<PAGE>
As filed with the Securities and Exchange Commission on January 29, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM SB-2
REGISTRATION STATEMENT
Under The Securities Act of 1933
---------------------
FRISBY TECHNOLOGIES, INC.
(exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 3086 62-1411534
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification Number)
</TABLE>
417 South Main Street, Freeport, New York 11520 (516) 378-0162
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
---------------------
Gregory S. Frisby
Chief Executive Officer
417 South Main Street
Freeport, NY 11520
(516) 378-0162
(516) 378-0262 (fax)
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
Irvin Brum, Esq. Shari K. Krouner, Esq.
William A. Ubert, Esq. Kramer, Levin, Naftalis & Frankel
Margo L. Intrator, Esq. 919 Third Avenue
Ruskin, Moscou, Evans & Faltischek, P.C. New York, New York 10022
170 Old Country Road (212) 715-9100
Mineola, New York 11501 (212) 715-8000 (fax)
(516) 663-6600
(516) 663-6641 (fax)
---------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of each Class of Number of Shares to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered(1) Offering Price per Share Aggregate Offering Price Registration Fee
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 1,840,000(2) $ 8.00 $14,720,000 $ 4,342.40
Common Stock, $.001 par value(3) 160,000 $ 9.60 $ 1,536,000 $ 453.12
Total Fee ...................................................................................................... $ 4,795.52
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 240,0000 shares to cover the Over-Allotment Option.
(3) Issuable upon exercise of the Underwriter's Option.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION, DATED JANUARY 29, 1998
PROSPECTUS
[GRAPHIC OMITTED]
FRISBY TECHNOLOGIES, INC.
1,600,000 Shares
Common Stock
Frisby Technologies, Inc. (the "Company") hereby offers (the "Offering")
1,600,000 shares of common stock, $.001 par value per share (the "Common
Stock"). Prior to the Offering, there has been no public market for the Common
Stock. The Company has applied for the listing of its Common Stock on the
Nasdaq SmallCap Market under the proposed symbol "FRIS" and on the Pacific
Exchange ("PacEx") under the proposed symbol "FRS". It is currently estimated
that the initial public offering price of the Common Stock will be between
$6.00 and $8.00 per share. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND
SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD
TO SUSTAIN A TOTAL LOSS OF THEIR INVESTMENT. PROSPECTIVE PURCHASERS SHOULD
CONSIDER CAREFULLY THE MATTERS SET FORTH UNDER "RISK FACTORS" BEGINNING ON
PAGE 9 OF THIS PROSPECTUS.
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<TABLE>
<CAPTION>
Underwriting Discounts
Price to Public and Commissions (1) Proceeds to Company (2)
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<S> <C> <C> <C>
Per Share ......... $ $ $
Total (3) ......... $ $ $
</TABLE>
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(1) Does not reflect additional compensation to be received by the Underwriter
including: (i) a non-accountable expense allowance equal to three percent
of the gross proceeds of the Offering (of which $40,000 has been paid);
and (ii) an option entitling the Underwriter to purchase from the Company,
for a period of five years from the date of this Prospectus, up to 160,000
shares of Common Stock at an exercise price equal to 120% of the initial
public offering price (the "Underwriter's Option").
(2) Before deducting expenses of the Offering payable by the Company (including
the Underwriter's non-accountable expense allowance) estimated at $______
($______ if the Over-Allotment Option is exercised in full). See "Use of
Proceeds."
(3) The Company has granted to the Underwriter an option (the "Over-Allotment
Option"), exercisable within 45 days after the date of the Offering to
purchase up to 240,000 additional shares of Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments. If the
Over-Allotment Option is exercised in full, the total Price to Public,
total Underwriting Discounts and Commissions and total Proceeds to Company
will be $_______, $_______ and $_______, respectively. See "Underwriting."
The Common Stock offered hereby is subject to prior sale, when, as and if
delivered to and accepted by the Underwriter, and subject to approval of
certain legal matters by its counsel and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject any order in whole or part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made at the
offices of Barington Capital Group, 888 Seventh Avenue, New York, New York
10019, on or about ___________, 1998.
BARINGTON CAPITAL GROUP
The date of this Prospectus is _____________, 1998
<PAGE>
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Group Photograph
of product applications
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Depicted above are various product applications incorporating the
Company's Thermasorb(R) and ComforTemp(R) products.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
ON THE NASDAQ SMALLCAP MARKET, REGIONAL MARKETS OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK ON THE OPEN MARKET IN ORDER TO
STABILIZE THE MARKET PRICE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
---------------------
Upon completion of the Offering, the Company will be subject to the
reporting requirements of the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
---------------------
Thermasorb(R) and ComforTemp(R) are registered trademarks of the Company
and the Company has applied for trademark registration for Comfort in the
Extreme(TM). This Prospectus also contains trademarks and trade names of other
companies.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
------------------------------------------ ----------------------------------------
Photograph of
LOGO Gloves Photograph of
COMFORTEMP & Helmet
HangTag Ear-warmers
------------------------------------------ ----------------------------------------
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Photograph of Photograph of Photograph of
Waders Boots Packaging
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Depicted above are various product
applications incorporating the Company's
Thermasorb(R) and ComforTemp(R) products.
- ---------------------------------------- ------------------------------------------ ----------------------------------------
The Company's thermal managment
technology utilized in Thermasorb(R)
additives and CorforTemp(R) foams provide
the following unique characteristics:
o Intelligent thermal management -- provide
pre-selected temperature control;
o Versatile -- may be incorporated into a
wide variety of end-use products;
Photograph of o Lightweight -- lighter and less bulky than Photograph of
Thermasorb(R) additive conventional insulating materials; ComforTemp(R) foam
o Durable -- typically outlasts product to
which it is applied;
o Rechargeable -- continuous, automatic thermal
management;
o Customizable -- may be engineered to meet the
requirements of applications across a wide
temperature range;
o Complementary -- may be used to enhance other
insulating products.
- ---------------------------------------- ------------------------------------------ ----------------------------------------
The Company's Thermasorb(R) additive. The Company's ComforTemp(R) product in
the form of polyurethane foam.
<PAGE>
Unless otherwise indicated, the information contained in this Prospectus
assumes the reincorporation of the Company in the State of Delaware (which will
take place before the completion of the Offering) has been accomplished and the
Over-Allotment Option is not exercised. Except as otherwise indicated, all
share information and per share amounts set forth in this Prospectus have been
adjusted to reflect a 5,679-for-one stock split of the Common Stock and the
issuance of 441,327 shares of the Company's Common Stock in a private
placement, concluded prior to the commencement of the Offering. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
such forward-looking statements. Factors that might cause such differences
include, but are not limited to, those discussed under the heading "Risk
Factors." The shares offered hereby involve a high degree of risk.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and should be read in conjunction with that
information and those financial statements and notes. Prospective investors are
urged to read this Prospectus in its entirety.
THE COMPANY
Frisby Technologies, Inc. (the "Company") is engaged in the development
and commercialization of innovative advanced thermal management products for
use in a broad range of consumer and industrial products such as gloves, boots,
athletic footwear, apparel, protective and temperature retardant equipment,
electronics cooling systems, packaging materials, and coating substances. The
Company's Thermasorb(R) and ComforTemp(R) products utilize licensed patents and
the Company's proprietary microencapsulated phase change material ("MicroPCM")
technology to enhance thermal characteristics (i.e., insulation, cooling or
temperature control properties) of these and a variety of other consumer and
industrial products. For example, when ComforTemp(R) foams are incorporated
into ski gloves, the skier's hands remain within a constant, pre-set
temperature range without the typical accumulation of moisture. If a firefighter
were to wear flame retardant clothing incorporating ComforTemp(R) foam, the
firefighter would remain cooler and be able to fight fires longer and more
safely than a firefighter wearing flame retardant clothing without ComforTemp(R)
foam.
The Company's marketing strategy is based on penetrating large select
markets for its thermal management technology through relationships with
strategic partners. The Company works closely with its strategic partners
within each market to develop commercially viable product applications. To
date, the Company has entered into such strategic partnerships with, among
others, Wells Lamont Division of Marmon Holdings, Inc., LaCrosse Footwear, Inc.
and Bell Sports Corp.
Industry Overview
Thermal management is the process by which the temperature of various
materials is controlled or manipulated. The thermal management materials
industry consists primarily of a wide variety of non-phase change materials
such as Thinsulate(R) brand insulation for use in apparel; flexible and rigid
polyurethane foams for use in footwear, sporting goods, automotive and
transportation industries; specialized chemical additives for use in
temperature resistant paints and coatings; and liquid coolants for use in
aerospace, automotive and computer/electronics cooling systems. Phase change
thermal management materials are comprised of materials that have the ability
to absorb and reject large amounts of heat by changing from solid to liquid and
back, thereby greatly enhancing the ability to heat or cool a particular
object. According to a 1997 study conducted by the Society of Plastics,
Polyurethane Division, the U.S. market for polyurethane (a major host material
for the Company's Thermasorb(R) additives and also a major component of the
Company's ComforTemp(R) series of foams) for 1996 was 4.6 billion pounds. By
way of illustration only, if the Company were to incorporate its products into
just one percent of the products currently using polyurethane, the Company
would expect sales of approximately 11 million pounds of its Thermasorb(R)
additive.
3
<PAGE>
The Company believes that its products are the first to combine the two
distinct technologies of thermal management phase change materials ("PCMs") and
microencapsulation to effect meaningful thermal performance improvements within
applications across broad markets. Microencapsulation is the enclosing of
materials inside a microscopic shell to maintain the integrity of the enclosed
material. The combination of PCM technology with microencapsulation technology
overcomes many of the inherent shortcomings of non-encapsulated PCMs, such as
the tendency of non-encapsulated PCMs to lose their integrity, and to
dissipate, evaporate or exhaust themselves over time. Microencapsulation
permits PCMs to be imbedded into a variety of host materials, while maintaining
the integrity and thermal functionality of the core PCMs. Microencapsulation is
a proven technology and has been used extensively in the pharmaceutical
industry (time release medication) and the paper industry (carbonless copy
paper). Since its advent, microencapsulation has been increasingly utilized
across diverse applications. Management believes that the technology will
continue to gain further penetration and usage in different fields, including
thermal management.
Products
The Company's products offer impressive and cost-effective thermal
management solutions for a broad range of industries. The Company's current
MicroPCM based products consist of a series of thermal additives and a series
of foams in which the thermal additives are embedded. The Company currently
markets its thermal additives and foams under the trademarks Thermasorb(R) and
ComforTemp(R), respectively.
Thermasorb(R) additives are a series of thermal management additives
developed using the latest advances in microencapsulation technology.
Thermasorb(R) MicroPCMs are micron-sized particles in the form of a dry,
free-flowing powder, consisting of a heat absorbing core material encapsulated
within a proprietary, durable shell wall. Thermasorb(R) additives can improve
the thermal storage capacity of a variety of host materials, including liquid,
foam, epoxy or composite materials. Thermasorb(R) additives are currently
commercially available in a variety of transition temperatures ranging from 43o
F to 190o F. Thermasorb(R) additives incorporated into solid materials enable
those materials to absorb up to ten times more heat than traditional insulating
materials. In tests performed for the United States Air Force by Triangle
Research and Development Corp. ("TRDC"), the principal licensor of the
Company's technology, liquid coolants containing Thermasorb(R) additives were
shown to remove up to 40 times more heat than traditional coolants.
ComforTemp(R) foams are a series of foam products that contain embedded
Thermasorb(R) additives. ComforTemp(R) foams can be fabricated in different
ways to have the ability to retain or exclude heat thereby maintaining a more
constant temperature. ComforTemp(R) foams are currently available in a light,
breathable polyurethane foam which has the added capability of wicking away
moisture while maintaining comfort in extreme hot or cold climates. For cold
weather apparel products, the greatest asset of ComforTemp(R) foams is the
ability to retain body heat during periods of activity and to release the heat
back to the individual during periods of inactivity when the body is most in
need of warmth. ComforTemp(R) foams "recharge" naturally depending on the
individual level of physical activity or other external conditions. For hot
weather products, ComforTemp(R) foams can be used as a thin thermal
barrier/heat shield to protect against extreme heat as well as to facilitate
the regulation of body heat generated during activity thereby providing a
cooling effect.
The Company's thermal management technology utilized in Thermasorb(R)
additives and ComforTemp(R) foams provide the following unique characteristics:
o Intelligent thermal management -- provide pre-selected temperature control;
o Versatile -- may be incorporated into a wide variety of end-use products;
o Lightweight -- lighter and less bulky than conventional insulating
materials;
o Durable -- typically outlasts product to which it is applied;
o Rechargeable -- continuous, automatic thermal management;
o Customizable -- may be engineered to meet the requirements of applications
across a wide temperature range;
o Maintenance free -- no maintenance or power source required; and
o Complementary -- may be used to enhance other insulating products.
4
<PAGE>
Strategy
The Company's current primary objective is to increase acceptance and
usage of its existing products and to adapt such products for use in additional
consumer and commercial products within targeted industries through strategic
partnerships with leaders in such industries. The Company intends to establish
its Thermasorb(R) and ComforTemp(R) products as the most advanced thermal
management products available, and to establish Thermasorb(R) and ComforTemp(R)
as internationally recognized consumer and industrial brands.
A significant portion of the Company's marketing and brand promotion
efforts are coordinated with its strategic partners. The Company's agreements
with its strategic partners typically obligate the strategic partner to display
and promote the Company's trademarks, including Thermasorb(R) and
ComforTemp(R), in all promotional materials, point of sale displays and direct
product advertising relating to end-products incorporating the Company's
products. The Company refers to these efforts as "co-branding."
The Company's products are currently being marketed commercially in
apparel, footwear and sporting goods products. Three additional fields in which
its products are most likely to become commercially feasible in the near term
are home furnishings, shipping/packaging and healthcare. In the future, the
Company's plans include developing products and establishing strategic
partnerships in the automotive, aerospace and computers and electronics
industries.
The Company's strategy is to pursue product applications which it
determines can: (i) offer significant growth potential within large,
established and/or growing markets; (ii) generate attractive margins and
enhanced brand recognition while having low capital requirements; (iii) meet a
significant unmet market need; and (iv) provide a strong proprietary
opportunity for industry leaders entering into strategic partnerships with the
Company. Once a specific market or product is identified, the Company seeks to
introduce that product by: (i) targeting a market leader in that specific
industry; (ii) establishing a strategic relationship with that market leader;
(iii) working closely with its strategic partner to develop the optimal
characteristics and marketing efforts for each product incorporating the
Company's products; and (iv) coordinating with its strategic partner to
maximize market penetration including penetration of the mass market.
The Company's current plans involve maximizing the commercial viability
and success of its thermal management products. From time to time, the Company
becomes aware of and considers conducting funded research projects that do not
relate to thermal management. The Company expects to evaluate future funded
research and development projects on a case-by-case basis and will engage in
those projects management considers to offer complementary opportunities for
the Company.
Strategic Partners
Through mid-1996, the Company focused its efforts on acquiring patent
licenses and developing proprietary technology and identifying and testing
potential applications for its innovative thermal management products. During
that period, the Company generated substantially all of its revenues from
United States government related research and development contracts. In March
1996, the Company began to commercially market its Thermasorb(R) and
ComforTemp(R) products.
After the conclusion of this Offering, the Company anticipates that it
will generate revenues from two principal sources: (i) sales of its
Thermasorb(R) and ComforTemp(R) products for use in the products of its
strategic partners; and (ii) royalties from the use of the Thermasorb(R) and
ComforTemp(R) trademarks by its strategic partners based on a percentage of its
strategic partners' sales of products containing the Company's products to
end-users. The Company also may receive license fees and development fees from
some strategic partners for the grant of exclusive rights within a specific
product category and for development services provided by the Company.
5
<PAGE>
To date, the Company's products have been incorporated into and are
currently being sold to consumers of products such as HotFingers(TM) ski gloves
by Wells Lamont, ski and snowboard helmets by Bell Sports Corp., hiking boots
and snowboots by Cove Shoe Company and Genfoot, Inc., and fishing waders by Fly
Technologies, Inc. In addition, the Company's products are currently being
incorporated into products such as snowboots by LaCrosse Footwear, Inc. and
personal hydration systems by FasTrak Systems, Inc., each of which are expected
to be made available for sale to consumers in 1998.
The Company is currently in negotiations with additional entities that are
interested in entering into strategic partnerships for the use of Thermasorb(R)
additives or ComforTemp(R) foams in their products. These companies are in the
technical outerwear, athletic footwear, home furnishing, shipping and
packaging, healthcare, automotive, aerospace, and computer and electronics
industries.
History
The Company was incorporated in North Carolina in November 1989 and is
expected to be reincorporated in Delaware in January 1998. The Company's
principal executive office is located at 417 South Main Street, Freeport, New
York 11520. Its telephone number is (516) 378-0162 and its web sites are
http://www.frisby.com and http://www.comfortemp.com.
6
<PAGE>
The Offering
</TABLE>
<TABLE>
<S> <C>
Common Stock Offered by the Company (1) ............ 1,600,000 shares
Common Stock Outstanding
Immediately Prior to the Offering (2) ............ 3,280,613 shares
Common Stock to be Outstanding
Following the Offering (1) (2) ................... 4,880,613 shares
Risk Factors ....................................... The shares of Common Stock offered hereby
involve a high degree of risk and should be pur-
chased only by persons who can afford to sustain
a total loss of their investment. See "Risk Factors"
and "Dilution."
Use of Proceeds .................................... The net proceeds of the Offering will be used by
the Company to provide resources for: (i) sales
and marketing; (ii) product development; (iii)
capital expenditures; (iv) research and develop-
ment; and (v) working capital. See "Use of
Proceeds."
Proposed Nasdaq SmallCap Market Symbol (3) ......... FRIS
Proposed PacEx Symbol (3) .......................... FRS
</TABLE>
- -------------
(1) Does not include: (i) 240,000 shares of Common Stock issuable upon exercise
of the Over-Allotment Option; or (ii) 160,000 shares of Common Stock
issuable upon exercise of the Underwriter's Option. See "Underwriting."
(2) Does not include: (i) 587,500 shares of Common Stock issuable upon
conversion of 587,500 shares of the Company's convertible preferred stock
(the "Convertible Preferred Stock") issuable upon exercise of an option
(the "Private Placement Option") issued in connection with a private
placement concluded in December 1997 (the "Private Placement"); or (ii)
250,000 shares of Common Stock reserved for issuance upon exercise of
options which may be granted under the Company's 1997 Stock Option Plan
(the "Stock Option Plan") which will be adopted prior to the completion of
the Offering. See "Capitalization," "Management -- Stock Option Plan,"
"Certain Transactions" and "Description of Securities."
(3) There is currently no market for the Common Stock and there can be no
assurance that a market for the Common Stock will develop after the
Offering. The Company has applied for the listing of its Common Stock on
the Nasdaq SmallCap Market and the PacEx. There can be no assurance,
however, that such listing will be granted or, if granted, maintained. See
"Risk Factors -- No Prior Market for the Common Stock; Determination of
Offering Price; Potential Volatility of Stock Price."
7
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data presented below under the captions "Statement
of Operations Data" and "Balance Sheet Data" for and as of the end of each of
the periods indicated are derived from the financial statements of the Company
appearing elsewhere herein. The information set forth below should be read in
conjunction with such financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The summary financial data presented below as of September 30,
1997 and for the nine months ended September 30, 1996 and 1997 are unaudited;
however, in the opinion of the Company, all adjustments necessary for the fair
presentation of the results of such periods consisting only of normal recurring
adjustments have been included. The results of operations for the nine months
ended September 30, 1997 may not be indicative of results of operations for the
full year ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
----------------------------- -------------------------------
1995 1996 1996 1997
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue ............................... $ 882,000 $1,208,000 $ 955,000 $ 922,000
Cost of sales ......................... 579,000 1,036,000 753,000 745,000
---------- ---------- ---------- -----------
Gross profit .......................... 303,000 173,000 202,000 177,000
Operating expenses:
Selling and marketing ............... 33,000 83,000 75,000 283,000
General and administrative .......... 242,000 207,000 131,000 575,000
---------- ---------- ---------- -----------
Total operating expenses .............. 275,000 290,000 206,000 858,000
---------- ---------- ---------- -----------
Income (loss) from operations ......... 28,000 (118,000) (3,000) (681,000)
Net income (loss) ..................... $ 6,000 $ (88,000) $ (5,000) $ (751,000)
========== ========== ========== ===========
Pro forma net income (loss) per
share(1) ............................ $ 0.00 $ (0.03) $ 0.00 $ (0.24)
========== ========== ========== ===========
Pro forma shares used in
computing pro forma net income
(loss) per share(1) ................. 3,154,000 3,154,000 3,154,000 3,154,000
========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------------------------
Pro Forma
Actual Pro Forma(2) As Adjusted(2)(3)
------------- -------------- ------------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash ................................... $ 24,000 $ 697,000 $ 9,841,000
Working capital (deficit) .............. (873,000) 702,000 9,846,000
Total assets ........................... 643,000 1,216,000 10,360,000
Note payable ........................... 500,000 -- --
Due to related party ................... 402,000 -- --
Stockholders' equity (deficit) ......... (809,000) 791,000 9,935,000
</TABLE>
- -------------
(1) The shares used in the historical calculation of shares outstanding for the
respective periods have been presented pro forma to give effect to an
additional 314,000 shares resulting from the December 1997 Private
Placement, applying the principles of Staff Accounting Bulletin 83 of the
Securities and Exchange Commission. See Note 2 of notes to financial
statements.
(2) Pro forma to give effect to the issuance and sale in December 1997 by the
Company of 441,327 shares of Common Stock for an aggregate purchase price
of $2,500,000 pursuant to the Private Placement, receipt by the Company of
approximately $1,600,000 in proceeds net of $900,000 of related expenses,
of which approximately $100,000 had been paid prior to September 30, 1997,
and the application of approximately $1,027,000 therefrom for the
repayment of loans owed to affiliated parties and financial institutions,
including approximately $125,000 of loans from affiliated parties made
after September 30, 1997. See "Certain Transactions."
(3) Pro forma, as adjusted to give effect to the sale by the Company of the
1,600,000 shares of Common Stock offered hereby at the assumed initial
offering price of $7.00 per share and receipt of the estimated net
proceeds therefrom. See "Use of Proceeds."
8
<PAGE>
RISK FACTORS
The shares of Common Stock offered hereby involve substantial risks and
should be purchased only by persons who can afford to sustain the loss of their
entire investment. The following risk factors, in addition to the other
information and financial data set forth elsewhere in this Prospectus, should
be considered carefully in evaluating the Company and its business before
making an investment in the Common Stock. The risks described below and
elsewhere in this Prospectus are not intended to be an exhaustive list of the
general or specific risks involved, but merely to identify certain risks that
are now foreseen by the Company. It must be recognized that other risks, not
now foreseen, might become significant in the future and that the risks, which
are now foreseen, might affect the Company to a greater extent than now
foreseen or in a manner not now contemplated. Furthermore, this Prospectus
contains certain forward-looking statements that are based on current
expectations, estimates and projections about the business of the Company and
the industry in which the Company operates, management's beliefs and
assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks" and "estimates," variations on such
words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. The Company's actual results could differ materially from those
expressed or forecasted in these forward-looking statements as a result of
certain factors, including those set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
elsewhere in this Prospectus. Each prospective investor should carefully
consider all information contained in this Prospectus and should give
particular consideration to the following risk factors before deciding to
purchase the Common Stock offered hereby.
Limited Operating History
The Company was formed in 1989 and has a limited operating history. The
Company's activities to date have primarily related to: (i) the identification
and licensing of, and research and materials development related to, its
MicroPCM technology, the rights to which were initially licensed to the Company
in 1991; (ii) the arrangement of the contract manufacturing of MicroPCMs by
third-party suppliers; (iii) identification of initial target markets and entry
into strategic partnerships in those markets; and (iv) the limited
commercialization by the Company's first strategic partners of thermal
management products incorporating the Company's Thermasorb(R) additives and
ComforTemp(R) foams. The Company commenced producing and selling its products
commercially in mid-1996 and, as of December 31, 1997, the Company had entered
into seven agreements with strategic partners. The Company intends to rely
extensively upon the "co-branding" of its products with the products of its
strategic partners. The Company's co-branding strategy involves requiring its
strategic partners to display the Company's trademarks, Thermasorb(R) and
ComforTemp(R), on or in conjunction with end-use products incorporating its
products and in all advertising relating to those products. There can be no
assurance that the Company, alone or with its strategic partners, will be able
to create awareness of, and demand for, the Company's products through their
respective marketing efforts. The failure of the Company's co-branding approach
to marketing would require the Company to develop its marketing capabilities at
a potentially higher cost to the Company. Further, there can be no assurance
that the Company's co-branding strategy will be successful or, if successful,
that such program will lead to increased sales of the Company's products and
services. If the Company's co-branding strategy is not successful, there can be
no assurance that the Company will have sufficient resources to develop its own
marketing program or, if developed, that such program will be successful. See
"Business -- Strategy" and "-- Sales and Marketing."
Additionally, the Company's business and its operations are subject to
unanticipated expenses, uncertain market acceptance, competition, government
regulation, increases in costs, delays and risks inherent in the establishment
of a new business enterprise, including limited capital, and delays in product
development by the Company or its strategic partners. There can be no assurance
that the Company will succeed in addressing any or all of these risks, and
failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Products" and "-- Technology Overview."
