In connection with the Datatec Loan, the Company executed a promissory note
(the "Datatec Note") in favor of the officer of Datatec who made the Datatec
Loan. The Datatec Note provides that the Company is obligated to pay $50,000 on
November 31, 1997 and $100,000 on February 28, 1998; provided, however, that if
the Company consummates an initial public offering (an "IPO") of its securities
pursuant to a registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, $100,000 of the proceeds of such
IPO shall be immediately applied to prepayment of the $100,000 due to be paid on
February 28, 1998. The Datatec Note bears interest at a rate of 10% per annum,
and
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accrued interest is due with the payments indicated above. In the event that the
Company completes an IPO prior to February 28, 1998 and fails to pay the Datatec
Note in full by that date, or, the Datatec Note is not paid in full on or prior
to February 28, 1998, in any event, the Datatec Note shall be converted into
such number of shares of Common Stock of the Company as shall equal the
principal amount then outstanding plus accrued interest divided by a fraction,
the numerator of which shall equal the greater of $20,000,000 or the fair market
value of the Company, and the denominator of which shall be the number of shares
of Common Stock of the Company outstanding immediately prior to such conversion.
Under the Reseller Agreement, the Company has an exclusive right for a
period of five years to resell CASI's licensed software in South America
(excluding Central America) and Malaysia and a non-exclusive worldwide right (i)
to market, distribute, license and support the CASI's Configurator software in
object-code form, and (ii) to use CASI's Configurator software to provide
services to the Company's customers and sublicensees. CASI has agreed that it
will not enter into any agreement with a third party which provides for the
right to license or resell the CASI's Configurator software products in the
countries comprising Asia, the Pacific Rim, Japan or Australia without allowing
the Company a first right of refusal to create an agreement with such third
party as a distributor and/or sub-licensee and/or first offering the Company the
right to license or resell on terms and conditions, including price, equivalent
to those contained in the proposed third party agreement. CASI has retained the
right to use its software in Malaysia and South America only for CASI's own
configuration centers.
The Company loaned approximately $40,000 aggregate principal amount to Mr.
Max Toghraie, the Chief Executive Officer of the Company and a director, in
exchange for a promissory note dated February 12, 1997, at a rate of 5.7% per
annum. The loan was fully repaid on June 16, 1997.
During fiscal 1997, the Company had sales of approximately $532,800 to and
purchases of approximately $804,300 from Samax, a company owned by the mother of
Mr. Max Toghraie. For the nine month period ended December 31, 1997, the Company
had sales of approximately $1.39 million to and purchases of approximately
$598,200 from Samax. At December 31, 1997, the Company had approximately
$146,500 and $0 included in trade receivables and accounts payable,
respectively, attributed to Samax. Although the Company is not currently making
purchases from or sales to Samax, if the Company determines that resuming
purchases from or sales to Samax in the future would be in the best interests of
the Company, any such future transactions would be negotiated on an arms-length
basis and on terms and conditions at least as favorable to the Company as those
which would be obtained from competitors of Samax.
The Company purchased 200,000 shares and 100,000 warrants in Evolutions,
Inc. ("Evolutions") for $100,000 which, at March 31, 1997, was personally
guaranteed by Max Toghraie. This guarantee was recorded as a receivable from a
director, Max Toghraie. Subsequent to June 13, 1997, the Board of Directors and
shareholders voted to release Max Toghraie from this guarantee as partial
inducement for Max Toghraie to accept additional management responsibilities at
the Company, including agreeing to become the chief executive officer. The
Company has determined, due to significant cash flow difficulties encountered by
Evolutions, that its investment is worthless. Accordingly, the Company has
recognized a one-time loss of $100,000 during the first quarter of 1997 which is
included in selling, general and administrative expenses.
In June 1997, Mr. James Ung and Ms. Mei Yang signed individual guarantees of
the Company's Finova Line.
On December 3, 1997, the Company executed a lease for approximately 21,900
square feet of office and warehouse space in the City of Industry, California.
The lease term is three years, and the base rent is $11,169 per month. On
December 3, 1997, James Ung and Mei Yang signed an individual guarantee (the
"Guarantee") of the Company's obligations under the lease, which Guarantee shall
terminate upon the earlier occurrence of (i) the date upon which the Company's
net worth exceeds 50% of the Company's net worth on the date of the Guarantee or
(ii) the date the Company becomes a public company.
42
<PAGE>
The Company believes that, with the exception of the determination to
release Mr. Toghraie from his guarantee, the transactions described above were
on terms no less favorable to the Company than could have been obtained in arm's
length transactions from unaffiliated third parties. All future transactions
between the Company and its officers, directors and 5% (or greater) shareholders
will be on terms no less favorable than could be obtained from unaffiliated
third parties and will be approved by a majority of the disinterested directors.
43
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of February 1, 1998, certain information
concerning the beneficial ownership of Common Stock, by (i) each stockholder
known by the Company to own beneficially five percent or more of the outstanding
Common Stock, (ii) each director, (iii) each executive officer named in this
Prospectus (a "Named Executive Officer"), and (iv) all executive officers and
directors of the Company as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
-----------------------------------
PERCENT OF TOTAL
------------------------
NAME AND ADDRESS OF DIRECTORS, NAMED BEFORE AFTER
EXECUTIVE OFFICERS AND 5% SHAREHOLDERS NUMBER OFFERING OFFERING
- ---------------------------------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Max Toghraie(2) .................................................................. 49,237 1.03% *
2062 Sapra St.
Thousand Oaks, CA 91362
James Ung and Mei Yang(3) ........................................................ 2,241,355 46.70% 31.57%
2010 E. Roundtree Court
Walnut, CA 91789
Nancy Hundt(4) ................................................................... 2,194,152 46.17% 31.11%
450 Belcaro
Agoura, CA 91301
Carl Wood(5) ..................................................................... 0 * *
1105 Harkness Lane
Redondo Beach, CA 90278
Philip Alford(6) ................................................................. 0 * *
746 West Adams Blvd Suite 109
Los Angeles, CA 90089
David Tobey(7) ................................................................... 5,994 * *
1545 Shadowtree Ct.
Colorado Springs, CO 80921
All Executive Officers and Directors as a group (7 persons)(8).................... 4,490,738 94.27% 62.75%
</TABLE>
- --------------------------
* less than one (1) percent.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 of
the Securities Exchange Act of 1934, as amended. Generally, a person is
deemed to be the beneficial owner of a security if he has the right to
acquire voting or investment power within 60 days. Except as otherwise
noted, each individual or entity has sole voting and investment power over
the securities listed.
(2) Shares issuable upon the exercise of options granted under the Stock Option
Plan on July 1, 1997 exercisable at $2.70 per share within 60 days of
February 1, 1998.
(3) Mr. Ung and Ms. Yang are married. Includes 38,533 shares issuable upon the
exercise of options granted under the Stock Option Plan to Mr. Ung on July
1, 1997 exercisable at $2.70 per share within 60 days of February 1, 1998,
and 10,704 shares issuable upon the exercise of options granted under the
Stock Option Plan to Ms. Yang on July 1, 1997 exercisable at $2.70 per share
within 60 days of February 1, 1998, 1,096,059 shares owned by Mr. Ung, and
1,096,059 shares owned by Ms. Yang.
(4) Includes 2,034 shares issuable upon the exercise of options granted under
the Stock Option Plan on July 1, 1997 exercisable at $2.70 per share within
60 days of February 1, 1998.
(5) Mr. Wood was granted options to purchase 40,000 shares of Common Stock under
the Stock Option Plan on February 6, 1998, exercisable at $4.50 per share,
none of which were exercisable within 60 days of February 1, 1998.
(6) Mr. Alford was granted options to purchase 36,000 shares under the Stock
Option Plan on February 2, 1998, exercisable at $4.50 per share, none of
which were exercisable within 60 days of February 1, 1998.
(7) Shares issuable upon the exercise of options granted under the Stock Option
Plan on July 1, 1997 exercisable at $2.70 per share within 60 days of
February 1, 1998.
(8) Includes an aggregate of 106,502 shares issuable upon the exercise of
options granted under the Stock Option Plan on July 1, 1997 exercisable at
$2.70 per share within 60 days of February 1, 1998.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock,
without par value, and 2,000,000 shares of Preferred Stock, without par value.
At February 2, 1998, the Company had 27 holders of record of the Common Stock.
The following statements are brief summaries of certain provisions relating to
the Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters on which the holders of Common Stock are entitled to vote
and have cumulative voting rights for the election of directors. The Articles of
Incorporation of the Company provide that at such time as the Company has (i)
shares listed on the New York Stock Exchange or the American Stock Exchange, or
(ii) securities designated for trading as a national market security on the
National Association of Securities Dealers Automatic Quotation System (or any
successor national market system) if the Company has at least 800 or more
holders of its Common Stock as of the record date of the Company's most recent
annual meeting of shareholders, the cumulative voting rights of shareholders
will cease. The holders of Common Stock are entitled to receive dividends
ratably when, as and if declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled, subject to the rights of
holders of Preferred Stock issued by the Company, if any, to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision is made for each class of stock, if any, having
preference over the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are, and the shares of Common Stock issuable
pursuant to this Prospectus will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and
unissued Preferred Stock in one or more series with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without shareholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a way of
discouraging, delaying or preventing an acquisition or change in control of the
Company. The Company does not currently intend to issue any shares of its
Preferred Stock.
BRIDGE WARRANTS
On December 23, 1997, the Company completed the Bridge Financing, which
included the sale of an aggregate of 100,000 Bridge Warrants for the purchase of
one share of Common Stock per warrant at an exercise price of $3.00 per share.
The Bridge Warrants provide for adjustment of the exercise price and for a
change in the number of shares issuable upon exercise to protect holders against
dilution in the event of a stock dividend, stock split, combination or
reclassification of the Common Stock. The exercise price of the Bridge Warrants
was arbitrarily determined by the Company and the purchasers thereof and should
not be construed to be predictive of or to imply that any price increases in the
Company's securities will occur. The Bridge Warrants do not confer upon the
Bridge Warrant holder any voting or other rights of a shareholder of the
Company. See "Risk Factors--Repayment of Indebtedness" and "--Potential Benefit
to Certain Investors."
45
<PAGE>
REGISTRATION RIGHTS
The 300,000 shares of Common Stock issued in the Bridge Financing and the
100,000 shares of Common Stock issuable upon exercise of the Bridge Warrants are
entitled to demand registration rights on one occasion, at the expense of the
Company, as well as "piggyback" registration rights with respect to any
registration of equity securities of the Company for a period of five (5) years,
commencing November 26, 1998 (unless the Company files a Form S-8, S-4 or
comparable registration statement).
TRANSFER AGENT AND REGISTRATION
Continental Stock Transfer and Trust Company, New York, New York, is the
transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering the Company will have outstanding 7,050,000
shares of Common Stock (7,395,000 if the Underwriters' over allotment option is
exercised in full) not including shares issuable upon exercise of outstanding
options and warrants. Of such shares 4,750,000 are subject to the resale
limitations contained in Rule 144 promulgated under the Securities Act. In
general, under Rule 144, as currently in effect, a person (or persons whose
shares are aggregated), with respect to restricted securities that satisfy a
one-year holding period, may sell within any three-month period a number of
restricted shares which does not exceed the greater of 1% of the then
outstanding shares of such class of securities or the average weekly trading
volume during the four calendar weeks prior to such sale. Sales under Rule 144
are also subject to certain requirements as to the manner of sale, notice and
the availability of current public information about the Company. Rule 144 also
permits, under certain circumstances, a person who is not an affiliate of the
Company, to sell restricted securities that satisfy a two-year holding period,
without regard to the volume or other resale limitations. The above is a brief
summary of Rule 144 and is not intended to be a complete description of the
Rule.
The "restricted" shares of Common Stock may in the future be eligible for
sale pursuant to Rule 144. Under lock-up agreements with Joseph Stevens, each
existing shareholder has agreed that he or it will not, directly or indirectly,
sell, assign or otherwise transfer any shares of Common Stock owned by it for a
period of (a) in the case of management and founding shareholders of the Company
who collectively hold 4,450,000 shares of Common Stock, a period of 18 months
after the effective date of the Registration Statement of which this Prospectus
is a part (the "Management Lock-Up Period") except with the Joseph Stevens'
prior written consent, and (b) in the case of the holders of 300,000 shares of
Common Stock issued in the Company's Bridge Financing, a period of 12 months
after the effective date of the Registration Statement of which this Prospectus
is a part, and thereafter for an additional six (6) months, without the written
consent of Joseph Stevens (the "Bridge Holder Lock-Up Period"); provided,
however, that (i) the Management Lock-Up Period shall immediately terminate if
the Common Stock is quoted on The Nasdaq SmallCap Market or The Nasdaq National
Market and the average closing bid price of the Common Stock equals or exceeds
$10.00 per share (subject to customary adjustments for stock splits,
combinations, consolidations and similar transactions) for any 30 consecutive
calendar days, and (ii) that, for twenty-four (24) months following the
effective date of the Registration Statement any sales of the Company's
securities subject to the lock-up agreements shall be made through Joseph
Stevens in accordance with its customary brokerage practices either on a
principal or agency basis. Once the lock-up agreements expire, all of the
4,750,000 shares of Common Stock will become eligible for immediate sale,
subject to compliance with the volume limitations of Rule 144 by the holders of
these shares.
46
<PAGE>
UNDERWRITING
Joseph Stevens & Company, Inc. and Royce Investment Group, Inc. (the
"Underwriters") have entered into an Underwriting Agreement with the Company
pursuant to which, and subject to the terms and conditions thereof, they have
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriters, on a firm commitment basis, the number of shares of Common Stock
set forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Joseph Stevens & Company, Inc........................................................
Royce Investment Group, Inc..........................................................
</TABLE>
The Company has been advised by the Underwriters that the Underwriters
initially propose to offer the Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and that the Underwriters
may allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") concessions not in excess of $ per
share of Common Stock, of which amount a sum not in excess of $ per share
of Common Stock may in turn be reallowed by such dealers to other dealers. After
the initial distribution of the shares of Common Stock offered hereby has been
completed, the public offering price, concessions and reallowances may be
changed by the Underwriters. The Underwriters have informed the Company that
they do not expect sales to discretionary accounts by the Underwriters to exceed
five percent of the securities offered by the Company hereby.
The Company has granted to Underwriters an option, exercisable within 45
days of the date of this Prospectus, to purchase from the Company at the
offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 345,000 shares of Common Stock on the
same terms and conditions of this Offering for the sole purpose of covering
over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Underwriters a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds derived from the sale of the Common
Stock underwritten, $30,000 of which has been paid to date.
In connection with this offering, the Underwriters and certain selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with this Offering than
it is committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of this Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 345,000 shares of Common Stock, by
exercising the Over-Allotment Option. In addition, the Underwriters may impose
"penalty bids" under contractual arrangements whereby it may reclaim from a
dealer participating in this Offering for the account of the Underwriters, the
selling concession with respect to shares of Common Stock that are distributed
in this Offering but subsequently purchased for the account of the Underwriters
in the open market. Any of the transactions described in this paragraph may
result in the maintenance of the prices of the Common Stock at levels above that
which might otherwise prevail in the open market. None of the transactions
described in the paragraph is required, and if they are undertaken, they may be
discontinued at any time.
Each officer and director of the Company and all of the holders of the
issued and outstanding shares of Common Stock, other than the investors in the
Bridge Financing, have agreed (i) not to directly or indirectly, issue, offer to
sell, sell, grant an option for the sale of transfer, pledge, assign,
hypothecate, or otherwise encumber or dispose of (collectively, "Transfer"), any
securities issued by the Company, including shares of Common Stock or securities
convertible into or exchangeable or exercisable for or
47
<PAGE>
evidencing any right to purchase or subscribe for any shares of Common Stock for
a period of eighteen (18) months from the effective date of the Registration
Statement (the Lock-Up Period), without the prior written consent of Joseph
Stevens provided, however, that the Lock-Up Period shall immediately terminate
if the Common Stock is quoted on The Nasdaq SmallCap Market or The Nasdaq
National Market and the average closing bid price of the Common Stock equals or
exceeds $10.00 per share (subject to customary adjustments for stocksplits,
combinations, consolidations and similar transactions) for any 30 consecutive
calendar days, and (ii) that, for twenty-four (24) months following the
effective date of the Registration Statement any sales of the Company's
securities shall be made through Joseph Stevens in accordance with its customary
brokerage practices either on a principal or agency basis. An appropriate legend
shall be marked on the face of certificates representing all such securities.
Each purchaser in the Bridge Financing has agreed (i) not to Transfer any
securities purchased by the investor in the Bridge Financing for a period of
twelve (12) months from the effective date of the Registration Statement and
thereafter for an additional period of six (6) months, without the consent of
Joseph Stevens, and (ii) that, for a period of twenty-four (24) months following
the effective date of the Registration Statement, any sales of the securities
purchased in the Bridge Financing shall be made through Joseph Stevens in
accordance with its customary brokerage practices either on a principal or
agency basis. An appropriate legend shall be marked on the face of the
certificates representing all such securities.
In connection with this Offering, the company has agreed to issue and sell
to the Underwriters and/or its designees, at the closing of the proposed
underwriting, for $23.00, five (5) year Underwriters' Warrants (the
"Underwriters' Warrants") to purchase 230,000 shares of Common Stock. The
Underwriters' Warrants are exercisable at any time during a period of four (4)
years commencing twelve months after the effective date of the Registration
Statement at a price equal to 165% of the public offering price per share and
are restricted from sale, transfer, assignment or hypothecation for a period of
twelve months from the date hereof, except to officers of the Underwriters. The
shares of Common Stock issuable upon exercise of the Underwriters' Warrants are
identical to those offered to the public. The Underwriters' Warrants contain
anti-dilution provisions providing for adjustment of the number of warrants and
exercise price under certain circumstances. The Underwriters' Warrants grant to
the holders thereof and to the holders of the underlying securities certain
rights of registration of the securities underlying the Underwriters' Warrants.
In connection with the Bridge Financing, the Company paid to the Joseph
Stevens, as placement agent, $100,000 in cash as commissions and a
non-accountable expense allowance of $30,000. The Company also paid certain
expenses of the placement agent including the placement agent's legal counsel
fees and issued to the placement agent warrants (the "Placement Agent's
Warrants") to purchase 35,000 shares of Common Stock at an exercise price of
$3.00 per share commencing November 26, 1998. The Placement Agent's Warrants
were canceled on March 6, 1998 .