Accumulated Losses; Reduction in Government-Funded Development; Possible Need
for Additional Financing
For the fiscal years ended December 31, 1995 and 1996 and for the nine
months ended September 30, 1997, the Company had net income (loss) of $6,000,
$(88,000), and $(751,000), respectively. The Company had a
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working capital deficit of $873,000 at September 30, 1997, and an accumulated
deficit of $810,000 through September 30, 1997. The Company anticipates that it
will continue to sustain losses through 1999, principally as a result of
expenses associated with the Company's continuing product development efforts
and anticipated selling, marketing and general administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
A significant portion of the $5,218,000 in revenues earned by the Company
since its inception through September 30, 1997 was generated from performing
contracts and providing engineering services directly or indirectly for the
United States government. Income from these contracts accounted for 96.3%,
92.7% and 34.2% of the Company's revenues for the fiscal years ended December
31, 1995 and December 31, 1996 and the nine months ended September 30, 1997,
respectively, and substantially funded the Company's development efforts.
Except for three of these contracts which provide for future development
payments to the Company totalling approximately $350,000, these contracts were
fully or substantially completed as of September 30, 1997. The Company does not
believe that it is materially dependent on a continued flow of revenue from
existing or future government related contracts. The Company currently expects
to continue to solicit approximately $500,000 per year of government related
contracts and to fund any remaining development efforts through license fees,
product sales and royalties. There can be no assurance that the United States
government and the related contracting parties will not curtail or eliminate
their expenditures for services of the type provided by the Company, or if not
curtailed or eliminated, that the Company will be successful in obtaining
contracts to perform such services in the future. See "Business -- Research and
Development."
The Company believes that the net proceeds from the Offering will be
sufficient to satisfy the Company's working capital requirements for a period
of approximately 24 months following completion of the Offering. No assurance
can be given that the Company will become profitable in such time or
thereafter. In the event that the Company's plans change, its assumptions prove
to be inaccurate (due to unanticipated expenses, difficulties, delays or
otherwise) or the proceeds of the Offering otherwise prove to be insufficient
to fund the implementation of the Company's business strategy and working
capital requirements, the Company could be required to seek additional
financing. The Company has no commitments for any future funding, and there can
be no assurance that the Company will be able to obtain additional capital in
the future. The type, timing and terms of such funding, if available, will be
determined by prevailing conditions in the financial markets and the Company's
financial condition, among other factors. If the Company requires additional
capital and is unable to obtain such capital, it may be required to
significantly curtail its activities which would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Market Acceptance
Since its inception, the Company has focused its product development
efforts on research and development with respect to its Thermasorb(R) and
ComforTemp(R) products and market applications incorporating Thermasorb(R)
additives and ComforTemp(R) foams which the Company believes will be superior
to similar applications utilizing currently available non-MicroPCM
technologies. As with any new technology, there is a risk that the market may
not appreciate the benefits of or recognize the potential applications for the
technology. See "Business -- Strategy."
In order for the Company to achieve broad market acceptance of its thermal
management products, the Company must demonstrate to potential consumers and
strategic partners that its additives or its products made therefrom are useful
in addition to or as replacements for existing thermal management technology.
The Company's strategy is to achieve and capitalize upon brand recognition of
its thermal management technologies in high profit markets. However, there can
be no assurance that the Company's existing or future products will be
commercially accepted. The Company's targeted strategic partner base may not
change the established thermal management technologies incorporated in their
products and may not make the necessary investment to purchase the Company's
products. If market acceptance of the Company's products does not develop, the
Company's prospects would be materially adversely affected.
Dependence Upon Intellectual Property
The Company's business is dependent on the continued validity of the
patents that it licenses and the effectiveness of its licenses to such patents.
The Company has a license agreement (the "TRDC License") with
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TRDC for the exclusive worldwide right to develop and commercialize all
patented and proprietary bulk PCMs and MicroPCM technologies owned presently or
in the future by TRDC ("TRDC Technology") with the exception of MicroPCMs
relating to fibers and fabrics with reversible enhanced thermal storage
properties ("MicroPCM Fibers and Fabrics"). TRDC's principal, Dr. David P.
Colvin, Ph.D., is a member of the Company's Innovation Advisory Board. The TRDC
Technology currently includes nine issued and one pending United States patent.
TRDC or its licensees have applied for international patent protection for
three of the issued patents. The TRDC License also grants to the Company the
exclusive right and license to sublicense, to manufacture bulk PCMs, MicroPCMs,
end-use products, and any improvements thereto based on the TRDC Technology,
and to market, sell, use, lease or distribute all applications of such products
worldwide, with the exception of MicroPCM Fibers and Fabrics. The Company has
been advised that TRDC has assigned its right to receive payments under the
TRDC License to an affiliated entity. See "Management -- Innovation Advisory
Board."
The rights to the portion of the TRDC Technology relating to MicroPCM
Fibers and Fabrics were licensed by TRDC to Outlast Technologies, Inc.
("Outlast") prior to the Company's licensing all of the other rights to the
TRDC Technology under the TRDC License. In order to further expand its rights
in the TRDC Technology, in January 1998, the Company entered into an agreement
with Outlast (the "Outlast Agreement"). The Outlast Agreement expands the
rights of the Company to include combinations of the Company's products with
fibers and fabrics. Under the Outlast Agreement, the Company has exclusive
rights, for most applications, to manufacture, sub-license and sell
ComforTemp(R) foams that are attached to fibers and fabrics or intended to be
attached to fibers or fabrics so long as the foam is greater than 2mm in
thickness. The Company also may sell Thermasorb(R) additives for use in such
foams to be attached to fibers and fabrics. The Company agreed to pay Outlast a
royalty if its products are used in certain combinations with fibers and
fabrics, with minimum annual payment requirements in effect for as long as the
Company desires the agreement to be exclusive (including exclusive of Outlast).
Pursuant to the Outlast Agreement, Outlast will not sell fabrics or fibers
attached to ComforTemp(R)-type foams greater than 2mm in thickness for ten
years, unless the Company elects to permit its agreement to become
non-exclusive.
The Company intends to seek TRDC's acknowledgment that Thermasorb(R) and
ComforTemp(R) products, on which royalties are paid under the Outlast
Agreement, will not be claimed to be royalty-bearing under the Company's TRDC
License. No assurance can be given that the Company will receive TRDC's
acknowledgment, and even if obtained, that claims will not be made or, if made,
will not be successful. In the event of any dispute as to which products of the
Company fall under the TRDC License and which, if any, fall under the Outlast
Agreement, the Company believes that it would avoid paying royalties to both
TRDC and Outlast on the same products by instituting an interpleader action and
depositing the higher royalty into court for distribution to the appropriate
licensor. No assurance can be given that such a procedure will be approved by
any court, if it becomes necessary. The Outlast Agreement further provides,
that if the scope of Outlast's license is restricted by agreement or court
decision in a challenge by any third party, the Outlast Agreement is
automatically restricted to the same extent. No assurance can be given that
under circumstances not presently foreseen the Company could not be required to
pay royalties to both TRDC and Outlast on certain product sales.
There can be no assurance that any steps taken by the Company to protect
its intellectual property will be adequate to prevent misappropriation, that
any patents or copyrights issued to the Company or its licensors will not be
invalidated, circumvented or challenged, or that the rights granted thereunder
will provide a competitive advantage. TRDC and the Company are jointly
responsible for the protection of the intellectual property licensed by the
Company from TRDC. Both Outlast and the Company are responsible for the
protection of the intellectual property sublicensed from Outlast. In addition,
laws of certain countries in which the Company's products are, or may be
developed, manufactured or sold, may not provide the Company's products and
intellectual property rights with the same degree of protection as the laws of
the United States. Furthermore, there can be no assurance that others will not
independently develop technologies similar or superior to the Company's
technology and obtain patents, trademarks or copyrights thereon. In such event,
the Company may not be able to license such technologies on reasonable terms,
or at all. Although the Company believes that its products and technology do
not infringe upon proprietary rights of others, there can be no assurance that
third parties will not assert infringement claims in the future. Moreover,
litigation may be necessary in the future to enforce the Company's rights under
licensed patents, copyrights and other intellectual property rights, to protect
the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of
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infringement or invalidity. Such litigation, regardless of the outcome, could
result in substantial cost and diversion of resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Patents/Intellectual Property."
In addition to patent protection, the Company seeks to protect its
proprietary information through confidentiality and non-competition agreements
with its employees, directors, licensees, customers, strategic partners,
consultants, advisors and collaborators. There can be no assurance that such
agreements will not be breached, that the Company will have adequate remedies
for any such breach or that the Company's proprietary information will not
otherwise become known to, or be independently developed by, the Company's
competitors. See "Business -- Patents/Intellectual Property."
The Company holds federal registrations of the trademarks Thermasorb(R)
and ComforTemp(R), Canadian registration for the trademark ComforTemp(R) and
has applied for trademark registration for Comfort in the Extreme(TM) in the
United States. The Company has also filed for international registrations for
ComforTemp(R) in the European Community. There can be no assurance that the
registered or unregistered trademarks of the Company do not infringe upon the
rights of third parties or that third parties will not assert claims of
infringement. The cost to defend such claims or the requirement to change any
trademark (which would result in the loss of any goodwill associated with that
trademark) could entail significant expense and have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Patents/Intellectual Property."
Dependence on Small Number of Strategic Partners; Limited Sales and Marketing
Experience
The Company received approximately 66% of its revenue for the nine months
ended September 30, 1997 from product sales, royalties and fees from three
strategic partners. While its agreements with its strategic partners require
minimum annual purchases of Thermasorb(R) additives and ComforTemp(R) foams and
royalty payments on the sale of goods utilizing Thermasorb(R) additives and
ComforTemp(R) foams for such strategic partners to retain the exclusivity of
their rights within specified product categories, there can be no assurance
that these strategic partners will not seek to terminate their agreements, will
fail to purchase such minimum quantities and/or fail to pay any royalties to
the Company. There can be no assurance that these or any other strategic
partners will renew or enter into such agreements with the Company in the
future. To the extent that the Company's current strategic partners fail to
renew their agreements, the Company will be forced to find new strategic
partners to replace them. To the extent that the Company is unable to
successfully replace such strategic partners or to enter agreements with
additional strategic partners, the Company's business, financial condition and
results of operations would be materially adversely affected. See "Business --
Strategic Partners."
In the event that sales by the Company's strategic partners of products
incorporating the Company's products cease or are curtailed for any reason, the
Company will experience a significant adverse effect on its cash flow. No
assurance can be given that the Company's existing strategic partners will be
able to generate sufficient sales of products incorporating the Company's
products, immediately or within a reasonable time after entering into
agreements with the Company, to enable the Company to achieve its business
plan.
The present management of the Company has limited experience with respect
to the sales and marketing of thermal management products to retail and
industrial markets. To date, the Company has only two employees dedicated to
sales and marketing. From the time the Company began to commercialize its
products in 1996 through September 30, 1997, the Company has generated $488,000
from sales of its Thermasorb(R) and ComforTemp(R) products.
Dependence on Single Source Providers for Manufacturing
The Company currently outsources the manufacture of all of its products,
including Thermasorb(R) additives and ComforTemp(R) foams to a limited number
of manufacturers. For the nine months ended September 30, 1997, all of the
Company's Thermasorb(R) additives were manufactured under a purchase order with
Minnesota Mining and Manufacturing, Inc. ("3M") and all of the Company's
ComforTemp(R) foams were manufactured under a purchase order with Lendell
Manufacturing, Inc. ("LMI"). The Company and 3M have entered into a letter
agreement that provides firm, fixed pricing for all of the Company's
anticipated Thermasorb(R) requirements, as
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well as favorable pricing and delivery terms for short run and prototype
production volumes. The letter agreement requires the Company to place a
blanket purchase order for 1998 which will be completed prior to the Offering.
The Company has also received written assurances from 3M regarding 3M's desire
to enter into a long-term supply agreement for the manufacture of the Company's
Thermasorb(R) additive. The Company also has executed a non-binding agreement
with Foamex International, Inc. ("Foamex") for the manufacture of certain foam
products not manufactured by LMI and the right to sell, co-exclusively with the
Company, ComforTemp(R) polyurethane foams. While the Company believes that its
relationship with Foamex will provide the Company with an additional, high
capacity, source of supply for polyurethane foams and access to as yet untapped
areas for new strategic partnerships, there can be no assurance that the
Company and Foamex will finalize a definitive agreement or that any of the
perceived benefits will materialize. No assurance can be given that the Company
will be able to procure long-term supply contracts with either 3M, LMI, Foamex
or any of its other suppliers. To date, the Company has not experienced
difficulty in connection with the delivery of Thermasorb(R) additives or
ComforTemp(R) foams. If for any reason the Company is unable or unwilling to
procure long-term supply contracts with such suppliers or if any of its
suppliers are unable to meet the Company's requirements, the Company could
experience cost increases, a deterioration of services from its suppliers, or
interruptions, delays or a reduction that may cause the Company to fail to meet
delivery schedules to its strategic partners which in turn may have a material
adverse effect on the Company's business. See "Business -- Sales and Marketing"
and "-- The Manufacturing Process."
Although the Company believes that alternate suppliers exist for the
manufacture of Thermasorb(R) additives and ComforTemp(R) foams in sufficient
quantities and at competitive prices with its current suppliers, any
unanticipated interruption of supply would have, at a minimum, a short-term
material adverse effect on the Company. The Company may outsource the
manufacture of some portion of its products to other domestic or international
manufacturers in the future. The Company has no current arrangement with any
such domestic or international alternative manufacturer, and there can be no
assurance that the Company will be able to negotiate acceptable arrangements,
or if negotiated, that such arrangements will be on terms and conditions
acceptable to the Company. Any difficulties encountered by third-party
manufacturers which result in product defects, production delays, cost overruns
or the inability to fulfill orders on a timely basis could have a material
adverse effect on the Company. See "Business -- The Manufacturing Process."
Alternative Technologies; Technological Obsolescence
The thermal management products industry is characterized by rapid
technological change and frequent introduction of new products and product
enhancements which result in relatively short product life cycles and rapid
product obsolescence. There can be no assurance that the Company will be able
to identify and offer thermal management products necessary to remain
competitive and avoid losses related to obsolete inventory or related drastic
price reductions.
The thermal management products industry presents continuing opportunities
for the development of alternative insulating and protective devices and
technologies. The development and commercialization of alternative thermal
management technologies that are less expensive, more effective or more
efficient than the Company's technologies could place the Company at a
competitive disadvantage. There can be no assurance that the Company will
successfully distinguish itself from its competitors, or that the market will
consider the products incorporating the Company's products to be superior to
its competitors' products or that the Company will be able to adapt to evolving
markets and technologies, develop new products or achieve and maintain
technological advantages. See "Business -- Technology Overview" and "--
Competition."
Risks Associated With Business Plan and Strategy; Need for Additional Personnel
The Company has formulated its business plan and strategy based upon
certain assumptions regarding the size of the thermal management products
market, the Company's anticipated share of this market, the price at which the
Company believes it will be able to sell its products, and consumer acceptance
of the Company's products. There can be no assurance that the Company's
assumptions will prove to be correct. The Company's ability to operate in the
future will depend upon many factors, including technological advances and
product obsolescence; levels of competition, including the entry into the
market of additional competitors and increased
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success by existing competitors; changes in general economic conditions;
increases in operating costs including costs of production, supplies, personnel
or equipment; and changes in requirements and regulations promulgated by
applicable federal, state and local regulatory authorities. There can be no
assurance that the Company will successfully obtain or apply the human,
operational and financial resources needed to manage a developing and expanding
business. Failure by the Company to manage its growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Strategy."
In order to meet both the existing and anticipated market demand for the
Company's products, the Company needs to attract and retain additional
personnel. The Company currently has only two full-time sales and marketing
employees, seven product development employees, one quality assurance
specialist, and has no Chief Financial Officer. In order to effectively manage
its finances and launch its marketing and sales strategy, the Company will have
to hire a Chief Financial Officer as well as additional sales, marketing,
technical and operations personnel. The success of the Company will also be
dependent upon its ability to hire, train and retain new and existing
personnel. The Company will compete with other companies with greater financial
and other resources for such qualified personnel. There can be no assurance
that the Company will be able to hire and retain additional personnel to
support the Company's marketing, sales, research and product development
efforts. See "Business -- Employees."
Fluctuations in Operating Results
The Company's operating results may vary significantly from quarter to
quarter or year to year, depending on various factors such as the timing of
product development, the timing of increased research and development, the
timing of sales and marketing expenses, the timing and size of orders and the
introduction of new products by the Company or its strategic partners.
Consequently, revenues or profits may vary significantly from quarter to
quarter or year to year, and revenues or profits in any period will not
necessarily be predictive of results in subsequent periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence on Key Personnel
The Company's growth and development is dependent upon the continued
services of Gregory S. Frisby, Chairman of the Board, President and Chief
Executive Officer of the Company, and Douglas J. McCrosson, Vice President of
Market Development and Secretary of the Company. The Company currently has key
man insurance on the life of Gregory S. Frisby in the amount of $2.5 million.
Although the Company has been able to hire and retain other qualified and
experienced personnel, the loss of the services of either Gregory S. Frisby or
Douglas J. McCrosson, for any reason, could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management."
The Company has entered into employment agreements with both Gregory S.
Frisby and Douglas J. McCrosson that will expire on December 31, 2002 and
December 31, 2000, respectively. These agreements contain confidentiality,
non-competition, and non-solicitation provisions. No assurance can be given
that such agreements will not be violated, or if violated, that such provisions
will be enforced in accordance with their terms, if at all. See "Management --
Employment Agreements."
Competition
The markets for thermal management products are widely diversified and
highly competitive. The Company will compete against current and future
competitors that manufacture, produce and sell natural and synthetic thermal
management products. Certain of the companies with which the Company competes
have substantially greater technical, financial, research and development, and
marketing resources than the Company. There can be no assurance that the
Company will be able to compete successfully with existing or new competitors.
See "Business -- Competition."
Product Liability Exposure and Availability of Insurance
The development, testing, manufacturing, marketing and sale of the
Company's products involve risks of allegations of product liability. While no
product liability claims have been made against the Company to date, if such
claims were made and adverse judgments obtained, whether directly against the
Company or against one
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of the Company's strategic partners in connection with an end-use product
incorporating the Company's products, such claims could have a material adverse
effect on the Company's business, financial condition and results of
operations. Although the Company has taken and intends to continue to take what
it believes to be appropriate precautions to minimize exposure to product
liability claims, there can be no assurance that it will be able to avoid
significant liability. The Company presently maintains product liability
insurance in the amount of $1,000,000 per claim with an annual aggregate limit
of $2,000,000 and is seeking proposals to increase its coverage. There can be
no assurance that such coverage is, or any new coverage will be, adequate or
will continue to be available at an acceptable cost, if at all. A product
liability claim, product recall or other claim with respect to uninsured
liabilities or in excess of insurance coverage could have a material adverse
effect on the Company's business, operating results and financial condition.
Government Regulations
As the licensor and supplier of the MicroPCMs and a licensor for their use
in certain applications, the Company relies upon its strategic partners to
incorporate the MicroPCM materials into final products, such as boots, gloves,
outerwear, helmets and automotive and industrial components. Each strategic
partner is responsible for determining that its final products conform to
applicable governmental health and safety regulations. The Company has not
undertaken all necessary tests or analyses to determine if end-products that
contain its thermal additives will conform to applicable health and safety
regulations. In the event that end-products incorporating the Company's
products fail to conform to such regulations, the Company may have to conduct
additional research and development to reformulate its products. There can be
no assurance that the products could be reformulated, nor can the Company make
any estimate of the time or expense involved in such additional research and
development, if it were to become necessary.
The Company may be subject to a variety of federal, state and local
environmental laws relating to the storage, discharge, handling, emission,
generation, manufacture, use and disposal of chemicals, solid and hazardous
waste and other toxic and hazardous materials related to its products. All of
the manufacture of the Company's products is outsourced to third-party
suppliers, and the Company maintains only a minimal amount of chemicals in its
own facility in order to support its internal development activity. The Company
believes that it has been operating its facilities in substantial compliance in
all material respects with existing laws and regulations. Nevertheless, the
failure to comply with current or future regulations could result in
substantial fines being imposed on the Company, suspension of production,
alteration of its manufacturing or cessation of its operations. Such
regulations could require the Company to acquire expensive remediation
equipment or to incur substantial compliance expenses. The Company cannot
predict the nature, scope or effect of legislation or regulatory requirements
that could be imposed or how existing or future laws or regulations will be
administered or interpreted with respect to products or activities to which
they have not previously applied. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies, could require substantial expenditures by the Company and could
adversely affect the results of operations of the Company.
In addition, the Company's local facilities and all of its operations are
subject to the plant and laboratory safety requirements of various federal,
state and local occupational safety and health laws. The Company believes it
has complied in all material respects with regard to governmental regulations
applicable to it. There can be no assurance, however, that the Company will
continue to comply with applicable government regulations or that such
regulations will not materially restrict or impede the Company's operations in
the future.
Broad Discretion as to Use of Proceeds
An estimated $1,544,000, or 16.9%, of the net proceeds of the Offering
have been allocated to working capital and will be used for such purposes as
management of the Company may determine. Management will have broad discretion
with respect to the expenditure of that portion of the net proceeds of the
Offering. In addition, the Company's estimated allocation of the remaining net
proceeds of the Offering is subject to reapportionment among the purposes set
forth under "Use of Proceeds" including working capital. The amount and timing
of expenditures will vary depending upon a number of factors, including the
progress of the Company's product development and marketing efforts, changing
competitive conditions and general economic conditions. See "Use of Proceeds."
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No Prior Market for the Common Stock; Determination of Offering Price;
Potential Volatility of Stock Price
Prior to the Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained or that the Common Stock will be resold at or above the
initial public offering price. The Company has applied for listing of the
Common Stock on the Nasdaq SmallCap Market and the PacEx, subject to approval
and notice of issuance. The initial public offering price of the Common Stock
offered hereby will be determined by negotiations between the Company and the
Underwriter and does not bear any relationship to the Company's book value,
assets, past operating results, financial condition and other established
criteria for value. Among the factors to be considered in determining the
initial public offering price will be the history of, and the prospects for,
the Company's business and the industry in which it competes, an assessment of
the Company's management, its past and present operations, the prospects for
earnings of the Company, the general condition of the securities market at the
time of the Offering, the market prices and earnings of similar securities of
comparable companies at the time of the Offering and prevailing market and
economic conditions. See "Underwriting."
After the Offering, the market price of the Common Stock may be subject to
significant fluctuations in response to numerous factors, including but not
limited to, fluctuations or uncertainties in the Company's quarterly operating
results (including losses), delays with respect to entering new licensing
agreements, length of time required for the Company's strategic partners to get
their products to market, announcements of technological innovations of new
products, patents and technology of other suppliers, governmental regulations,
conditions in the markets in which the Company and its competitors compete,
changes by financial analysts in their estimates of the earnings of the
Company, and the economy in general. From time to time, the stock market
experiences significant price and volume volatility which may affect the market
price of the Company's Common Stock for reasons unrelated to the performance of
the Company. In addition, it is expected that there will be a relatively small
number of shares of Common Stock trading publicly following the Offering.
Accordingly, stockholders may experience difficulty selling or otherwise
disposing of shares of Common Stock at favorable prices, or at all. See "Shares
Eligible for Future Sale" and "Underwriting."
Control by Principal Stockholders
Upon completion of the Offering, Gregory S. Frisby, Chairman of the Board,
President and Chief Executive Officer of the Company and his brother, Jeffry D.
Frisby, who is not involved in the day-to-day operations of the Company, will
continue to own approximately 29.1% each of the Company's outstanding Common
Stock (27.7% each if the Over-Allotment Option is exercised in full). Pursuant
to a Shareholders Agreement between Gregory S. Frisby and Jeffry D. Frisby,
Gregory S. Frisby controls the voting of all of Jeffry D. Frisby's shares
giving Gregory S. Frisby control of over 58.2% of the Company's outstanding
Common Stock after the Offering (55.4% if the Over-Allotment Option is
exercised in full) and the power to control the outcome of matters submitted to
a vote of the Company's stockholders, including the election of at least a
majority of the members of the Company's Board of Directors and to direct the
future operations of the Company. Such concentration may have the effect of
discouraging, delaying or preventing a change in control of the Company. See
"Certain Transactions" and "Principal Stockholders."
In addition, MUSI Investments S.A. ("MUSI") owns 441,327 shares of the
Company's outstanding Common Stock and holds an option that is exercisable for
587,500 shares of Convertible Preferred Stock that are convertible into an
equal number of shares of Common Stock under certain circumstances. MUSI,
Gregory S. Frisby and Jeffry D. Frisby are parties to a Stockholders Agreement
which requires the Company to use its best efforts to elect a designee of MUSI
as a director of the Company (the "MUSI Designee"). Upon exercise of its
option, MUSI would own 100% of the Convertible Preferred Stock. Except as
otherwise required by law, shares of Convertible Preferred Stock have the same
voting rights and vote together with the Common Stock. See "Certain
Transactions," "Principal Stockholders" and "Description of Securities."
Participation in Affiliate's Pension Plan
Until January 1, 1997, the Company's employees participated in a multiple
employer pension plan administered for the Company and its affiliate, Frisby
Aerospace, Inc. ("Frisby Aerospace"), by LaSalle National Bank.
16
<PAGE>
The plan was a 401(k) plan (the "Old Plan") and was funded by employee
contributions. Although the Company believes that the Old Plan was administered
in accordance with all applicable laws and regulations, the Company could be
liable to employees of Frisby Aerospace as well as employees of the Company if
it were alleged and proven that the Old Plan was not administered in accordance
with all applicable laws and regulations. If imposed, such liability could have
a material adverse effect on the Company.
No Assurance of Continued Nasdaq SmallCap Market or PacEx Listing; Risk of
Application of Penny Stock Rules
The trading of the Company's stock in the Nasdaq SmallCap Market and the
PacEx, if approved, will be conditioned upon the Company's meeting certain
asset, capital and surplus earnings and stock price tests. To maintain
eligibility for trading on the Nasdaq SmallCap Market, the Company will be
required to maintain, among other things, net tangible assets of at least
$2,000,000; a minimum bid price for the listed securities of $1.00 per share; a
market value of the public float of at least $1,000,000; and at least two
market makers for its securities. To maintain eligibility on the PacEx, the
Company is required, among other matters, to maintain total net tangible assets
in excess of $2,000,000 and a stock price of $1.00 per share. There can be no
assurance that the Company will be approved for listing or, if approved, will
continue to satisfy the requirements for maintaining a Nasdaq SmallCap Market
or a PacEx listing. If the Common Stock were to be delisted from the Nasdaq
SmallCap Market and/or the PacEx, the prices and the holders' ability to sell
such securities would be adversely affected. If the Common Stock were delisted
and the Company desired to have it relisted, the Company would be required to
satisfy the more stringent initial listing requirements of the Nasdaq SmallCap
Market and the PacEx.
If the Company is delisted from the Nasdaq SmallCap Market and the PacEx
and the price per share dropped below $5.00, then unless the Company satisfied
certain net assets tests, the Common Stock would become subject to certain
penny stock rules promulgated by the Securities and Exchange Commission (the
"Commission"). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer must also provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for stock that becomes subject to the
penny stock rules. If the Common Stock becomes subject to the penny stock
rules, investors in the Offering may find it more difficult to sell their
Common Stock.
Common Stock Eligible for Future Sale
Immediately after completion of the Offering, the Company will have
4,880,613 shares of Common Stock outstanding, of which the 1,600,000 shares
(1,840,000 shares if the Over-Allotment Option is exercised in full) sold
pursuant to the Offering, will be freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), by persons other than "affiliates" of the Company, as
defined under the Securities Act. The remaining 3,280,613 shares of Common
Stock are deemed "restricted securities" as defined by Rule 144 under the
Securities Act and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
the exemption provided by Rule 144. All of the restricted shares of Common
Stock will be eligible for trading under Rule 144 commencing 90 days following
the date of this Prospectus, subject to certain limitations and other
restrictions, including volume restrictions, prescribed by such rule, and to
the contractual "lock-up" restrictions described below. The Company, its
officers, directors, current stockholders, and option holders have agreed to
enter into lock-up agreements (the "Lock-Up Agreements") under which they will
agree not to sell or otherwise dispose of any of their shares of Common Stock
of the Company for a period of 24 months commencing upon the date of this
Prospectus, or 18 months in certain circumstances, unless certain criteria are
met or prior written consent is obtained from the
17
<PAGE>
Underwriter. Sales of substantial amounts of Common Stock, or the perception
that these sales could occur, could adversely affect the prevailing market
price for the Common Stock and could impair the ability of the Company to raise
additional capital through the sale of its securities or through debt
financing. See "Shares Eligible for Future Sale" and "Underwriting."
Effect of Options and Underwriter's Option on Stock Price
The Company has reserved 250,000 shares of Common Stock for issuance to
key employees, officers, directors and consultants upon the exercise of options
available for grant under the Stock Option Plan. The Company also will sell to
the Underwriter in connection with the Offering, the Underwriter's Option to
purchase an aggregate of 160,000 shares, subject to adjustment as provided
therein. Issuance of the Underwriter's Option and options issuable under the
Stock Option Plan could adversely impact future financings. In addition,
certain holders of such securities have certain registration rights, and the
sale of shares of Common Stock upon exercise of such rights or the availability
of such shares for sale could adversely affect the market price of the Common
Stock. See "Description of Securities" and "Underwriting."
The Underwriter's Option is exercisable for up to 160,000 shares of Common
Stock for a five year period commencing one year from the date of the Offering,
at an exercise price equal to 120% of the initial public offering price. The
exercise of the Underwriter's Option and any options issued under the Stock
Option Plan may dilute the book value per share of Common Stock. The holders of
such options may exercise them at a time when the Company would otherwise be
able to obtain additional equity capital on terms more favorable to the Company
and have the opportunity to benefit from increases in the price of the Common
Stock without risk of an equity investment. The Company has agreed to grant
certain demand and "piggyback" registration rights to the holders of the
Underwriter's Option. Such registration rights could involve substantial
expenses to the Company and may adversely affect the terms upon which the
Company may obtain additional financing. See "Shares Eligible for Future Sale"
and "Underwriting."
Dilution
As of September 30, 1997, the pro forma net tangible book value of the
Common Stock was $0.24 per share. Upon completion of this Offering, the net
tangible book value will be approximately $2.04 per share, representing
immediate and substantial dilution to the public investors of approximately
$4.96 or 70.9%. See "Dilution."
No Dividends
The Company currently anticipates that it will retain all of its future
earnings, if any, for use in the operation and expansion of its business, and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. See "Dividend Policy" and "Description of Securities."
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation, By-Laws
and Delaware law may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider in its best interests, including attempts that might result in a
premium over the market price for the shares held by the stockholders and could
make it more difficult to remove incumbent management. The Company's
Certificate of Incorporation or By-Laws provide that: (i) directors may
authorize the issuance of preferred stock (the "Preferred Stock") having rights
and preferences established by the Board of Directors without further approval
by the stockholders; (ii) directors may be removed from office only for cause
and only by the affirmative vote of the holders of two-thirds of the then
outstanding shares of capital stock entitled to vote generally in an election
of directors; (iii) except as otherwise required by law, vacancies in the Board
of Directors may be filled only by the remaining directors; (iv) commencing
with the consummation of the Offering, any action required or permitted to be
taken by the stockholders of the Company may be effected only at an annual or
special meeting of stockholders and not by written consent of the stockholders;
(v) any special meeting of stockholders may be called only upon the affirmative
vote of at least a majority of the stockholders or a majority of the members of
the Board of Directors; and (vi) all nominations for candidates for election
18
<PAGE>
as directors, other than nominations by or at the discretion of the Board of
Directors or a committee of the Board of Directors and all stockholder
proposals to be considered at annual or special meetings of the stockholders be
presented to the Company pursuant to an advance notice procedure set forth in
the Certificate of Incorporation. In general, notice of an intent to nominate a
director or to make a stockholder proposal to be considered at a meeting must
be received by the Company not less than 60 nor more than 90 days before the
meeting and must contain certain information concerning the nominee for
director or the proposal to be brought before the meeting and concerning
stockholders submitting the proposal. The affirmative vote of at least a
majority of the directors or the holders of at least two-thirds of the voting
power of the Company's stock is required to alter, amend, repeal or adopt any
provision inconsistent with the provisions described in this paragraph. See
"Description of Securities -- Preferred Stock" and "-- Directors' Limitation of
Liability and Indemnification."
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the General Corporation Law of the State of Delaware (the
"DGCL"). In general, this statute restricts a corporation from entering into
certain business combinations with an interested stockholder (defined as any
person or entity that is the beneficial owner of at least 15% of a
corporation's voting stock) or its affiliates for a period of three years after
the date of the transaction in which the person became an interested
stockholder unless: (i) the transaction is approved by the Board of Directors
of the corporation prior to such business combination; (ii) the interested
stockholder acquires 85% of the corporation's voting stock in the same
transaction in which it exceeds 15%; or (iii) the business combination is
approved by the Board of Directors and by a vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder.
Indemnification and Limitation on Liability of Directors and Officers
The Company's Certificate of Incorporation provides for the
indemnification of the Company's directors and officers to the fullest extent
permitted under the DGCL. As permitted by the DGCL, the Company's Certificate
of Incorporation provides that directors of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except: (i) for any breach of the director's duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or violation of law;
(iii) for acts or omissions relating to prohibited dividends or distributions
or the purchase or redemption of stock; or (iv) for any transaction from which
the director derives an improper personal benefit. However, insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable. See "Description of
Securities -- Directors' Limitation of Liability and Indemnification."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby at the assumed initial offering price of $7.00 per share,
after deducting underwriting discounts and commissions and other expenses of
the Offering estimated to be $2,056,000 ($2,274,000 if the Over-Allotment
Option is exercised in full), will be approximately $9,144,000 ($10,606,000 if
the Over-Allotment Option is exercised in full).
The Company intends to use the net proceeds of the Offering as follows:
Approximate Percentage of
Use Amount Net Proceeds
- ---------------------------------- ------------- --------------
Sales and marketing .............. $4,400,000 48.1%
Product development .............. 2,400,000 26.2
Capital expenditures ............. 600,000 6.6
Research and development ......... 200,000 2.2
Working capital .................. 1,544,000 16.9
---------- -----
TOTAL ......................... $9,144,000 100.0%
========== =====
The Company intends to use an estimated $4,400,000 of the net proceeds of
the Offering to expand its sales and marketing efforts, including hiring
additional marketing and technical personnel to support the Company's marketing
and sales efforts in industries where the Company's products are currently
being marketed commercially including apparel, footwear and sporting goods
products; industries in which the Company's products are most likely to become
commercially feasible in the near term, including home furnishings, shipping
and packaging, and healthcare; and industries which the Company plans to enter
in the future, including automotive, aerospace, and computers and electronics.
The Company will also increase its consumer advertising through visual and
print media, in-store promotions and displays, and event sponsorships.
The Company intends to use an estimated $2,400,000 of the net proceeds of
the Offering for product development for current and potential customers and
strategic partners, including the development of additional and improved end-use
products to be sold by strategic partners utilizing the Company's Thermasorb(R)
and ComforTemp(R) products and the establishment of customer and technical
support service teams.
The Company intends to use approximately $600,000 of the net proceeds of
the Offering to fund capital expenditures necessary to support the sales and
marketing, research and development, improved quality control and product
development expansion described above, including but not limited to, the
acquisition of certain testing and analysis equipment for use in connection
with the Company's product development, research and development and improved
quality assurance efforts.
To date, the Company has funded, and anticipates that it will continue to
fund, the majority of its research and development efforts through funding
obtained from government and related private sources. Accordingly, the Company
intends to use an estimated $200,000 of the net proceeds of the Offering for
research and development, including, hiring additional technical personnel and
developing new products and technologies. In the event the Company is unable to
obtain government or private industry funding for research and development, the
Company will be required to pay any future research and development costs from
its own resources which would increase the amount of net proceeds allocated to
research and development efforts thereafter.
The balance of the net proceeds of approximately $1,544,000 ($3,006,000 if
the Over-Allotment Option is exercised in full), will be employed for working
capital, including hiring a chief financial officer and other management
personnel. The Company may also from time to time utilize a portion of such
proceeds to acquire or enter into licensing arrangements with respect to
complementary businesses, products, services or technologies.
The table above represents the Company's best estimate of its allocation
of the uses of the net proceeds of the Offering based upon the current state of
its business operations, its current business plan and strategy, and current
economic and industry conditions. The amount and timing of expenditures will
vary depending upon a
20
<PAGE>
number of factors, including, among other things, the progress of the Company's
product development and marketing efforts, changing competitive conditions and
general economic conditions. The allocation of the net proceeds of the Offering
is subject to reapportionment among the purposes listed above. The actual
allocation of the net proceeds cannot be predicted with any degree of
certainty.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds of the Offering in short-term,
interest-bearing, investment-grade debt securities, money market accounts,
certificates of deposit, or direct or guaranteed obligations of the United
States government.
DIVIDEND POLICY
The Company intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent upon, among other things, earnings, capital requirements, financing
agreement covenants, the financial condition of the Company and applicable law.
If and when issued upon exercise of the Private Placement Option, there would
be a dividend preference of $1.00 per share on the Convertible Preferred Stock,
if, as and when declared by the Board of Directors. See "Description of
Securities."
21
<PAGE>
DILUTION
As of September 30, 1997, the Company had a pro forma net tangible book
value of approximately $791,000, or $.24 per share of Common Stock outstanding,
after giving effect to the sale in December 1997 of 441,327 shares of Common
Stock in the Private Placement for a purchase price of $2,500,000, less related
expenses of $900,000. Net tangible book value equals the tangible net worth of
the Company (total tangible assets less total liabilities) divided by the
number of shares of Common Stock outstanding. After giving effect to the sale
by the Company of 1,600,000 shares of Common Stock in this Offering at an
assumed initial public offering price of $7.00 per share and after deducting
the estimated underwriting discounts and Offering expenses, the pro forma net
tangible book value of the Company as of September 30, 1997 would have been
approximately $9,935,000 or $2.04 per share. This represents an immediate
increase in pro forma net tangible book value of $1.80 per share to current
stockholders and an immediate dilution of $4.96 per share to new investors. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share (1) ............ $ 7.00
Pro forma net tangible book value before the Offering ......... $ 0.24
Increase attributable to new investors ........................ 1.80
------
Pro forma net tangible book value after the Offering ........... 2.04
------
Dilution per share to new investors ............................ $ 4.96
======
</TABLE>
- ------------
(1) Represents the assumed initial public offering price per share of Common
Stock, before deducting underwriting discounts and Offering expenses
payable by the Company.
The following table summarizes, immediately prior to the Offering, the
difference between existing stockholders and investors in the Offering with
respect to the number and percentage of shares of Common Stock purchased from
the Company, the amount and percentage of consideration paid and the average
price paid per share of Common Stock, before the deduction of offering expenses
and underwriting discounts:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
----------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 3,280,613 67% $ 2,500,500 18% $ 0.76
New investors ................. 1,600,000 33 11,200,000 82 $ 7.00
--------- -- ----------- --
Total ...................... 4,880,613 100% $13,700,500 100%
========= === =========== ===
</TABLE>
The foregoing table reflects the issuance and sale in December 1997 by the
Company of 441,327 shares of Common Stock in the Private Placement. The table
does not include: (i) 587,500 shares of Common Stock issuable upon the
conversion of the Convertible Preferred Stock; (ii) 250,000 shares of Common
Stock reserved for issuance upon exercise of options which may be granted under
the Stock Option Plan; (iii) up to 240,000 shares of Common Stock issuable upon
exercise of the Over-Allotment Option; or (iv) 160,000 shares of Common Stock
issuable upon exercise of the Underwriter's Option. See "Management -- Stock
Option Plan," "Certain Transactions," "Description of Securities" and
"Underwriting."
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as
of September 30, 1997; (ii) on a pro forma basis to give effect to the Private
Placement, net of related costs and the application of the net proceeds
therefrom; and (iii) on a pro forma, as adjusted basis to give further effect
to the sale by the Company of 1,600,000 shares of Common Stock at an assumed
public offering price of $7.00 per share, after deducting underwriting
discounts and commissions and estimated Offering expenses. This table should be
read in conjunction with the financial statements, including the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1997
------------------------------------------------
(unaudited)
Pro Forma
Actual Pro Forma (1) As Adjusted (2)
------------- --------------- ----------------
<S> <C> <C> <C>
Short-term debt:
Note payable ........................................ $ 500,000 $ -- $ --
Due to related party ................................ 402,000 -- --
---------- ---------- -----------
Total short-term debt ................................ $ 902,000 $ -- $ --
========== ========== ===========
Stockholders' equity (deficit):
Preferred Stock, 1,000,000 shares authorized; none
issued or outstanding .............................
Common Stock, $.001 par value, 10,000,000 shares
authorized; shares issued and outstanding:
2,839,286 actual; 3,280,613 pro forma; 4,880,613
pro forma, as adjusted (3) ........................ $ 1,000 $ 3,000 $ 5,000
Additional paid-in-capital .......................... -- 1,598,000 10,740,000
Retained earnings (accumulated deficit) ............. (810,000) (810,000) (810,000)
---------- ---------- -----------
Total stockholders' equity (deficit) ................. (809,000) 791,000 9,935,000
---------- ---------- -----------
Total capitalization .............................. $ (809,000) $ 791,000 $ 9,935,000
========== ========== ===========
</TABLE>
- ------------
(1) Pro forma to give effect to the issuance and sale by the Company in
December 1997 of 441,327 shares of Common Stock for an aggregate purchase
price of $2,500,000 pursuant to the Private Placement, receipt by the
Company of approximately $1,600,000 in net proceeds and the application of
a portion of such net proceeds to the repayment of certain debt
obligations of the Company. See "Summary Financial Data," "Certain
Transactions" and "Description of Securities."
(2) Pro forma, as adjusted to give effect to: (i) the sale by the Company of
the 1,600,000 shares of Common Stock offered hereby at the assumed initial
offering price of $7.00 per share and receipt of the net proceeds
therefrom.
(3) Does not include: (i) 587,500 shares of Common Stock issuable upon the
conversion of the Convertible Preferred Stock issuable upon the exercise
of the Private Placement Option; and (ii) 250,000 shares of Common Stock
reserved for issuance under the Stock Option Plan. See "Certain
Transactions," "Description of Securities" and Note 10 of notes to
financial statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to assist the reader in
understanding and assessing the significant changes and trends relating to the
results of operations and financial condition of the Company. This discussion
and analysis should be read in conjunction with the Company's financial
statements and notes thereto included elsewhere in this Prospectus.
Overview
The Company was formed in 1989 to identify, acquire, manage, and
commercialize innovative technologies. Since its inception, the Company's focus
has been on developing thermal management products utilizing a proprietary and
patented MicroPCM technology, the rights to which the Company has licensed
under the TRDC License and the Outlast License. This technology centers around
a thermal additive material that the Company markets under the trade name
Thermasorb(R). To date, this additive material has been applied primarily to a
family of cooling and insulating foams under the trade name ComforTemp(R), as
well as to other materials. The license agreements give the Company the
exclusive worldwide right to develop and commercialize this technology with
respect to certain applications in exchange for royalties that range from one
percent to five percent of product sales revenue and 12.5% to 50% of license
fees and royalty revenues, as defined. The TRDC License also requires the
Company to make minimum annual payments each year if the royalties do not
exceed certain annual minimums that increase from $15,000 to $150,000 over the
first eight years of the TRDC License and remain at $150,000 thereafter. The
Company is expensing these minimum annual payments to cost of sales on a
straight-line basis over the first eight years of the agreement. Under the
Outlast License, the Company is required to make minimum annual payments in
order to maintain the exclusivity of its license. The annual minimum payments
increase incrementally from $150,000 to $600,000 per year from 1998 through 2002
and will be $1,000,000 per year thereafter. See "Business -- Patents/
Intellectual Property."
The Company has incurred cumulative losses since inception through
September 30, 1997 of approximately $810,000. This is primarily due to the
efforts of the Company to develop a supply infrastructure and to identify and
test applications of its thermal management products with only limited
commercialization prior to 1997. During 1997, the Company began to bring its
products to market, as a result of which, approximately 66% of the Company's
revenue during the nine months ended September 30, 1997 was attributable to
product sales and licensing fees related to its thermal management technology.
The Company is following a strategy of positioning its products as high
performance products that will be sold in specialty retail or industrial
markets. This will be accomplished primarily through strategic partnerships
with selected market leaders within targeted industries.
After the conclusion of this Offering, the Company anticipates that it
will generate revenues from two principal sources: (i) sales of its
Thermasorb(R) and ComforTemp(R) products for use in the products of its
strategic partners; and (ii) royalties from the use of the Thermasorb(R) and
ComforTemp(R) trademarks by its strategic partners based on a percentage of its
strategic partners' sales of products containing the Company's products to end-
users. The Company may also receive license fees and development fees from some
strategic partners for the grant of exclusive rights within a specific product
category and for development services provided by the Company.
Management anticipates that the Company will continue to incur operating
losses through 1999, when it expects to begin realizing greater revenues from
the increased introduction of its products into the marketplace by its
strategic partners. The Company plans to use the net proceeds of the Offering
for sales and marketing, product development, capital expenditures, research
and development, and for working capital. See "Use of Proceeds."
24
<PAGE>
Results of Operations
The following table sets forth certain operating data in dollars and
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996
---------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales .............. $ 3,000 0.3% $ 14,000 1.2%
Research and development
projects ................. 849,000 96.3 1,120,000 92.6
Licenses ................... 30,000 3.4 75,000 6.2
--------- ----- ---------- -----
Total revenues .............. 882,000 100.0 1,208,000 100.0
Cost of sales:
Products ................... 2,000 0.2 12,000 1.0
Research and development
projects ................. 574,000 65.1 1,004,000 83.1
Licenses ................... 2,000 0.2 20,000 1.7
--------- ----- ---------- -----
Total cost of sales ......... 579,000 65.6 1,036,000 85.8
--------- ----- ---------- -----
Gross profit ................ 303,000 34.4 173,000 14.3
Selling and marketing
expense .................... 32,000 3.6 83,000 6.9
General and administrative
expense .................... 242,000 27.4 207,000 17.1
--------- ----- ---------- -----
Income (loss) from
operations ................. 28,000 3.2 (118,000) ( 9.8)
Interest expense ............ 15,000 1.7 19,000 1.6
--------- ----- ---------- -----
Income (loss) before income
taxes ...................... 13,000 1.5 (136,000) (11.3)
Income tax provision
(benefit) .................. 7,000 0.8 (49,000) ( 4.1)
--------- ----- ---------- -----
Net income (loss) ........... $ 6,000 0.7% $ (88,000) ( 7.3)%
========= ===== ========== =====
<CAPTION>
Nine Months Ended September 30,
1996 1997
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales .............. $ 12,000 1.3% $ 377,000 40.9%
Research and development
projects ................. 883,000 92.4 315,000 34.2
Licenses ................... 60,000 6.3 230,000 24.9
--------- ----- ---------- -----
Total revenues .............. 955,000 100.0 922,000 100.0
Cost of sales:
Products ................... 6,000 0.6 361,000 39.2
Research and development
projects ................. 729,000 76.3 186,000 20.2
Licenses ................... 18,000 1.9 198,000 21.5
--------- ----- ---------- -----
Total cost of sales ......... 753,000 78.8 745,000 80.8
--------- ----- ---------- -----
Gross profit ................ 202,000 21.2 177,000 19.2
Selling and marketing
expense .................... 75,000 7.9 283,000 30.7
General and administrative
expense .................... 131,000 13.7 575,000 62.4
--------- ----- ---------- -----
Income (loss) from
operations ................. (3,000) ( 0.3) (681,000) (73.9)
Interest expense ............ 13,000 1.4 26,000 2.8
--------- ----- ---------- -----
Income (loss) before income
taxes ...................... (17,000) ( 1.8) (706,000) (76.6)
Income tax provision
(benefit) .................. (12,000) ( 1.3) 45,000 4.9
--------- ----- ---------- -----
Net income (loss) ........... $ (5,000) ( 0.5)% $ (751,000) (81.5)%
========= ===== ========== =====
</TABLE>
<PAGE>
Nine months ended September 30, 1997 and 1996
Revenues. The Company generates revenue from three primary sources: (i)
sales of its Thermasorb(R) and ComforTemp(R) products for use in its strategic
partners' products; (ii) revenue from research and development contracts
related to the United States Government; and (iii) license fees from the use of
Thermasorb(R) and ComforTemp(R) trademarks by strategic partners in end-user
products, as well as other fees earned in connection with its agreements with
strategic partners. Total revenues for the nine months ended September 30, 1997
decreased by $33,000 to $922,000 from $955,000 for the nine months ended
September 30, 1996.
Product sales. Product sales for the nine months ended September 30, 1997
increased by $365,000 to $377,000 from $12,000 for the nine months ended
September 30, 1996. The increase was primarily the result of the Company's
bringing its ComforTemp(R) foams to market in 1997.
Research and development projects. Revenues from research and development
projects for the nine months ended September 30, 1997 decreased by $568,000
to $315,000 from $883,000 for the nine months ended September 30, 1996.
This decrease resulted primarily from completion of several long-term
contracts during the nine months ended September 30, 1997 and the shift in
the Company's focus from obtaining and performing funded research and
development contracts to commercialization of its products.
Licenses. Revenues from license fees for the nine months ended September
30, 1997 increased by $170,000 to $230,000 from $60,000 for the nine months
ended September 30, 1996. This increase resulted primarily from the entry
into three additional strategic partnership agreements during 1997. These
arrangements provided for payments to the Company of certain license fees,
at signing, in consideration for exclusive use of the Company's technology
in particular product categories.
25
<PAGE>
Cost of sales. Total cost of sales for the nine months ended September 30,
1997 decreased by $8,000 to $745,000 from $753,000 for the nine months ended
September 30, 1996. The Company's cost of sales consists of: (i) direct and
indirect costs incurred in connection with product sales; (ii) direct and
indirect costs incurred in connection with revenue from research and
development contracts relating to the United States government programs; and
(iii) royalty payments required to be made to TRDC in accordance with the TRDC
License.
Cost of sales -- Products. Cost of sales related to products for the nine
months ended September 30, 1997 increased by $355,000 to $361,000 from
$6,000 for the nine months ended September 30, 1996. This increase
reflected the commercialization of the Company's products during the last
three months of 1996 and the nine months ended September 30, 1997.
Cost of sales -- Research and development projects. Cost of sales related
to research and development projects for the nine months ended September
30, 1997 decreased by $543,000 to $186,000 from $729,000 for the nine
months ended September 30, 1996 primarily due to a decrease in projects
during the nine months ended December 30, 1997. This decrease reflected a
shift of personnel to work on the Company's product development effort, the
cost of which efforts are classified as general and administrative
expenses. This shift reflected the Company's general strategy of shifting
its focus to commercialization of its products from funded research and
development. The related gross profit of such projects increased to 41.0%
for the nine months ended September 30, 1997 from 17.4% for the nine months
ended September 30, 1996. This increase was primarily attributable to
losses incurred during 1996 relating to cost sharing contracts which the
Company performed during 1996. In addition, the Company's overall
development contract mix consisted of more cost plus fixed-fee contracts
during 1996 as opposed to more fixed priced contracts in 1997 which fixed
price contracts proved to be more profitable.