The Company has also agreed that for five (5) years from the effective date
of the Registration Statement, Joseph Stevens may designate one person for
election to the Company's Board of Directors (the "Designation Right"). In the
event that Joseph Stevens elects not to exercise it Designation Right, then it
may designate one person to attend all meetings of the Company's Board of
Directors for a period of five (5) years. The Company has agreed to reimburse
Joseph Stevens designee for all out-of-pocket expenses incurred in connection
with the designee's attendance at meetings, of the Board of Directors. The
Company has also agreed to retain Jospeh Stevens as the Company's financial
consultant for a period of twenty-four (24) months from the date hereof and to
pay Joseph Stevens a monthly retainer of $2,000 all of which is payable in
advance on the closing date set forth in the Underwriting Agreement.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price of the Common Stock was
determined by negotiation between the Company and the Underwriters. Among the
factors considered in determining such price, in addition to the prevailing
market conditions, included the history of and the prospects for the industry in
which the Company
48
<PAGE>
competes, the market price of the Common Stock, an assessment of the Company's
management, the prospects of the Company, its capital structure and such other
factors that were deemed relevant. The offering price does not necessarily bear
any relationship to the assets, results of operations or net worth of the
Company.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each agreement which are filed as exhibits to the Registration Statement. See
"Additional Information."
LEGAL MATTERS
Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California, have rendered an opinion to the effect that the Common Stock offered
by the Company upon sale will be duly and validly issued, fully paid and
non-assessable. Troop Meisinger Steuber & Pasich, LLP holds warrants to purchase
45,000 shares of Common Stock of the Company. Orrick, Herrington & Sutcliffe
LLP, New York, has acted as counsel to the Underwriters in connection with
certain legal matters relating to this Offering.
EXPERTS
The financial statements of the Company at March 31, 1997 and for the year
then ended, included in this Prospectus and Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto and are included herein in reliance upon
authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement under the Securities Act for the
shares offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits included
with the Registration Statement. Statements contained in this Prospectus as to
the contents of any contract or any other document referred to are not
necessarily complete, and with respect to any contract or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
is qualified in its entirety by this reference. For further information about
the Company and the shares offered by this Prospectus, reference is hereby made
to the Registration Statement and exhibits included with the Registration
Statement. A copy of the Registration Statement, including exhibits, may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N .W. Washington, D.C. 20549, upon payment of
certain prescribed rates.
Upon consummation of the Offering, the Company will become subject to the
information requirements of the Exchange Act and, in accordance therewith, will
file reports and other information with the Securities, and Exchange Commission
in accordance with its rules. These reports and other information concerning the
Company may be inspected and copied at the public reference facilities referred
to above as well as certain regional offices of the Securities and Exchange
Commission located at Seven World Trade Center, 13th Floor, New York, New York,
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661-2511.
The Securities and Exchange Commission also maintains a Web Site which
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission (such as the Company) at http:\\www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by its independent auditors and quarterly reports
containing unaudited consolidated financial statements for each of the first
three quarters of each fiscal year.
49
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of March 31, 1997 and December 31, 1997 (unaudited)...................................... F-3
Statements of operations for the period from April 2, 1996 (inception) to March 31, 1997 and the nine month
periods ended December 31, 1996 and 1997 (unaudited)..................................................... F-4
Statements of Changes in Shareholders' equity for the period from April 2, 1996 (inception) to March 31,
1997 and the nine month period ended December 31, 1997 (unaudited)....................................... F-5
Statements of Cash Flows for the period from April 2, 1996 (inception) to March 31, 1997 and the nine month
periods ended December 31, 1996 and 1997 (unaudited)..................................................... F-6
Notes to the Financial Statements.......................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cumetrix Data Systems Corp.:
We have audited the accompanying balance sheet of Cumetrix Data Systems
Corp. (a California corporation--formerly Data Net International, Inc.) as of
March 31, 1997, and the related statements of operations, shareholders' equity
and cash flows for the period from April 2, 1996 (inception) to March 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 Cumetrix Data Systems Corp.
as of March 31, 1997 and the results of its operations and its cash flows for
the period from April 2, 1996 (inception) to March 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 13, 1997
F-2
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
MARCH 31, -------------
ASSETS 1997
----------- (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................................ $ 479,796 $ 2,962,821
Trade receivables, net of allowance for doubtful accounts of $2,000 at March 31,
1997 and $39,800 at December 31, 1997............................................. 853,090 3,081,217
Receivables from related party...................................................... 39,700 --
Inventories......................................................................... 331,559 2,723,275
Deferred taxes...................................................................... 12,000 53,788
Prepaid expenses.................................................................... 5,318 24,148
----------- -------------
Total current assets............................................................ 1,721,463 8,845,249
----------- -------------
FIXED ASSETS, net 32,278 38,115
----------- -------------
OTHER ASSETS:
Capitalized purchased software costs................................................ -- 1,100,000
Receivable from director............................................................ 100,000 --
Other............................................................................... 1,500 288,850
----------- -------------
Total Assets.................................................................... $ 1,855,241 $10,272,214
----------- -------------
----------- -------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................... $1,455,139 $6,713,957
Accrued expenses................................................... 87,274 279,924
Income taxes payable............................................... 21,500 415,213
Current portion of long-term debt.................................. 3,390 1,203,626
--------- -----------
Total current liabilities...................................... 1,567,303 8,612,720
--------- -----------
LONG-TERM DEBT, net of current portion............................... 12,574 9,822
--------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: Authorized, 2,000,000 shares
Issued and outstanding, none..................................... -- --
Common stock, no par value: Authorized, 20,000,000 shares
Issued and outstanding, 4,384,236 at March 31, 1997 and 4,750,000
at December 31, 1997............................................. 250,000 999,200
Retained earnings.................................................. 25,364 650,472
--------- -----------
Total shareholders' equity..................................... 275,364 1,649,672
--------- -----------
Total liabilities and shareholders' equity..................... $1,855,241 1$0,272,214
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD NINE MONTH PERIODS ENDED
FROM APRIL 2, DECEMBER 31,
1996 (INCEPTION) ----------------------------
TO MARCH 31, 1997 1996 1997
----------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES....................................................... $ 25,940,203 $ 17,175,071 $ 49,267,491
COST OF PRODUCTS................................................ 25,139,001 16,604,294 47,192,956
----------------- ------------- -------------
Gross profit................................................ 801,202 570,777 2,074,535
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................... 751,133 501,923 1,029,504
----------------- ------------- -------------
Income from operations...................................... 50,069 68,854 1,045,031
INTEREST EXPENSE................................................ 9,334 4,500 13,908
OTHER INCOME (EXPENSE), net..................................... (5,871) 10 10,723
----------------- ------------- -------------
Income before provision for income taxes.................... 34,864 64,364 1,041,846
PROVISION FOR INCOME TAXES...................................... 9,500 25,745 416,738
----------------- ------------- -------------
NET INCOME...................................................... $ 25,364 $ 38,619 $ 625,108
----------------- ------------- -------------
----------------- ------------- -------------
BASIC AND DILUTED EARNINGS PER SHARE............................ $ 0.01 $ 0.01 $ 0.14
----------------- ------------- -------------
----------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, April 2, 1996 (inception)............................ -- $ -- $ -- $ --
Sale of common stock........................................ 4,384,236 250,000 -- 250,000
Net income.................................................. -- -- 25,364 25,364
---------- ---------- ---------- ------------
Balance, March 31, 1997....................................... 4,384,236 250,000 25,364 275,364
Sale of common stock, net of offering expenses of $150,800
(unaudited)............................................... 365,764 745,500 -- 745,500
Issuance of warrants in connection with Private Placement,
net of offering expenses of $1,300........................ -- 3,700 -- 3,700
Net income (unaudited)...................................... -- -- 625,108 625,108
---------- ---------- ---------- ------------
Balance, December 31, 1997 (unaudited)........................ 4,750,000 $ 999,200 $ 650,472 $ 1,649,672
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD NINE-MONTH PERIODS ENDED
FROM APRIL 2, DECEMBER 31,
1996 (INCEPTION) ---------------------------
TO MARCH 31, 1997 1996 1997
----------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 25,364 $ 38,619 $ 625,108
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 6,634 5,528 2,847
Amortization of deferred financing costs.................. -- -- 12,100
Provision for doubtful accounts........................... 50,329 17,000 56,310
Loss on receivable from director.......................... -- -- 100,000
Changes in assets and liabilities:
Trade receivables......................................... (903,419) (790,284) (2,284,437)
Inventories............................................... (331,559) (313,700) (2,391,716)
Deferred taxes............................................ (12,000) (10,000) (41,788)
Prepaid expenses.......................................... (5,318) (5,318) (18,830)
Other..................................................... (1,500) (60,000) (129,250)
Accounts payable.......................................... 1,455,139 1,313,967 5,258,818
Accrued expenses.......................................... 87,274 31,647 22,450
Income taxes payable...................................... 21,500 35,745 393,713
----------------- ------------ -------------
Net cash provided by operating activities............... 392,444 263,204 1,605,325
----------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets....................................... (38,912) (36,192) (8,684)
Purchase of investment guaranteed by director................... (100,000) (100,000) --
Receivables from related parties................................ (39,700) -- 39,700
Purchase of Capitalized Software Costs.......................... -- -- (150,000)
----------------- ------------ -------------
Net cash used in investing activities................... (178,612) (136,192) (118,984)
----------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings................................... 18,820 18,820 --
Payments on bank borrowings..................................... (2,856) (2,055) (2,516)
Proceeds from Notes............................................. -- -- 550,000
Payments on Notes............................................... -- -- (300,000)
Proceeds from stock issuance.................................... 250,000 200,000 749,200
----------------- ------------ -------------
Net cash provided by financing activities............... 265,964 216,765 996,684
----------------- ------------ -------------
NET INCREASE IN CASH.............................................. 479,796 343,777 2,483,025
CASH, beginning of period......................................... -- -- 479,796
----------------- ------------ -------------
CASH, end of period............................................... $ 479,796 $ 343,777 $ 2,962,821
----------------- ------------ -------------
----------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(INFORMATION AS OF DECEMBER 31, 1997 AND 1996 IS UNAUDITED)
1. LINE OF BUSINESS
Cumetrix Data Systems Corp., formerly Data Net International, Inc. (the
Company) was incorporated on April 2, 1996 in the state of California. The
Company distributes computer peripherals, components, accessories and assembles
computer systems. The Company currently sells a majority of its products to
distributors, systems integrators, and retail stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS
a. CASH
Cash includes currency on hand and deposit accounts to which funds may be
deposited or withdrawn at any time without prior notice or penalty. At times,
cash balances in the Company's accounts may exceed federally insured limits.
b. TRADE RECEIVABLES
Trade receivables represent unsecured balances due from its customers with
the Company at risk to the extent such amounts become uncollectible. The Company
performs credit evaluations of each of its customers and maintains allowances
for potential credit losses. Such losses have generally been within management's
expectations.
c. INVENTORIES
Inventories consist primarily of purchased finished goods and are stated at
the lower of cost or market; cost is determined using the first-in, first-out
method of accounting.
d. FIXED ASSETS
Depreciation is provided principally on the straight-line method over the
estimated useful lives of the assets. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Furniture and fixtures 7 years
Office equipment 5 years
Vehicles 5 years
Leasehold improvements 5 years
</TABLE>
The Company's fixed assets are recorded at cost and includes significant
expenditures that increase the asset lives. Ordinary maintenance and repairs are
charged to operations as incurred
When assets are sold or otherwise disposed of, the recorded cost and related
accumulated depreciation or amortization are removed from the accounts and any
resulting gain or loss is recognized.
e. DEFERRED OFFERING COSTS
Costs associated with offerings of Company common shares are initially
capitalized and then netted with the proceeds received from the sale of the
common shares when the offering is completed. If the intended offering is
terminated these costs are charged to operations. Offering costs of $166,000 are
capitalized as of December 31, 1997 and included in other long-term assets.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
f. DEFERRED FINANCING COSTS
Debt issuance costs are initially capitalized as deferred financing costs
and amortized over the terms of the notes using the effective interest rate
method. In the event the notes are repaid prior to their original maturity, any
unamortized portion of the debt issuance costs capitalized will be charged to
operations. Debt issuance costs of $109,200, net amortization of $12,100, have
been capitalized as of December 31, 1997 and included in other long-term assets.
g. CAPITALIZED PURCHASED SOFTWARE COSTS
Capitalized purchased software costs represents the license fee paid to
Computer-Aided Software Integration, Inc. (CASI) for certain configuration
software (see Note 9). The Company will amortize these costs on a straight-line
basis over the estimated life of the configuration software (currently estimated
to be between 3-5 years) commencing at the date that the configuration software
is first placed into service.
h. STATEMENT OF CASH FLOWS
The Company prepares its statement of cash flows using the indirect method
as defined under Statement of Financial Accounting Standards No. 95 (SFAS No.
95). In July 1997, the Company licensed software for $1,100,000 by issuing a
note and obtaining a loan from a related party (see Note 9). Supplemental
disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED
DECEMBER 31,
MARCH 31, --------------------
1997 1996 1997
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash paid for interest........................................ $ 1,431 $ 4,500 $ 1,808
Cash paid for income taxes.................................... $ -- $ -- $ 13,000
</TABLE>
i. USE OF ESTIMATES
The preparation of the 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
j. CONCENTRATION OF RISK
During the period from April 2, 1996 (inception) to March 31, 1997, one
vendor accounted for 43 percent of purchases. There are many vendors in this
industry and management believes that the other vendors could provide similar
products on comparable terms. Management believes that a change in suppliers
would not cause any material effect to the Company's operations or loss of
sales.
During fiscal 1997, no customer accounted for more than 10 percent of net
sales.
k. REVENUE RECOGNITION
Net sales are currently generated from the sales of components and systems.
Systems include ready-to-use computers that have been assembled and have
software already installed. Components sales consist of individual hardware
items.
Revenue is recorded at the time of shipment net of allowances for estimated
sales returns.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
l. UNAUDITED QUARTERLY FINANCIAL STATEMENTS
The unaudited financial statements for the nine-month periods ended December
31, 1997 and 1996, have been prepared in conformity with generally accepted
accounting principles. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures made are adequate to make the information
presented not misleading. These unaudited financial statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results of operations, changes in
cash flows and financial position as of and for the periods presented. The
unaudited financial statements should be read in conjunction with the audited
financial statements and related notes thereto. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full year.
m. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred income tax assets or
liabilities are computed based on the temporary difference between the financial
statement and income tax bases of assets and liabilities using the enacted
marginal tax rate in effect for the year in which the differences are expected
to reverse. Deferred income tax expenses or credits are based on the changes in
the deferred income tax assets or liabilities from period to period.
n. NEW AUTHORITATIVE PRONOUNCEMENTS
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structure." SFAS No. 128
revises and simplifies the computation for earnings per share and requires
certain additional disclosures. SFAS No. 129 requires additional disclosures
regarding the Company's capital structure. SFAS No. 128 was adopted for the
period ended December 31, 1997 and SFAS No. 129 will be adopted for the year
ending March 31, 1998.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments on Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income. SFAS No. 131 requires disclosure for each segment that is
similar to those required under current standards and additional quarterly
disclosure requirements. Both standards will be adopted on April 1, 1998.
F-9
<PAGE>
o. INCOME PER COMMON SHARE
Income per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the related
periods. For all periods presented, per share information was computed pursuant
to the provisions of SFAS No.128.
A summary of the shares used to compute earnings per share is as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
FOR THE PERIOD ENDED
FROM APRIL 2, DECEMBER 31,
1996 (INCEPTION) ----------------------
TO MARCH 31, 1997 1996 1997
----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Weighted average common shares used to compute
basic earnings per share....................... 3,310,574 3,132,569 4,477,590
Effect of Dilutive Securities:
Stock options................................ -- -- 56,826
Warrants..................................... -- -- 21,568
----------------- ---------- ----------
Weighted average common shares used to compute
diluted earnings per share 3,310,574 3,132,569 4,555,984
----------------- ---------- ----------
----------------- ---------- ----------
</TABLE>
The adoption of SFAS No. 128 did not have any impact on basic or diluted
earnings per share for the periods from April 2, 1996 (inception) to March 31,
1997 or the nine-month period ended December 31, 1997.
p. RISK FACTORS
UNCERTAINTY OF COMMERCIALIZATION OF THE ACSA SOLUTION--The Company's ability
to successfully implement, market and introduce the ACSA Solution services on a
timely basis will be a significant factor in the Company's ability to improve
its operating margins and remain competitive. The Company's ability to market
the ACSA Solution successfully will depend on the Company convincing potential
customers of the benefits of the ACSA Solution. The Company has only recently
commenced marketing the ACSA Solution. The Company is currently constructing its
first ACSA Center located in the City of Industry. No ACSA Center is currently
in operation and the Company currently has no sales revenue attributable to the
ACSA Solution or a ACSA Center. Although the Company is engaged in negotiations
and discussions with a number of potential customers, there can be no assurance
that any such discussions will lead to significant sales of the ACSA Solution,
or that the ACSA Solution will attain market acceptance. Any failure by the
Company to anticipate or respond in a cost-effective and timely manner to market
trends or customer requirements, or any significant delays in introduction of
ACSA services, could have a material adverse effect on the Company's business,
operating results and financial condition.
ELECTRONICS INDUSTRY CYCLICALITY--The personal computer component
distribution industry has been affected historically by general economic
downturns, which have had an adverse economic effect upon manufacturers and
end-users of personal computers, as well as component distributors such as the
Company. In addition, the life-cycle of existing personal computer products and
the timing of new product development and introduction can affect demand for
disk drives and other personal computer components. Any downturns in the
personal computer component distribution industry, or the personal computer
industry in general, could adversely affect the Company's business and results
of operations.
FOREIGN SUPPLIERS REGULATION--A significant number of the products
distributed by the Company are manufactured in Taiwan, China, Korea and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs, import
and export controls and changes in governmental policies, any of which could
have a material adverse effect on the Company's
F-10
<PAGE>
business and results of operations. While the Company does not believe that any
of these factors adversely impact its business significantly at present, there
can be no assurance that these factors will not materially adversely affect the
Company in the future. Any significant disruption in the delivery of merchandise
from the Company's suppliers, substantially all of whom are foreign, would also
have a material adverse impact on the Company's business and results of
operations. Currently all purchases are made in U.S. dollars.