Cost of sales -- Licenses. Cost of sales related to licensing for the nine
months ended September 30, 1997 increased by $180,000 to $198,000 from
$18,000 for the nine months ended September 30, 1996. This increase was
primarily the result of the increase in license revenue which required
increased licensing payments to be made by the Company in accordance with
the terms of the TRDC License and a $100,000 charge related to prior
periods incurred upon the execution of the Outlast Agreement.
Selling and marketing expense. Selling and marketing expenses for the nine
months ended September 30, 1997 increased by $208,000 to $283,000 from $75,000
for the nine months ended September 30, 1996. This increase was primarily the
result of the Company's increasing its marketing activity with respect to its
thermal management technology as its products were ready for market and the
pursuit of additional exclusive and non-exclusive licenses with potential
strategic partners.
General and administrative expense. General and administrative expenses
for the nine months ended September 30, 1997 increased by $444,000 to $575,000
from $131,000 for the nine months ended September 30, 1996. This increase was
primarily due to the shift in personnel and related costs from funded research
and development to product development, which are classified as general and
administrative expenses. This shift reflected the Company's general strategy of
shifting its focus to commercialization of its products from funded research
and development.
Interest expense. Interest expense for the nine months ended September 30,
1997 increased by $13,000 to $26,000 from $13,000 for the nine months ended
September 30, 1996. The increase was primarily the result of increased average
borrowings outstanding under the Company's line of credit.
Income tax provision (benefit). The Company recorded an income tax
provision for the nine months ended September 30, 1997 of $45,000 compared to
an income tax benefit of $12,000 for the nine months ended September 30, 1996.
The loss before income taxes for the nine months ending September 30, 1997 was
$706,000 compared to $17,000 for the nine months ended September 30, 1996. The
income tax provision for the nine months ended September 30, 1997 arose from
providing a valuation allowance against all deferred tax assets due to
uncertainties relating to expected future taxable income that would have to be
generated to realize such assets. The income tax benefit for the nine months
ended September 30, 1996 resulted primarily from recognition of a net operating
loss carryback and a deferred tax asset.
Net loss. As a result of the foregoing, the net loss for the nine months
ended September 30, 1997 increased to $751,000 from $5,000 for the nine months
ended September 30, 1996.
26
<PAGE>
Years ended December 31, 1996 and 1995
Revenues. Total revenues for the year ended December 31, 1996 increased by
$326,000 to $1,208,000 from $882,000 for the year ended December 31, 1995.
Product sales. Product sales for the year ended December 31, 1996 increased
by $11,000 to $14,000 from $3,000 for the year ended December 31, 1995.
Research and development projects. Revenues from research and development
projects for the year ended December 31, 1996 increased by $271,000 to
$1,120,000 from $849,000 for the year ended December 31, 1995. This
increase was primarily the result of the Company's performing under 19
active contracts during 1996 as compared to performing under 12 active
contracts during the year ended December 31, 1995.
Licenses. Revenues from license fees for the year ended December
31, 1996 increased by $45,000 to $75,000 from $30,000 for the year ended
December 31, 1995. The increase was primarily the result of the Company's
entering into one licensing arrangement and two joint development and
option to license agreements with three strategic partners during the year
ended December 31, 1996 as the Company began to bring its products to
market. The revenues for the year ended December 31, 1995 consisted primarily
of a license fee received from a strategic partner pursuant to a Joint
Development and Option to License Agreement.
Cost of sales. Total cost of sales for the year ended December 31, 1996
increased by $457,000 to $1,036,000 from $579,000 for the year ended December
31, 1995.
Cost of sales -- Products. Cost of sales related to products for the year
ended December 31, 1996 increased by $10,000 to $12,000 from $2,000 for the
year ended December 31, 1995. Cost of sales for the year ended December 31,
1995 were minimal as the Company had not yet fully developed its technology
and initiated sales and licensing activities.
Cost of sales -- Research and development projects. Cost of sales related
to research and development projects for the year ended December 31, 1996
increased by $430,000 to $1,004,000 from $574,000 for the year ended
December 31, 1995. The related gross profit of such projects decreased from
32.4% for the year ended December 31, 1995, to 10.4% for the year ended
December 31, 1996. This decrease in gross profit resulted primarily from
costs incurred during the year ended December 31, 1996 as a result of
certain cost sharing contracts which the Company entered into during the
year ended December 31, 1996.
Cost of sales -- Licenses. Cost of sales related to licensing arrangements
for the year ended December 31, 1996 increased by $18,000 to $20,000 from
$2,000 for the year ended December 31, 1995. Cost of sales for the year
ended December 31, 1995 were minimal as the Company had not yet fully
developed its technology.
Selling and marketing expense. Selling and marketing expenses for the year
ended December 31, 1996 increased by $51,000 to $83,000 from $32,000 for the
year ended December 31, 1995. This increase resulted primarily from the
Company's increased advertising efforts in connection with the marketing of its
thermal management products which were first marketed in mid-1996.
General and administrative expense. General and administrative expenses
for the year ended December 31, 1996 decreased by $35,000 to $207,000 from
$242,000 for the year ended December 31, 1995.
Interest expense. Interest expense for the year ended December 31, 1996
increased by $4,000 to $19,000 from $15,000 for the year ended December 31,
1995. The increase was primarily the result of increased average borrowings
outstanding under to the Company's line of credit.
Income tax provision (benefit). The income tax benefit for the year ended
December 31, 1996 was $49,000 compared to an income tax provision of $7,000 for
the year ended December 31, 1995. The loss before income taxes for the year
ended December 31, 1996 was $136,000 compared to income before income taxes of
$13,000 for the year ended December 31, 1995. The income tax benefit resulted
primarily from the recognition of a net operating loss carryback and a deferred
tax asset.
27
<PAGE>
Net income (loss). As a result of the foregoing factors, the Company
incurred a net loss of $88,000 for the year ended December 31, 1996 compared to
net income of $6,000 for the year ended December 31, 1995.
Liquidity and Capital Resources
From its inception through September 30, 1997, the Company incurred
cumulative losses of approximately $810,000. The Company has financed its
operations to date through research and development contracts relating to
United States government programs, loans from an affiliated company and bank
borrowings. During 1997, the Company received non-interest bearing advances
from Frisby Aerospace, an affiliated company, aggregating $376,000, all of
which was outstanding at September 30, 1997. In addition, Frisby Aerospace
provides the Company with various services, including facilities and other
related services without charge or on terms the Company believes to be
substantially equivalent to those available from unaffiliated third parties
with respect to certain facilities and services. Frisby Aerospace has charged
the Company approximately $68,000, $51,000, $41,000 and $47,000 for such
services during the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997, respectively. As of September 30, 1997, the
Company was indebted to Frisby Aerospace for a total of approximately $402,000,
including $376,000 for cash advances and $26,000 for unpaid charges for
services. The Company has also funded its operations through bank borrowings in
the amount of $500,000, all of which was outstanding at September 30, 1997.
Both the bank debt and the advances due to Frisby Aerospace (including an
additional $125,000 advance to the Company by Frisby Aerospace subsequent to
September 30, 1997) were subsequently repaid with a portion of the proceeds of
the Private Placement. See "Risk Factors -- Accumulated Losses; Reduction in
Government-Funded Development; Possible Need for Additional Financing" and
"Certain Transactions."
At September 30, 1997, the Company had a working capital deficit of
$873,000, including accounts receivable of $252,000 and inventory of $149,000,
offset by accounts payable of $230,000, note payable for bank borrowings of
$500,000 and amounts due to a related party of $402,000.
The Company's liquidity during the nine months ended September 30, 1997
was significantly impacted by its increasing development of its thermal
management products and increasing related sales and marketing efforts. In
addition, the increases in inventory and accounts receivable arising from
product sales have increased the Company's working capital needs. Net cash
(used in) provided by operating activities for the nine months ended September
30, 1997 and 1996 and the years ended December 31, 1996 and 1995 was
$(554,000), $25,000, $(70,000) and $23,000, respectively. The principal factors
contributing to the cash used in operating activities for the nine months ended
September 30, 1997 was the net loss for the period. The principal factors
contributing to the cash provided by operating activities for the nine months
ended September 30, 1996 was the decrease in accounts receivable, partially
offset by an increase in inventory levels, and a reduction in amounts payable
to a related party and income taxes. The principal factor contributing to the
cash used in operating activities for the year ended December 31, 1996 was the
net loss for the period. The principal factors contributing to the cash
provided by operating activities for the year ended December 31, 1995 was the
net income adjusted for depreciation.
Management anticipates that the Company will continue to incur operating
losses at least until 1999, when it expects to begin realizing greater revenues
from increased introduction of its products into the marketplace by its
strategic partners.
The Company has a $500,000 line of credit with a bank which was fully
drawn-down at September 30, 1997. The line of credit bears interest at 0.5%
above the bank's prime rate (8.5% at September 30, 1997) and will expire on
June 30, 1998. The amount outstanding under the line of credit was repaid in
full in December 1997 with proceeds from the Private Placement and,
accordingly, the full amount is currently available.
The Company has incurred cumulative losses since its inception, and
therefore, has not been subject to significant federal income taxes. Through
September 30, 1997, the Company has generated net operating loss carryforwards
of approximately $673,000 which may be available to reduce future available
taxable income and future tax liabilities. These carryforwards expire
principally in the year 2012. The Tax Reform Act of 1986 provides for an annual
limitation on the use of net operating loss carryforwards (following certain
ownership changes) that could significantly limit the Company's ability to
utilize these carryforwards. Upon the completion
28
<PAGE>
of the Offering, the exercise of the Over-Allotment Option, or the subsequent
exercise of options or warrants in connection with other future sales of
equity, the Company's ability to utilize the aforementioned carryforwards may
be limited. Additionally, because the United States tax laws limit the time
during which these carryforwards may be applied against future taxes, the
Company may not be able to take full advantage of these attributes for federal
tax purposes.
The Company sold 441,327 shares of its Common Stock and an option to
purchase 587,500 shares of the Company's Convertible Preferred Stock at an
exercise price of $4.26 per share exercisable until February 27, 1998 to an
unaffiliated foreign investor on December 29, 1997 for an aggregate purchase
price of $2,500,000 and net proceeds of approximately $1,600,000, after the
payment of related issuance costs. See "Certain Transactions" and "Description
of Securities."
Of the $9,144,000 of estimated proceeds of the Offering, the Company
intends to use approximately $4,400,000 for sales and marketing, $2,400,000 for
product development of current and potential licensees, $600,000 for capital
expenditures, $200,000 for research and development, and $1,544,000 for working
capital. See "Use of Proceeds."
Based on the Company's current operating plan, the Company believes that
the net proceeds of the Offering, together with its existing resources and
revenues from continuing operations, will be sufficient to satisfy its capital
requirements for at least 24 months following the consummation of the Offering.
Such belief is based upon certain assumptions, and there can be no assurance
that such assumptions are correct. In the event that the Company's plans
change, or the proceeds of the Offering are insufficient to fund operations due
to unanticipated delays, problems, expenses or otherwise, the Company would be
required to seek additional financing sooner than anticipated. Further,
depending on the Company's progress in marketing its product line, gaining
acceptance of its thermal management technology and its other products and
services among the business community, the Company may determine that it is
advisable to raise additional capital sooner than was anticipated.
Inflation
The impact of general inflation on the Company's business has been
insignificant to date and the Company believes that it will continue to be
insignificant for the foreseeable future.
Recent Pronouncement of the Financial Accounting Standards Board
A recent pronouncement of the Financial Accounting Standards Board
("FASB") is Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," issued in February 1997. This statement establishes
standards for computing and presenting earnings per share and is effective for
periods ending after December 15, 1997. This standard requires the Company to
present basic earnings per share and diluted earnings per share for all periods
presented in this Prospectus. The impact of adopting this standard is not
expected to be material.
29
<PAGE>
BUSINESS
General
The Company is engaged in the development and commercialization of
innovative advanced thermal management products for use in a broad range of
consumer and industrial products such as gloves, boots, athletic footwear,
apparel, protective and temperature retardant equipment, electronics cooling
systems, packaging materials, and coating substances. The Company's
Thermasorb(R) and ComforTemp(R) products utilize licensed patents and the
Company's proprietary MicroPCM technology to enhance thermal characteristics
(i.e., insulation, cooling or temperature control properties) of these as well
as a variety of other consumer and industrial products. For example, when
Thermasorb(R) additives and ComforTemp(R) foams are incorporated into ski
gloves, the skier's hands would remain within a constant, pre-set temperature
range without the typical accumulation of moisture. Also, if a firefighter were
to wear flame retardant clothing incorporating ComforTemp(R) foam, the
firefighter would remain cooler and be able to fight fires longer and more
safely than a firefighter wearing flame retardant clothing without
ComforTemp(R) foam.
The Company's marketing strategy is based on penetrating large select
markets for its thermal management technology through relationships with
strategic partners. The Company works closely with its strategic partners
within each market to develop commercially viable product applications. To
date, the Company has entered into such strategic partnerships with, among
others, Wells Lamont Division of Marmon Holdings, Inc., LaCrosse Footwear, Inc.
and Bell Sports Corp.
Thermal management is the process by which the temperature of various
materials can be controlled or manipulated. The thermal management materials
industry consists primarily of a wide variety of non-phase change materials
such as Thinsulate(R) brand insulation for use in apparel, flexible and rigid
polyurethane foams for use in footwear, sporting goods, automotive and
transportation industries, specialized chemical additives for use in
temperature resistant paints and coatings, and liquid coolants for use in
aerospace, automotive and computer/electronics cooling systems. Phase change
thermal management materials are comprised of materials that have the ability
to absorb and reject large amounts of heat by changing from solid to liquid and
back, thereby greatly enhancing the ability to heat or cool a particular
object. According to a 1997 study by the Society of Plastics, Polyurethane
Division, the U.S. market for polyurethane (a major host material for the
Company's Thermasorb(R) and also a major component of the Company's
ComforTemp(R) series of foams) was 4.6 billion pounds. By way of illustration
only, if the Company were to incorporate its products into just one percent of
the products currently using polyurethane, the Company would expect sales of
approximately 11 million pounds of its Thermasorb(R) additive.
The Company's products offer impressive and cost-effective thermal
management solutions for a broad range of industries. The Company's current
MicroPCM based products consist of a series of thermal additives and a series
of foams in which the thermal additives are embedded. The Company currently
markets its thermal additives and foams under the trademarks Thermasorb(R) and
ComforTemp(R), respectively.
The Company's thermal management technology utilized in Thermasorb(R)
additives and ComforTemp(R) foams provide the following unique characteristics:
o Intelligent thermal management -- provide pre-selected temperature
control;
o Versatile -- may be incorporated into a wide variety of end-use
products;
o Lightweight -- lighter and less bulky than conventional insulating
materials;
o Durable -- typically outlasts product to which it is applied;
o Rechargeable -- continuous automatic thermal management;
o Customizable -- may be engineered to meet the requirements of
applications across a wide
temperature range;
o Maintenance free -- no maintenance or power source required; and
o Complementary -- may be used to enhance other insulating products.
After the conclusion of this Offering, the Company anticipates that it
will generate revenues from two principal sources: (i) sales of its
Thermasorb(R) and ComforTemp(R) products for use in the products of its
strategic
30
<PAGE>
partners; and (ii) royalties from the use of the Thermasorb(R) and
ComforTemp(R) trademarks by its strategic partners based on a percentage of its
strategic partners' sales to end-users of products containing the Company's
products. The Company also may receive license fees and development fees from
some strategic partners for the grant of exclusive rights within a specific
product category and for development services provided by the Company.
To date, the Company's products have been incorporated into and are
currently being sold to consumers of products such as HotFingers(TM) ski gloves
by Wells Lamont, ski and snowboard helmets by Bell Sports Corp., hiking boots
and snowboots by Cove Shoe Company and Genfoot, Inc. and fishing waders by Fly
Technologies, Inc. In addition, the Company's products are currently being
incorporated into products such as snowboots by LaCrosse Footwear, Inc. and
personal hydration systems by FasTrak Systems, Inc., which are expected to be
available for sale to consumers in 1998.
Industry Overview
Thermal management is the process by which the temperature of various
materials is controlled or manipulated. The thermal management materials
industry consists primarily of a wide variety of non-phase change materials
such as Thinsulate(R) brand insulation for use in apparel; flexible and rigid
polyurethane foams for use in footwear, sporting goods, automotive and
transportation industries; specialized chemical additives for use in
temperature resistant paints and coatings; and liquid coolants for use in
aerospace, automotive and computer/electronics cooling systems. Phase change
thermal management materials are comprised of materials that have the ability
to absorb and reject large amounts of heat by changing from solid to liquid and
back, thereby greatly enhancing the ability to heat or cool a particular
object. According to a 1997 study by the Society of Plastics, Polyurethane
Division, the U.S. market for polyurethane (a major host material for the
Company's Thermasorb(R) additives and also a major component of the Company's
ComforTemp(R) series of foams) was 4.6 billion pounds. By way of illustration
only, if the Company were to incorporate its products into just one percent of
the products currently using polyurethane the Company would expect sales of
approximately 11 million pounds of its Thermasorb(R) additive.
The Company believes that its products are the first to combine the two
distinct technologies of thermal management and microencapsulation to effect
meaningful thermal performance improvements within applications across broad
markets. Microencapsulation is the enclosing of materials inside a microscopic
shell to maintain the integrity of the enclosed material. The combination of
PCM technology with microencapsulation technology overcomes many of the
inherent shortcomings of non-encapsulated PCMs, such as the tendency of non-
encapsulated PCMs to lose their integrity, and to dissipate, evaporate or
exhaust themselves over time. Microencapsulation permits PCMs to be imbedded
into a variety of host materials, while maintaining the integrity and thermal
functionality of the core PCMs. Microencapsulation is a proven technology and
has been used extensively in the pharmaceutical industry (time release
medication) and the paper industry (carbon-less copy paper). Since its advent,
microencapsulation has been increasingly utilized across diverse applications.
Management believes that the technology will continue to gain further
penetration and usage in different fields, including thermal management.
Strategy
Through mid-1996, the Company focused its efforts on acquiring,
identifying and testing potential applications for its innovative thermal
management products and developing its supply chain infrastructure. Having now
obtained licenses to its technology and identified select applications in which
to initially market its thermal management products and having completed
testing and development of products with manufacturers in several fields, the
Company's primary objective is to increase acceptance and usage of its thermal
management products in select high performance applications within high-volume
targeted industries through strategic partnerships with leaders in such
industries while continuously introducing new products in response to the
demands of the marketplace.
Most of the Company's marketing and brand promotion efforts are
coordinated through its strategic partners. The Company's agreements with its
strategic partners typically obligate the strategic partner to display and
promote the Company's trademarks, including, Thermasorb(R) and ComforTemp(R) in
all promotional materials, point of sale displays, and direct product
advertising with respect to products incorporating the Company's products. The
Company refers to these efforts as "co-branding."
31
<PAGE>
The Company's products are currently being marketed commercially in
apparel, footwear and sporting goods products. Three additional fields in which
it believes applications of its products are most likely to become commercially
feasible in the near term are home furnishings, shipping and packaging and
healthcare. In the future, the Company's plans include developing products and
establishing strategic partnerships in the automotive, aerospace and computers
and electronics industries.
The Company is following a deliberate strategy of positioning its products
as high performance products that will be sold in specialty retail or
industrial markets. In the near term the Company intends to focus its attention
on building high-quality, well-recognized brand names for its ComforTemp(R)
foams and Thermasorb(R) additives within niche markets such as the athletic
footwear and outdoor apparel market.
The Company evaluates prospective products by utilizing a four part
criteria. The Company's strategy is to pursue prospective product applications
which it determines can: (i) offer significant growth potential within large,
established and/or growing markets; (ii) generate attractive margins and
enhanced brand recognition while having low capital requirements; (iii) meet a
significant unmet market need; and (iv) provide a strong proprietary
opportunity for industry leaders entering into strategic partnerships with the
Company. Once a specific market or product is identified, the Company seeks to
introduce that product by: (i) targeting a market leader in that specific
industry; (ii) establishing a strategic relationship with that market leader;
(iii) working closely with its strategic partners to develop the optimal
characteristics and marketing efforts for each product incorporating the
Company's products; and (iv) coordinating with its strategic partners to
maximize market penetration including penetration of the mass market.
Products
The Company's product portfolio currently consists of its Thermasorb(R)
additives and ComforTemp(R) foams. These products offer advanced thermal
management solutions for a broad range of industries. In addition, these
products address the expanding need for improved thermal management
capabilities in a wide variety of commercial products. In response to the
requirements of its strategic partners, the Company will work to develop
applications of its products in other base materials such as epoxy resins,
paints and composite materials.
Thermasorb(R) additives are a series of thermal management additives
developed using the latest advances in microencapsulation technology.
Thermasorb(R) MicroPCMs are micron-sized particles in the form of a dry
free-flowing powder, consisting of a heat absorbing core material encapsulated
within a proprietary, durable shell wall. Thermasorb(R) additives can improve
the thermal storage capacity of a variety of host materials, including liquid,
foam, epoxy and composite materials. Thermasorb(R) additives are currently
commercially available in a variety of transition temperature settings ranging
from 43oF to 190oF. The variety of the Company's Thermasorb(R) additives allows
for an engineered solution for a multitude of thermal requirements.
ComforTemp(R) foams are a series of foam products containing embedded
Thermasorb(R) additives. ComforTemp(R) foams can be fabricated in different
ways to have the ability to retain or exclude heat thereby maintaining a more
constant temperature. Thermasorb(R) and ComforTemp(R) products have impressive
and cost-effective thermal management properties. For example, Thermasorb(R)
additives incorporated into solid materials enable those materials to absorb up
to ten times more heat than traditional insulating materials. In tests
performed for the United States Air Force by TRDC, liquid coolants containing
Thermasorb(R) additives have been shown to remove up to 40 times more heat than
traditional coolants. ComforTemp(R) foams are currently available in a light,
breathable polyurethane which has the added capability of wicking away moisture
while maintaining comfort in extreme hot or cold climates. For cold weather
apparel products, the greatest asset of ComforTemp(R) foam is its ability to
retain body heat during periods of activity and to release the heat back to the
individual during periods of inactivity, when the body is most in need of
warmth. ComforTemp(R) foams can be "recharged" repeatedly, as it recharges
depending on the individual level of physical activity or other external
conditions. For hot weather products, ComforTemp(R) foams can be used as a thin
thermal barrier or heat shield to provide protection against extreme heat as
well as to facilitate the regulation of body heat generated during activity
thereby providing a cooling effect. ComforTemp(R) foams can also be used as a
therapeutic or "climate controlled" wrap for comfort or medical purposes.
32
<PAGE>
The Company's thermal management technology utilized in Thermasorb(R)
additives and ComforTemp(R) foams provide the following unique characteristics:
o Intelligent thermal management -- provide pre-selected temperature
control;
o Versatile -- may be incorporated into a wide variety of end-use
products;
o Lightweight -- lighter and less bulky than conventional insulating
materials;
o Durable -- typically outlasts product to which it is applied;
o Rechargeable -- continuous automatic thermal management;
o Customizable -- may be engineered to meet the requirements of
applications across a wide temperature range;
o Maintenance free -- no maintenance or power source required; and
o Complementary -- may be used to enhance other insulating products.
Product Development Services and Support
The Company offers its strategic partners a broad range of applied
engineering and application support services. The Company's application and
thermal engineers specialize in the design, use and application of PCMs and
MicroPCMs. The Company works with all of its strategic partners to tailor
applications of its product solutions to the strategic partner's specific
thermal management needs. These services include:
Prototype Fabrication: Development of prototypes providing MicroPCM
thermal management solutions for custom designed products and systems.
Thermal Analysis: Analysis and testing of the thermal management
characteristics of existing and prototype products and systems.
Program Management: From initial concept to final product, the Company's
engineers work towards providing a complete thermal management product or
system.
Technology Assessment and Product Development: Performance of market
research and product assessments as well as reviews of competing products
and technologies.
End-Use Product and Systems Design: Design of thermal management
solutions for temperature control systems and specific components to
ensure optimal thermal management.
These design, application and support services enable the Company to work
closely with its strategic partners and potential strategic partners early in
the product development and design process in an effort to reduce the time from
product conception to market.
Initial Target Markets
Apparel Market -- The Company's ComforTemp(R) foams and Thermasorb(R) additives
can enhance the thermal characteristics of a multitude of end-products in the
apparel industry. People working in extreme hot or cold conditions or who are
required to wear protective garments, including firefighters, utility workers,
construction workers, police officers or individuals who spend significant
amounts of time outdoors, will benefit from apparel manufacturers' use of
Thermasorb(R) additives and ComforTemp(R) foams in their products. Such
products may alleviate the discomfort, fatigue and impaired coordination caused
by heat stress or prolonged exposure to heat or cold. During 1997, one of the
Company's strategic partners, Wells Lamont, a large U.S. glove manufacturer,
launched the worldwide roll-out of gloves incorporating ComforTemp(R) foam in
its line of HotFingers(TM) ski gloves.
Footwear Markets -- ComforTemp(R) foam is well suited for use as an insulating
or temperature management material in boots and shoes. During 1997, the
Company's strategic partners, Cove Shoe Company and Genfoot, Inc., launched the
worldwide roll-out of cold weather footwear including hunting boots and rubber
bottom boots. The Company, in January 1998, signed a binding Memorandum of
Understanding with LaCrosse Footwear, Inc., America's largest manufacturer of
rubber bottom boots, pursuant to which LaCrosse, Inc. is to introduce three
styles of snow boots containing the Company's ComforTemp(R) insulation for sale
during 1998.
33
<PAGE>
Sporting Goods Equipment -- The Company believes that many athletic goods could
be improved if the Company's products were incorporated into products for
climbing/mountaineering, cycling, hiking/backpacking, racquet sports,
canoeing/kayaking, running, cross training, sailing, skiing, snowboarding,
fishing, hunting, walking and racing. During 1997, the Company's strategic
partners, Fly Technologies, Inc. and Bell Sports Corp., launched the worldwide
roll-out of products incorporating ComforTemp(R) foam in fishing and hunting
waders, and ski and snowboarding helmets, respectively. FasTrak Systems, Inc.
is currently developing a thermally managed personal hydration system under the
CamelBak(TM) line for introduction in 1998.
Home Furnishings -- The Company has identified applications for incorporating
its ComforTemp(R) foams into home furnishings and home products including
mattresses, mattress covers, comforters and pillows. The Company is working
with a leading home furnishings manufacturer to develop a line of home
furnishing products incorporating its ComforTemp(R) foam.
Shipping and Packaging -- Thermasorb(R) and ComforTemp(R) products have
applications in the packaging and shipping industries. The Company is currently
working with a strategic partner to develop enhanced insulating packages
designed to keep foods hot or frozen longer without the need for portable
heaters, refrigeration systems or dry ice. Currently under development is a
soft-sided delivery bag that will be used for fast food and home delivery
applications. These thermally-enhanced bags will ensure that products remain
hot until orders are received by customers. The bags are designed to keep food
at cooking temperatures for up to 90 minutes. The Company sees significant
market potential for this type of product due to the number of people ordering
prepared food for home delivery.
Other potential shipping and packaging applications for the Company's
products include pharmaceutical packaging, flower/seed transport, produce
transport, organ transplant containers, blood/plasma containers, retrofitting
of insulated truck bodies, thermal blankets, speedwalls and electronic
component packaging.
Healthcare Industry -- The Company's Thermasorb(R) and ComforTemp(R) products
may be incorporated into many products useful in the healthcare industry,
including hot and cold packs. Cold packs containing the Company's Thermasorb(R)
additives are being developed to maintain temperatures as low as -30oF, while
hot packs containing the Company's Thermasorb(R) additives are being developed
to maintain temperatures as high as 190oF and can be heated using a microwave
oven. Other healthcare applications include wraps, braces and blankets.
Automotive Industry -- The Company has identified many applications for
incorporating its Thermasorb(R) additives into automotive components, including
seating systems, heat shields, interior and exterior trim, foams and foam
laminates, engine cooling systems, thermal grease, epoxies, lubricants and
oils, and adhesives. The Company's strategy is to work with end-product
manufacturers to identify, test, and provide product solutions to existing and
future thermal management problems. The Company is currently working with
automotive industry participants on the development of prototypes for interior
trim, heat shields, slurry engine coolants, battery insulation and oil coolers,
as well as for cooling the next generation of electric and hybrid motor
vehicles.
Aerospace Industry -- The Company continues to be involved with government
sponsored research and development efforts on avionics, computer and
electronics cooling systems. In this regard, the Company has developed or is
currently in the process of developing prototypes utilizing its proprietary
thermal management products in conjunction with heat sinks, slurry coolants,
thermal capacitors and power supplies. In addition, the Company has identified
applications of its products which can be used in the manufacture of insulating
coatings and paints, which have historically been targeted and tested for the
commercial aircraft industry because it can provide a decrease in the overall
weight of commercial aircraft through more efficient insulation systems.
Aircraft skin protected with a coating impregnated with Thermasorb(R) additives
permit manufacturers to use lighter and less expensive composite materials to
replace premium-priced exotic metals that are capable of withstanding high
temperatures. This not only reduces the weight of the aircraft, but greatly
reduces maintenance costs and has the added benefit of protecting underlying
materials from thermal shock.
Electronics/Computer Industry -- As computers, electronic systems and
components become smaller and more powerful, the amount of heat generated
increases as does the need for thermal management solutions. Excessive heat
degrades system performance and reliability and can cause system failure. The
Company has recognized and is addressing these thermal management opportunities
by developing products that use Thermasorb(R) based solutions to safeguard
electronic components from system failure by utilizing the ability of
Thermasorb(R) additives to absorb large amounts of heat.
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<PAGE>
Sales and Marketing
Currently the Company's sales strategy consists of working with its
strategic partners to increase the number of end-use products incorporating
Thermasorb(R) and ComforTemp(R) offered for sale. The Company leverages the
existing sales, marketing and distribution systems of its strategic partners to
maximize exposure of its products to retailers around the world. This strategy
permits the Company to support a large volume of end-use sales through a small
in-house sales staff servicing a small number of strategic partners. The
combined sales forces of the Company's strategic partners comprise an extensive
network of salespersons and sales representatives.
The Company's sales process with respect to prospective strategic partner
is as follows:
o A market leader for a particular niche is identified by the Company's
marketing group.
o A relationship is established with a technical point of contact within
the target company to achieve "buy in" of the Company's product concept by
the technology experts within the prospective strategic partner.
o The Company and the prospect enter into a reciprocal secrecy agreement
ensuring mutual confidentiality and prohibiting "reverse engineering" of
the Company's products and requiring the prospect to enter into a license
with the Company should it ever decide to place the MicroPCM technology
into production.
o The Company's product development personnel (application engineers)
evaluate the prospective strategic partners' needs and recommend a course
of action.
o Upon receipt of an indication of further interest from the prospective
strategic partner, the parties may elect to enter into a Joint Development
and Option to License Agreement (a "JD/Option to License Agreement") if
further development is needed to determine if the Company's products meet
the requirements of the prospective strategic partner. This permits the
prospective strategic partner to evaluate the technology more closely
while (for a fee) reserving the rights to obtain a license once
development is completed.
o The Company and the strategic partner negotiate and enter into a
Memorandum of Understanding with a view to the finalization of a License
Agreement.
o The Company and the strategic partner enter into a License Agreement.
A significant portion of the Company's marketing and brand promotion
efforts are coordinated through its strategic partners. The Company's agreements
with its strategic partners typically obligate the strategic partner to display
and promote the Company's trademarks, including, Thermasorb(R) and ComforTemp(R)
in all promotional materials, point of sale displays, and direct product
advertising for end-use products incorporating the Company's products. The
Company plans to coordinate the promotion of its Thermasorb(R) additives and
ComforTemp(R) foams with the promotional efforts of its strategic partners and
to implement a scaled-up public relations campaign in order to accelerate the
inclusion of feature stories and references to ComforTemp(R) foams and its
strategic partners in targeted industry and consumer periodicals. The Company
believes that this co-branding strategy will help to minimize its advertising
and marketing costs, thereby allowing the Company to allocate a greater portion
of its financial resources to the identification of new strategic partners and
the development of new product applications in conjunction with its new and
existing strategic partners.
In addition to its own marketing efforts and the efforts of its strategic
partners, the Company entered into a non-binding agreement in December 1997
with Foamex granting to Foamex a co-exclusive license with the Company to sell
ComforTemp(R) polyurethane foams and an exclusive license to manufacture
ComforTemp(R) polyurethane foams (other than certain ComforTemp(R)
formulations, currently supplied to the Company by another supplier). The
agreement contemplates a definitive agreement having a term of five years with
an option for a two year renewal and a worldwide license to sell and to
sublicense the right to develop and sell ComforTemp(R) based products to
selected end-product manufacturers with which Foamex has existing
relationships, subject to the Company's prior written consent. In addition, the
Company intends to provide Foamex with a license to manufacture certain
ComforTemp(R) foams within the Americas. The license would provide the Company
with up-front license fees, technical support payments, minimum purchase
requirements, payment of a percentage of sublicensing revenues to the Company
and co-branding obligations in return for continued exclusive
35
<PAGE>
rights and reciprocal agreements to be the sole source of supply for MicroPCMs
and polyurethane foams (other than certain ComforTemp(R) formulations), as the
case may be. The Company believes that its relationship with Foamex provides
several substantial benefits: (i) an additional, high capacity, source of
supply for polyurethane foams; and (ii) access to as yet untapped areas for new
strategic partnerships. For the fiscal year ended December 31, 1996, Foamex had
total revenues of approximately $926,000,000.
Strategic Partnerships
The Company seeks to enter into agreements with strategic partners that
have very strong brand names, excellent reputations for quality and performance
and extensive and established sales and distribution networks. A typical
agreement with a strategic partner: (i) identifies a narrowly defined end-use
product area in which to develop and commercialize products; (ii) requires the
strategic partner to purchase all of its requirements for ComforTemp(R) and
Thermasorb(R) MicroPCM additives and foams from the Company; (iii) establishes
minimum annual purchases of such additives and foams; and (iv) in exchange for
a royalty, grants to the strategic partner a license, which may or may not be
exclusive, to use the Company's name and trademarks in conjunction with the
products produced.
The Company earns revenues from the sale of its Thermasorb(R) additives and
ComforTemp(R) foams for inclusion in the products of its strategic partners
(including annual minimum purchases to maintain exclusivity), earned royalties,
license fees for exclusive agreements and development fees for development
services. In order to maintain exclusive rights within their respective fields
of use, several of the Company's strategic partners are required to make minimum
purchases of the Company's products. If those already contracted for minimum
purchase requirements are satisfied, the Company will receive approximately
$1,500,000 from the required minimum product sales and related royalties during
fiscal 1998.
Generally, the Company's strategic partners are required to co-brand the
Company's products by including the Company's trademarks in all their marketing
materials, point of sale displays, and sales promotion efforts for end-use
products incorporating the Company's products. Exclusivity, when granted, is
established within narrowly-defined end-use products intended to maximize the
Company's ability to selectively enter into additional agreements with market
leaders in many different product categories and to focus the strategic partner
on its field of specialization.
The table below lists the Company's current strategic partners and the
product category which is the subject of its current arrangements with such
partners.
<TABLE>
<CAPTION>
Strategic Partner Product
- ------------------------------------------------ --------------------------------------------------------
<S> <C>
Wells Lamont Division of Marmon Holdings, Inc. All Hand Apparel and Selected Accessories
Bell Sports Corp. (*) Winter Sports Helmets (Ski/Snowboard)
Cove Shoe Co. (H.H. Brown) Outdoor Goodyear Welt Construction Boots
Genfoot, Inc. Cold Weather Insulated Rubber Bottom Boots
Fly Technologies, Inc. Fishing and Hunting Waders
LaCrosse Footwear, Inc. (*) Cold Weather Insulated Rubber Bottom Boots
CamelBak/FasTrak Systems, Inc. (*) Personal Hydration Systems
Thermo Solutions, Inc. (*) Temperature Sensitive Food Storage/Transport Containers
</TABLE>
- ------------
*A signed Memorandum of Understanding is in effect.
Wells Lamont Division of Marmon Holdings, Inc. -- All Hand Apparel. The Company
entered into an agreement in January 1997 with Wells Lamont Division of Marmon
Holdings, Inc. ("Wells Lamont"), granting Wells Lamont exclusive rights to use
the Company's products and trademarks with respect to all hand apparel (e.g.,
gloves and mittens) and selected other products (e.g., ear warmers and
industrial gloves) for a period of three years. Pursuant to the agreement,
Wells Lamont is required to purchase all of its requirements (including certain
minimum purchases to maintain its exclusive rights) for Thermasorb(R) additives
and ComforTemp(R) foams from the Company and is required to pay to the Company
an up front fee with respect to its exclusive rights and a royalty based on
sales. The agreement permits Wells Lamont to enter into sub-license agreements
and requires Wells
36
<PAGE>
Lamont to pay the Company a specified percentage of any royalties received
under any such sub-license agreements for the production or sale of the
licensed products. Wells Lamont is a large U.S. glove manufacturer with a
significant market share for gardening gloves and work gloves. Wells Lamont is
also a significant supplier of ski gloves with its HotFingers(TM) brand. Wells
Lamont has been in continuous operation for 90 years and also manufactures ear
warmers, hats, socks, and industrial gloves.
Bell Sports Corp. -- Winter Sports Helmets. The Company has entered into an MOU
in April 1997 with Bell Sports Corp. ("Bell") granting Bell exclusive rights to
use the Company's products and trademarks with respect to winter sports helmets
(skiing and snowboarding) for a period of two years. The Company and Bell are
proceeding to finalize a license agreement. Pursuant to the MOU, Bell is
required to purchase all of its requirements for Thermasorb(R) additives and
ComforTemp(R) foams from the Company and is required to pay to the Company an
up front fee with respect to its exclusive rights and a royalty based on sales.
The MOU also requires Bell to co-brand products that incorporate the Company's
products, thereby enhancing the name recognition for the Company's trademarks.
For the fiscal year ended June 30, 1997, Bell had total revenues of
approximately $260,000,000.
Cove Shoe Company -- Outdoor Boots with Goodyear Welt Construction. The Company
entered into an agreement in February 1997 with Cove Shoe Company, Inc. ("Cove
Shoe") granting Cove Shoe exclusive rights to use the Company's products and
trademarks with respect to the manufacture and distribution of outdoor boots
with Goodyear welt construction within certain specific style categories (e.g.,
military, outdoor and others) for a period of three years. Pursuant to the
agreement, Cove Shoe is required to purchase all of its requirements (including
certain minimum purchases to maintain its exclusive rights) for Thermasorb(R)
additives and ComforTemp(R) foams from the Company and is required to pay to
the Company an up front fee with respect to its exclusive rights and a royalty
based on sales. The agreement also permits Cove Shoe to enter into sub-license
agreements provided Cove Shoe pays to the Company a specified percentage of any
royalties received under any such sub-license. Cove Shoe is a division of H.H.
Brown Shoe Company, a subsidiary of Berkshire Hathaway, Inc., and is one of the
oldest shoe manufacturers in the United States. Cove Shoe engages in private
label manufacturing for many companies including L.L. Bean, Cabellas, Browning,
Eddie Bauer and Bass Pro Shops. Cove Shoe is a major supplier to military and
army-navy stores and has a license to market footwear with the Harley-Davidson
trademark.
Genfoot, Inc. -- Cold Weather Insulated Rubber Bottom Boots. The Company
entered into an agreement in February 1997 with Genfoot, Inc. ("Genfoot")
granting to Genfoot non-exclusive rights to use the Company's products and
trademarks with respect to the manufacture and distribution of cold weather
insulated rubber bottom boots for a period of two years. The agreement requires
Genfoot to purchase all of its requirements for Thermasorb(R) additives and
ComforTemp(R) foams from the Company. The agreement also requires Genfoot to
co-brand the Company's products in connection with its products incorporating
the Company's products, thereby enhancing the name recognition of the Company's
trademarks. In accordance with the terms of the agreement, Genfoot produced and
displayed ten styles of Kamik brand boots incorporating the Company's products
at the 1997 Outdoor Retailers Show and has advised the Company that it plans to
increase this to 12 styles for 1998 including two children's styles. Genfoot is
one of the largest Canadian boot manufacturers measured in number of pairs of
boots shipped. Genfoot has been in continuous operation for nearly 100 years.
Fly Technologies, Inc. -- Fishing and Hunting Waders. The Company entered into
an agreement in March 1997, with Fly Technologies, Inc. ("Fly Tech") granting
Fly Tech the exclusive right to use the Company's products and trademarks with
respect to the manufacture and distribution of fishing and hunting waders for a
period of two years. The agreement requires Fly Tech to purchase all of its
requirements (including certain minimum purchases to maintain its exclusive
rights) for Thermasorb(R) additives and ComforTemp(R) foams from the Company
and provides for an up front fee with respect to its exclusive rights and a
royalty based on sales. The agreement permits Fly Tech to enter into
sub-license agreements that require Fly Tech to pay the Company a specified
percentage of any royalties received under any such sub-license. The agreement
also requires Fly Tech to co-brand the Company's products in connection with
its products incorporating the Company's products, thereby enhancing the name
recognition of the Company's trademarks. In addition to their own Fly Tech
brand, Fly Tech manufactures private label fishing and hunting waders for
companies such as Bass Pro Shops, Cabellas and L.L. Bean.
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<PAGE>
LaCrosse Footwear, Inc. -- Cold Weather Rubber Bottom Boots. The Company
entered into an MOU in January 1998 with LaCrosse Footwear, Inc. ("LaCrosse")
granting LaCrosse non-exclusive rights to use the Company's products and
trademarks with respect to cold weather, insulated rubber bottom boots other
than welt-constructed boots for a period of two years. The Company and LaCrosse
are proceeding to finalize an agreement. The MOU provides for royalties based
on product sales, requires LaCrosse to purchase all of its requirements of
Thermasorb(R) additives and ComforTemp(R) foams from the Company. The MOU also
requires LaCrosse to design, produce and market at least three styles of rubber
bottom boots incorporating ComforTemp(R) foam in its Fall/Winter 1998 product
line. The MOU also requires LaCrosse to co-brand its products that incorporate
the Company's products thereby enhancing the name recognition for the Company's
trademarks. For the fiscal year ended December 31, 1996, LaCrosse had total
revenues of approximately $122,000,000.
CamelBak/FasTrak Systems, Inc. -- Personal Hydration Systems. The Company
entered into an MOU in July 1997 with CamelBak/FasTrak Systems, Inc.
("CamelBak") granting CamelBak exclusive rights to use the Company's products
and trademarks with respect to cold-weather personal portable hydration systems
for commercial and military use for a period of two years. The Company and
CamelBak are proceeding to finalize an agreement. The agreement is royalty free
but requires CamelBak to purchase all of its requirements (including certain
minimum purchases to maintain its exclusive rights) of Thermasorb(R) additives
and ComforTemp(R) foams from the Company and requires CamelBak to design,
produce and market at least one style of winter hydration system incorporating
ComforTemp(R) foam in its Winter 1997/98 product line. The MOU also requires
CamelBak to co-brand products that incorporate the Company's products thereby
enhancing the name recognition for the Company's trademarks.
Thermo Solutions, Inc. -- Temperature Sensitive Food Storage/Transport
Containers. The Company entered into an agreement in May 1996 that was amended
by an MOU entered into in January 1998 with Thermo Solutions, Inc. ("Thermo
Solutions"), an early stage company specializing in the manufacture, sale and
distribution of packaging containers for food storage and delivery
applications. The Company and Thermo Solutions are proceeding to finalize an
agreement. As amended, the agreement is expected to grant Thermo Solutions the
exclusive right to use the Company's products and trademarks with respect to
temperature sensitive food storage/transport containers of certain sizes
through December 1998 with two, one year options. The amended agreement
requires Thermo Solutions to purchase all of its requirements (including
certain minimum purchases) for Thermasorb(R) additives and ComforTemp(R) foams
from the Company and provides for annual licensing fees and royalties based on
sales. The final agreement is expected to provide that Thermo Solutions, with
the Company's prior consent, may enter into sub-license agreements that require
Thermo Solutions to pay a percentage of any royalties received under any such
sub-license to the Company. The MOU also requires Thermo Solutions to co-brand
products that incorporate the Company's products thereby enhancing the name
recognition for the Company's trademarks.
Research and Development
From its inception in 1989 until mid-1997, the Company's revenues were
largely derived from a variety of government related research and development
contracts which funded the Company's research and development efforts during
that period. Terms and conditions under these government contracts varied from
a cost plus basis to a fixed price basis. Upon completion of research and
development under these contracts, the government may retain some rights to a
royalty-free license to use the newly developed technology for certain of its
own uses, and the Company retains all other rights to use and further
commercialize the newly developed technology.
The Company was awarded its first research and development contract from
McDonnell Douglas Corporation in 1991 to study the benefits of using MicroPCM
technology in avionics cooling systems in military aircraft. Since that time,
the Company has identified many applications for its products in a wide variety
of areas, including both intermediate and end-use products, and across a wide
range of large and/or growing industry segments.
For the fiscal years ended December 31, 1995 and 1996 and the nine month
period ended September 30, 1997, the Company was primarily involved in
government research and development projects related to technology that is used
to improve the thermal management properties of military aircraft and
protective outerwear. For those periods, the Company's revenues from research
and development were $849,000, $1,120,000, and $315,000, respectively, and its
research and development costs related to such projects were $574,000,
$1,004,000, and $186,000, respectively.
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<PAGE>
From time to time, the Company becomes aware of and considers conducting
funded research projects that do not relate to thermal management. The Company
expects to evaluate future funded research and development projects on a case
by case basis and will engage in those projects management considers to offer
complementary opportunities for the Company. Of the total research and
development revenues received during the fiscal years ended December 31, 1995
and 1996 and the nine month period ended September 30, 1997, revenues from
projects unrelated to thermal management technology amounted to approximately
$113,000, $402,000 and $113,000, respectively. To date, the Company has not
developed any non-thermal technologies or products that it considers ready to
commercialize.
As of September 30, 1997, the Company had ongoing research projects under
government contracts and other third party funding in the amount of $351,000
and proposals outstanding for research and development projects having an
aggregate potential value of less than $250,000. The Company anticipates that
it will continue to conduct some funded research projects in the future. At
present the Company would estimate approximately $500,000 per year will be
realized from funded research projects. See "Risk Factors -- Accumulated
Losses; Reduction in Government-Funded Development; Possible Need for
Additional Financing" and "-- Dependence on Small Number of Strategic Partners;
Limited Sales and Marketing Experience."
Technology Overview
Encapsulation technology and traditional PCMs have been separately in
development and use since the early 1970's. Nonencapsulated PCMs have been used
in many energy-related products for heat storage and temperature control.
Microencapsulation has been used extensively in the pharmaceutical industry
(time released medication) and the paper industry (carbonless copy paper). The
Company's technology combines these two sciences to form an entirely new class
of materials that creates heretofore unmatched thermal management solutions.
PCMs have the capacity to absorb and reject large amounts of heat upon a
change of phase (e.g., from solid to liquid, liquid to gas, etc.). The
temperature at which the heat absorption and rejection takes place is known as
the phase change or transition temperature. The amount of heat either rejected
or absorbed is known as the latent heat of fusion.
In the Company's products, the PCM is encapsulated into tiny capsules
ranging in size from one to several hundred microns in diameter. Encapsulating
PCMs within a thin polymer shell, thereby forming a microscopic sphere or
MicroPCM, allows for the melting and freezing of the PCM core to be contained
within this shell. The capsules resemble a fine powder, permitting them to be
mixed into a variety of host materials (e.g., fluids, foams and other solid
structures) while maintaining the integrity and thermal functionality of the
core PCM. The shell wall material used in the Company's MicroPCM additive
Thermasorb(R) is extremely durable and is designed and formulated to perform
under extreme mechanical, chemical, and thermal conditions.
Upon heat absorption, the core material in the MicroPCM melts, changing
from solid to liquid. Upon heat release or at freezing, the core material turns
solid again and is ready for the next melting phase. This unique, reversible
characteristic is referred to as "recharging".
Since the latent heat of fusion of Thermasorb(R) additives is
substantially higher than the heat capacity of a host material, the net effect
of adding a concentration of Thermasorb(R) additives to a host material results
in an increase in the heat capacity of the end product. The choice of core
materials contained in the MicroPCM for any given application depends on the
desired transition temperature and other system level parameters. The Company
has identified dozens of PCMs that are suitable for encapsulation with the
Company's existing processes, ranging in melting points from -65oF to over
225oF.
ComforTemp(R) foams are currently available in a soft hydrophilic version
which is light, breathable, open-cell, polyurethane foam which the Company
believes is best suited to apparel and footwear applications. The Company's
ComforTemp(R) product also has the potential to be produced in at least seven
different foam categories including rubber, closed cell neoprene, latex, soft
hydrophilic, polyurethane soft, polyurethane rigid, silicone and styrofoam.
Each foam category exhibits different thermal, operational and functional
capabilities. Depending upon the thermal management characteristics required
for a strategic partner's end-use application, the appropriate type of foam
(impregnated with Thermasorb(R) additives having the desired transition
temperature) can be used to provide optimal thermal protection.
39
<PAGE>
Test results -- Insulation. Tests performed by the Company for the U.S.
Air Force, as well as by independent third-party testing laboratories,
including Holometrix, Inc. and the Naval Clothing and Textile Research Center
("NCTRF"), have demonstrated that certain ComforTemp(R) foams provided greater
thermal insulation than other existing thermal management materials. The graph
below depicts the results of two such tests. The heavily shaded portion of the
graph shows the inherent thermal insulation value of the materials (including
ComforTemp(R) foam in the uncharged state) as tested by industry standards
while the lightly shaded portion shows the additional insulation value of
ComforTemp(R) foam in the charged state. The information with respect to the
"uncharged" state relates to ComforTemp(R) foam either prior to being charged
by wearer activity or after being de-charged by extended exposure at cold
temperatures. The information with respect to the "charged" state relates to
the additional insulative benefit derived from the ComforTemp(R) foam as a
result of the heat release characteristic of the embedded Thermasorb(R)
capsules.
Insulating Value of ComforTemp(R) Foam in Charged and Uncharged States Compared
to Other
Commercially Available Insulating Materials
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
I |
|
N |
|
S |
|
U 10 --| *
| *
L 9 --|
|
A 8 --|
|
T 7 --|
|
I 6 --| X
| X X
N 5 --|
|
G 4 --| X X X
|
3 --|
|
V 2 --|
|
A 1 --|
|
L |
|
U |
|
E |---------------------------------------------------------------------------------------------------------------
ColorTemp ColorTemp name brand fabric typical foam typical felt name brand fabric
from(LX) foam(DX) insulation "A" insulation insulation insulation "B"
</TABLE>
In the bar graph above, the X's designate the highest limit of the heavily
shaded portion and the *'s designate the highest limit of the lightly shaded
portion, as each is described in the text above the graph.
40
<PAGE>
Test results -- Heat protection. The following graph depicts the results
of a test conducted on ComforTemp(R) by the Air Force Fire Research Lab at
Tyndall Air Force Base. This test demonstrated the extended period of
protection that would be provided to a firefighter as a result of incorporating
a layer of ComforTemp(R) foam in a conventional fire suit when exposed to a
temperature simulating the intense heat of a jet fuel fire. By measuring the
temperature increase inside the fire-suit material, with and without
ComforTemp(R) foam, the skin temperature of a firefighter is simulated.