3. FIXED ASSETS, NET
Fixed assets, net, consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1997
----------- DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures.............................................. $ 8,260 $ 8,260
Office equipment.................................................... 9,039 17,723
Vehicles............................................................ 21,320 21,320
Leasehold improvements.............................................. 293 293
----------- ------------
38,912 47,596
Less--Accumulated depreciation and amortization..................... (6,634) (9,481)
----------- ------------
$ 32,278 $ 38,115
----------- ------------
----------- ------------
</TABLE>
4. INCOME TAXES
The provision for income taxes is comprised of the following components:
<TABLE>
<CAPTION>
MARCH 31,
1997
------------ NINE-MONTH
PERIOD ENDED
DECEMBER 31,
1997
-------------
(UNAUDITED)
<S> <C> <C>
Current:
Federal........................................................ $ 14,500 $ 389,747
State.......................................................... 7,000 68,779
Deferred:
Federal........................................................ (8,700) (35,520)
State.......................................................... (3,300) (6,268)
------------ -------------
Provision for income taxes....................................... $ 9,500 $ 416,738
------------ -------------
------------ -------------
</TABLE>
The approximate tax effect of temporary differences which gave rise to
significant deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1997
------------ DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C> <C>
Depreciation and amortization.................................... $ (434) $ (4,195)
Reserves......................................................... 2,408 32,623
Accrued liabilities.............................................. 4,006 5,299
Unicap........................................................... 6,020 20,061
------------ ------------
$ 12,000 $ 53,788
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
4. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the amount computed at
the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED
DECEMBER 31,
MARCH 31, ----------------------
1997 1996 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Federal income tax provision at the statutory rate........ $ 11,854 $ 21,884 $ 354,228
State taxes, net of federal benefit....................... 2,092 3,861 62,510
Other items, net.......................................... (4,446) -- --
----------- ---------- ----------
Provision for income taxes................................ $ 9,500 $ 25,745 $ 416,738
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
5. RELATED PARTY TRANSACTIONS
In February 1997, a director borrowed $39,700 from the Company. The
receivable is evidenced by an unsecured note due in 120 days on June 15, 1997,
with interest at 5.75 percent. The note was repaid in June 1997.
During fiscal 1997, the Company had sales of approximately $532,800 to and
purchases of approximately $804,300 from a corporation owned by a related party.
At March 31, 1997, the Company had $12,400 and $132,700 included in trade
receivables and accounts payable, respectively, related to these transactions.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases a facility under a lease agreement which expires on April
30, 1998. The following is a schedule of future minimum lease payments required
under this operating lease as of March 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C>
1998......................................................................... $ 47,616
1999......................................................................... 3,968
---------
$ 51,584
---------
---------
</TABLE>
Total rental expense for the year ended March 31, 1997 was approximately
$49,000.
LONG-TERM DEBT
The Company has borrowed from a bank for its delivery van. The loan bears
interest at 8.9 percent per annum with monthly installments of principal and
interest of approximately $400. The following is a schedule of future minimum
required payments:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C>
1998......................................................................... $ 3,390
1999......................................................................... 3,707
2000......................................................................... 4,054
2001......................................................................... 4,426
2002......................................................................... 387
---------
$ 15,964
---------
---------
</TABLE>
F-12
<PAGE>
7. RECEIVABLE FROM DIRECTOR
The receivable from director at March 31, 1997 resulted from the purchase by
the Company of 200,000 shares and 100,000 warrants for $100,000 in Evolutions,
Inc. (Evolutions) which at March 31, 1997, was personally guaranteed by a
director of the Company. Subsequent to June 13, 1997, the board of directors and
shareholders voted to release this director from this guarantee as partial
inducement for this individual to accept additional management responsibilities
at the Company, including agreeing to become the chief executive officer. The
Company has determined, due to significant cash flow difficulties encountered by
Evolutions, that its investment is worthless. Accordingly, the Company has
recorded a $100,000 loss during the first quarter of 1997 which is included in
selling, general and administrative expenses.
8. SUBSEQUENT EVENTS
COMMON STOCK
On April 7, 1997, a relative of a shareholder purchased 65,764 shares of
common stock for $300,000. In addition, the Company granted to this party an
option to acquire up to an additional 372,659 common shares at $4.56 per share.
The options expired on October 7, 1997 unexercised.
FINANCING ARRANGEMENT
In June 1997, the Company obtained credit for inventory purchases through
Finova Capital Corporation. The terms for purchases are net 30 and are
collateralized by inventory and accounts receivable. Unless the Company fails to
pay Finova within this 30 day period, all finance costs associated with this
line are charged by Finova to the Company's vendors. This arrangement is
personally guaranteed by two officers of the company. At December 31, 1997, the
Company had a payable to Finova Capital Corporation of approximately $3,400,460
included in accounts payable.
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED)
RELATED PARTY TRANSACTIONS
For the nine-month period ended December 31, 1997, the Company had sales of
approximately $1,391,300 to and purchases of approximately $598,200 from a
corporation owned by a related party. At December 31, 1997, the Company had
$146,500 and $0 included in trade receivables and accounts payable,
respectively, from this related party.
CONCENTRATION OF RISK
During the nine-month period ended December 31, 1997, one vendor accounted
for 58.3 percent of purchases. During the nine-month period ended December 31,
1997, one customer accounted for 10.9 percent of net sales.
SOFTWARE LICENSE
In September 1997, the Company signed a software license and a reseller
agreement with Computer Aided Software Integration, Inc. (CASI), a subsidiary of
Datatec Systems, Inc. (Datatec), formerly known as Glasgal Communications, Inc.
A director of the Company is also the founder, president, C.E.O., and a
principal shareholder of CASI. The Company paid CASI a one-time license fee of
$1,100,000 for the configuration software. The license agreement is generally a
worldwide royalty-free and nonexclusive license to reproduce and use the
software. The Company has capitalized this amount and will start to amortize
these costs' once the Company puts the software into use. The license fee was
paid in the form of a non-interest bearing promissory note for $950,000 and a
cash payment of $150,000 loaned to the Company by an officer of Datatec (Datatec
Note) with interest at 10 percent. The Datatec Note provides
F-13
<PAGE>
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED) (CONTINUED)
that the Company is obligated to pay $50,000 (amount paid prior to December 31,
1997) and $100,000 on or before February 28, 1998; provided, however, that if
the Company consummates an initial public offering (an "IPO") of its securities
pursuant to a registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, $100,000 of the proceeds of such
IPO shall be immediately applied to prepayment of the $100,000 due to be paid on
February 28, 1998. In the event that the Company completes an IPO prior to
February 28, 1998 and fails to pay the Datatec Note in full by that date, or,
the Datatec Note is not paid in full on or prior to February 28, 1998, in any
event, the Datatec Note shall be converted into such number of shares of Common
Stock of the Company as shall equal the principal amount then outstanding plus
accrued interest divided by a fraction, the numerator of which shall equal the
greater of $20,000,000 or the fair market value of the Company, and the
denominator of which shall be the number of shares of Common Stock of the
Company outstanding immediately prior to such conversion. The CASI note is due
in installments of $250,000 (paid prior to December 31, 1997) and $700,000 due
on or before February 28, 1998, respectively. The aggregate principal balance on
these Notes of $800,000 is included in current portion of long-term debt in the
December 31, 1997 Balance Sheet. In addition, the Company has a maintenance fee
of $25,000 per year, payable in equal quarterly installments. The Company also
issued CASI a contingent warrant exercisable in the event of default of the note
at $4.50 per share. This warrant is convertible into 155,902 shares of common
stock.
STOCK SPLIT
In October 1997, the Company effected a 10.960591 for one common stock split
and increased the number of authorized shares of common stock to 20,000,000. All
information in the accompanying financial statements has been retroactively
restated to reflect these changes.
PREFERRED STOCK
In October 1997, the Company authorized 2,000,000 shares of preferred stock.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key executives. These
agreements have terms of five years.
STOCK OPTIONS
In July 1997, the Company established the 1997 Stock Incentive Plan (the
"Plan"). Under the Plan, options are generally granted to employees and
directors at an exercise price equal to fair market value, as determined by the
board of directors. The Company has reserved 500,000 shares of the Company's
common stock for issuance under the Plan. On July 1, 1997, the Company granted
options to purchase up to 307,717 shares of common stock with an exercise price
of $2.70 per share. The plan terminates in 2007.
Information regarding the Company's options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE WEIGHTED
UNDER EXERCISE AVERAGE AGGREGATE
OPTION PRICE FAIR VALUE PRICE
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1997.............................................. -- $ -- $ -- $ --
Granted............................................................ 307,717 2.70 0.72 830,836
Canceled........................................................... -- -- -- --
Exercised.......................................................... -- -- -- --
--------- ----- ----- ----------
BALANCE, December 31, 1997........................................... 307,717 $ 2.70 $ 0.72 $ 830,836
--------- ----- ----- ----------
--------- ----- ----- ----------
</TABLE>
F-14
<PAGE>
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED) (CONTINUED)
Information about the Company's options outstanding at December 31, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE REMAINING
EXERCISE PRICE NUMBER OF SHARES OUTSTANDING CONTRACTUAL LIFE
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
$2.70 307,717 9.50 years
</TABLE>
The Company accounts for stock options granted to non-employees in
accordance with SFAS No. 123 which requires non-cash compensation expense be
recognized over the expected period of benefit. The Company accounts for its
stock options granted to employees and directors under Accounting Principles
Board No. 25 (APB 25), under which no compensation cost has been recognized. As
of December 31, 1997, options for 93,721 shares were exercisable.
If the Company had recognized compensation cost for stock-based employee
compensation in accordance with SFAS No. 123, the Company's net income would
have decreased as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
ENDED
DECEMBER 31, 1997
-----------------------
AS REPORTED PRO FORMA
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net income..................................................................... $ 625,108 $ 582,672
Basic and diluted earnings per share........................................... $ 0.14 $ 0.13
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants: risk-free interest rate of 6.31 percent; expected lives of five
years; no expected volatility and no dividends would be issued during the option
terms.
Subsequent to December 31, 1997, the Company granted additional options
under the Plan to purchase up to 76,000 shares of Common Stock with an exercise
price of $4.50 per share.
PRIVATE PLACEMENT
In December 1997, the Company completed a private placement for $1,000,000
with net proceeds of approximately $740,000. The Company sold 20 units for
$50,000 per unit. Each unit consisted of (i) an unsecured promissory note for
$20,000, bearing interest at 10 percent due eighteen months from the date of
issue or upon closing of a $2,000,000 financing, (ii) 15,000 shares of common
stock and (iii) 5,000 warrants exercisable at $3.00 per share into common stock
for three years, commencing one year after of issuance. The proceeds were used,
in part, to pay $250,000 of the CASI note and $50,000 of the Datatec Note. In
connection with the private placement the Placement Agent and the Company's
legal counsel received 35,000 warrants and 45,000 warrants, respectively for
nominal consideration. The warrants are excercisable at $3.00 per share. The
Placement Agent Warrants were cancelled on March 6, 1998.
F-15
<PAGE>
Back Inside Cover Page
[Graphic depicting schematically: File & Print Services, Client Server
Applications, Workstation Setup, and Connectivity Devices]
Caption: The ACSA solution will enable automated custom software and hardware
configuration of computers at the point of assembly to permit operation with
each individual end user's specific network and software applications including
file and print services, workstation applications and communication devices.
[Photo of motherboard]
[Caption: The Company assembles custom systems from individual components
such as 'motherboards.']
Collage of Products sold by the Company.
No Caption
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO UNDERWRITER, DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Recent Bridge Financing........................ 17
Use of Proceeds................................ 18
Dividend Policy................................ 19
Dilution....................................... 19
Capitalization................................. 20
Selected Financial Data........................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 27
Management..................................... 36
Certain Transactions........................... 41
Principal Shareholders......................... 44
Description of Capital Stock................... 45
Shares Eligible for Future Sale................ 46
Underwriting................................... 47
Legal Matters.................................. 49
Experts........................................ 49
Additional Information......................... 49
Index to Financial Statements.................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
2,300,000 SHARES
OF
COMMON STOCK
--------------
PROSPECTUS
--------------
JOSEPH STEVENS & COMPANY, INC.
, 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the Securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee and the
NASD filing fee.
<TABLE>
<CAPTION>
<S> <C>
Registration fee--Securities and Exchange Commission........................... $ 4,300.00
NASD filing fee................................................................ 1,535.00
Nasdaq Listing fee............................................................. 10,000.00
Accounting fees and expenses................................................... 90,000.00
Legal fees and expenses (other than blue sky).................................. 150,000.00
Blue sky fees and expenses, including legal fees............................... 10,000.00
Underwriter's expenses......................................................... 345,000.00
Printing; stock certificates................................................... 100,000.00
Transfer agent and registrar fees.............................................. 2,500.00
Directors and Officers' Insurance.............................................. 50,000.00
Miscellaneous.................................................................. 38,665.00
-------------
Total...................................................................... $ 802,000.00
-------------
-------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation include a provision that
eliminates the personal liability of its directors to the Registrant and its
shareholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Registrant or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Registrant or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary course
of performing a director's duties, of a risk of a serious injury to the
Registrant or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Registrant or its shareholders, (vi) under Section 310 of the
California Corporations Code (the "California Code") (concerning contracts or
transactions between the Registrant and a director) or (vii) under Section 316
of the California Code (concerning directors' liability for improper dividends,
loans and guarantees). The provision does not extend to acts or omissions of a
director in his capacity as an officer. Further, the provision will not affect
the availability of injunctions and other equitable remedies available to the
Registrant's shareholders for any violation of a director's fiduciary duty to
the Registrant or its shareholders.
The Registrant's Articles of Incorporation also include an authorization for
the Registrant to indemnify its agents (as defined in Section 317 of the
California Code), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this latter provision, the
Registrant's Bylaws provide for indemnification of the Registrant's directors,
officers and employees. In addition, the Registrant, at its discretion, may
provide indemnification to persons whom the Registrant is not obligated to
indemnify. The Bylaws also allow the Registrant to enter into indemnity
agreements with individual directors, officers, employees and other agents.
These indemnity agreements have been entered into with all directors and provide
the maximum indemnification permitted by law. These agreements,
II-1
<PAGE>
together with the Registrant's Bylaws and Articles of Incorporation, may require
the Registrant, among other things, to indemnify such directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities resulting from willful misconduct of a culpable nature),
to advance expenses to them as they are incurred, provided that they undertake
to repay the amount advanced if it is ultimately determined by a court that they
are not entitled to indemnification, and to obtain directors' and officers'
insurance if available on reasonable terms.
Section 317 of the California Code and the Registrant's Bylaws make
provision for the indemnification of officers, directors and other corporate
agents in terms sufficiently broad to indemnify such persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act.
Section 10 of the Underwriting Agreement filed as Exhibit 1.1 hereto sets
forth certain provisions with respect to the indemnification of certain
controlling persons, directors and officers against certain losses and
liabilities, including certain liabilities under the Securities Act.
The Registrant maintains director and officer liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Proposed form of Underwriting Agreement...................................... 1.1
Registrant's Restated Articles of Incorporation.............................. 3.1
Registrant's Amended and Restated Bylaws..................................... 3.2
Registrant's Form of Indemnification Agreement............................... 10.3
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On November 26, 1997, the Company issued warrants to purchase 35,000 shares
of Common Stock to Joseph Stevens & Company, Inc. (the "Placement Agent
Warrants"). The Placement Agent's Warrants were sold for a nominal purchase
price of $3.50, or $.0001 per warrant, and were exercisable at $3.00 per share
during the period commencing November 26, 1998 and ending November 26, 2001. The
Placement Agent's Warrants were cancelled on March 6, 1998. In December 1997,
the Company issued warrants to purchase 45,000 shares of common stock of the
Company to Troop Meisinger Steuber & Pasich, LLP. The warrants issued to Troop
Meisinger Steuber and Pasich, LLP were issued for nominal consideration of
$45.00 and for legal services. These warrants are exercisable beginning December
23, 1997 and ending December 31, 2002 at an exercise price of $3.00 per share.
Each of Joseph Stevens & Company, Inc. and Troop Meisinger Steuber & Pasich,
LLP, represented that (i) it acquired the warrants for its own account with the
present intention of holding such warrants for investment purposes only and not
with a view to, or for sale in connection with, any distribution of such
warrants (other than a distribution in compliance with all applicable federal
and state securities laws); (ii) it is an experienced and sophisticated investor
and has such knowledge and experience in financial and business matters that it
is capable of evaluating the relative merits and the risks of an investment in
the warrants and of protecting its own interest in connection with the
transaction at issue; (iii) it is willing to bear and is capable of bearing the
economic risk of an investment in the warrants; and (iv) the Company made
available, prior to the date of its warrant agreement, to it the opportunity to
ask questions of the Company and its officers, and to receive from the Company
and its officers information concerning the terms and conditions of the warrant
and the warrant agreement and to obtain any additional information with respect
to the Company, its business, operations
II-2
<PAGE>
and prospects, as reasonably requested by it; and (v) it is an "accredited
investor" as that term is defined under Rule 501(a)(8) of Regulation D
promulgated by the Commission under the Securities Act. The issuance and sale of
these securities was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act (in accordance with Rule 506 of Regulation D and Rule 152 promulgated by the
Commission under the Securities Act) as a transaction not involving any public
offering.