Relative Heat Shielding Capability of a Fire-Suit
With and Without ComforTemp(R) Foams
200 |
|
|
|
T 180 |
E |
M | *
P |
E |
R 160 |
A |
T |
U | X
R |
E 140 |
, |
|
D |
E |
G 120 |
R |
E |
E |
S |
100 |
F |
|
|
|
80 |
|----------------------------------------------------------------------
0 50 100 150 200 250 300
seconds
* = standard material
X = ComforTemp foam
The "*" and "X" each represent the end point of a line originating at the
intersection of the vertical and horizontal axes of the graph and extending
to such points. Although neither line maintains a perfectly constant slope,
overall the straight lines described above fairly approximate the slope of the
lines produced from the actual data.
The Manufacturing Process
The Company currently outsources all of its production needs and
anticipates that it will continue to do so for the foreseeable future. The
Company currently has informal agreements and is negotiating definitive supply
agreements with companies involved in each stage of the manufacturing process.
In the event that any of those companies were unable to continue to supply the
Company with materials or services, the Company believes that it would be able
to arrange for other sources available on similar terms and at competitive
prices. See "Risk Factors -- Dependence on Single Source Providers for
Manufacturing."
41
<PAGE>
The chart below illustrates the manufacturing and quality assurance
processes for the Company's products:
The flow chart shows the flow of the Company's manufacturing process from
(level 1) raw phase change materials to (level 2) Thermasorb(R) additives to
(level 3) ComforTemp(R) foam in slab form to (level 4) ComforTemp(R) foam in
thin sheets, with corresponding quality assurance at each stage of the process.
Sales are indicated, after quality assurance reviews of finished Thermasorb(R)
additive (level 2) and of ComforTemp(R) foam in thin sheets (level 4).
Currently, all of the Company's requirements for Thermasorb(R) additives
are manufactured by the Minnesota Mining and Manufacturing Company ("3M"). The
Company and 3M are parties to a Reciprocal Secrecy Agreement pursuant to which
each agrees to maintain the confidence of the others' proprietary information
and to not use or divulge that information except with the written consent of
the other. The Company and 3M have entered into a letter agreement that provides
firm fixed pricing for all of the Company's anticipated 1998 requirements for
Thermasorb(R) additives, as well as favorable pricing and delivery terms for
short run and prototype production volumes. The letter agreement requires the
Company to place a blanket purchase order for all of 1998's anticipated usage
which will be placed prior to the Offering. To date, the Company has obtained
all of its requirements for ComforTemp(R) foams under purchase orders with LMI.
The Company has relationships with other suppliers for each of the other steps
of the production process. The Company also has recently entered into a
non-binding agreement with Foamex as an additional supplier for production of
ComforTemp(R) polyurethane foams. The Company has agreed to permit Foamex to
sell ComforTemp(R) polyurethane foams for applications specifically consented to
by the Company. Foamex is a major manufacturer of foam products, having
significant manufacturing capacity both within and outside of the United States.
For the fiscal year ended December 31, 1996, Foamex had total revenues of
approximately $926,000,000. See "Business -- Sales and Marketing."
The Company monitors and tests its products during each step of the
manufacturing process for quality assurance purposes. Raw PCM, identified by
lot number, is delivered to the Company to ensure that the quantity of heat the
PCM can hold at different temperature levels adheres to the Company's product
specifications. After encapsulation, the Company tests and verifies the quality
of the shell wall and validates that the product satisfies its thermal
requirements. The Company verifies and tests the foam products prior to
shipment to its strategic partners. All testing is performed by the Company's
quality assurance team based in its North Carolina facility.
Patents/Intellectual Property
In 1991, the Company secured exclusive rights under a Joint Development
Agreement and subsequently entered into the TRDC License with TRDC. Pursuant to
the TRDC License, TRDC granted to the Company perpetual exclusive worldwide
rights with respect to all applications of bulk PCMs and MicroPCMs covered by
TRDC's patents and proprietary intellectual property other than MicroPCM Fibers
and Fabrics which previously
42
<PAGE>
had been licensed to Outlast. Pursuant to the terms of the TRDC License, the
Company has the exclusive right to manufacture bulk PCMs and MicroPCMs, end-use
products and improvements and the right to market, sell, use, lease and
distribute all applications except MicroPCM Fibers and Fabrics, and to
sublicense such rights. The Company is required to pay TRDC a royalty based on
gross product sales revenues and a percentage of any royalties the Company
receives from its strategic partners and sublicensees. The TRDC License
establishes minimum annual royalties payable over the term of the TRDC License
which are offset to the extent of any actual earned royalties paid to TRDC and
a percentage of any research and development contracts accepted by TRDC from
the Company. Pursuant to the terms of the TRDC License, the Company is required
to pay all of the patent expenses with respect to inventions that exclusively
benefit the Company and a portion of the patent expenses with respect to
inventions in which the Company shares the benefits with others. Effective
January 3, 1997, TRDC assigned its rights under the TRDC License to an
affiliated entity. TRDC is obligated under the TRDC License to notify the
Company and to give the Company the benefit of any future developments for bulk
PCM and MicroPCM technologies other than MicroPCM Fibers and Fabrics.
The TRDC License granted to the Company broad exclusive rights in the
MicroPCM Technology. Even so, the Company wanted to secure exclusive rights to
a significant portion of the rights granted earlier by TRDC to Outlast,
especially in light of the Company's initial successes with strategic partners
in the fields of apparel and footwear where there exists a high likelihood of
some combination of the Company's Thermasorb(R) and ComforTemp(R) products with
some type of fiber or fabric. In order to expand the scope of the Company's
rights in the MicroPCM Technology, in January 1998, the Company entered into
the Outlast Agreement. The Outlast Agreement, among other things, secures
additional exclusive rights for the Company and limits Outlast's rights with
respect to the combination of MicroPCM foams with fibers and fabrics. Under the
Outlast Agreement, the Company has exclusive rights, for most applications, to
manufacture, sub-license and sell ComforTemp(R) foams that are attached to
fibers and fabrics or intended to be attached to fibers or fabrics so long as
the foam is greater than 2mm in thickness. The Company also may sell
Thermasorb(R) additives for use in foams attached to fibers and fabrics. The
Company agreed to pay Outlast a royalty for its products if its products are
used in such combinations with fibers and fabrics, with minimum annual payment
requirements in effect for as long as the Company desires the agreement to be
exclusive (including exclusive of Outlast). Pursuant to the Outlast Agreement,
Outlast will not sell ComforTemp(R)-type foams greater than 2mm in thickness
attached to fibers and fabrics for ten years, unless the Company elects to
permit its agreement to become non-exclusive. See "Risk Factors -- Dependence
Upon Intellectual Property."
Currently, TRDC's intellectual property relating to MicroPCMs includes
nine existing U.S. patents and one pending patent which expire from 2006 to
2013. TRDC is in the process of applying for international patent protection
for the TRDC patented technology. The Company believes that its MicroPCM
technology is adequately protected by its existing licenses of the TRDC patents
and by its proprietary know-how, although the validity of the patents
underlying the licenses and the limits of the licenses have never been
contested in any legal proceeding. See "Risk Factors -- Dependence Upon
Intellectual Property."
43
<PAGE>
The following table sets forth information regarding the patents currently
licensed to the Company.
<TABLE>
<CAPTION>
Patent
Date of Expiration
Patent Patent Number Description Industry (Year)
- ----------- ---------------- ---------------------------------------- ------------------------ -----------
<S> <C> <C> <C> <C>
2/28/89 4,807,696 Thermal Energy Storage Apparatus Automotive, Aerospace, 2006
Using Encapsulated PCMs Electronics
3/27/90 4,911,232 Heat Transfer Using MicroPCM Slurries Automotive, Computers, 2007
Electronics
8/25/92 5,141,079 Cutting/Cooling Fluid All Industries 2009
7/6/93 5,224,356 Thermal Energy Absorbing and Electronics 2010
Conducting Potting Materials
3/1/94 5,290,904 Thermally Enhanced Heat Shields Protective Apparel 2011
11/22/94 5,366,801 Coated Fabric With Reversible Enhanced Protective Apparel 2011
Properties
5/16/95 5,415,222 Microclimate Cooling Garments Protective Apparel 2012
3/19/96 5,499,460 Moldable Foam Insole with Footwear 2013
Reversible Enhanced Thermal Storage
6/10/97 5,637,389 Thermally Enhanced Foam Insulation All Industries 2012
Patent Pending Thermal Insulating Coating using All Industries --
MicroPCMs*
</TABLE>
- ------------
*A Notice of Allowance has been issued and a patent number is expected by the
Company to be issued shortly.
The Company has registered the trademarks Thermasorb(R) and ComforTemp(R)
with the United States Patent and Trademark Office (the "PTO") and has applied
for registration of the trademark Comfort in the Extreme(TM) which application
has been allowed by the PTO. Effective September 10, 1997, the Company received
a registered Canadian trademark for ComforTemp(R). Trademark applications have
also been submitted for ComforTemp(R) in the European Community. See "Risk
Factors -- Dependence Upon Intellectual Property."
In addition to its licenses and trademarks, the Company is developing
considerable proprietary technology and trade secrets with respect to the
selection of the raw material(s) to be used for the capsules' core material,
shell wall materials and the composition of the capsule which the Company
believes accords it a considerable competitive advantage. The Company believes
that significant barriers have been created for potential competitors by
securing licenses under patents which grant and protect its rights to a wide
variety of applications, spanning a broad spectrum of industries and end-use
products. In order to further protect its proprietary trade secrets and
know-how, the Company generally requires any person having access to such
confidential information to execute an agreement whereby such person agrees to
keep such information confidential.
Competition
The Company's Thermasorb(R) additives and ComforTemp(R) foams compete with
a wide variety of natural and synthetic insulating products, including other
applications of MicroPCMs and bulk PCMs, open and closed cell foams, synthetic
insulators (e.g., Thinsulate(R), Polar Guard(R)), wool and down. The Company
believes that its ComforTemp(R) foams offer significant benefits over natural
and synthetic insulation materials and foams not containing MicroPCMs because
of (i) the ability of the ComforTemp(R) foam to absorb heat and release it when
cooling occurs; (ii) its lightweight, low bulk characteristics; (iii) its
durability; (iv) its rechargeability; (v) its ability to be customized to a
particular temperature within a wide range of temperatures in a wide variety of
applications; (vi) its minimal maintenance requirements; and (vii) its ability
to be combined with other available heat management materials. The Company's
products also have the capacity to function reversibly. Depending on the
placement of the ComforTemp(R) foam, it may be engineered to absorb, reject or
regulate heat.
44
<PAGE>
The Company competes directly with Outlast in certain applications. The
license granted to Outlast by TRDC permits it to market applications of
MicroPCM Fibers and Fabrics. The Company believes that the principal area of
competition with Outlast involves applications where MicroPCM Fibers or Fabrics
less than 2mm thick may be used instead of combinations including the Company's
ComforTemp(R) foam. The Company believes that products incorporating its
ComforTemp(R) foam will offer significant advantages over such fabric
application because fabrics will not have sufficient volume of MicroPCMs to
provide a significant thermal management solution. See "Business --
Patents/Intellectual Property."
The Company will also compete with other companies, including R.G. Barry
Company and Phase Change Laboratories, Inc., companies utilizing bulk PCMs
primarily for heat retention products. The Company believes Thermasorb(R)
additives and ComforTemp(R) foams offer superior performance characteristics
because microencapsulation obviates the need for containment of the PCM in a
sealed bag or other packaging which may tear or leak resulting in contamination
and rendering the end product useless.
The Company's products also compete with active mechanical and solid
cooling alternatives (e.g., fans, conductive heat sinks) currently utilized for
selected electronics and computer cooling applications and certain medical
products. For these applications, Thermasorb(R) will compete within a
fragmented market comprised of specialty firms, including Aavid Thermal
Technologies, Inc. and various smaller companies, including Advanced Ceramics
Corporation, Thermacore, Inc., Chipcoolers, Inc. and Marlow Industries, Inc.
The Company believes that Thermasorb(R) would be an effective means to enhance
the performance of thermal solutions being provided by these and other firms,
resulting in a fertile area for strategic partnerships within this segment of
the industry.
The Company's products will also compete with actively cooled liquid
solutions (e.g., automobile radiator circulating water to cool an engine) which
the Company believes is inferior in technical performance to
Thermasorb(R)-based cooling solutions. The Company recognizes, however, that
there is a significant price differential between existing water-based systems
and cooling solutions incorporating the Company's Thermasorb(R) additives. The
Company believes that based upon its current technology the additional cost
involved in utilizing a Thermasorb(R) solution will not be justified in such a
price sensitive market, therefore, the Company will not target this area in the
near term.
Facilities
The Company currently has three facilities. The Company occupies its
current headquarters located in Freeport, New York, consisting of approximately
500 square feet under a rent free arrangement with an affiliated company,
Frisby Aerospace. The Company will vacate its current space in February 1998
and take occupancy of approximately 2,000 square feet of space located at 77
East Main Street, Bay Shore, New York. This space will be occupied by the
Company pending completion of its permanent space also to be located in Bay
Shore. The landlord for both the temporary and the permanent space in Bay Shore
is the Town of Islip. The Company anticipates taking occupancy of the permanent
space in Bay Shore by January 1999. The temporary space in Bay Shore is
currently occupied on a rent free basis and the Company believes it will
continue to be occupied on a rent free basis until the Company takes occupancy
of the permanent space in Bay Shore. The Company is currently negotiating the
lease for the new headquarters space in the newly renovated facility in Bay
Shore, New York. See "Certain Transactions."
The Company currently sub-leases its development and laboratory facilities
in Clemmons, North Carolina, consisting of approximately 8,000 square feet from
Frisby Aerospace. The existing sublease expired on November 30, 1997 and has
been extended on a month-to-month basis at a monthly rent of $2,520. On
December 4, 1997, the Company entered into a Memorandum of Understanding with
Piedmont to lease space in a facility in Winston Salem, North Carolina which
will better suit the Company's near and long-term requirements for expansion
space. Pursuant to the MOU, the lease will have a 20 year term and an initial
price of approximately $6.00 per square foot. The Company and the landlord
presently are proceeding to conclude a formal lease. The Company expects to
take possession of approximately 25,000 square feet of new space and to vacate
its Clemmons facility by June 1998. The Company has also reserved two
condominium units in the Winston-Salem facility for a purchase price of $80,000
and $78,000, respectively. The Company plans to use the condominium units as
accommodations for visiting employees, directors and strategic partners which
the Company believes will provide more cost effective lodging for such
visitors. See "Certain Transactions."
45
<PAGE>
The Company also leases approximately 5,000 square feet from a
non-affiliate in Aiken, South Carolina. The Company uses the Aiken facility to
perform some of its research and development activities. The facility is
expected to remain in use until June 1998. The monthly rent for the facility is
$1,250.
The Company does not consider any of its current facilities suitable for
its future needs and is negotiating new leases in New York and North Carolina
as described above. The Company believes that the new space in North Carolina
will be sufficient for the Company's research and development efforts for the
foreseeable future. Upon taking occupancy of the new North Carolina facility,
the Company will move the operations currently conducted at its South Carolina
facility into the new North Carolina facility.
Employees
As of December 31, 1997, the Company had 13 full-time employees of which
two are executives, seven are research and development personnel, two are
engaged in sales and marketing, one is a quality assurance specialist and one is
clerical. The Company has no collective bargaining agreements and believes its
relations with its employees are good.
Legal Proceedings
The Company is not involved in any legal proceedings. In the ordinary
course of its business, the Company, from time to time, may be subject to
litigation.
46
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names and ages of the Company's
directors, executive officers and significant employees and the positions they
hold with the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------- ----- -----------------------------------------------------
<S> <C> <C>
Gregory S. Frisby(1) .......... 38 Chairman of the Board of Directors, President, Chief
Executive Officer and Treasurer
Jeffry D. Frisby(1) ........... 42 Director
Douglas J. McCrosson .......... 35 Vice President of Market Development and Secretary
Pietro A. Motta ............... 60 Director
</TABLE>
- ------------
(1) Gregory S. Frisby and Jeffry D. Frisby are brothers.
Gregory S. Frisby has been the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company since its inception in
1989. From 1991 to 1997, Gregory S. Frisby was the Chief Executive Officer of
Frisby Aerospace. He also serves as a member of the Board of Directors of
Applied Technology Center Corporation since 1995 and the Long Island Forum for
Technology since 1994. He is a member of the Scientific and Business Advisory
Board of the Long Island Research Institute. From 1993 to 1994, Gregory S.
Frisby was Chairman of the National Advisory Board for the Small Business
Development Center Program for the Small Business Administration, from 1991 to
1993 he was a member of the advisory panel assessing U.S. technology and the
transition to a peacetime economy for the Congressional Office of Technology
Assessment, and from 1995 to 1996 he was a member of the CEM Task Force on
Privatization at the U.S. Department of Energy and a member of the Economic
Policy Council's Panel on "Economic Adjustment After the Cold War" for the
United Nations Association. Gregory S. Frisby received his Bachelor of Science
degree in Business Administration from Wake Forest University in 1981.
Douglas J. McCrosson has been the Vice President of Market Development and
Secretary of the Company since 1997. Mr. McCrosson became the Vice President of
Technical Operations in 1997 and from 1992 through 1997, he was the Group
Director responsible for all of the Company's thermal product development
programs. From 1988 to 1992, Mr. McCrosson was employed as an engineering
manager at Frisby Aerospace. From 1984 to 1988, Mr. McCrosson was a hydraulic
systems engineer for the Grumman Corporation. Mr. McCrosson received his
Bachelor of Science degree in Mechanical Engineering from the State University
of New York at Buffalo in 1984 and his Masters of Science degree in Management
from Polytechnic University in 1990.
Jeffry D. Frisby is a director of the Company. Since 1986, Jeffry D.
Frisby has been the President and a director of Frisby Aerospace. Jeffry D.
Frisby also serves on the Industrial Advisory Board of the American Society of
Mechanical Engineers. He received his Bachelor of Science degree in Business
Administration from Wake Forest University in 1977.
Pietro A. Motta is a director of the Company. Since 1984, he has provided
independent legal and financial advisory services for corporate transactions to
private financial, industrial and real estate groups. He is also a director of
SMEF, the investment banking unit of Compagnie Monegasque de Banque, and an
international advisor to HSBC Investment Banking of Hong Kong & Shanghai Bank.
Mr. Motta received his Bachelors degree from Collegio San Carlo & Liceo Manzoni
in 1956 and his Juris Doctor degree from Universita degli Studi di Milano in
1960.
Board of Directors
Upon completion of the Offering, the Board of Directors will consist of
five members. There are currently three directors and two vacancies on the
Board. Pursuant to agreements between the Company and the Underwriter and the
Company and MUSI, the Underwriter and MUSI each have the right to designate one
nominee
47
<PAGE>
for election as a member of the Board of Directors of the Company. Mr. Motta is
the MUSI designee to the Board. The Company expects to appoint one additional
person to serve on the Board before the completion of the Offering, and
following completion of the Offering, expects to appoint a designee of the
Underwriter to fill the one remaining vacancy. See "Certain Transactions."
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Board Committees
After completion of the Offering, the Board of Directors will have Audit,
Compensation and Option Committees. The Audit Committee will make annual
recommendations to the Board of Directors concerning the appointment of the
independent public accountants of the Company and will review the results and
scope of the audit and other services provided by the Company's independent
auditors. The Compensation Committee will make recommendations to the Board of
Directors concerning salaries and incentive compensation for employees of the
Company. The Option Committee will make recommendations to the Board of
Directors concerning incentive stock option plans for officers, directors, key
employees and consultants of the Company. After their appointment to the Board
of Directors, the two independent directors will be appointed to the Audit
Committee, the Compensation Committee and the Option Committee.
Director Compensation
Directors who are employees of the Company receive no compensation for
their service as members of the Board. It is expected that directors who are
not employees of the Company will receive options to purchase 7,500 shares of
Common Stock for each year served on the Board of Directors at a price equal to
no less than the fair market value on the date of the grant that will vest one
year after such grant and reimbursement of expenses incurred in connection with
attendance at Board of Directors and committee meetings.
Innovation Advisory Board
The Company is in the process of forming an innovation advisory board (the
"Advisory Board"). The members (the "Advisors") of the Advisory Board will
consult with the Company on developments relating to the scientific, research
and sales and marketing aspects of its business. In selecting the members of
the Advisory Board, the Company's Board of Directors intends to seek expertise
in a variety of areas, including financial, technical and marketing matters
related to the Company's thermal management products as well as the marketing
of products manufactured or sold by the Company's strategic partners and
customers. Currently the Company has identified three members of the Advisory
Board including Dr. David P. Colvin, Ph.D., the inventor of the Company's
MicroPCM technology and principal of TRDC, and representatives of certain of
the Company's current and potential strategic partners including Hannoosh
Industries and Sensormatic Electronics. Advisors will devote only a small
portion of their time to the affairs of the Company and will have other
commitments to, or consulting or advisory contracts with, other institutions
which may conflict with the Advisors' obligations to the Company. The Company
will require each of its Advisors to execute a confidentiality agreement upon
the commencement of his or her relationship with the Company. The agreements
generally provide that all confidential information made known to the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not disclosed to third
parties except under specified circumstances.
Set forth below are the names and areas of expertise of individuals
currently identified by the Company and agreeing to serve on the Company's
Advisory Board:
<TABLE>
<CAPTION>
Name Area of Expertise
- ------------------------------------- -------------------------------------
<S> <C>
Dr. David P. Colvin, Ph.D. Thermal Science and medical research
Dr. James Hannoosh, Ph.D. Advanced materials development
Mark Krom Electronics
</TABLE>
Advisory Board Compensation
Advisors who are not employees of the Company will receive options to
purchase 2,500 shares of Common Stock for each year served on the Advisory
Board at a price equal to no less than the fair market value on the date of the
grant, and reimbursement of expenses incurred in connection with attendance of
Advisory Board meetings.
48
<PAGE>
Limitation of Liability and Indemnification of Directors and Officers
The Certificate of Incorporation provides for the indemnification of the
Company's directors and officers to the fullest extent permitted under the
DGCL.
As permitted by the DGCL, the Company's Certificate of Incorporation
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director, except: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or violation of law; (iii) for acts and
omissions relating to prohibited dividends or distributions or the purchase or
redemption of stock; or (iv) for any transaction from which the director
derives an improper personal benefit. As a result of this provision, the
Company and its stockholders may be unable to obtain monetary damages from a
director for breach of his or her duty of care.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed 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.
Executive Compensation
The following table sets forth the compensation for services in all
capacities awarded to, earned by or paid to the Company's Chief Executive
Officer. There were no other executive officers of the Company whose aggregate
cash compensation during the fiscal year ended December 31, 1996 exceeded
$100,000:
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation
- -------------------------------------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Gregory S. Frisby, Chairman of the 1996 $52,000 -- --
Board of Directors, Chief Executive 1995 $52,000 -- --
Officer, President and Treasurer 1994 $51,000 $15,000 --
</TABLE>
Employment Agreements
Effective January 1, 1998, the Company entered into an employment
agreement with Gregory S. Frisby (the "Frisby Employment Agreement"), pursuant
to which the Company will employ Gregory S. Frisby until December 31, 2002,
unless sooner terminated for death, physical or mental incapacity or cause. The
Frisby Employment Agreement provides for a base salary of $200,000 per year,
with an annual increase of ten percent per year after the first year, a bonus
equal to two percent of the Company's pre-tax profits, an automobile allowance
of $400 per month, five weeks paid vacation each year and, until the second
anniversary of the consummation of the Offering, a Company provided life
insurance policy payable to his named beneficiaries having a death benefit of
$7,500,000.
Additionally, pursuant to the Frisby Employment Agreement, Gregory S.
Frisby has agreed (i) both during and after his employment not to disclose or
misappropriate confidential information of the Company; (ii) to disclose and
upon request convey to the Company any intellectual property originated by him
during his employment by the Company or one year thereafter, or with the
Company's time, material or funds; (iii) not to compete (as defined) with the
Company for a period of 12 months from the termination or expiration of the
Frisby Employment Agreement, or such shorter time as may be determined by the
Board of Directors, provided that the Company shall pay to him monthly during
such period an amount equal to the aggregate of his base salary (as in effect
as of the termination or expiration of the Frisby Employment Agreement),
benefits and bonus unless he has received certain severance payments otherwise
due him.
Effective January 1, 1998, the Company entered into an employment
agreement with Douglas J. McCrosson (the "McCrosson Employment Agreement"),
pursuant to which the Company will employ Mr. McCrosson until December 31,
2000, unless sooner terminated for death, physical or mental incapacity or
cause. The McCrosson Employment Agreement provides for a base salary of $88,400
for 1998, $96,200 for 1999 and $105,300 for the year 2000, an automobile
allowance of $400 per month and three weeks paid vacation each year.
49
<PAGE>
If the McCrosson Employment Agreement is terminated early for death or
physical or mental incapacity by the Company, the Company will pay him, or his
estate, any accrued but unpaid salary (including any declared but unpaid bonus)
and a severance payment equal to two months of his then current salary.
"Cause" is defined under the McCrosson Employment Agreement to include:
(i) the commission of any material breach of any of the provisions or covenants
of his employment agreement; (ii) the commission of any act of willful
misconduct or gross negligence in the performance of his duties or obligations
under his employment agreement, or, without proper cause, the willful refusal
or habitual neglect of the performance of his employment duties or obligations
under his employment agreement; (iii) the commission of any act of dishonesty,
breach of trust, fraud or embezzlement; or (iv) his conviction, or plea of
guilty or nolo contendere to, a felony or indictable offense (unless committed
in the reasonable, good faith belief that the Executive's actions were in the
best interests of the Company and its stockholders and would not violate
criminal law). If, following 30 days notice and opportunity to cure, the
Company terminates Mr. McCrosson for cause, he shall be entitled only to
accrued but unpaid salary and benefits (including any declared but unpaid
bonus).
Following 30 days notice, the Company may terminate the McCrosson
Employment Agreement without cause. Following 30 days notice and opportunity to
cure, Mr. McCrosson may terminate the McCrosson Employment Agreement if the
Company has materially breached the McCrosson Employment Agreement. If the
McCrosson Employment Agreement is terminated pursuant to this paragraph, Mr.
McCrosson will be entitled to a severance payment equal to four months of his
then current salary and all accrued and unpaid salary and benefits (including
any declared but unpaid bonus).
The McCrosson Employment Agreement also contains: (i) a non-competition
provision that precludes Mr. McCrosson from competing with the Company for a
period of three years from the date of termination of his employment; (ii) a
non-disclosure and confidentiality provision; and (iii) a non-interference
provision whereby, for a period of three years after the termination of his
employment with the Company, he will not interfere with the Company's
relationship with its strategic partners, customers or employees.
Stock Option Plan
Prior to the completion of Offering, the stockholders will adopt a Stock
Option Plan pursuant to which 250,000 Common Shares will be reserved for
issuance to key employees, officers, directors and consultants of the Company
other than Gregory S. Frisby and Jeffry D. Frisby and to attract, motivate and
retain capable management personnel. At the date of this Prospectus, no stock
options have been granted under the Stock Option Plan.
The Stock Option Plan will be administered by the Option Committee of the
Board of Directors, which is required to be comprised of at least two
non-employee directors, as defined under Rule 16b-3 under the Exchange Act or,
if no Committee is appointed, by the Board of Directors of the Company. The
Stock Option Plan authorizes the grant of incentive stock options (as defined
in Section 422 of the Code) and non-qualified stock options at the discretion
of the Option Committee.
The option price per share of Common Stock underlying each option granted
under the Stock Option Plan may not be less than 100% (110% in the case of an
incentive stock option granted to a 10% stockholder) of the fair market value
per share of Common Stock on the date of the option grant.
Options may not be exercised after ten years from the option grant date
(five years in the case of an incentive stock option granted to a 10%
stockholder). In the case of any incentive stock option, the option shall
terminate on the date that is three months (one year, in the event that the
termination of employment is by reason of death or disability) after the date
on which the optionee terminates employment or, if earlier, the date specified
in the agreement relating to the option grant.
50
<PAGE>
Retirement Plan
Effective January 1, 1997, the Company adopted a 401(k)/Profit Sharing
Plan (the "Plan") for the benefit of all its eligible employees. The Plan is
funded from contributions by employees for their own account and does not
provide for any mandatory or matching contributions by the Company. The Plan is
administered by LaSalle National Bank, an independent third-party administrator
of pension plans. Funds in each employee's account will be invested at the
employee's direction among the investment options available under the Plan. All
employees of the Company on the effective date of the Plan immediately became
eligible. An employee who became employed after January 1, 1997 will become
entitled to participate in the Plan after the completion of six months of
service and the attainment of 21 years of age. Under the Plan, participants
will be permitted to contribute from their compensation any amount up to the
lesser of 20% of their annual gross salary or the maximum deferral allowed
under the Internal Revenue Code. The Company will be entitled to make optional
profit sharing contributions for any plan year in its discretion. See "Risk
Factors -- Participation in Affiliate's Pension Plan."
51
<PAGE>
CERTAIN TRANSACTIONS
On November 3, 1989, the Company issued 567,857 shares of Common Stock to
each of five members of the Frisby family, including Gregory S. Frisby,
President, Founder and Chief Executive Officer of the Company. In November
1997, pursuant to Stock Option Agreements between all of the stockholders of
the Company, Gregory S. Frisby and Jeffry D. Frisby exercised options to
purchase all of the outstanding shares of the Company and two affiliated
companies from the other stockholders of the Company for an aggregate purchase
price of $4,078,854. The purchase consideration remains outstanding, without
interest, and is due on or before November 15, 1998 unless extended by the
parties in writing. As a result of that transaction, Gregory S. Frisby and
Jeffry D. Frisby each owned 50% of the shares of the Company.
On December 10, 1997, Gregory S. Frisby and Jeffry D. Frisby entered into
a Shareholder Agreement (the "JF/GF Agreement") pursuant to which Jeffry D.
Frisby agreed to vote all of his shares in accordance with Gregory S. Frisby's
direction. As a result, Gregory S. Frisby will have effective control of the
Company and will continue to have the power to control the outcome of matters
submitted to a vote of the Company's stockholders, such as the election of at
least a majority of the members of the Company's Board of Directors and to
direct the future operations of the Company. Such concentration of voting power
may have the effect of discouraging, delaying or preventing a change in control
of the Company. The JF/GF Agreement prohibits the transfer of shares by either
party except in accordance with its terms which include a right of first
refusal to purchase one another's stock on the same terms as any potential
third-party purchaser. Pursuant to the terms of the JF/GF Agreement, upon the
death of Gregory S. Frisby, Jeffry D. Frisby will have voting control of all
shares then owned by Gregory S. Frisby and upon the death of either Gregory S.
Frisby or Jeffry D. Frisby, the Company may, at its election, purchase the
shares of Common Stock then owned by such stockholder for a per share price
equal to the fair market value of the Common Stock as then determined by the
Company's Board of Directors. See "Management -- Board of Directors."
The Company has, since its inception, received non-interest bearing
advances from Frisby Aerospace in order to meet operating expenses and has
received certain accounting, clerical and office services from Frisby Aerospace
without charge. During 1997, the Company continued to borrow operating capital
from Frisby Aerospace and, as of December 30, 1997, the Company repaid the
entire balance of $527,000 with a portion of the proceeds of the Private
Placement. During 1997, the Company also exhausted its $500,000 existing line
of credit with European American Bank ("EAB"), which is jointly and severally
guaranteed by Gregory S. Frisby, Jeffry D. Frisby and Frisby Aerospace, which
guarantees the Company expects to have released after the consummation of the
Offering. The EAB loan was repaid in full in December 1997 with a portion of
the proceeds of the Private Placement.
The Company currently occupies a portion of Frisby Aerospace's New York
facility and subleases its North Carolina offices from Frisby Aerospace. No
lease for the New York facility exists between the Company and Frisby Aerospace
and no rental payments are made by the Company to Frisby Aerospace with respect
to such facility. The Company's North Carolina lease with Frisby Aerospace
expired on November 30, 1997 and has been extended on a month-to-month basis.
The Company expects that such arrangement will continue until the Company
vacates the premises in February 1998. The rental payment is $2,520 per month.
For each of the years ended December 31, 1996 and 1997, the Company made
aggregate rental payments of $30,240 to Frisby Aerospace with respect to the
North Carolina facility. The Company believes that the monthly rent paid to
Frisby Aerospace for the North Carolina facility approximates the amount
negotiable on an arm's-length basis.
The Company has entered into a memorandum of understanding with an
unrelated third party for the lease of a new facility in North Carolina. The
Company plans to move its North Carolina and South Carolina facilities into the
new North Carolina facility by June 1998. The Company and Piedmont Institute
for Research & Technology II, LLC ("Piedmont") are still negotiating the size
of the premises to be leased by the Company, which is expected to be
approximately 25,000 square feet, with a cost per square foot of approximately
$6.00. Upon execution of the lease Gregory S. Frisby and Jeffry D. Frisby will
each receive a five percent equity interest (the "Equity Interest") in
Piedmont. The Equity Interest will vest in ten years from the date of execution
of the new North Carolina lease on the condition that the Company remains in
the premises for ten years from the date the lease is executed. Notwithstanding
the grant of the Equity Interest, the Company believes that the rental payment
represents an arm's-length price for the lease of the new North Carolina
facility.
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<PAGE>
Additionally, the Company has reserved two condominium units in the new
North Carolina facility which it plans to purchase at a cost of $80,000 and
$78,000 to be used for accommodating visiting employees, directors and
strategic partners and which the Company believes will provide cost-effective
lodging for such visitors. The Company believes that the cost of the
condominium units approximates the price that would be negotiated on an
arm's-length basis.
The Company is a guarantor of a $350,000 loan made by Long Island
Development Corp. ("LIDC") to Frisby Industries, Inc. ("Frisby Industries"), an
affiliate of the Company, on November 4, 1994. As of November 1997, the
outstanding balance of the loan was $231,307. Pursuant to the Other Stockholder
Agreement, as hereinafter described, Gregory S. Frisby has agreed to reimburse
the Company for any payments the Company makes to LIDC pursuant to the
guaranty. Frisby Industries has agreed not to increase the current balance of
the loan from LIDC.
In December 1997, pursuant to a Purchase Agreement (the "Purchase
Agreement") the Company issued to MUSI 441,327 shares of the Company's Common
Stock and the Private Placement Option for an aggregate purchase price of
$2,500,000. MUSI may exercise the Private Placement Option at any time prior to
February 28, 1998 for 587,500 shares of the Company's Convertible Preferred
Stock as an exercise price of $2,500,000. The Company paid $300,000 to an entity
designated by MUSI in respect of related transaction costs incurred by MUSI.
See "Description of Securities -- Preferred Stock" and "Shares Eligible for
Future Sale -- Lock-Up Agreements."
In connection with MUSI's purchase of the Common Stock, MUSI, the Company,
Gregory S. Frisby and Jeffry D. Frisby entered into a Stockholders Agreement in
December 1997 (the "Other Stockholders Agreement"). The Other Stockholders
Agreement provides for restrictions on the transfers of shares, rights of first
refusal, the designation by MUSI of one nominee for director (the "MUSI
Designee") and the designation by management of the remaining nominees (the
"Frisby Designees") and prior to the Offering, the requirement that the MUSI
Designee and the Frisby Designees must agree in order for the Company to take
certain actions. Pursuant to the Other Stockholders Agreement, Gregory S.
Frisby and Jeffry D. Frisby agree to use their best efforts to cause the MUSI
Designee to be elected as a director of the Company. See "Management -- Board
of Directors."
Additionally, the Other Stockholders Agreement provides that MUSI, at any
time beginning 18 months after the Company's Offering, may require the Company
to register, on two occasions, at the Company's expense, all or an amount equal
to or exceeding $500,000 of MUSI's Common Stock in a public offering pursuant
to the Securities Act. The Other Stockholders Agreement grants to MUSI, Gregory
S. Frisby and Jeffry D. Frisby the right to "piggyback" their Common Stock in
any registration by the Company of its Common Stock, other than the Offering,
subject to the right of the managing underwriter to restrict or limit the
registration of such shares if the number of such shares requested to be sold
would have an adverse effect on the Offering. The expenses incurred in
connection with a "piggyback" registration, other than underwriter's discounts
and commissions, are to be paid by the Company. In the event MUSI, Gregory S.
Frisby or Jeffry D. Frisby own less than 25% of the number of the Company's
Common Stock owned by them on the date of the Other Stockholders Agreement,
their rights under the Other Stockholders Agreement shall terminate.
The Company has agreed to indemnify MUSI from all losses, costs, damages,
liabilities and expenses resulting from any misrepresentation or breach of any
representation, warranty, covenant or undertaking made or to be performed by
the Company in accordance with the terms of the Purchase Agreement between the
Company and MUSI.
Upon completion of the Offering, the Underwriter has the right to
designate one nominee for election to the Company's Board of Directors. The
Company has agreed to use its best efforts to effect the election of such
nominee to the Board. See "Management -- Board of Directors."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of the date of this Prospectus, and as adjusted to reflect the
sale of 1,600,000 shares of Common Stock offered hereby by: (i) each person
known to the Company to be the beneficial owner of more than five percent of
the outstanding shares of Common Stock or Convertible Preferred Stock; (ii)
each director and nominee director of the Company; (iii) each named executive
officer of the Company; and (iv) all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
Combined Percentage of
Number of Percentage of Class Beneficial Voting Power
Beneficially Owned (1) Owned (2)
Shares ---------------------- ----------------------------
Beneficially Before After Before After
Name and Address Title of Class Owned (1) Offering Offering Offering Offering
- ------------------------------------ ------------------ --------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory S. Frisby (3)(4) Common Stock 2,839,286 86.5% 58.2% 86.5% 58.2%
Jeffry D. Frisby (4)(5) ............ Common Stock 1,419,643 43.3 29.1 43.3 29.1
MUSI Investments, S.A. (6) ......... Common Stock 441,327 13.5 9.0 -- --
Convertible
Preferred Stock 587,500 (7) 100.0 100.0 26.6(2) 18.8(2)
Pietro A. Motta (8) ................ Common Stock -- -- -- -- --
All executive officers and directors
as a group (3 persons) ............ Common Stock 2,839,286 86.5% 58.2% 86.5% 58.2%
</TABLE>
- ------------
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Exchange Act, and generally includes voting or investment power with
respect to securities, subject to community property laws, where
applicable. A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date of this
Prospectus upon exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
that are exercisable within 60 days from the date of this Prospectus have
been exercised. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
(2) Except as otherwise required by law, the Company's Convertible Preferred
Stock is entitled to one vote per share on matters presented to a vote of
the Company's stockholders.
(3) The address of Gregory S. Frisby is c/o Frisby Technologies, Inc., 417
South Main Street, Freeport, New York 11520.
(4) Gregory S. Frisby has been granted voting rights with respect to the shares
owned by Jeffry D. Frisby pursuant to a Shareholder Agreement between
Gregory S. Frisby and Jeffry D. Frisby. See "Certain Transactions."
(5) The address of Jeffry D. Frisby is c/o Frisby Industries, Inc., 4520
Hampton Road, Clemmons, North Carolina 27012.
(6) The address of MUSI Investments, S.A. is c/o CMB Compagnie Monegasque de
Banque, 23, Avenue de la Costa, BP #167 MC 9800 3 Monaco. MUSI is
beneficially owned by an individual who is not otherwise affiliated with
the Company.
(7) Includes 587,500 shares of Convertible Preferred Stock issuable upon
exercise of an option exercisable within 60 days of the date of this
Prospectus.
(8) The address of Pietro A. Motta is Motta & Co., Via Bigli, 7, 20121 Milano.
54
<PAGE>
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, par value $.001 per share and 1,000,000 shares of Preferred
Stock. As of December 31, 1997, there were 3,280,613 shares of Common Stock
issued and outstanding held of record by three stockholders. No shares of
Preferred Stock were issued and outstanding.
Common Stock
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the stockholders of the Company.
Holders of shares of Common Stock are entitled to receive dividends when, as,
and if declared by the Company's Board of Directors, out of funds legally
available to the Company. The Company currently intends to retain all future
earnings for the use in the operation of its business and therefore does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. See "Dividend Policy." Upon liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in the
assets remaining after payment of all liabilities and liquidation preferences,
if any. Shares of Common Stock are not redeemable and have no preemptive or
similar rights to subscribe for additional shares. All outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby will be, upon
payment and issuance, fully paid and non-assessable.
Preferred Stock
The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to 1,000,000 shares
of Preferred Stock, in one or more series, and to designate the number of
shares constituting any series, and to fix the rights, preferences, privileges
and restrictions thereof, including dividend rights, voting rights, rights and
terms of redemption, redemption price or prices and liquidation preferences of
such series. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders. The issuance of Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of
Common Stock, including the loss of voting control.
Prior to the Offering the Company will file a certificate of designation
designating 587,500 shares of the Preferred Stock as the Convertible Preferred
Stock with the rights, privileges and designations of the Convertible Preferred
Stock which will include: (i) a dividend preference (the "Dividend Preference")
of $1.00 per share of Convertible Preferred Stock prior to any payment of
dividends to holders of the Common Stock; (ii) the right, following the payment
of the Dividend Preference, for such share of Convertible Preferred Stock to
share equally with each share of Common Stock with respect to any dividend
which may be declared by the Company's Board of Directors; (iii) the right to
cast one vote per share of Convertible Preferred Stock, together with the
holders of the Common Stock, on each matter subject to the vote of the
Company's stockholders; (iv) a liquidation preference (the "Liquidation
Preference") of $4.26 per share of Convertible Preferred Stock in the event the
Company shall be liquidated or dissolved; and (v) the right, following the
payment of the Liquidation Preference, to share equally with each share of
Common Stock with respect to any distribution made to the Company's
stockholders upon the Company's liquidation or dissolution. Each share of
Convertible Preferred Stock is convertible at the election of MUSI into one
share of the Company's Common Stock (subject to adjustments for subdivisions or
combinations of the Common Stock or reclassification of the Common Stock)
during the 60-day period commencing 370 days following the closing by the
Company of an initial public offering.
The Private Placement Option
In connection with the Private Placement, the Company granted the Private
Placement Option to MUSI exercisable until February 27, 1998 for the purchase
of up to 587,500 shares of Convertible Preferred Stock at an exercise price of
$4.26 per share. The Private Placement Option contains customary anti-dilution
provisions with respect to stock dividends, stock splits and recapitalization
in favor of MUSI.
Directors' Limitation of Liability and Indemnification
The Certificate of Incorporation provides for the indemnification of the
Company's directors and officers to the fullest extent permitted under the
DGCL. As permitted by the DGCL, the Company's Certificate of Incorporation also
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director, except: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith
or which
55
<PAGE>
involve intentional misconduct or violation of law; (iii) for acts and
omissions relating to prohibited dividends or distributions or the purchase or
redemption of stock; or (iv) for any transaction from which the director
derives an improper personal benefit. As a result of this provision, the
Company and its stockholders may be unable to obtain monetary damages from a
director for breach of his or her duty of care.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Anti-Takeover Provisions; Section 203 of the Delaware General Corporation Law
The Company is governed by Section 203 of the DGCL, an anti-takeover law.
In general, this statute restricts a corporation from entering into certain
business combinations with an interested stockholder (defined as any person or
entity that is the beneficial owner of at least 15% of a corporation's voting
stock) or its affiliates for a period of three years after the date of the
transaction in which the person became an interested stockholder unless: (i)
the transaction is approved by the Board of Directors of the corporation prior
to such business combination; (ii) the interested stockholder acquires 85% of
the corporation's voting stock in the same transaction in which it exceeds 15%;
or (iii) the business combination is approved by the Board of Directors and by
a vote of two-thirds of the outstanding voting stock not owned by the
interested stockholder. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder.
The Company's Certificate of Incorporation and By-Laws include certain
provisions which may have an anti-takeover effect and may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider in
its best interests, including attempts that might result in a premium over the
market price for the shares held by the stockholders and could make it more
difficult to remove incumbent management. The Company's Certificate of
Incorporation or By-Laws provides that: (i) directors may authorize the
issuance of Preferred Stock having rights and preferences established by the
Board of Directors without further approval by the stockholders; (ii) directors
may be removed from office only for cause and only by the affirmative vote of
the holders of two-thirds of the then outstanding shares of capital stock
entitled to vote generally in an election of directors; (iii) except as
otherwise required by law, vacancies in the Board of Directors may be filled
only by the remaining directors; (iv) commencing with the consummation of the
Offering, any action required or permitted to be taken by the stockholders of
the Company may be effected only at an annual or special meeting of
stockholders and not by written consent of the stockholders; (v) any special
meeting of stockholders may be called only upon the affirmative vote of at
least a majority of the stockholders or a majority of the members of the Board
of Directors; and (vi) all nominations for candidates for election as
directors, other than nominations by or at the discretion of the Board of
Directors or a committee of the Board of Directors and all stockholder
proposals to be considered at annual or special meetings of the stockholders be
presented to the Company pursuant to an advance notice procedure set forth in
the Certificate of Incorporation. In general, notice of an intent to nominate a
director or to make a stockholder proposal to be considered at a meeting must
be received by the Company not less than 60 nor more than 90 days before the
meeting and must contain certain information concerning the nominee for
director or the proposal to be brought before the meeting and concerning
stockholders submitting the proposal. The affirmative vote of at least a
majority of the directors or the holders of at least two-thirds of the voting
power of the Company's stock is required to alter, amend, repeal or adopt any
provision inconsistent with the provisions described in this paragraph.
The DGCL, the Certificate of Incorporation and the By-Laws may discourage
certain types of transactions involving an actual or potential change in
control of the Company.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 4,880,613 shares of Common
Stock outstanding (5,120,613 if the Over-Allotment Option is exercised in
full). Of such shares, all of the 1,600,000 shares sold in the Offering
(1,840,000 if the Over-Allotment Option is exercised in full) will be freely
transferable without restriction or further registration under the Securities
Act unless acquired by an "affiliate" of the Company within the meaning of the
Securities Act. Upon completion of the Offering, the existing stockholders of
the Company will own 3,280,613 shares of Common Stock. All of these shares are
deemed "restricted securities" as defined by Rule 144 of the Securities Act
("Rule 144"). Upon expiration of the contractual restrictions between the
Company, its officers and directors and the Underwriter, but not earlier than
one year after the date of this Prospectus, these shares will be available for
sale in the public market, subject to compliance with Rule 144.
Rule 144, as currently in effect, provides that a person (or persons whose
sales are aggregated) who is an affiliate of the Company, or who has
beneficially owned shares for at least one year which were issued and sold in
reliance upon certain exemptions from registration under the Securities Act
("Restricted Shares"), is entitled to sell within any three month period a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of Common Stock or the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who has beneficially owned Restricted Shares for at
least two years and who is not an affiliate of the Company may sell such shares
under Rule 144 without regard to volume limitations, manner-of-sale provisions,
notice requirements or the availability of current public information about the
Company.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 of the Securities Act ("Rule 701")
may be relied upon with respect to the resale of securities originally
purchased from the Company by its employees, directors, officers, consultants
or advisors prior to the date the issuer becomes subject to the reporting
requirements of the Exchange Act, pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the Commission has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and,
subject to the contractual restrictions described above, beginning one year
after the date of this Prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by Affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirements.
Subject to certain limited exceptions, the holders of all of the remaining
shares of Common Stock and the holders of all of the warrants and options to
purchase shares of Common Stock, have agreed not to transfer or otherwise
dispose of any securities of the Company for a period following the closing of
the Offering, without the prior written consent of the Underwriter. See "--
Lock-Up Agreements."
Prior to the Offering, there has been no public market for the Common
Stock, and no predictions can be made as to the effect, if any, that market
sales of Restricted Shares or the availability of Restricted Shares for sale
will have on the market price prevailing from time to time. See "Risk Factors
- -- Effect of Options and Underwriter's Option on Stock Price." Nevertheless,
sales of substantial amounts of Restricted Shares in the public market could
adversely affect prevailing market prices.
Up to 160,000 additional shares of Common Stock may be purchased by the
Underwriter through the exercise of the Underwriter's Option during the period
commencing on the closing of the Offering and ending on the fifth anniversary
of such date. The holders of the Underwriter's Option will have certain demand
and "piggyback" registration rights with respect to the shares of Common Stock
underlying such options. Such shares of Common Stock issuable upon exercise of
the Underwriter's Option may be freely tradable, provided that the Company
satisfies certain securities registration and qualification requirements in
accordance with the terms of the Underwriter's Option. See "-- Registration
Rights" and "Underwriting."
57
<PAGE>
Registration Rights
The Company has granted certain demand and "piggyback" registration rights
with respect to the 160,000 shares of Common Stock issuable upon exercise of
the Underwriter's Option. Subject to certain conditions and limitations, the
registration rights granted to such holders give such holders the right to
register all or any portion of the Common Stock held by them or issuable upon
the exercise of the Underwriter's Option (collectively, the "Registrable
Securities"), in connection with any registration by the Company of shares of
Common Stock or securities substantially similar to the Common Stock. The
Underwriter is entitled to exercise demand registration rights to require the
Company to register under the Securities Act the shares issuable upon exercise
of the Underwriter's Option not more than twice. See "Underwriting."
The Other Stockholders Agreement provides that MUSI, at any time following
the 18 month anniversary of the Offering, may require the Company to register,
on two occasions, at the Company's expense, all, or an amount exceeding
$500,000, of the MUSI's Common Stock in a public offering pursuant to the
Securities Act. The Other Stockholders Agreement grants to MUSI, Gregory S.
Frisby and Jeffry D. Frisby the right to "piggyback" their Common Stock in any
registration by the Company of its Common Stock, other than the Offering,
subject to the right of the managing underwriter to restrict or limit the
registration of such shares if the number of such shares requested to be sold
would have an adverse effect on the Company's offering. The expenses incurred
in connection with a "piggyback" registration, other than underwriters
documents and commissions, are to be paid by the Company. In the event MUSI,
Gregory S. Frisby or Jeffry D. Frisby own less than 25% percent of the number
of the Company's Common Stock owned by them on the date of the Other
Stockholders Agreement, their rights against the Company under the Other
Stockholders Agreement will terminate.
The registration rights described herein are subject to certain notice
requirements, timing restrictions and volume limitations which may be imposed
by the underwriters of an offering. The Company is required to bear the
expenses of all such registrations, except for the expenses associated with the
second of the demand registrations, if applicable, granted to the holders of
the Underwriter's Option, and the underwriting discounts and commissions
relating to the sale of the shares of Common Stock held by such investors.