On December 23, 1997, prior to the filing of the Registration Statement with
respect to the Offering, the Company completed a financing (the "Bridge
Financing") consisting of the sale of 20 units (the "Units"), each unit
comprised of: (i) an unsecured promising note (each a "Bridge Note") of the
Company in the principal amount of $20,000, bearing interest at a rate of 10%
per annum payable upon the earlier of the closing of the Offering or 18 months
from the date of issuance; (ii) 15,000 shares of Common Stock of the Company,
and (iii) 5,000 warrants of the Company, each warrant exercisable to purchase
one share of Common Stock at an initial exercise price of $3.00 per share,
subject to adjustment, during the 36-month period commencing one year from the
date the warrants are issued (the "Bridge Warrants"). Each Unit was sold for
$50,000 generating gross proceeds to the Company of $1,000,000 and net proceeds
of $740,000. 60,000 of the Bridge Warrants are exercisable during the period
beginning November 26, 1998 and ending November 26, 2001. 37,500 of the Bridge
Warrants are exercisable during the period beginning December 16, 1998 and
ending December 16, 2001. 2,500 of the Bridge Warrants are exercisable during
the period beginning December 23, 1998 and ending December 23, 2001. Prior to
filing the Registration Statement with respect to the Offering, the purchasers
in the Bridge Financing had entered into binding agreements for the purchase of
the Units. 12 of the Units we sold on November 26, 1997, 7.5 of the Units were
sold December 16, 1997, and 0.5 of the Units were sold on December 23, 1997. The
obligations of the purchasers were not subject to any conditions within the
control of the purchasers or any right of renegotiation. All purchasers of Units
in the Bridge Financing were brokerage customers of Joseph Stevens & Company,
Inc., the Underwriter, who acted as placement agent for the Bridge Financing,
but were not and are not otherwise related to or affiliated with the Company or
Joseph Stevens & Company, Inc. Joseph Stevens & Company, Inc. acted as placement
agent and there was no public solicitation or advertising in connection with the
offering. The transaction was exempt from the registration requirements of the
Securities Act of 1933 (the "Act") under Section 4(2) of the Act and Rule 506 of
Regulation D and Rule 152 promulgated thereunder. The proceeds were used by the
Company for working capital, to repay indebtedness and to commence construction
of the Company's first ACSA Center.
On April 12, 1996, the Company sold 2,192,118 shares of its Common stock to
Nancy Hundt in consideration of $200,000 cash. On November 12, 1997, Ms. Hundt
signed an investment representation which states that she purchased the shares
for her own account and not with a view to resale or distribution. On April 12,
1996, Ms. Hundt was appointed, and she accepted, director of the Company. There
were no underwriters involved in the sale of these securities and there was no
public solicitation or advertisement by the Company in connection with the sale
of these securities. This transaction was exempt from the registration
requirements of the Act under section 4(2) of the Act and section 25102(f) of
the California Securities Law. The proceeds were used by the Company as working
capital to cover general start-up costs.
On April 12, 1996, the Company sold 1,096,059 shares of its Common Stock
each to James Ung and Mei Yang, who are married, each of whom paid $25,000 in
consideration therefor. On November 12, 1997, each of Mr. Ung and Ms. Yang
signed an investment representation which states that each of Mr. Ung and Ms.
Yang purchased the shares for their own accounts and not with a view to resale
or distribution. On April 12, 1996, Mr. Ung and Ms. Yang were appointed, and
they each accepted, director of the Company. There were no underwriters involved
in the sale of these securities and there was no public solicitation or
advertisement by the Company in connection with the sale of these securities.
This transaction was exempt from the registration requirements of the Act under
Section 4(2) of the Act and section 25102(f) of the
II-3
<PAGE>
California Securities Law. The proceeds were used by the Company as working
capital to cover general start-up costs.
On April 7, 1997, the Company sold 65,764 shares of its Common Stock and an
option to purchase an additional 372,659 shares, which option expired October 7,
1997, to Vince Yiang, the brother of Mei Yang, who paid $300,000 in
consideration therefor. On November 12, 1997, Mr. Yiang signed an investment
representation in which Mr. Yiang represents that he purchased the shares for
his own account and not with a view to resale or distribution, and that he has
an individual net worth greater than $1.0 million. There were no underwriters
involved in the sale of these securities and there was no public solicitation or
advertisement by the Company in connection with the sale of these securities.
The transaction was exempt from the registration requirements of the Act under
Section 4(2) of the Act. The proceeds were used by the Company as general
working capital.
II-4
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Underwriter's Warrant Agreement.
1.3* Form of Financial Advisory and Consulting Agreement.*
3.1 Articles of Incorporation of Registrant.*
3.2 Certificate of Amendment to Articles of Incorporation, as filed on December 22, 1997.*
3.2.1 Certificate of Amendment of the Articles of Incorporation, as filed on January 6, 1998.*
3.3 Amended and Restated Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.*
10.1 Standard Sublease Agreement, dated April 9, 1996, between ITT Barton Instruments and the Company.*
10.2 Employment Agreement, dated May 1, 1997, between the Company and James Ung.*
10.3 Employment Agreement, dated July 1, 1997, between the Company and Mei Yoon Yang.*
10.4 Executive Employment Agreement, dated July 1, 1997, between the Company and Max Toghraie.*
10.5 Amended and Restated License Agreement, dated July 1, 1997, between Computer-Aided Software Integration,
Inc. and the Company.*
10.6 Reseller Agreement, made effective as of September 15, 1997, between Computer-Aided Software
Integration, Inc. and the Company.(++)*
10.7 Promissory Note, dated July 1, 1997, executed by the Company in favor of Computer Aided Software
Integration, Inc.*
10.8 Warrant Agreement, dated July 1, 1997, between the Company and Computer-Aided Software Integration,
Inc.*
10.9 Promissory Note, dated July 1, 1997, executed by the Company in favor of Ralph Glasgal.*
10.10 Lease Agreement, dated for reference purposes October 28, 1997, between the Company and Fortune Dynamic,
Inc.*
10.11 Guaranty, dated December 3, 1997, given by James Ung to Fortune Dynamic, Inc.*
10.12 Dealer Loan and Security Agreement, dated June 3, 1997, between the Company and FINOVA Capital
Corporation.*
10.13 Individual Guaranty, dated June 3, 1997, between FINOVA Capital Corporation and James Ung and Mei Yang.*
10.14 Amended and Restated 1997 Stock Plan.*
10.15 Form of Nonstatutory Stock Option Agreement.*
10.16 Warrant Agreement, dated December 23, 1997, between the Company and Troop Meisinger Steuber & Pasich,
LLP.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its Opinion filed as Exhibit 5.1
herewith)*
27 Financial Data Schedule.*
99.1 Consent of Carl L. Wood.*
</TABLE>
- ------------------------
++ Specified portions of this Exhibit have been omitted and filed separately
with the United States Securities and Exchange Commission pursuant to a
request for an order granting confidential treatment pursuant to Rule 406 of
the General Rules and Regulations under the Securities Act of 1933.
* Previously filed.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the 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, the registrant will, unless in
the opinion of its counsel the matter has been settled by a 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.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, 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.
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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 that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused Amendment No. 5 to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on April 3,
1998.
<TABLE>
<S> <C> <C>
CUMETRIX DATA SYSTEMS CORP.
By: /s/ MAX TOGHRAIE
-----------------------------------------
Max Toghraie
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 5
to this Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MAX TOGHRAIE
- ------------------------------ Chief Executive Officer April 3, 1998
Max Toghraie and Director
*
- ------------------------------ President and Director April 3, 1998
James Ung
*
- ------------------------------ Secretary, Treasurer April 3, 1998
Mei Yang and Director
Chief Financial Officer
* and
- ------------------------------ Principal Accounting April 3, 1998
Carl Wood Officer
*
- ------------------------------ Director April 3, 1998
Nancy Hundt
*
- ------------------------------ Director April 3, 1998
David Tobey
*
- ------------------------------ Director April 3, 1998
Philip J. Alford
*By: /s/ MAX TOGHRAIE
-------------------------
Max Toghraie April 3, 1998
ATTORNEY-IN-FACT
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Underwriter's Warrant Agreement.
1.3 Form of Financial Advisory and Consulting Agreement.*
3.1 Articles of Incorporation of Registrant.*
3.2 Certificate of Amendment to Articles of Incorporation, as filed on December 22, 1997.*
3.2.1 Certificate of Amendment of the Articles of Incorporation, as filed on January 6, 1998.*
3.3 Amended and Restated Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.*
10.1 Standard Sublease Agreement, dated April 9, 1996, between ITT Barton Instruments and the Company.*
10.2 Employment Agreement, dated May 1, 1997, between the Company and James Ung.*
10.3 Employment Agreement, dated July 1, 1997, between the Company and Mei Yoon Yang.*
10.4 Executive Employment Agreement, dated July 1, 1997, between the Company and Max Toghraie.*
10.5 Amended and Restated License Agreement, dated July 1, 1997, between Computer-Aided Software Integration,
Inc. and the Company.*
10.6 Reseller Agreement, made effective as of September 15, 1997, between Computer-Aided Software
Integration, Inc. and the Company.(++)*
10.7 Promissory Note, dated July 1, 1997, executed by the Company in favor of Computer Aided Software
Integration, Inc.*
10.8 Warrant Agreement, dated July 1, 1997, between the Company and Computer-Aided Software Integration,
Inc.*
10.9 Promissory Note, dated July 1, 1997, executed by the Company in favor of Ralph Glasgal.*
10.10 Lease Agreement, dated for reference purposes October 28, 1997, between the Company and Fortune Dynamic,
Inc.*
10.11 Guaranty, dated December 3, 1997, given by James Ung to Fortune Dynamic, Inc.*
10.12 Dealer Loan and Security Agreement, dated June 3, 1997, between the Company and FINOVA Capital
Corporation.*
10.13 Individual Guaranty, dated June 3, 1997, between FINOVA Capital Corporation and James Ung and Mei Yang.*
10.14 Amended and Restated 1997 Stock Plan.*
10.15 Form of Nonstatutory Stock Option Agreement.*
10.16 Warrant Agreement, dated December 23, 1997, between the Company and Troop Meisinger Steuber & Pasich,
LLP.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its Opinion filed as Exhibit 5.1
herewith)*
27 Financial Data Schedule.*
99.1 Consent of Carl L. Wood.*
</TABLE>
- ------------------------
++ Specified portions of this Exhibit have been omitted and filed separately
with the United States Securities and Exchange Commission pursuant to a
request for an order granting confidential treatment pursuant to Rule 406 of
the General Rules and Regulations under the Securities Act of 1933.
* Previously filed.
<PAGE>
EXHIBIT 1.1
2,300,000 SHARES OF
COMMON STOCK
CUMETRIX DATA SYSTEMS CORP.
UNDERWRITING AGREEMENT
New York, New York
March, 1998
JOSEPH STEVENS & COMPANY, INC.
ROYCE INVESTMENT GROUP, INC.
c/o Joseph Stevens & Company, Inc.
33 Maiden Lane, 8th Floor
New York, New York 10038
Ladies and Gentlemen:
CUMETRIX DATA SYSTEMS CORP., a California corporation (the "Company"),
confirms its agreement with Joseph Stevens & Company, Inc. ("JSC") and Royce
Investment Group, Inc. ("Royce")(collectively, JSC and Royce are hereinafter
referred to as "you" or the "Underwriters"), with respect to the sale by the
Company and the purchase by the Underwriters of 2,300,000 shares of common
stock, no par value (the "Common Stock"). Such 2,300,000 shares of Common Stock
are hereinafter referred to as the "Firm Shares." Upon the Underwriters'
request, as provided in Section 2(b) of this Agreement, the Company shall also
issue and sell to the Underwriters up to an additional 345,000 shares for the
purpose of covering over allotments, if any. Such 345,000 shares are
hereinafter collectively referred to as the "Option Shares." The Underwriters,
who are acting severally and not jointly, agree to purchase the respective
number of Firm Shares and Option Shares set forth opposite their respective
names in Schedule A attached hereto. The Company also proposes to issue and
sell to the Underwriters or its designees warrants (the "Underwriters'
Warrants"), pursuant to the Underwriters' Warrant Agreement (the "Underwriters'
Warrant Agreement"), for the purchase of an additional 230,000 shares of Common
Stock (the "Underwriters' Shares"). The Firm Shares, the Option Shares, the
Underwriters' Warrants and the Underwriters' Shares are hereinafter collectively
referred to as the "Securities" and are more fully described in the Registration
Statement and the Prospectus referred to below.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and covenants and agrees with, the Underwriters as
of the date hereof, and as of the Closing Date (hereinafter defined) and the
Option Closing Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and amendments
thereto, on Form S-1 (Registration No. 333-43151), including any related
preliminary prospectus or prospectuses (each a "Preliminary Prospectus"), for
the registration of the Securities, under the Securities Act of 1933, as amended
(the "Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
rules and regulations of the Commission under the Act. The Company will not
file any other amendment to such registration statement which the Underwriters
shall have objected to in writing after having been furnished with a copy
thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time it becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein
(including, but not limited to, those documents or that information incorporated
by reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430A of the rules and regulations under
the Act), is hereinafter called the "Registration Statement," and the form of
prospectus in the form first filed with the Commission pursuant to Rule 424(b)
of the rules and regulations under the Act is hereinafter called the
"Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus or any part of any Preliminary
Prospectus, the Registration Statement or the Prospectus, and no proceedings for
a stop order suspending the effectiveness of the Registration Statement or any
of the Company's securities have been instituted or are pending or threatened.
Each of the Preliminary Prospectus, the Registration Statement and the
Prospectus, at the respective times of filing thereof, conformed with the
requirements of the Act and the Rules and Regulations, and none of the
Preliminary Prospectus, the Registration Statement nor the Prospectus, at the
respective times of filing thereof, 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, in light of the circumstances in which
they were made, not misleading; PROVIDED, HOWEVER, that this representation and
warranty does not apply to statements made or statements omitted in reliance
upon and in conformity with written information furnished to the Company with
respect to the Underwriters by or on behalf of the Underwriters expressly for
use in such Preliminary Prospectus, the Registration Statement or the
Prospectus. The Company has filed all reports, forms or other documents
required to be filed under the Act and the Exchange Act and the respective Rules
and Regulations thereunder, and all such reports, forms or other documents, when
so filed or as subsequently amended, complied in all material respects with the
Act and the Exchange Act and the respective Rules and Regulations thereunder.
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(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date and each Option Closing Date, if
any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus will contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and will conform to the requirements of the Act and the Rules and
Regulations; and, at and through such dates, neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; PROVIDED, HOWEVER,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to any Underwriter by or on behalf of such
Underwriter expressly for use in the Preliminary Prospectus, Registration
Statement or the Prospectus or any amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership or leasing
of any properties or the character of its operations require such qualification
or licensing, except where the failure to be so qualified or be in good standing
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company,
taken as a whole ("Material Adverse Effect"). Except as set forth in the
Prospectus, the Company does not own, directly or indirectly, an interest in any
corporation, partnership, trust, joint venture or other business entity. The
Company has all requisite power and authority (corporate and other), and has
obtained any and all authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), necessary and material to the Company's
owning or leasing its properties and conducting its business as described in the
Prospectus; the Company is and has been doing business in compliance with all
such authorizations, approvals, orders, licenses, certificates, franchises and
permits and with all federal, state, local and foreign laws, rules and
regulations to which it is subject; and the Company has not received any notice
of proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise or permit which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially and adversely affect the condition, financial or
otherwise, or the earnings, prospects, stockholders' equity, value, operations,
properties, business or results of operations of the Company. The disclosure in
the Registration Statement concerning the effects of federal, state, local and
foreign laws, rules and regulations on the Company's business as currently
conducted and as contemplated is correct in all material respects and does not
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Securities" and will have
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the adjusted capitalization set forth therein on the Closing Date and the Option
Closing Date, if any, based upon the assumptions set forth therein, and the
Company is not a party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement and the Underwriters'
Warrant Agreement and as described in the Prospectus. The Securities and all
other securities issued or issuable by the Company on or prior to the Closing
Date and each Option Closing Date, if any, conform or, when issued and paid for,
will conform, in all respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holder of any security of the Company or any similar
contractual right granted by the Company. The Securities to be sold by the
Company hereunder and pursuant to the Underwriters' Warrant Agreement are not
and will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and delivered
in accordance with the terms hereof and thereof, will be validly issued, fully
paid and non-assessable and conform to the descriptions thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the authorization,
issue and sale of the Securities has been duly and validly taken; and the
certificates representing the Securities, when delivered by the Company, will be
in due and proper form. Upon the issuance and delivery pursuant to the terms
hereof and the Underwriters' Warrant Agreement of the Securities to be sold by
the Company hereunder and thereunder to the Underwriters, the Underwriters will
acquire good and marketable title to such Securities, free and clear of any
lien, charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever asserted against the Company or any
affiliate (within the meaning of the Rules and Regulations) of the Company.
(f) The financial statements of the Company together with the related
notes thereto, included in the Registration Statement, each Preliminary
Prospectus and the Prospectus fairly present the financial position, income,
changes in stockholders' equity and the results of operations of the Company at
the respective dates and for the respective periods to which they apply and the
pro forma financial information included in the Registration Statement and
Prospectus presents fairly on a basis consistent with that of the audited
financial statement therein, what the Company's pro forma capitalization and
balance sheet data would have been for the respective periods and as of the
respective dates to which they apply after giving effect to the adjustments
described therein. Such financial statements have been prepared in conformity
with generally accepted accounting principles and the Rules and Regulations,
consistently applied throughout the periods involved. There has been no
material adverse change or development involving a prospective change in the
condition, financial or otherwise, or in the earnings, prospects, stockholders'
equity, value, operations, properties, business or results of operations of the
Company, whether or not arising in the ordinary course of business, since the
date of the financial statements included in the Registration Statement and the
Prospectus; and the outstanding debt, the property, both tangible and
intangible, and the business of the Company conform in all material respects to
the descriptions thereof contained in the Registration Statement and the
Prospectus. The financial information set forth in the Prospectus under the
headings "Summary
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Financial Data," "Capitalization," "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation" fairly
presents, on the basis stated in the Prospectus, the information set forth
therein and such financial information has been derived from or compiled on a
basis consistent with that of the audited financial statements included in the
Prospectus.
(g) The Company (i) has paid all federal, state, local and foreign
taxes for which it is liable and which are required to have been paid,
including, but not limited to, withholding taxes and amounts payable under
Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the
"Code"), and has furnished all information returns it is required to furnish
pursuant to the Code, (ii) has established adequate reserves for such taxes
which are not due and payable, and (iii) does not have any tax deficiency or
claims outstanding, proposed or assessed against it, except in the cases of each
clauses (i) through (iii) where the failure to do so would not have a Material
Adverse Effect..
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Securities from
the Company, (iii) the consummation by the Company of any of its obligations
under this Agreement or the Underwriters' Warrant Agreement, or (iv) resales of
the Firm Shares or the Option Shares in connection with the distribution
contemplated hereby.
(i) The Company maintains insurance policies, including, but not
limited to, general liability, property, personal and product liability
insurance, and surety bonds which insure the Company and its employees against
such losses and risks generally insured against by comparable businesses. The
Company (i) has not failed to give notice or present any insurance claim with
respect to any insurable matter under the appropriate insurance policy or surety
bond in a due and timely manner, (ii) does not have any disputes or claims
against any underwriter of such insurance policies or surety bonds, nor has
failed to pay any premiums due and payable thereunder, or (iii) has not failed
to comply with all conditions contained in such insurance policies and surety
bonds. There are no facts or circumstances under any such insurance policy or
surety bond which would relieve any insurer of its obligation to satisfy in full
any valid claim of the Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those pertaining to environmental or similar matters), domestic or
foreign, pending or, to the best knowledge of the Company, threatened against
(or circumstances that may give rise to the same), or involving the properties
or business of, the Company which (i) questions the validity of the capital
stock of the Company, this Agreement, the Underwriters' Warrant Agreement or the
Consulting Agreement (as defined in Section 1(ff) hereof) or of any action taken
or to be taken by the Company pursuant to or in connection with this Agreement,
the Underwriters' Warrant Agreement or the Consulting Agreement, (ii) is
required to be disclosed in the Registration Statement which is not so disclosed
(and such proceedings as are summarized in the Registration Statement are
accurately summarized in all material respects), or (iii) might materially and
adversely affect the condition, financial or
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<PAGE>
otherwise, or the earnings, prospects, stockholders' equity, value, operations,
properties, business or results of operations of the Company.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, to enter into this Agreement,
the Underwriters' Warrant Agreement and the Consulting Agreement and to
consummate the transactions provided for in such agreements; each of this
Agreement, the Underwriters' Warrant Agreement and the Consulting Agreement have
been duly and properly authorized, executed and delivered by the Company.
Assuming due authorization, execution and delivery by the Underwriters or JSC,
as the case may be, this Agreement, the Underwriters' Warrant Agreement and the
Consulting Agreement constitutes a legal, valid and binding agreement of the
Company, enforceable against the Company in accordance with its respective terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
application of equitable principles in any motion, legal or equitable, and
except as obligations to indemnify or contribute to losses may be limited by
applicable law). None of the Company's issue and sale of the Securities,
execution or delivery of this Agreement, the Underwriters' Warrant Agreement or
the Consulting Agreement, its performance hereunder and thereunder, its
consummation of the transactions contemplated herein and therein or the conduct
of its business as described in the Registration Statement and the Prospectus
and any amendments or supplements thereto, conflicts with or will conflict with
or results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result in
the creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever
upon, any property or assets (tangible or intangible) of the Company pursuant to
the terms of (i) the certificate of incorporation or by-laws of the Company,
(ii) any material license, contract, indenture, mortgage, lease, deed of trust,
voting trust agreement, stockholders' agreement, note, loan or credit agreement
or other material agreement or instrument evidencing an obligation for borrowed
money, or any other material agreement or instrument to which the Company is a
party or by which it is or may be bound or to which its properties or assets
(tangible or intangible) are or may be subject, or (iii) any statute, judgment,
decree, order, rule or regulation applicable to the Company of any arbitrator,
court, regulatory body or administrative agency or other governmental agency or
body (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction over
the Company or any of its activities or properties, except where such breach or
violation would not have a Material Adverse Effect.
(l) No consent, approval, authorization or order of, and no filing
with, any arbitrator, court, regulatory body, administrative agency, government
agency or other body, domestic or foreign, is required for the issuance of the
Securities pursuant to the Prospectus and the Registration Statement, this
Agreement and the Underwriters' Warrant Agreement, the performance of this
Agreement, the Underwriters' Warrant Agreement and the Consulting Agreement and
the transactions contemplated hereby and thereby, except such as have been
obtained under the Act, the rules of the National Association of Securities
Dealers, Inc. (the "NASD"), the rules of the Nasdaq Stock Market, or under State
or other securities or Blue Sky Laws.
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(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or business may be subject have been
duly and validly authorized, executed and delivered by the Company, and
constitute legal, valid and binding agreements of the Company enforceable
against the Company, in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting the enforcement of creditors' rights and the application of equitable
principles in any motion, legal or equitable, and except as obligations to
indemnify or contribute to losses may be limited by applicable law). The
descriptions in the Registration Statement of agreements, contracts and other
documents are accurate and fairly present the information required to be shown
with respect thereto by Form S-1; and there are no agreements, contracts or
other documents which are required by the Act to be described in the
Registration Statement or filed as exhibits to the Registration Statement which
are not described or filed as required; and the exhibits which have been filed
are complete and correct copies of the documents of which they purport to be
copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money, (ii) entered into any transaction other than in
the ordinary course of business, or (iii) declared or paid any dividend or made
any other distribution on or in respect of any class of its capital stock; and,
subsequent to such dates, and except as may be otherwise disclosed in the
Prospectus, there has not been any change in the capital stock, debt (long or
short term) or liabilities or any material change in the condition, financial or
otherwise, or the earnings, prospects, stockholders' equity, value, operations,
properties, business or results of operations of the Company.
(o) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, indenture, mortgage,
lease, deed of trust, voting trust agreement, stockholders' agreement, note,
loan or credit agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which the
Company is a party or by which the Company is or may be bound or to which the
property or assets (tangible or intangible) of the Company is or may be subject.
(p) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance with all
federal, state, local and foreign laws, rules and regulations respecting
employment, employment practices, terms and conditions of employment and wages
and hours. There are no pending investigations involving the Company by the
United States Department of Labor or any other governmental agency responsible
for the enforcement of any federal, state, local or foreign laws, rules and
regulations relating to employment. There is no unfair labor practice charge or
complaint against the Company pending before the National Labor Relations Board
or any strike, picketing, boycott, dispute, slowdown or stoppage pending or
threatened against or involving the Company, or any predecessor entity, and none
has ever occurred. No representation question exists respecting the employees
of the
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Company, and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company. No labor dispute with the employees of the Company
exists or, to the best of the Company's knowledge, is imminent.
(q) The Company does not, now or at any time previously, maintain,
sponsor or contribute to any "employee benefit plan" as defined in Section 3(2)
of the Employee Retirement Income Security Act of 1974, as amended.
(r) Neither the Company nor any of its respective employees,
directors, stockholders or affiliates (within the meaning of the Rules and
Regulations), has taken or will take, directly or indirectly, any action
designed to or which has constituted or which might be expected to cause or
result in, under the Exchange Act or otherwise, the stabilization or
manipulation of the price of any security of the Company, whether to facilitate
the sale or resale of the Securities or otherwise.
(s) To the best of the Company's knowledge, none of the trademarks,
trade names, service marks, service names, copyrights, patents and patent
applications, and none of the licenses and rights to the foregoing, presently
owned or held by the Company are in dispute or are in conflict with the right of
any other person or entity. The Company (i) owns or has the right to use, free
and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind whatsoever, all
trademarks, trade names, service marks, service names, copyrights, patents and
patent applications, and licenses and rights with respect to the foregoing, used
in the conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity under or with respect to any of
the foregoing and (ii) is not obligated or under any liability whatsoever to
make any payments by way of royalties, fees or otherwise to any owner or
licensee of, or other claimant to, any trademark, trade name, service mark,
service name, copyright, patent or patent application except as set forth in the
Registration Statement or the Prospectus. There is no action, suit, proceeding,
inquiry, arbitration, investigation, litigation or governmental or other
proceeding, domestic or foreign, pending or, to the best of the Company's
knowledge, threatened (or circumstances that may give rise to the same) against
the Company which challenges the rights of the Company with respect to any
trademarks, trade names, service marks, service names, copyrights, patents,
patent applications or licenses or rights to the foregoing used in the conduct
of its business.
(t) Except as set forth in the Registration Statement or the
Prospectus, the Company owns or has the right to use all trade secrets, know how
(including all unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), inventions, technology, designs, processes,
works of authorship, computer programs and technical data and information that
are material to the development, manufacture, operation and sale of all products
and services sold or proposed to be sold by the Company, free and clear of and
without violating any right, lien, or claim of others, including, without
limitation, former employers of its employees.
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(u) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever, other than liens for taxes not
yet due and payable and except where failure by the Company to hold good and
marketable to, or valid and enforceable leasehold estates in such real or
personal property, free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities would not
have a Material Adverse Effect.
(v) Arthur Andersen LLP, whose reports are filed with the Commission
as a part of the Registration Statement, are independent certified public
accountants as required within the meaning of the Act and the Rules and
Regulations.
(w) The holders of all of the shares of Common Stock of the Company,
including each director, officer and principal shareholder of the Company, but
excluding the Bridge Investors (as such term is defined below), have executed an
agreement (collectively, the "Management Lock-Up Agreements") pursuant to which
he, she or it has agreed, for a period extending eighteen (18) months following
the effective date of the Registration Statement (the "Lock-Up Period"), not to
directly or indirectly, offer, offer to sell, sell, grant an option for the
purchase or sale of, transfer, pledge, assign, hypothecate or otherwise encumber
(whether pursuant to Rule 144 of the Rules and Regulations or otherwise) any
securities issued or issuable by the Company, whether or not owned by or
registered in the name of such persons, or dispose of any interest therein,
without the prior written consent of JSC; provided, however, that the Lock-Up
Period shall immediately terminate if the average closing bid price of the
Common Stock, if the Common Stock is quoted on the Nasdaq system, or the Nasdaq
SmallCap Market, or the average closing sale price of the Common Stock, if the
Common Stock is listed on the American Stock Exchange or New York Stock
Exchange, equals or exceeds $10.00 per share (subject to customary adjustments
for stocksplits, combinations, consolidations and similar transactions) for any
30 consecutive calendar days. Such persons have all further agreed in the
Management Lock-Up Agreements that, for a period extending twenty-four (24)
months following the effective date of the Registration Statement, all sales of
such securities of the Company shall be made through JSC in accordance with its
customary brokerage policies. The investors (collectively, the "Bridge
Investors"), who purchased securities of the Company in the Company's bridge
financing (the "Bridge Financing") pursuant to the confidential private
placement memorandum dated October 29, 1997, have agreed ("Bridge Lock-Up
Agreement"; collectively, the Bridge Lock-Up Agreements and the Management
Lock-Up Agreements shall be referred to as the "Lock-Up Agreements") not to
directly or indirectly, issue, offer to sell, grant an option for the sale of,
transfer, assign, hypothecate, pledge, distribute or otherwise dispose of or
encumber (either pursuant to Rule 144 of the regulations under the Securities
Act or otherwise) the units, the shares of common stock, the warrants or the
shares of common stock underlying such warrants acquired or sold in the Bridge
Financing for a period extending twelve (12) months following the effective date
of the Registration Statement and thereafter for an additional six (6) months,
without the prior written consent of JSC. The Bridge Investors have further
agreed that for a period extending twenty-four (24) months following the
effective date of the Registration Statement, all sales of such securities shall
be made through JSC in accordance with its customary
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brokerage policies. The Company will cause its transfer agent to make an
appropriate legend on the face of stock certificates representing all such
securities and to place "stop transfer" orders on the Company's stock ledgers.
(x) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuances
that may affect the Underwriters' compensation, as determined by the NASD.
(y) The Common Stock has been approved for quotation on the Nasdaq
SmallCap Market.
(z) Neither the Company nor any of its respective directors,
officers, stockholders, employees, agents or any other person acting on behalf
of the Company has, directly or indirectly, given or agreed to give any money,
gift or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or any official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or any other person who was, is or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (i) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (ii) if
not given in the past, might have had a material and adverse effect on the
condition, financial or otherwise, or the earnings, business affairs, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company, or (iii) if not continued in the future, might
materially and adversely affect the condition, financial or otherwise, or the
earnings, business affairs, prospects, stockholders' equity, value, operations,
properties, business or results of operations of the Company. The Company's
internal accounting controls are sufficient to cause the Company to comply with
the Foreign Corrupt Practices Act of 1977, as amended.
(aa) Except as set forth in the Prospectus, no officer, director or
stockholder of the Company, and no affiliate or associate (as these terms are
defined in the Rules and Regulations) of any of the foregoing persons or
entities, has or has had, either directly or indirectly, (i) an interest in any
person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services, or
(ii) a beneficial interest in any contract or agreement to which the Company is
a party or by which the Company may be bound. Except as set forth in the
Prospectus under "Certain Transactions," there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company, and
any officer, director or any person listed in the "Principal Shareholders"
section of the Prospectus or any affiliate or associate of any of the foregoing
persons or entities which are required to be disclosed in the Prospectus
pursuant to the Act and the Rules and Regulations.
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(bb) The minute books of the Company have been made available to the
Underwriters, contain a complete summary of all meetings and actions of the
directors and stockholders of the Company since the time of its incorporation,
and reflect all transactions referred to in such minutes accurately in all
respects.
(cc) Except and to the extent described in the Prospectus, no holder
of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company has the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement. Except as set forth in the Prospectus, no person
or entity holds any anti-dilution rights with respect to any securities of the
Company.
(dd) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to Underwriters' Counsel (as defined in Section
4(d) herein), shall be deemed a representation and warranty by the Company to
the Underwriters as to the matters covered thereby.
(ee) The Company has entered into a financial advisory and consulting
agreement substantially in the form filed as Exhibit 10.16 to the Registration
Statement (the "Consulting Agreement") with JSC, with respect to the rendering
of consulting services by JSC to the Company. The Consulting Agreement provides
that JSC shall be retained by the Company commencing on the consummation of the
proposed public offering and ending 24 months thereafter, at a monthly retainer
of $2,000, all of which is payable on consummation of the proposed public
offering. The Consulting Agreement has been duly and validly authorized by the
Company and assuming due execution by the parties thereto other than the
Company, constitutes a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law).
(ff) The Company has filed a Form 8-A with the Commission providing
for the registration under the Exchange Act of the Securities and such Form 8-A
has been declared effective by the Commission.
(gg) The Company has as of the effective date of the Registration
Statement (i) entered into an employment agreement with each of Max Toghraie,
James Ung and Mei Yang in the forms filed as Exhibit 10.4, 10.2 and 10.3,
respectively, to the Registration Statement and (ii) has obtained term key-man
insurance on the lives of each of James Ung and Max Toghraie in the amount of
$1,000,000 which policy names the Company as sole beneficiary.
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2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters, and the Underwriters
agree to purchase from the Company, the Firm Shares at a price equal to
$__________ [90.75% of the initial public offering price] per Share.
(b) In addition, on the basis of the representations, warranties,
covenants and agreement, herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters to purchase all or any part of the Option Shares at a price equal
to $__________ [90.75% of the initial public offering price] per Share. The
option granted hereby will expire forty-five (45) days after (i) the date the
Registration Statement becomes effective, if the Company has elected not to rely
on Rule 430A under the Rules and Regulations, or (ii) the date of this Agreement
if the Company has elected to rely upon Rule 430A under the Rules and
Regulations, and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Firm Shares upon notice by JSC to the Company
setting forth the number of Option Shares as to which the Underwriters are then
exercising the option and the time and date of payment and delivery for any such
Option Shares. Any such time and date of delivery (an "Option Closing Date")
shall be determined by the Underwriters, but shall not be later than seven (7)
full business days after the exercise of said option, nor in any event prior to
the Closing Date, unless otherwise agreed upon by the Underwriters and the
Company. Nothing herein contained shall obligate the Underwriters to exercise
the option granted hereby. No Option Shares shall be delivered unless the Firm
Shares shall be simultaneously delivered or shall theretofore have been
delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the offices of JSC at 33 Maiden Lane, New
York, New York 10038, or at such other place as shall be agreed upon by the
Underwriters and the Company. Such delivery and payment shall be made at 10:00
a.m. (New York City time) on __________ __, 1998 or at such other time and date
as shall be agreed upon by the Underwriters and the Company, but not less than
three (3) nor more than seven (7) full business days after the effective date of
the Registration Statement (such time and date of payment and delivery being
herein called the "Closing Date"). In addition, in the event that any or all of
the Option Shares are purchased by the Underwriters, payment of the purchase
price for, and delivery of certificates for, such Option Shares shall be made at
the above mentioned office of JSC or at such other place as shall be agreed upon
by the Underwriters and the Company. Delivery of the certificates for the Firm
Shares and the Option Shares, if any, shall be made to the Underwriters against
payment by the Underwriters of the purchase price for the Firm Shares and the
Option Shares, if any, to the order of the Company by wire transfer.
Certificates for the Firm Shares and the Option Shares, if any, shall be in
definitive, fully registered form, shall bear no restrictive legends and shall
be in such denominations and registered in such names as the Underwriters may
request in writing at least two (2) business days prior to the Closing Date or
the relevant Option Closing Date, as the case may be. The certificates for the
Firm Shares and the Option Shares, if any, shall be made available to the
Underwriters at such offices or such other place as the Underwriters may
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designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to the Closing Date or the relevant Option Closing Date,
as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Underwriters or their designees the Underwriters' Warrants for an aggregate
purchase price of $.0001 per warrant, which warrants shall entitle the holders
thereof to purchase an aggregate of an additional 230,000 Shares. The
Underwriters' Warrants shall be exercisable for a period of four (4) years
commencing one (1) year from the effective date of the Registration Statement at
a price equaling one hundred and sixty-five percent (165%) of the initial public
offering price of the Shares. The Underwriters' Warrant Agreement and the form
of the certificates for the Underwriters' Warrants shall be substantially in the
form filed as Exhibit 1.2 to the Registration Statement. Payment for the
Underwriters' Warrants shall be made on the Closing Date.
3. PUBLIC OFFERING OF THE SHARES. As soon after the Registration
Statement becomes effective as the Underwriters deem advisable, the Underwriters
shall make a public offering of the Firm Shares and such of the Option Shares as
the Underwriters may determine (other than to residents of or in any
jurisdiction in which qualification of the Shares is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Underwriters may from time to time increase or decrease the public offering
price after distribution of the Shares has been completed to such extent as the
Underwriters, in their sole discretion, deem advisable. The Underwriters may
enter into one or more agreements as the Underwriters, in their sole discretion,
deem advisable with one or more broker-dealers who shall act as dealers in
connection with such public offering.
4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants
and agrees with the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or the
Exchange Act before termination of the offering of the Securities to the public
by the Underwriters of which the Underwriters shall not previously have been
advised and furnished with a copy, or to which the Underwriters shall have
objected or which is not in compliance with the Act, the Exchange Act and the
Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Underwriters and confirm the same in writing, (i)
when the Registration Statement, as amended, becomes effective, when any
post-effective amendment to the Registration Statement becomes effective and, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A, (ii) of the
issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding the outcome of which may result in the suspension
of the effectiveness of the Registration Statement or any order preventing or
suspending the use of the Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto, or the institution of any
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proceedings for that purpose, (iii) of the issuance by the Commission or by any
state securities commission of any proceedings for the suspension of the
qualification of any of the Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose,
(iv) of the receipt of any comments from the Commission, and (v) of any request
by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information. If the
Commission or any state securities regulatory authority shall enter a stop order
or suspend such qualification at any time, the Company will make every effort to
obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Underwriters) with the Commission, or transmit the
Prospectus by a means reasonably calculated to result in filing the same with
the Commission, pursuant to Rule 424(b)(1) of the Rules and Regulations (or, if
applicable and if consented to by the Underwriters, pursuant to Rule 424(b)(4)
of the Rules and Regulations) within the time period specified in Rule 424(b)(1)
(or, if applicable and if consented to by the Underwriters, Rule 424(b)(4)).
(d) The Company will give the Underwriters notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use in
connection with the offering of any of the Securities which differs from the
corresponding prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) of the Rules and Regulations), and will
furnish the Underwriters with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such amendment or supplement to which the Underwriters
or Orrick, Herrington & Sutcliffe LLP, its counsel ("Underwriters' Counsel"),
shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Underwriters, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Underwriters may reasonably designate to
permit the continuance of sales and dealings therein for as long as may be
necessary to complete the distribution contemplated hereby, and shall make such
applications, file such documents and furnish such information as may be
required for such purpose; PROVIDED, HOWEVER, the Company shall not be required
to qualify as a foreign corporation or file a general or limited consent to
service of process in any such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless the Underwriters agree
that such action is not at the time necessary or advisable, use all reasonable
efforts to file and make such statements or reports at such times as are or may
reasonably be required by the laws of such jurisdiction to continue such
qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act, the Exchange Act and the Rules and
Regulations so far as necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and
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<PAGE>
the Prospectus, or any amendments or supplements thereto. If, at any time when
a prospectus relating to the Securities is required to be delivered under the
Act, any event shall have occurred as a result of which, in the opinion of
counsel for the Company or Underwriters' Counsel, the Prospectus, as then
amended or supplemented, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances in which they
were made, not misleading, or if it is necessary at any time to amend or
supplement the prospectus to comply with the Act, the Company will notify the
Underwriters promptly and prepare and file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Act, each such
amendment or supplement to be satisfactory to Underwriters' Counsel, and the
Company will furnish to the Underwriters copies of such amendment or supplement
as soon as available and in such quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later than forty
five (45) days after the end of the 12 month period beginning on the day after
the end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (ninety (90) days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Underwriters, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least twelve (12) consecutive months after the effective
date of the Registration Statement.
(h) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
will deliver to the Underwriters:
i) unaudited quarterly reports of earnings as certified by the
Company's principal financial and accounting officer;
ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity and cash flows of the Company for such fiscal
year, accompanied by a copy of the report thereon of the Company's
independent certified public accountants;
iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the
NASD or any securities exchange;
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v) every press release and every material news item or article
of interest to the financial community in respect of the Company, or
its respective affairs which was released or prepared by or on behalf
of the Company; and
vi) any additional information of a public nature concerning the
Company (and any future subsidiaries) or its respective business which
the Underwriters may request.
During such five-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(i) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for the Common Stock.
(j) The Company will furnish to the Underwriters, without charge and
at such place as the Underwriters may designate, copies of each Preliminary
Prospectus, the Registration Statement and any pre-effective or post-effective
amendments thereto (one of which will be signed and will include all financial
statements and exhibits), the Prospectus, and all amendments and supplements
thereto, including any prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such quantities
as the Underwriters may request.
(k) On or before the effective date of the Registration Statement,
the Company shall provide the Underwriters with originally executed copies of
duly executed, legally binding and enforceable Lock-Up Agreements, which are in
form and substance satisfactory to the Underwriters. On or before the Closing
Date, the Company shall deliver instructions to its transfer agent authorizing
such transfer agent to place appropriate legends on the certificates
representing the securities of the Company subject to the Lock-Up Agreements and
to place appropriate stop transfer orders on the Company's ledgers.
(l) The Company agrees that, for the duration of the Lock-Up Period
(as defined in SECTION 1(w), it and its future subsidiaries will not, without
the prior written consent of JSC (i) issue, sell, contract or offer to sell,
grant an option for the purchase or sale of, assign, transfer, pledge,
hypothecate, distribute or otherwise dispose of, directly or indirectly, any
shares of capital stock or any option, right or warrant with respect to any
shares of capital stock or any security convertible, exchangeable or exercisable
for capital stock, provided, that the Company may, without consent of JSC, issue
securities (a) upon the exercise of any outstanding stock options or warrants
granted or issued on or prior to the date hereof, and (b) subject to the terms
of Section 4(u) of this Agreement, up to an additional 116,283 shares of Common
Stock issuable upon the exercise stock options which may be granted pursuant to
the Company's 1997 Stock Option Plan, or (ii) file any registration statement
for the offer or sale of securities issued or to be issued by the Company or any
present or future subsidiaries.
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(m) Neither the Company nor any of its officers or directors will
take, directly or indirectly, any action designed to stabilize or manipulate the
price of any securities of the Company, or which might in the future reasonably
be expected to cause or result in the stabilization or manipulation of the price
of any such securities.
(n) The Company shall apply the net proceeds from the sale of the
Securities offered to the public in the manner set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
(o) The Company shall timely file all such reports, forms or other
documents as may be required from time to time under the Act, the Exchange Act,
and the Rules and Regulations, and all such reports, forms and documents will
comply as to form and substance with the applicable requirements under the Act,
the Exchange Act and the Rules and Regulations.
(p) The Company shall furnish to the Underwriters as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date hereof, the Closing Date or the relevant Option Closing
Date, as the case may be) which have been read by the Company's independent
public accountants, as stated in their letters to be furnished pursuant to
SECTION 6(j) hereof.
(q) The Company shall cause the Common Stock to be quoted on the
Nasdaq SmallCap Market and, for a period of five (5) years from the date hereof,
use its best efforts to maintain quotation of the Common Stock to the extent
outstanding on the Nasdaq SmallCap Market or the Nasdaq National Market.
(r) For a period of three (3) years from the Closing Date, the
Company shall at the request of the Underwriters, furnish or cause to be
furnished to the Underwriters and at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Common Stock and (ii) a list of
holders of all of the Company's securities.
(s) For a period of three (3) years from the Closing Date, the
Company shall, at the Company's sole expense, (i) promptly provide the
Underwriters, upon any and all requests of the Underwriters, with a "blue sky
trading survey" for secondary sales of the Company's securities, prepared by
counsel to the Company, and (ii) take all necessary and appropriate actions to
further qualify the Company's securities in all jurisdictions of the United
States in order to permit secondary sales of such securities pursuant to the
"blue sky" laws of those jurisdictions, provided that such jurisdictions do not
require the Company to qualify as a foreign corporation.
(t) As soon as practicable, but in no event more than thirty (30)
days after the effective date of the Registration Statement, the Company agrees
to take all necessary and appropriate actions to be included in Standard and
Poor's Corporation Descriptions and Moody's OTC Manual and to continue such
inclusion for a period of not less than three (3) years.
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(u) Without the prior written consent of JSC, the Company hereby
agrees that it will not, for the duration of the Lock-Up Period, adopt, propose
to adopt or otherwise permit to exist any employee, officer, director,
consultant or compensation plan or arrangement (i) permitting the grant, issue,
sale or entry into any agreement to grant, issue or sell any option, warrant or
other contract right (a) at an exercise or sale price per share that is less
than the greater of the initial public offering price of the Shares set forth
herein or the fair market value per share of the Common Stock on the date of
grant or sale, or (b) upon payment of less than the full purchase or exercise
price for such shares of Common Stock or other securities of the Company on the
date of grant or issuance; or (ii) permitting the existence of stock
appreciation rights, phantom options or similar arrangements; or (iii)
permitting the payment for such securities with any form of consideration other
than cash; or (iv) permitting the maximum number of shares of Common Stock or
other securities of the Company purchasable at any time pursuant to options,
warrants or other contract rights to exceed 545,000 (excluding the Underwriters'
Warrants, the 100,000 warrants issued to the Bridge Investors and the
Underwriters' Option to purchase 230,000 shares to cover-allotments, if any); or
(v) to any direct or indirect beneficial holder on the date hereof of more than
10% of the issued and outstanding shares of Common Stock.
(v) Until the completion of the distribution of the Securities to the
public, and during any period during which a prospectus is required to be
delivered, the Company shall not, without the prior written consent of JSC,
issue, directly or indirectly, any press release or other communication or hold
any press conference with respect to the Company or its activities or the
offering contemplated hereby, other than trade releases issued in the ordinary
course of the Company's business consistent with past practices with respect to
the Company's operations.
(w) The Company agrees that:
i) For a period of five (5) years after the effective date of
the Registration Statement, the Company shall cause one (1) individual
selected by JSC, subject to the good faith approval of the Company, to
be elected to the Board of Directors of the Company (the "Board"), if
requested by JSC.
ii) In the event JSC elects not to exercise the right as set
forth above, then it may designate one person to attend all meetings
of the Company's Board of Directors for a period of five (5) years.
Such person shall be entitled to attend all such meetings and to
receive all notices and other correspondence and communications sent
by the Company to members of its Board of Directors.
iii) The Company shall reimburse JSC's designee for his or her
out-of-pocket expenses incurred in connection with his or her
attendance of the Board meetings.
iv) In the event JSC shall not have designated such individual
at the time of any meeting of the Board or such person has not been
elected or is unavailable to serve, the Company shall notify JSC of
each meeting of the Board.
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(x) For a period equal to the lesser of (i) five (5) years from the
date hereof, and (ii) the sale to the public of the Underwriters' Securities,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form S-1 for the registration under the Act of the
Underwriters' Securities.
(y) For the duration of the Lock-Up Period, the Company shall not
restate, amend or alter any term of any written employment, consulting or
similar agreement entered into between the Company and any officer, director or
key employee as of the effective date of the Registration Statement in a manner
which is more favorable to such officer, director or key employee, without the
prior written consent of JSC.
(aa) The Company will use its best efforts to maintain the
effectiveness of the Registration Statement for a period of five (5) years after
the date hereof.
5. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay (such payment to be made, at the
discretion of the Underwriters, on the Closing Date and any Option Closing Date
(to the extent not paid on the Closing Date or a previous Option Closing Date))
all expenses and fees (other than fees of Underwriters' Counsel, except as set
forth in clause (iv) below), incident to the performance of the obligations of
the Company under this Agreement and the Underwriters' Warrant Agreement,
including, without limitation, (i) the fees and expenses of accountants and
counsel for the Company, (ii) all costs and expenses incurred in connection with
the preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage, overnight
delivery or courier charges with respect thereto) of the Registration Statement
and the Prospectus and any amendments and supplements thereto and the printing,
mailing (including the payment of postage, overnight delivery or courier charges
with respect thereto) and delivery of this Agreement, the Underwriters' Warrant
Agreement and agreements with selected dealers, and related documents, including
the cost of all copies thereof and of each Preliminary Prospectus and of the
Prospectus and any amendments thereof or supplements thereto supplied to the
Underwriters and such dealers as the Underwriters may request, in such
quantities as the Underwriters may request, (iii) the printing, engraving,
issuance and delivery of the Securities, including transfer taxes, if any, (iv)
the qualification of the Securities under state or foreign securities or "blue
sky" laws and determination of the status of such securities under legal
investment laws, including the costs of printing and mailing the "Preliminary
Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal
Investments Survey," if any, and disbursements, expenses and fees of counsel in
connection therewith, (v) advertising costs and expenses, including, but not
limited to costs and expenses in connection with "road shows," information
meetings and presentations, bound volumes and prospectus memorabilia and
"tombstone" advertisement expenses, (vi) costs and expenses in connection with
due diligence investigations, including, but not limited to, the fees of any
independent counsel or consultants, (vii) fees and expenses of a transfer and
warrant agent and registrar for the Securities, (viii) applications for
assignments of a rating of the Securities by qualified rating agencies, (ix) the
fees payable to the Commission and the NASD, and (x) the fees
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and expenses incurred in connection with the quotation of the Securities on the
Nasdaq SmallCap Market and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of SECTION 6 or SECTION 10(a) hereof, the Company shall
reimburse and indemnify the Underwriters for all of their actual out-of-pocket
expenses, including the fees and disbursements of Underwriters' Counsel, less
any amounts already paid pursuant to SECTION 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to SECTION 5(a) hereof, it will pay to JSC on the Closing Date
by certified or bank cashier's check, or, at the election of JSC, by deduction
from the proceeds of the offering of the Firm Shares, a non-accountable expense
allowance equal to three percent (3%) of the gross proceeds received by the
Company from the sale of the Firm Shares, thirty thousand dollars ($30,000) of
which has been paid to date by the Company. In the event the Underwriters elect
to exercise the overallotment option described in SECTION 2(b) hereof, the
Company further agrees to pay to JSC on each Option Closing Date, by certified
or bank cashier's check, or, at JSC's election, by deduction from the proceeds
of the Option Shares purchased on such Option Closing Date, a non-accountable
expense allowance equal to three percent (3%) of the gross proceeds received by
the Company from the sale of such Option Shares.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date and each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date and each Option Closing Date, if
any, of the statements of officers of the Company made pursuant to the
provisions hereof; the performance by the Company on and as of the Closing Date
and each Option Closing Date, if any, of its covenants and obligations
hereunder; and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 p.m., New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Underwriters, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Underwriters of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
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(b) The Underwriters shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Underwriters' opinion, is material, or omits to state a
fact which, in the Underwriters' opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances in which they were made not misleading, or that the Prospectus, or
any supplement thereto, contains an untrue statement of fact which, in the
Underwriters' opinion, is material, or omits to state a fact which, in the
Underwriters' opinion, is material and is required to be stated therein or is
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriters shall have
received from Underwriters' Counsel such opinion or opinions with respect to the
organization of the Company, the validity of the Securities, the Registration
Statement, the Prospectus and such other related matters as the Underwriters may
request and Underwriters' Counsel shall have received such papers and
information as they may request in order to enable them to pass upon such
matters.
(d) On the Closing Date, the Underwriters shall have received the
favorable opinion of Troop Meisinger Steuber & Pasich, LLP, counsel to the
Company dated the Closing Date, addressed to the Underwriters, in form and
substance substantially as set forth in Exhibit A hereto and in form and
substance satisfactory to Underwriters' Counsel.
(e) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Troop Meisinger Steuber & Pasich, LLP, counsel
to the Company dated the relevant Option Closing Date, addressed to the
Underwriters, and in form and substance satisfactory to Underwriters' Counsel
confirming as of the Option Closing Date, the statements made by Troop Meisinger
Steuber & Pasich, LLP, in its opinion delivered on the Closing Date.
(f) On or prior to each of the Closing Date and each Option Closing
Date, if any, Underwriters' Counsel shall have been furnished with such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
SECTION 6(c) hereof, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company herein contained.
(g) Prior to the Closing Date and each Option Closing Date, if any,
(i) there shall have been no material adverse change or development involving a
prospective adverse change in the condition, financial or otherwise, or the
earnings, stockholders' equity, value, operations, properties, business or
results of operations of the Company, whether or not in the ordinary course of
business, from the latest dates as of which such matters are set forth in the
Registration Statement and the Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
from the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and the Prospectus; (iii) the Company shall
not be in default under any provision of any instrument relating to any
outstanding indebtedness; (iv) the Company shall not have issued any securities
(other than the Securities) or declared or paid any dividend or made any
distribution in respect of its capital stock
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of any class and there shall not have been any change in the capital stock, debt
(long or short term) or liabilities or obligations of the Company (contingent or
otherwise) from the latest dates as of which such matters are set forth in the
Registration Statement and the Prospectus; (v) no material amount of the assets
of the Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and the Prospectus; (vi) no action, suit, proceeding,
inquiry, arbitration, investigation, litigation or governmental or other
proceeding, domestic or foreign, shall be pending or threatened (or
circumstances giving rise to same) against the Company or affecting any of its
properties or business before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially and adversely affect the condition,
financial or otherwise, or the earnings, stockholders' equity, value,
operations, properties, business or results of operations of the Company taken
as a whole, except as set forth in the Registration Statement and Prospectus;
and (vii) no stop order shall have been issued under the Act with respect to the
Registration Statement and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(h) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial officer of the Company,
dated the Closing Date or the relevant Option Closing Date, as the case may be,
to the effect that each of such persons has carefully examined the Registration
Statement, the Prospectus and this Agreement, and that:
i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing
Date or the Option Closing Date, as the case may be, and the Company
has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement on its part to be performed or
satisfied at or prior to such Closing Date or Option Closing Date, as
the case may be;
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or,
to the best of each of such person's knowledge, are contemplated or
threatened under the Act;
iii) The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto contain all statements and
information required to be included therein, and none of the
Registration Statement, the Prospectus or any amendment or supplement
thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which
they were made, not misleading and neither the Preliminary Prospectus
nor any supplement thereto included any untrue statement of a material
fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; and
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<PAGE>
iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (A) the
Company has not incurred any material liabilities or obligations,
direct or contingent; (B) the Company has not paid or declared any
dividends or other distributions on its capital stock; (C) the Company
has not entered into any transactions not in the ordinary course of
business; (D) there has not been any change in the capital stock or
long-term debt or any increase in the short-term borrowings (other
than any increase in short-term borrowings in the ordinary course of
business) of the Company (E) the Company has not sustained any
material loss or damage to its property or assets, whether or not
insured; (F) there is no litigation which is pending or threatened (or
circumstances giving rise to same) against the Company or any
affiliate (within the meaning of the Rules and Regulations) of the
foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and (G) there
has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this SECTION 6(g)
are to such documents as amended and supplemented at the date of such
certificate.
(i) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters and the
Board of Directors of the Company and in form and substance satisfactory in all
respects (including the non-material nature of the changes or decreases, if any,
referred to in clause (iii) below) to the Underwriters and Underwriters'
Counsel, from Arthur Andersen LLP.
i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the Rules and Regulations;
ii) stating that it is their opinion that the financial
statements of the Company included in the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations and
that the Underwriters may rely upon the opinion of Arthur Andersen LLP
with respect to such financial statements and supporting schedules
included in the Registration Statement;
iii) stating that, on the basis of a limited review which
included a reading of the latest unaudited interim financial
statements of the Company, a reading of the latest available minutes
of the stockholders and board of directors and the various committees
of the board of directors of the Company, consultations with officers
and other employees of the Company responsible for financial and
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accounting matters and other specified procedures and inquiries,
nothing has come to their attention which would lead them to believe
that (A) the unaudited financial statements and supporting schedules
of the Company included in the Registration Statement do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not
fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of
the audited financial statements of the Company included in the
Registration Statement, (B) the pro forma financial information
contained in the Registration Statement and the Prospectus does not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or is
not fairly presented in conformity with generally accepted accounting
principles applied on a basis consistent with that of the audited
financial statements of the Company or the unaudited financial
information included in the Registration Statement and Prospectus or
(C) at a specified date no more than five (5) days prior to the
effective date of the Registration Statement, there has been any
change in the capital stock or long-term debt of the Company, or any
decrease in the stockholders' equity or net current assets or net
assets of the Company as compared with amounts shown in the December
31, 1997 balance sheet included in the Registration Statement, other
than as set forth in or contemplated by the Registration Statement,
or, if there was any change or decrease, setting forth the amount of
such change or decrease, and (D) during the period from December 31,
1997 to a specified date not more than five (5) days prior to the
effective date of the Registration Statement, there was any decrease
in net revenues, net earnings or net earnings per share of Common
Stock, in each case as compared with the corresponding period
beginning December 31, 1996, other than as set forth in or
contemplated by the Registration Statement, or, if there was any such
decrease, setting forth the amount of such decrease;
iv) setting forth, at a date not later than five (5) days prior
to the effective date of the Registration Statement, the amount of
liabilities of the Company (including a break down of commercial paper
and notes payable to banks);
v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in
the Prospectus, in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the
general accounting records, including work sheets, of the Company and
excluding any questions requiring an interpretation by legal counsel,
with the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures do not
constitute an audit in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
and
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vi) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriters may request.
(k) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Arthur Andersen LLP a letter, dated as of
the Closing Date or the relevant Option Closing Date, as the case may be, to the
effect that (i) it reaffirms the statements made in the letter furnished
pursuant to SECTION 6(i), (ii) if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that Arthur Andersen LLP has
carried out procedures as specified in clause (v) of SECTION 6(j) hereof with
respect to certain amounts, percentages and financial information as specified
by the Underwriters and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (v).
(l) On each of Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Underwriters the appropriate number of
Securities.
(m) No order suspending the sale of the Securities in any
jurisdiction designated by the Underwriters pursuant to SECTION 4(e) hereof
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(n) On or before the effective date of the Registration Statement,
the Company shall have executed and delivered to the Underwriters, the
Underwriters' Warrant Agreement, substantially in the form filed as Exhibit 1.2
to the Registration Statement. On or before the Closing Date, the Company shall
have executed and delivered to the Underwriters the Underwriters' Warrants in
such denominations and to such designees as shall have been provided to the
Company.
(o) On or before Closing Date, the Common Stock shall have been duly
approved for quotation on the Nasdaq SmallCap Market, subject to official notice
of issuance.
(p) On or before Closing Date, there shall have been delivered to the
Underwriters all of the Lock-Up Agreements, in form and substance satisfactory
to Underwriters' Counsel.
(q) On or before the Closing Date, the Company shall have (i)
executed and delivered to JSC the Consulting Agreement, substantially in the
form filed as Exhibit 10.16 to the Registration Statement and (ii) paid to JSC
$48,000 representing the retainer fee pursuant to the Consulting Agreement.
(r) At least two (2) full business days prior to the date hereof, the
Closing Date and each Option Closing Date, if any, the Company shall have
delivered to the Underwriters the
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unaudited interim financial statements required to be so delivered pursuant to
SECTION 4(p) of this Agreement.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or at any Option Closing Date, as the
case may be, is not so fulfilled, the Underwriters may terminate this Agreement
or, if the Underwriters so elect, they may waive any such conditions which have
not been fulfilled or extend the time for their fulfillment.
7. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this SECTION 7, "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriters, and each person, if any, who controls the Underwriters
("controlling person") within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, from and against any and all losses, claims, damages,
expenses or liabilities, joint or several (and actions, proceedings,
investigations, inquiries and suits in respect thereof), whatsoever (including
but not limited to any and all costs and expenses whatsoever reasonably incurred
in investigating, preparing or defending against such action, proceeding,
investigation, inquiry or suit commenced or threatened, or any claim
whatsoever), as such are incurred, to which the Underwriters or such controlling
person may become subject under the Act, the Exchange Act or any other statute
or at common law or otherwise or under the laws of foreign countries, arising
out of or based upon (A) any untrue statement or alleged untrue statement of a
material fact contained (i) in the Registration Statement, any Preliminary
Prospectus, or the Prospectus (as from time to time amended and supplemented);
(ii) in any post-effective amendment or amendments or any new registration
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the Securities; or (iii) in any application or
other document or written communication (in this SECTION 7, collectively
referred to as "applications") executed by the Company or based upon written
information furnished by the Company filed, delivered or used in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
the NASD, Nasdaq or any securities exchange; (B) the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading (in the case of the Prospectus, in
light of the circumstances in which they were made); or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or any Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be. The indemnity agreement in
this Section 7(a) shall be in addition to any liability which the Company may
have at common law or otherwise.
(b) Each of the Underwriters agree, severally but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration
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<PAGE>
Statement, and each person, if any, who controls the Company within the meaning
of the Act, to the same extent as the foregoing indemnity from the Company to
the Underwriters but only with respect to statements or omissions, if any, made
in any Preliminary Prospectus, the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto or in any application made in
reliance upon, and in strict conformity with, written information furnished to
the Company with respect to any Underwriter by such Underwriter expressly for
use in such Preliminary Prospectus, the Registration Statement or Prospectus or
any amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or the Prospectus directly
relating to the transactions effected by the Underwriters in connection with the
offering contemplated hereby. The Company acknowledges that the statements with
respect to the public offering of the Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in any Preliminary Prospectus, the Registration Statement or the
Prospectus. The indemnity agreement in this Section 7(b) shall be in addition
to any liability which the Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this SECTION
7 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against one or more indemnifying
parties under this SECTION 7, notify each party against whom indemnification is
to be sought in writing of the commencement thereof (but the failure to so
notify an indemnifying party shall not relieve it from any liability which it
may have under this SECTION 7 (except to the extent that it has been prejudiced
in any material respect by such failure) or from any liability which it may have
otherwise). In case any such action, investigation, inquiry, suit or proceeding
is brought against any indemnified party, and it notifies an indemnifying party
or parties of the commencement thereof, the indemnifying party or parties will
be entitled to participate therein, and to the extent it or they may elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, an indemnified party shall have the right to employ its own counsel
in any such case but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of such counsel
shall have been authorized in writing by the indemnifying parties in connection
with the defense of such action at the expense of the indemnifying party, (ii)
the indemnifying parties shall not have employed counsel reasonably satisfactory
to such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party shall have reasonably concluded that there may be defenses
available to it which are different from or additional to those available to one
or all of the indemnifying parties (in which event the indemnifying parties
shall not have the right to direct the defense of such action, investigation,
inquiry, suit or proceeding on behalf of the indemnified party or parties), in
any of which events such fees and expenses of one additional counsel shall be
borne by the indemnifying parties. In no event shall the indemnifying parties
be liable for fees and expenses of more than one counsel (in addition to any
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action, investigation, inquiry, suit or proceeding or
separate
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but similar or related actions, investigations, inquiries, suits or proceedings
in the same jurisdiction arising out of the same general allegations or
circumstances. An indemnifying party will not, without the prior written
consent of the indemnified parties, settle, compromise or consent to the entry
of any judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action), unless such settlement, compromise or consent
(i) includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party. Anything in this SECTION 7 to
the contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
PROVIDED, HOWEVER, that such consent may not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes a claim for indemnification
pursuant to this SECTION 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this SECTION 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, investigations, inquiries, suits or proceedings in respect thereof) (A)
in such proportion as is appropriate to reflect the relative benefits received
by each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand, from the offering of the Securities or (B) if
the allocation provided by clause (A) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (A) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is a contributing party
and the Underwriters are the indemnified party, 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
of the Securities (before deducting expenses) bear to the total underwriting
discounts received by the Underwriters hereunder, in each case as set forth in
the table on the cover page of the Prospectus. 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 or by the
Underwriters, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid by an indemnified party as a result of the losses, claims, damages,
expenses or liabilities (or actions, investigations, inquiries, suits or
proceedings in respect thereof) referred to in the first (1st) sentence of 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, claim, investigation, inquiry suit or proceeding.
Notwithstanding the provisions of this SECTION 7(d), the Underwriters shall not
be required to contribute any amount in excess of the
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underwriting discount applicable to the Securities purchased by the Underwriters
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 12(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
SECTION 7(d), each person, if any, who controls the Company or the Underwriters
within the meaning of the Act, each officer of the Company who has signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company or the Underwriters, as the case may be,
subject in each case to this SECTION 7(d). Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit,
inquiry, investigation or proceeding, against such party in respect to which a
claim for contribution may be made against another party or parties under this
SECTION 7(d), notify such party or parties from whom contribution may be sought,
but the omission to so notify such party or parties shall not relieve the party
or parties from whom contribution may be sought from any obligation it or they
may have hereunder or otherwise than under this SECTION 7(d), or to the extent
that such party or parties were not adversely affected by such omission.
Notwithstanding anything in this SECTION 7 to the contrary, no party will be
liable for contribution with respect to the settlement of any action or claim
effected without its written consent. The contribution agreement set forth
above shall be in addition to any liabilities which any indemnifying party may
have at common law or otherwise.
8. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company contained in this Agreement, or contained in certificates of officers of
the Company submitted pursuant hereto, shall be deemed to be representations,
warranties, covenants and agreements at the Closing Date and each Option Closing
Date, if any, and such representations, warranties, covenants and agreements of
the Company, and the respective indemnity and contribution agreements contained
in SECTION 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any of the Underwriters,
the Company, any controlling person of any of the Underwriters or the Company,
and shall survive the termination of this Agreement or the issuance and delivery
of the Securities to the Underwriters.
9. EFFECTIVE DATE. This Agreement shall become effective at 10:00
a.m., New York City time, on the next full business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Underwriters, in their discretion, shall release the Securities
for sale to the public; PROVIDED, however, that the provisions of SECTIONS 5, 7
and 10 of this Agreement shall at all times be effective. For purposes of this
SECTION 9, the Securities to be purchased hereunder shall be deemed to have been
so released upon the earlier of dispatch by the Underwriters of telegrams to
securities dealers releasing such shares for offering or the release by the
Underwriters for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. TERMINATION.
(a) Subject to SECTION 10(b) hereof, the Underwriters shall have the
right to terminate this Agreement: (i) if any domestic or international event or
act or occurrence has materially adversely disrupted, or in the Underwriters'
opinion will in the immediate future
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<PAGE>
materially adversely disrupt, the financial markets; or (ii) if any material
adverse change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
NASD, the Boston Stock Exchange, the Commission or any governmental authority
having jurisdiction over such matters; or (iv) if trading of any of the
securities of the Company shall have been suspended, or if any of the securities
of the Company shall have been delisted, on any exchange or in any
over-the-counter market; or (v) if the United States shall have become involved
in a war or major hostilities, or if there shall have been an escalation in an
existing war or major hostilities, or a national emergency shall have been
declared in the United States; or (vi) if a banking moratorium shall have been
declared by any state or federal authority; or (vii) if the Company shall have
sustained a material or substantial loss by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not such loss shall have been insured, will, in the Underwriters' opinion, make
it inadvisable to proceed with the delivery of the Securities; or (ix) if there
shall have occurred any outbreak or escalation of hostilities or any calamity or
crisis or there shall have been such a material adverse change in the conditions
or prospects of the Company, or if there shall have been such a material adverse
change in the general market, political or economic conditions, in the United
States or elsewhere, as in the Underwriters' judgment would make it inadvisable
to proceed with the offering, sale and/or delivery of the Securities; or (x) if
Mr. James Ung or Mr. Max Toghraie shall no longer serve the Company in their
present respective capacities.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of SECTION 6 or SECTION 10(a) hereof the Company shall
promptly reimburse and indemnify the Underwriters for all of their actual
out-of-pocket expenses, including the fees and disbursements of Underwriters'
Counsel, less amounts previously paid pursuant to SECTION 5(c) hereof. In
addition, the Company shall remain liable for all "blue sky" counsel fees and
expenses and "blue sky" filing fees. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to SECTIONS 6 and 10(a)
hereof), and whether or not this Agreement is otherwise carried out, the
provisions of SECTION 5 and SECTION 7 shall not be in any way be affected by
such election or termination or failure to carry out the terms of this Agreement
or any part hereof.
11. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing
Date or any Option Closing Date, as applicable, to sell and deliver the number
of Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Shares to be purchased on an Option Closing Date, the Underwriters may,
at their option, by notice from the Underwriters to the Company, terminate the
Underwriters' obligation to purchase Option Shares from the Company on such
date) without any liability on the part of any non-defaulting party other than
pursuant to SECTION 5, SECTION 7 and SECTION 10 hereof. No action taken
pursuant to this SECTION 11 shall relieve the Company from liability, if any, in
respect of such default.
12. NOTICES. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters
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shall be directed to the Underwriters at Joseph Stevens & Company, Inc., 33
Maiden Lane, 8th Floor, New York, NY 10038, Attention: Mr. Joseph Sorbara;
and to Royce Investment Group, Inc. ________________________________________;
with a copy to Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue, New
York, New York 10103, Attention: Rubi Finkelstein, Esq. Notices to the
Company shall be directed to the Company at CUMETRIX DATA SYSTEMS CORP., 957
Lawson Street, Industry, California 91748, with a copy to Troop Meisinger
Steuber & Pasich, LLP Attention: Murray Markiles, Esq.
13. PARTIES. This Agreement shall inure solely to the benefit of,
and shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in SECTION 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Shares from the Underwriters shall be deemed to be a
successor by reason merely of such purchase.
14. CONSTRUCTION. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York, without
giving effect to choice of law or conflict of laws principles.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
16. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, the Underwriters'
Warrant Agreement and the Consulting Agreement constitute the entire agreement
of the parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof and
thereof. This Agreement may not be amended except in a writing signed by the
Underwriters and the Company.
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If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
CUMETRIX DATA SYSTEMS CORP.
By:
------------------------------------
Max Toghraie
Chief Executive Officer
Confirmed and accepted as of
the date first above written.
JOSEPH STEVENS & COMPANY, INC.
By:
----------------------------------------
Name:
Title:
ROYCE INVESTMENT GROUP, INC.
By:
----------------------------------------
Name:
As Attorney-in-Fact for Royce Investment Group, Inc.
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SCHEDULE A
NUMBER OF SHARES
Joseph Stevens & Company, Inc.
Royce Investment Group, Inc.
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EXHIBIT 1.2
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CUMETRIX DATA SYSTEMS CORP.
AND
JOSEPH STEVENS & COMPANY, INC.
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UNDERWRITERS'
WARRANT AGREEMENT
APRIL __, 1998
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UNDERWRITERS' WARRANT AGREEMENT dated as of April __,1998 by and among
CUMETRIX DATA SYSTEMS CORP., a California corporation (the "Company"), JOSEPH
STEVENS & COMPANY, INC. ("Joseph Stevens"), and ROYCE INVESTMENT GROUP, INC.
("Royce")(collectively, Joseph Stevens and Royce are hereinafter referred to
variously as the "Holders" or the "Underwriters").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriters or its
designee(s) warrants ("Warrants") to purchase up to 230,000 shares ("Shares") of
common stock, no par value per share, of the Company ("Common Stock"); and
WHEREAS, the Underwriters have agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof by and
among the Underwriters and the Company to act as the underwriters in connection
with the proposed public offering of 2,300,000 shares of Common Stock at a
public offering price of $____ per share; and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Underwriters in consideration for, and as part
of the Underwriters' compensation in connection with the Underwriting Agreement;
NOW, THEREFORE, in consideration of the promises, the payment by the
Underwriters to the Company of twenty-three dollars ($23.00), the agreements
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
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1. GRANT. The Underwriters (or their designee(s)) are hereby
granted the right to purchase, at any time from April __, 1999 [one year from
the date hereof], until 5:00 p.m., New York time, on April __, 2003 [5 years
from the date hereof], up to 230,000 Shares at an initial exercise price
(subject to adjustment as provided in Section 8 hereof) of $____ per Share [165%
of the initial public offering price per share] subject to the terms and
conditions of this Agreement. Joseph Stevens or its designee(s) shall receive
certificate(s) evidencing the right to purchase up to an aggregate 211,600
Shares and Royce or its designee(s) shall receive certificate(s) evidencing the
right to purchase up to an aggregate 18,400 Shares.
2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
3. EXERCISE OF WARRANT.
3.1 METHOD OF EXERCISE. The Warrants are initially exercisable at an
initial exercise price per Share set forth in Section 6 hereof payable by
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 8 hereof. Upon surrender of a Warrant
Certificate, together with the annexed Form of Election to Purchase duly
executed and payment of the Exercise Price (as hereinafter defined) for the
Shares purchased at the Company's principal offices, located at 957 Lawson
Street, Industry, California 91748, the registered holder of a Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the Shares so purchased. The purchase rights represented by
each Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional shares of the Common Stock underlying
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the Warrants). Warrants may be exercised to purchase all or part of the Shares
represented thereby. In the case of the purchase of less than all the Shares
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the Shares purchasable
thereunder.
3.2 EXERCISE BY SURRENDER OF WARRANT. In addition to the method of
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in full or in part by surrendering
the Warrant Certificate in the manner specified in Section 3.1 in exchange for
the number of Shares equal to the product of (x) the number of Shares as to
which the Warrants are being exercised, multiplied by (y) a fraction, the
numerator of which is the Market Price (as defined in Section 3.3 hereof) of the
Shares minus the Exercise Price of the Shares and the denominator of which is
the Market Price per Share. Solely for the purposes of this Section 3.2, Market
Price shall be calculated either (i) on the date on which the form of election
attached hereto is deemed to have been sent to the Company pursuant to Section
13 hereof ("Notice Date") or (ii) as the average of the Market Price for each of
the five trading days immediately preceding the Notice Date, whichever of (i) or
(ii) results in a greater Market Price.
3.3 DEFINITION OF MARKET PRICE.
(a) As used herein, the phrase "Market Price" of the Shares, at any
date shall be deemed to be the last reported sale price of the Common Stock, or,
in case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange
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on which shares of the Common Stock are listed or admitted to trading or by the
Nasdaq National Market ("Nasdaq/NM") or the Nasdaq Small Cap Market ("Nasdaq
Small Cap"), or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted by the National Association of Securities
Dealers Automated Quotation System ("Nasdaq"), the average closing bid price as
furnished by the National Association of Securities Dealers, Inc. ("NASD")
through Nasdaq or similar organization if Nasdaq is no longer reporting such
information. If the Market Price of the Shares cannot be determined pursuant to
the sentence above, the Market Price of the Shares shall be determined in good
faith (using customary valuation methods) by resolution of the members of the
Board of Directors of the Company, based on the best information available to
it.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock or other securities,
properties or rights underlying such Warrants shall be made forthwith (and in
any event such issuance shall be made within five (5) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall (subject to the provisions of Sections 5 and 7 hereof) be issued in the
name of, or in such names as may be directed by, the Holder thereof.
The Warrant Certificates and the certificates representing the shares
of Common Stock underlying the Warrants or other securities, property or rights
shall be executed on behalf of the Company by the manual or facsimile signature
of the then present Chairman or Vice Chairman of the Board of Directors or
President or Vice President of the Company under its corporate seal reproduced
thereon, attested to by the manual or facsimile signature of the then present
Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of the
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Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers or partners of the Underwriters.
6. EXERCISE PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $____ per Share [165% of the initial public offering price per Share]. The
adjusted exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in accordance with
the provisions of Section 8 hereof.
6.2 EXERCISE PRICE. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context.
7. REGISTRATION RIGHTS.
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Warrants and
the shares of Common Stock underlying the Warrants and any other securities
issuable upon exercise of the Warrants (collectively, the "Warrant Securities")
have not been registered under the Securities Act of 1933, as amended (the
"Act"), pursuant to the Company's Registration Statement on Form S-1
(Registration No. 333-43151) (the "Registration
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Statement"). Upon exercise, in part or in whole, of the Warrants, certificates
representing the Warrant Securities shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), and
may not be offered, sold, pledged, hypothecated, assigned or
transferred except pursuant to (i) an effective registration statement
under the Act, (ii) to the extent applicable, Rule 144 under the Act
(or any similar rule under such Act relating to the disposition of
securities), or (iii) an opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel to the issuer, that an exemption
from registration under such Act is available.
7.2 PIGGYBACK REGISTRATION. If, at any time commencing after the
date hereof and expiring seven (7) years thereafter, the Company proposes to
register any of its securities under the Act (other than pursuant to Form S-8,
S-4 or a comparable registration statement), the Company will give written
notice by registered mail, at least thirty (30) days prior to the filing of each
such registration statement, to the Underwriters and to all other Holders of the
Warrants and/or the Warrant Securities of its intention to do so. If the
Underwriters or other Holders of the Warrants and/or Warrant Securities notify
the Company within twenty (20) days after receipt of any such notice of their
desire to include any such securities in such proposed registration statement,
the Company shall afford the Underwriters and such Holders of the Warrants
and/or Warrant Securities the opportunity to have any such Warrant Securities
registered under such registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
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7.3 DEMAND REGISTRATION.
(a) At any time after the date hereof and expiring five (5) years
thereafter, the Holders of the Warrants and/or Warrant Securities representing a
"Majority" (as hereinafter defined) of such securities (assuming the exercise of
all of the Warrants) shall have the right (which right is in addition to the
registration rights under Section 7.2 hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Securities and
Exchange Commission (the "Commission"), on one occasion, a registration
statement and such other documents, including a prospectus, as may be necessary
in the opinion of both counsel for the Company and counsel for the Underwriters
and Holders, in order to comply with the provisions of the Act, so as to permit
a public offering and sale of their respective Warrant Securities for nine (9)
consecutive months by such Holders and any other Holders of the Warrants and/or
Warrant Securities who notify the Company within ten (10) days after receiving
notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in Section 7.4(a) hereof pursuant to the
written notice specified in Section 7.3(a) of a Majority of the Holders of the
Warrants and/or Warrant Securities, the Company shall have the option, upon the
written notice of election of a Majority of the Holders of the Warrants and/or
Warrant Securities to repurchase (i) any and all Warrant
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Securities at the higher of the Market Price per Share of Common Stock on (x)
the date of the notice sent pursuant to Section 7.3(a) or (y) the expiration of
the period specified in Section 7.4(a) and (ii) any and all Warrants at such
Market Price less the Exercise Price of such Warrant. Such repurchase shall be
in immediately available funds and shall close within two (2) days after the
later of (i) the expiration of the period specified in Section 7.4(a) or
(ii) the delivery of the written notice of election specified in this Section
7.3(c).
(d) In addition to the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time commencing after the date hereof
and expiring five (5) years thereafter, any Holder of Warrants and/or Warrant
Securities shall have the right, exercisable by written request to the Company,
to have the Company prepare and file, on one occasion, with the Commission a
registration statement so as to permit a public offering and sale for nine (9)
consecutive months by any such Holder of its Warrant Securities provided,
however, that the provisions of Section 7.4(b) hereof shall not apply to any
such registration request and registration and all costs incident thereto shall
be at the expense of the Holder or Holders making such request.
7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall
use its best efforts to have any registration statement declared effective
at the earliest possible time, and shall furnish each Holder desiring to
sell Warrant Securities such number of prospectuses as shall reasonably be
requested.
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(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses.
The Holder(s) will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(d). If the Company
shall fail to comply with the provisions of Section 7.4(a), the Company
shall, in addition to any other equitable or other relief available to the
Holder(s), be liable for any or all incidental or special damages sustained
by the Holder(s) requesting registration of their Warrant Securities,
excluding consequential damages.
(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Securities included in a
registration statement for offering and sale under the securities or blue
sky laws of such states as reasonably are requested by the Holder(s),
provided that the Company shall not be obligated to execute or file any
general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each
person, if any, who controls such Holders within the meaning of Section 15
of the Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"), against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them
may become subject under the Act, the Exchange Act or otherwise, arising
from
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such registration statement but only to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to
indemnify the Underwriters contained in Section 7 of the Underwriting
Agreement. The Company further agree(s) that upon demand by an indemnified
person, at any time or from time to time, it will promptly reimburse such
indemnified person for any loss, claim, damage, liability, cost or expense
actually and reasonably paid by the indemnified person as to which the
Company has indemnified such person pursuant hereto. Notwithstanding the
foregoing provisions of this Section 7.4(d) any such payment or
reimbursement by the Company of fees, expenses or disbursements incurred by
an indemnified person in any proceeding in which a final judgment by a
court of competent jurisdiction (after all appeals or the expiration of
time to appeal) is entered against the Company or such indemnified person
as a direct result of the Holder(s) or such person's gross negligence or
willful misfeasance will be promptly repaid to the Company.
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally,
and not jointly, indemnify the Company, its officers and directors and each
person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage or expense or liability (including all expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to
which they may become subject under the Act, the Exchange Act or otherwise,
arising from information furnished by or on behalf of such Holders, or
their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 7 of the
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Underwriting Agreement pursuant to which the Underwriters have agreed to
indemnify the Company. The Holder(s) further agree(s) that upon demand by
an indemnified person, at any time or from time to time, they will promptly
reimburse such indemnified person for any loss, claim, damage, liability,
cost or expense actually and reasonably paid by the indemnified person as
to which the Holder(s) have indemnified such person pursuant hereto.
Notwithstanding the foregoing provisions of this Section 7.4(e) any such
payment or reimbursement by the Holder(s) of fees, expenses or
disbursements incurred by an indemnified person in any proceeding in which
a final judgment by a court of competent jurisdiction (after all appeals or
the expiration of time to appeal) is entered against the Company or such
indemnified person as a direct result of the Company or such person's gross
negligence or willful misfeasance will be promptly repaid to the Holder(s).
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial
filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities
other than the Warrant Securities to be included in any registration
statement filed pursuant to Section 7.3 hereof other than the holders of
securities in the Company's private placement consummated through closings
on November 26, 1997, December 16, 1997, and December 23, 1997, without the
prior written consent of the Holders of the Warrants and Warrant Securities
representing a Majority of such securities (assuming the exercise of all of
the Warrants).
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(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed
to such Holder or underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the
date of the closing under the underwriting agreement), and (ii) a "cold
comfort" letter dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, a
letter dated the date of the closing under the underwriting agreement)
signed by the independent public accountants who have issued a report on
the Company's financial statements included in such registration statement,
in each case covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the
case of such accountants' letter, with respect to events subsequent to the
date of such financial statements, as are customarily covered in opinions
of issuer's counsel and in accountants' letters delivered to underwriters
in underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of
at least 12 consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall deliver promptly to each Holder participating
in the offering requesting the correspondence and memoranda described below
and to the
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managing underwriter, if any, copies of all correspondence between the
Commission and the Company, its counsel or auditors and all memoranda
relating to discussions with the Commission or its staff with respect to
the registration statement and permit each Holder and underwriter to do
such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement as it
deems reasonably necessary to comply with applicable securities laws or
rules of the NASD. Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the
Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder or
underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriter selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested to be included in such
underwriting, which may be Joseph Stevens or Royce. Such agreement shall
be satisfactory in form and substance to the Company, each Holder and such
managing underwriter, and shall contain such representations, warranties
and covenants by the Company and such other terms as are customarily
contained in agreements of that type used by the managing underwriter. The
Holders shall be parties to any underwriting agreement relating to an
underwritten sale of their Warrant Securities and may, at their option,
require that any or all of the representations, warranties and covenants of
the Company to or for the benefit of such underwriters shall also be made
to and for the benefit of such Holders. Such Holders shall not be required
to make any representations or warranties to or agreements with
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the Company or the underwriters except as they may relate to such Holders
and their intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written request
therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of
the date of filing of such registration statement, including without
limitation, restricted shares of Common Stock, options, warrants or any
other securities convertible into shares of Common Stock.
(m) For purposes of this Agreement, the term "Majority" in reference
to the Holders of Warrants or Warrant Securities shall mean in excess of
fifty percent (50%) of the then outstanding Warrants or Warrant Securities
that (i) are not held by the Company, an affiliate, officer, creditor,
employee or agent thereof or any of their respective affiliates, members of
their family, persons acting as nominees or in conjunction therewith and
(ii) have not been resold to the public pursuant to a registration
statement filed with the Commission under the Act.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
8.1 SUBDIVISION AND COMBINATION. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
8.2 STOCK DIVIDENDS AND DISTRIBUTIONS. In case the Company shall pay
dividend in, or make a distribution of, shares of Common Stock or of the
Company's capital stock convertible into Common Stock, the Exercise Price shall
forthwith be proportionately
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decreased. An adjustment made pursuant to this Section 8.2 shall be made as of
the record date for the subject stock dividend or distribution.
8.3 ADJUSTMENT IN NUMBER OF SECURITIES. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 8, the number of
Warrant Securities issuable upon the exercise at the adjusted Exercise Price of
each Warrant shall be adjusted to the nearest whole number by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
8.4 DEFINITION OF COMMON STOCK. For the purpose of this Agreement,
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the Certificate of Incorporation of the Company as may be amended or
restated as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value.
8.5 MERGER OR CONSOLIDATION OR SALE.
(a) In case of any consolidation of the Company with, or merger of
the Company with, or merger of the Company into, another corporation (other than
a consolidation or merger which does not result in any reclassification or
change of the outstanding Common Stock), the corporation formed by such
consolidation or merger shall execute and deliver to the Holder a supplemental
warrant agreement providing that the holder of each Warrant then outstanding or
to be outstanding shall have the right thereafter (until the expiration of such
Warrant) to receive, upon exercise of such Warrant, the kind and amount of
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shares of stock and other securities and property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in this Section 8. The above provision of
this subsection shall similarly apply to successive consolidations or mergers.
(b) In the event of (i) the sale by the Company of all or
substantially all of its assets, or (ii) the engagement by the Company or any of
its affiliates in a "Rule 13e-3 transaction" as defined in paragraph (a)(3) of
Rule 13e-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended, or (iii) a distribution to the Company's stockholders
of any cash, assets, property, rights, evidences of indebtedness, securities or
any other thing of value, or any combination thereof, the Holders of the
unexercised Warrants shall receive notice of such sale, transaction or
distribution twenty (20) days prior to the date of such sale or the record date
for such transaction or distribution, as applicable, and, if they exercise such
Warrants prior to such date, they shall be entitled, in addition to the shares
of Common Stock issuable upon the exercise thereof, to receive such property,
cash, assets, rights, evidence of indebtedness, securities or any other thing of
value, or any combination thereof, on the payment date of such sale, transaction
or distribution.
8.6 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No adjustment
of the Exercise Price shall be made if the amount of said adjustment shall be
less than ten cents (10 CENTS) per Warrant Security, provided, however, that in
such case any adjustment that would otherwise be required then to be made shall
be carried forward and shall be made at the time
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of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least ten cents (10 CENTS) per
Warrant Security.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Shares in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock, or other securities, properties
or rights.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof.
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The Company covenants and agrees that, upon exercise of the Warrants and payment
of the Exercise Price therefor, all shares of Common Stock and other securities
issuable upon such exercise shall be duly and validly issued, fully paid, non-
assessable and not subject to the preemptive rights of any stockholder. As long
as the Warrants shall be outstanding, the Company shall use its best efforts to
cause all shares of Common Stock issuable upon the exercise of the Warrants to
be listed (subject to official notice of issuance) on all securities exchanges
on which the Common Stock issued to the public in connection herewith may then
be listed and/or quoted on Nasdaq National Market or Nasdaq Small Cap Market.
12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on
the books of the Company; or
(b) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
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(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least twenty (20) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 hereof
or to such other address as the Company may designate by notice to the
Holders.
(c) If to the Underwriters, to Joseph Stevens & Company, Inc., 33
Maiden Lane, New York, New York, 10038, Attention: Joseph Sorbara; and to
Royce Investment Group, Inc. ___________________________________________.
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14. SUPPLEMENTS AND AMENDMENTS. The Company and the Underwriters may
from time to time supplement or amend this Agreement without the approval of any
Holders of Warrant Certificates (other than the Underwriters) in order to cure
any ambiguity, to correct or supplement any provision contained herein which may
be defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Underwriters may deem necessary or desirable and which the Company and
the Underwriters deem shall not adversely affect the interests of the Holders of
Warrant Certificates.
15. SUCCESSORS. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close of
business on April __, 2005. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on April __, 2011.
17. GOVERNING LAW, SUBMISSION TO JURISDICTION. This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company, the Underwriters and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Underwriters and the Holders hereby
20
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irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum. Any such process or summons to be served upon any of the Company, the
Underwriters and the Holders (at the option of the party bringing such action,
proceeding or claim) may be served by transmitting a copy thereof, by registered
or certified mail, return receipt requested, postage prepaid, addressed to it at
the address as set forth in Section 13 hereof. Such mailing shall be deemed
personal service and shall be legal and binding upon the party so served in any
action, proceeding or claim. The Company, the Underwriters and the Holders
agree that the prevailing party(ies) in any such action or proceeding shall be
entitled to recover from the other party(ies) all of its/their reasonable legal
costs and expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefor.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contain the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
19. SEVERABILITY. If any provision of this Agreement shall be held
to be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
20. CAPTIONS. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Underwriters
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and any other registered Holder(s) of the Warrant Certificates or Warrant
Securities any legal or equitable right, remedy or claim under this Agreement;
and this Agreement shall be for the sole and exclusive benefit of the Company
and the Underwriters and any other Holder(s) of the Warrant Certificates or
Warrant Securities.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall constitute but one and the same
instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
CUMETRIX DATA SYSTEMS CORP.
By:
-----------------------------------
Max Toghraie
Chief Executive Officer
Attest:
- -------------------------
Secretary
JOSEPH STEVENS & COMPANY, INC.
By:
-----------------------------------
Name:
Title:
ROYCE INVESTMENT GROUP, INC.
By:
-----------------------------------
Name:
As Attorney-In-Fact for
Royce Investment Group, Inc.
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION
OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE
ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, __________, 2003
No. UW-01 Warrants to Purchase ________
Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that______________________________,
or registered assigns, is the registered holder of Warrants to purchase
initially, at any time from __________, 1999 until 5:00 p.m. New York time on
__________, 2003 ("Expiration Date"), up to 230,000 fully paid and
non-assessable shares of common stock, no par value ("Common Stock") of
CUMETRIX DATA SYSTEMS CORP., a California corporation (the "Company"), at the
initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $____ per share upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, or by surrender of this Warrant Certificate in lieu of cash payment,
but subject to the conditions set forth herein and in the warrant agreement
dated as of __________, 1998 by and among the Company, Joseph Stevens &
Company, Inc. and Royce Investment Group, Inc. (the "Warrant Agreement").
Payment of the Exercise Price shall be made by certified or official bank
check in New York Clearing House funds payable to the order of the Company or
by surrender of this Warrant Certificate.
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No Warrant may be exercised after 5:00 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
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IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of April __, 1998
CUMETRIX DATA SYSTEMS CORP.
[SEAL] By:
----------------------------------------
Max Toghraie
Chief Executive Officer
Attest:
- --------------------------
Secretary
3
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[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _____________ Shares and
herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of CUMETRIX DATA
SYSTEMS CORP. in the amount of $__________, all in accordance with the terms of
Section 3.1 of the Underwriters' Warrant Agreement dated as of ___________, 1998
by and among CUMETRIX DATA SYSTEMS CORP., Joseph Stevens & Company, Inc., and
Royce Investment Group, Inc. The undersigned requests that certificates for such
securities be registered in the name of _______________ whose address is
__________________________ and that such certificates be delivered to
______________________________ whose address is ____________________________.
Dated:
Signature
-------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
4
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ____________ Shares all in
accordance with the terms of Section 3.2 of the Underwriters' Warrant Agreement
dated as of ______________, 1998 by and among CUMETRIX DATA SYSTEMS CORP.,
Joseph Stevens & Company, Inc., and Royce Investment Group, Inc. The
undersigned requests that certificates for such securities be registered in the
name of __________________ whose address is _______________________ and that
such certificates be delivered to _____________________ whose address is
____________________________________.
Dated:
Signature
-------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
5
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _____________ hereby sells, assigns and transfers
unto
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:
--------------------------- ----------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CUMETRIX DATA SYSTEMS CORP.:
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
April 3, 1998