Lock-Up Agreements
Subject to the limited exceptions described below, and pursuant to the
Underwriting Agreement, the Company and pursuant to lock-up agreements with the
Underwriter, all of the existing stockholders of the Company and all of the
existing option holders of the Company as of the effective date of the
Registration Statement, have agreed not to offer, issue, sell, contract to
sell, grant any option for the sale of or otherwise dispose of any securities
of the Company for a period of 24 months from the date of closing of the
Offering, without the prior written consent of the Underwriter. Notwithstanding
these lock-up agreements, any stockholder subject to such agreement may sell
his, her or its shares of Common Stock commencing 12 months after the
completion of the Offering in the event that the last sales price for the
Common Stock on its principal exchange has been at least 200% of the initial
public offering price for a period of 20 consecutive trading days ending within
five days of the date of such sale, and such sale is completed at a price in
excess of 200% of the initial public offering price. Furthermore, MUSI may sell
its shares commencing 18 months after the completion of the Offering provided
it exercises the Private Placement Option. The Underwriter currently has no
plans, proposals, arrangements or understandings to modify, shorten or waive
the lock-up agreements.
58
<PAGE>
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement (the form of which has been filed as an exhibit to the
Registration Statement on Form SB-2, of which this Prospectus forms a part), to
purchase from the Company all of the shares of Common Stock offered hereby. The
Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent and that the Underwriter shall be
obligated to purchase all of the shares of Common Stock if any are purchased by
the Underwriter.
The Underwriter has advised the Company that it proposes to offer the
shares of Common Stock offered hereby to the public at the offering price set
forth on the cover page of this Prospectus. The Underwriter may allow to
certain dealers, who are members of the National Association of Securities
Dealers (the "NASD"), concessions not in excess of $______ per share of Common
Stock, of which not in excess of $______ may be reallowed to other dealers who
are members of the NASD. After the commencement of this Offering, the Offering
price, the concessions and the reallowance may be changed.
The Company has granted the Over-Allotment Option to the Underwriter,
exercisable during the 45-day period after the closing date of the Offering, to
purchase up to an aggregate of 240,000 additional shares of Common Stock at the
Offering price, less underwriting discounts and commissions. The Underwriter
may exercise such option only for the purpose of covering over-allotments made
in connection with the sale of the Common Stock offered hereby.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of three percent of the aggregate offering price of the shares of
Common Stock offered hereby (including any shares of Common Stock purchased
pursuant to the Over-Allotment Option), of which $40,000 has been paid to date.
The Company also has agreed to sell to the Underwriter, or its designees,
the Underwriter's Option to purchase 160,000 shares at a price of $.001 per
option. The Underwriter's Option will be exercisable for a period of five
years, commencing on the closing date of the Offering, at an initial per share
exercise price equal to 120% of the initial public offering price per share.
The Underwriter's Option cannot be transferred, assigned or hypothecated for
one year from the date of issuance, except that it may be assigned in whole or
in part, to any successor, officer or partner of the Underwriter (or to
officers or partners of any such successor or partner). The Underwriter's
Option may be exercised on one or a number of occasions as to all or a portion
of the shares covered by the option, and will contain certain registration
rights and anti-dilution provisions providing for appropriate adjustment of the
exercise price and number of shares which may be purchased upon exercise, upon
the occurrence of certain events. See "Risk Factors -- Effect of Options and
Underwriter's Option on Stock Price."
The Company has granted to the Underwriter two "demand" registration
rights for the sale of the shares of Common Stock underlying the Underwriter's
Option, for a period of five years after the closing of the Offering, of which
one registration will be at the Company's expense. The Company also has granted
to the Underwriter, for a period of seven years after the date of closing of
the Offering, unlimited "piggyback" registration rights for the sale of the
shares of Common Stock underlying the Underwriter's Option. See "Shares
Eligible for Future Sale."
The Company also has agreed that for a period of three years following the
completion of the Offering, it will use its best efforts (including the
solicitation of proxies) to elect one designee of the Underwriter to the Board
of Directors of the Company.
The foregoing discussion of the material terms and provisions of the
Underwriting Agreement is qualified in its entirety by reference to the
detailed provisions of the Underwriting Agreement.
Pursuant to the Underwriting Agreement, the Company and all of the
existing stockholders of the Company as of the effective date of the
Registration Statement, have agreed not to offer, issue, sell, contract to
sell, grant any option for or otherwise dispose of any securities of the
Company for a period of 24 months from the date of closing of the Offering,
without the prior written consent of the Underwriter except for: (i) options
granted pursuant to the Employee Stock Option Plan and the issuance of Common
Stock upon the exercise of such options; (ii) the issuance of securities in
connection with any merger or acquisition approved by a majority of the
independent directors of the Company; and (iii) the issuance of shares of
Common Stock to unaffiliated third
59
<PAGE>
parties at fair market value pursuant to a Private Placement approved by a
majority of the independent directors of the Company, commencing 12 months
after the Offering has closed. Notwithstanding these lock-up arrangements, any
stockholder subject to such arrangement may sell shares of Common Stock
commencing 12 months after the completion of the Offering in the event that the
last sale price for the Common Stock on its principal exchange has been at
least 200% of the Offering price for a period of 20 consecutive trading days
ending within five days of the date of such sale, and such sale is completed at
a price in excess of 200% of the initial public offering price or upon the
closing of a follow-up public offering underwritten by a major bracket or large
regional underwriting firm and which raises at least $20 million in gross
proceeds. The Underwriter has no current or future plans, proposals,
arrangements or understandings to modify, shorten or waive the lock-up
arrangements. The Company will file a post-effective amendment to the
registration statement of which this Prospectus constitutes a part, in the
event that the Underwriter waives the lock-up agreements with respect to ten
percent or more of the shares held by existing stockholders of the Company, or
will revise the Prospectus if the lock-up is waived with respect to five
percent to ten percent of the shares held by existing stockholders of the
Company.
The Underwriter may engage in certain transactions which may stabilize,
maintain or otherwise affect the price of the Common Stock. Such transactions
may include over-allotments of Common Stock and purchases of the Common Stock.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the Offering price of the shares of Common Stock offered
and sold in the Offering has been determined by arms length negotiation between
the Company and the Underwriter and does not necessarily bear any relationship
to the Company's book value, assets, past operating results, financial
condition, or other established criteria of value. Factors considered in
determining such price include an assessment of the Company's recent financial
results and current financial condition, future prospects of the Company, the
qualifications of the Company's management and other relevant factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New
York. Certain legal matters in connection with the Offering will be passed upon
for the Underwriter by Kramer, Levin, Naftalis & Frankel, New York, New York.
EXPERTS
The financial statements of the Company at December 31, 1996 and for the
year then ended, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, and for the year ended
December 31, 1995 by KPMG Peat Marwick LLP ("KPMG"), independent auditors, as
set forth in their respective reports thereon appearing elsewhere in this
Prospectus, and are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
CHANGE IN INDEPENDENT AUDITORS
After the completion of the audit of the Company's 1995 financial
statements, the Company dismissed KPMG as its independent auditors. The report
of KPMG on the Company's financial statements for 1995 contained no adverse
opinion or disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with its audit
for the year ended December 31, 1995, there have been no disagreements with
KPMG on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of KPMG would have caused them to make reference thereto in
their report on the financial statements for such year. The decision to change
firms was approved by the Company's Board of Directors.
The Company engaged Ernst & Young LLP as its new independent auditors
during December 1996.
During the year ended December 31, 1995 and until completion of the audit
of the Company's 1995 financial statements, the Company did not consult with
Ernst & Young LLP on items which (i) were or should have been subject to
Statement on Auditing Standards No. 50 or (ii) concerned the subject matter of
a disagreement or reportable event with KPMG.
60
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (the "Registration Statement") under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus, which forms a part
of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511 or Seven World Trade Center, New York, New York
10048. Copies of such material may also be obtained at prescribed rates from
the Public Reference Section of the Commission in Washington, D.C. 20549.
Statements contained in the Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company, the address of such site is http://www.sec.gov.
61
<PAGE>
Frisby Technologies, Inc.
Financial Statements
Contents
<TABLE>
<S> <C>
Report of Independent Auditors--Ernst & Young LLP ........................ F-2
Report of Independent Auditors--KPMG Peat Marwick LLP .................... F-3
Balance Sheets as of December 31, 1996 and September 30, 1997 (Unaudited) F-4
Statements of Operations and Retained Earnings (Deficit) for the
Years Ended December 31, 1995 and 1996 and for the
Nine Months Ended September 30, 1996 (Unaudited) and 1997 (Unaudited) ... F-5
Statements of Cash Flows for the Years Ended December 31, 1995 and
1996 and for the Nine Months Ended September 30, 1996 (Unaudited)
and 1997 (Unaudited) .................................................... F-6
Notes to Financial Statements ............................................ F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Stockholders
Frisby Technologies, Inc.
We have audited the accompanying balance sheet of Frisby Technologies,
Inc. as of December 31, 1996, and the related statements of operations and
retained earnings (deficit) and cash flows for the year then ended. 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 Frisby Technologies, Inc.
at December 31, 1996, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Melville, New York
April 10, 1997, except for Note 1 as to
which the date is December 23, 1997
F-2
<PAGE>
Report of Independent Auditors
The Stockholders
Frisby Technologies, Inc.
We have audited the accompanying statements of operations and retained
earnings and cash flows of Frisby Technologies, Inc. for the year ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 presents
fairly, in all material respects, the results of Frisby Technologies, Inc.'s
operations and its cash flows for the year ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
April 24, 1996
F-3
<PAGE>
Frisby Technologies, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash .............................................................. $ 52,677 $ 24,429
Accounts receivable--billed, net of allowance for doubtful accounts
of $30,000 (1997) ............................................... 152,776 251,951
Accounts receivable--unbilled ..................................... 31,170 22,006
Inventory ......................................................... 47,974 149,321
Recoverable and prepaid income taxes .............................. 26,902 26,902
Other current assets .............................................. 4,923 2,758
--------- ----------
Total current assets ............................................... 316,422 477,367
Property and equipment, net ........................................ 76,444 65,095
Deferred income taxes .............................................. 44,792 --
Deferred transaction costs ......................................... -- 100,188
--------- ----------
Total assets ....................................................... $ 437,658 $ 642,650
========= ==========
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable .................................................. $ 93,237 $ 230,241
Accrued expenses and other current liabilities .................... 33,178 86,038
License fees payable .............................................. 7,446 131,975
Note payable ...................................................... 250,000 500,000
Due to related party .............................................. 10,550 402,288
--------- ----------
Total current liabilities .......................................... 394,411 1,350,542
Accrued license agreement costs .................................... 101,250 101,250
--------- ----------
Total liabilities .................................................. 495,661 1,451,792
Commitments
Stockholders' deficit:
Preferred Stock, 1,000,000 shares authorized; no shares issued or
outstanding ..................................................... -- --
Common Stock, $.001 par value; 10,000,000 shares authorized;
2,839,286 shares issued and outstanding ......................... 500 500
Accumulated deficit ............................................... (58,503) (809,642)
--------- ----------
Total stockholders' deficit ........................................ (58,003) (809,142)
--------- ----------
Total liabilities and stockholders' deficit ........................ $ 437,658 $ 642,650
========= ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Frisby Technologies, Inc.
Statements of Operations and Retained Earnings (Deficit)
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31 September 30
---------------------------- ------------------------------
1995 1996 1996 1997
------------ ------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales ......................... $ 3,050 $ 13,638 $ 12,215 $ 376,626
Research and development projects 849,030 1,119,549 882,773 315,272
Licenses .............................. 30,000 75,000 60,000 230,000
--------- ---------- ---------- ----------
Total revenues ......................... 882,080 1,208,187 954,988 921,898
--------- ---------- ---------- ----------
Cost of sales:
Products .............................. 2,448 11,581 6,138 361,085
Research and development projects 574,209 1,004,457 728,724 186,040
Licenses .............................. 2,462 19,553 18,306 198,000
--------- ---------- ---------- ----------
Total cost of sales .................... 579,119 1,035,591 753,168 745,125
--------- ---------- ---------- ----------
Gross profit ........................... 302,961 172,596 201,820 176,773
Selling and marketing expense .......... 32,498 82,995 74,570 282,881
General and administrative expense ..... 242,342 207,263 130,582 574,698
--------- ---------- ---------- ----------
Income (loss) from operations .......... 28,121 (117,662) (3,332) (680,806)
Interest expense ....................... 15,053 18,636 13,180 25,541
--------- ---------- ---------- ----------
Income (loss) before income taxes ...... 13,068 (136,298) (16,512) (706,347)
Income tax provision (benefit) ......... 6,686 (48,642) (11,887) 44,792
--------- ---------- ---------- ----------
Net income (loss) ...................... 6,382 (87,656) (4,625) (751,139)
Retained earnings (deficit):
Beginning of period ................... 22,771 29,153 29,153 (58,503)
--------- ---------- ---------- ----------
End of period ......................... $ 29,153 $ (58,503) $ 24,528 $ (809,642)
========= ========== ========== ==========
Net income (loss) per share ............ -- $ (.03) -- $ (.26)
========= ========== ========== ==========
Shares used in computing net income
(loss) per share ...................... 2,839,286 2,839,286 2,839,286 2,839,286
========= ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
Frisby Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31 September 30
---------------------------- -----------------------------
1995 1996 1996 1997
------------ ------------- ------------ --------------
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) ....................................... $ 6,382 $ (87,656) $ (4,625) $ (751,139)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation ......................................... 9,810 15,065 11,151 11,349
Deferred income tax (benefit) provision .............. (22,420) (21,740) (9,856) 44,792
Changes in assets and liabilities:
Accounts receivable ................................. 66,907 16,813 120,115 (90,011)
Inventory ........................................... (15,770) (32,204) (41,958) (101,347)
Recoverable and prepaid income taxes ................ -- (26,902) (2,662) --
Other current assets ................................ 3,898 269 (1,658) 2,165
Accrued license agreement costs ..................... 61,741 39,509 25,447 --
Accounts payable .................................... (155,513) 74,108 14,948 137,004
Accrued expenses and other current liabilities 6,632 16,408 (10,986) 52,860
License fees payable ................................ -- 7,446 -- 124,529
Due to and due from related party, net .............. 35,236 (43,655) (47,241) 15,738
Income taxes payable ................................ 26,052 (27,872) (27,872) --
---------- --------- --------- ----------
Net cash provided by (used in) operating activities ..... 22,955 (70,411) 24,803 (554,060)
---------- --------- --------- ----------
Investing activities
Capital expenditures .................................... (7,044) (26,072) (19,214) --
---------- --------- --------- ----------
Net cash used in investing activities ................... (7,044) (26,072) (19,214) --
---------- --------- --------- ----------
Financing activities
Net proceeds from notes payable ......................... 25,000 110,000 15,000 250,000
Net proceeds from borrowings from related party ......... -- -- -- 376,000
Prepayment of transaction costs ......................... -- -- -- (100,188)
Principal payments of capital lease obligation .......... (845) (10,186) (7,239) --
---------- --------- --------- ----------
Net cash provided by financing activities ............... 24,155 99,814 7,761 525,812
---------- --------- --------- ----------
Net increase (decrease) in cash ......................... 40,066 3,331 13,350 (28,248)
Cash--beginning of period ............................... 9,280 49,346 49,346 52,677
---------- --------- --------- ----------
Cash--end of period ..................................... $ 49,346 $ 52,677 $ 62,696 $ 24,429
========== ========= ========= ==========
Supplemental information
Interest paid ........................................... $ 15,008 $ 18,636 $ 14,097 $ 25,541
Income taxes paid ....................................... -- $ 25,179 $ 24,992 --
</TABLE>
See accompanying notes.
F-6
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements
Information for the nine months ended September 30, 1997
and 1996 and at September 30, 1997 is unaudited.
1. Organization and Business
The Company is a technology development company engaged in the development
and commercialization of thermal management products for use in a broad range
of consumer and industrial products. The Company's Thermasorb(R) and
ComforTemp(R) products utilize licensed patents and the Company's proprietary
MicroPCM technology to enhance thermal characteristics (i.e., insulation,
cooling or temperature control properties) in a variety of consumer and
industrial products.
On December 19, 1997, the Board of Directors authorized and the
stockholders ratified an amendment to the Company's certificate of
incorporation increasing the number of authorized shares of Common Stock to
10,000,000 shares, changing the par value of the Common Stock to $.001 and
authorizing 1,000,000 shares of "blank check" preferred stock, having such
rights and preferences and issuable in such series as may from time to time be
determined by the Company's Board of Directors. On December 23, 1997, the Board
of Directors authorized: (i) a 5,679-for-1 stock split of the outstanding
shares of common stock; and (ii) the reservation of 250,000 shares of common
stock for issuance upon exercise of options which may be granted under the
Company's Stock Option Plan. All of the aforementioned are to be effective
prior to the Offering. Effect has been given to the stock split as if it
occurred on January 1, 1995. All common share data has been restated to reflect
the stock split.
2. Summary of Significant Accounting Policies
Interim Financial Statements
The balance sheet at September 30, 1997 and the statements of operations
and retained earnings (deficit), and cash flows for the nine months ended
September 30, 1996 and 1997 have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position at September
30, 1997 and the results of operations and cash flows for the nine months ended
September 30, 1996 and 1997 have been made.
Revenue Recognition
The Company accounts for long-term contracts based on the
percentage-of-completion method based on the relationship of total costs
incurred to date to estimated total costs at completion. Adjustments to cost
estimates are made periodically and related changes reflected in operations
cumulative to the date of change. Revenue on cost-plus-fixed-fee contracts is
recognized to the extent of costs incurred plus a proportionate amount of the
fee earned. Provisions for estimated losses, if any, on uncompleted contracts
are made in the period in which such losses are determined.
Revenues from sales of products are generally recognized upon shipment.
License revenues are generally recorded when the Company has satisfactorily
completed all of its related obligations pursuant to the underlying agreement.
Royalty revenues are generally recorded when the Company's strategic partners
report sales of products containing Thermasorb(R) and ComforTemp(R) to their
customers.
Depreciation and Amortization
The Company's fixed assets are stated at cost. Depreciation is provided
over the estimated useful lives (three to ten years) of the assets under the
straight-line method. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or the estimated useful life of the
asset.
F-7
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Income (Loss) Per Share
Income (loss) per share is based on the weighted average number of shares
of Common Stock outstanding during the respective periods.
In accordance with Staff Accounting Bulletin 83 of the Securities and
Exchange Commission ("SAB 83"), Common Stock and options issued during the 12
months preceding the Offering, at prices below the estimated Offering price
(assumed to be $7.00 per share), are required to be included in the Company's
net income (loss) per share computation using the treasury stock method and the
estimated Offering price, and are treated as if they had been issued at January
1, 1995, even for periods in which they were antidilutive.
The shares used in computing net income (loss) for all periods presented
does not include 314,000 shares resulting from the Private Placement of shares
of Common Stock and options (See Note 10), applying the principles of SAB 83.
These shares will be included in such computation upon the issuance of
financial statements for the year ended December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings Per Share" ("FAS 128"), which is effective for both
interim and annual financial statements for periods ending after December 15,
1997. At that time, the Company will be required to change the method currently
used to compute income (loss) per share and restate all periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options and warrants will be excluded. The adoption of FAS 128 will not
have any effect on the accompanying financial statements.
Fair Value of Financial Instruments
The book values of the cash, accounts receivable, accounts payable,
accrued liabilities, due to related party, and note payable approximate their
fair values principally because of the short-term maturities of these
instruments.
Inventories
Inventories consist substantially of finished goods and are stated at the
lower of cost or market. Cost is determined by the weighted average method.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
approximately $168,000, $21,100 and $33,000 of advertising costs for the nine
months ended September 30, 1997 and 1996 and the year ended December 31, 1996,
respectively. Advertising costs for the year ended December 31, 1995 were not
material.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Significant Concentrations
The Company currently outsources the manufacture of all of its products,
including Thermasorb(R) and ComforTemp(R) to a limited number of manufacturers.
The Company and its Thermasorb(R) supplier have entered into a letter agreement
that provides firm, fixed pricing for all of the Company's anticipated 1998
requirements for Thermasorb(R) additives, as well as favorable pricing and
delivery terms for short run and prototype production volumes. The letter
agreement requires the Company to place a blanket purchase order for 1998 which
will be completed prior to the Offering. The Company has also received written
assurances from the supplier regarding its desire to enter into a long-term
supply agreement for the manufacture of the Company's Thermasorb(R) additive.
All of the Company's ComforTemp(R) is manufactured by a different vendor
pursuant to a purchase order. No assurance can be given that the Company will be
able to procure long-term supply contracts with either vendor on terms as
favorable as the current agreements.
F-8
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
3. Significant Concentrations -- (Continued)
The Company does a significant amount of business with a limited number of
strategic partners. Revenue from two strategic partners comprised approximately
95% (69% and 26%) and 79% (55% and 24%) of the Company's total revenue for the
years ended December 31, 1995 and 1996, respectively, and 84% (62% and 22%) for
the nine months ended September 30, 1996. Revenues from three strategic
partners comprised approximately 66% (19%, 10% and 37%) of the Company's total
revenue for the nine months ended September 30, 1997.
At December 31, 1996 and September 30, 1997, respectively, three strategic
partners accounted for approximately 87% (42%, 35%, and 10%) and 52% (18%, 17%,
and 17%) of the Company's accounts receivable. Consistent with industry
standards, receivables are payable in accordance with the terms of the
underlying contracts and collateral is not required.
4. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
<S> <C> <C>
Leasehold improvements ................................. $ 36,336 $ 36,336
Furniture .............................................. 14,247 14,247
Equipment .............................................. 56,340 56,340
-------- --------
106,923 106,923
Less accumulated depreciation and amortization ......... 30,479 41,828
-------- --------
$ 76,444 $ 65,095
======== ========
</TABLE>
5. Note Payable
At December 31, 1996, the Company had an available line of credit for
$250,000 with a bank (the "Line"), all of which was outstanding. During 1997,
the Line was increased to $500,000, all of which was outstanding at September
30, 1997. The Line is maintained for working capital purposes. The Line bears
interest at .5% above the bank's prime rate (8.5% at September 30, 1997) and
expires on June 30, 1998.
Substantially all of the Company's assets are pledged as security under
the Line. The Line is also secured by a joint guaranty from the chief executive
officer, a member of the Board of Directors, and Frisby Aerospace, Inc.
("Frisby Aerospace"), an affiliated company. The Company is attempting to have
all intercompany and personal guarantees released by the bank. On December 30,
1997, the Company repaid all amounts outstanding with a portion of the proceeds
from the Private Placement (see Note 10).
<PAGE>
6. Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
<S> <C> <C>
License agreement costs ............................. $41,237 $ 60,754
Net operating loss carryforward ..................... -- 259,000
Accounts receivable reserves ........................ -- 12,000
Other ............................................... 3,555 --
------- ----------
Total deferred tax assets ........................ 44,792 331,754
Valuation allowance for deferred tax assets ......... -- (331,754)
------- ----------
Net deferred tax assets .......................... $44,792 $ --
======= ==========
</TABLE>
F-9
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
6. Income Taxes -- (Continued)
As a result of losses from operations, and if the Company filed an income
tax return at September 30, 1997, the Company would have available a net
operating loss carryforward ("NOL") of approximately $673,000 for Federal
income tax purposes that expires in 2012.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
period in which the NOL can be utilized and the temporary differences become
deductible. Since the Company has incurred losses in previous years and it
anticipates a loss at least until 1999, the Company has established a valuation
allowance for deferred tax assets at September 30, 1997.
Significant components of the income tax provision (benefit) are as
follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
---------------------------- -------------------------
1995 1996 1996 1997
------------ ------------- ------------- ---------
<S> <C> <C> <C> <C>
Current:
Federal ......... $ 25,541 $ (25,541) $ (987) $ --
State ........... 3,565 (1,361) (1,044) --
--------- --------- --------- -------
29,106 (26,902) (2,031) --
--------- --------- --------- -------
Deferred:
Federal ......... (19,634) (19,081) (8,858) 36,000
State ........... (2,786) (2,659) (998) 8,792
--------- --------- --------- -------
(22,420) (21,740) (9,856) 44,792
--------- --------- --------- -------
Total ............ $ 6,686 $ (48,642) $ (11,887) $44,792
========= ========= ========= =======
</TABLE>
The income tax benefit differs from the amounts computed by applying the
statutory United States Federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------- -----------------------------
1995 1996 1996 1997
--------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Provision (benefit) for Federal income taxes at
the statutory rate ................................. $4,443 $ (46,341) $ (5,614) $ (240,158)
State income taxes, net of Federal income tax
benefit ............................................ 514 (2,653) (1,348) (22,521)
Other ............................................... 1,729 352 (4,925) (24,283)
Valuation allowance for deferred tax assets ......... -- -- -- 331,754
------ --------- --------- ----------
$6,686 $ (48,642) $ (11,887) $ 44,792
====== ========= ========= ==========
</TABLE>
<PAGE>
7. Related Party Transactions
Frisby Aerospace, an affiliated company, charges the Company for space and
related services. These charges, which are non-interest bearing, are based upon
management allocations. These charges aggregated approximately $68,000,
$51,000, $41,000 and $47,000 for the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, respectively, and were
included in cost of sales in the accompanying statement of operations and
retained earnings (deficit). The Company also received unsecured, non-interest
bearing advances from Frisby Aerospace aggregating $376,000 during the nine
months ended September 30, 1997. Such amounts are payable on demand. Total
amounts owed to Frisby Aerospace was $10,550 and $402,288 at December 31, 1996
and September 30, 1997, respectively. In addition, Frisby Aerospace provides
the Company with certain accounting, clerical and office services without
charge.
F-10
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
7. Related Party Transactions -- (Continued)
A portion of the proceeds received from the Private Placement (See Note
10) was used to repay the amounts owed to Frisby Aerospace (including an
additional $125,000 advanced to the Company after September 30, 1997) in full
on December 30, 1997.
8. License Arrangements and Other Commitments
(a) The Company signed an Exclusive License Agreement (the "TRDC License")
in 1995 with a research and development corporation which holds innovative
proprietary technology in microencapsulated and thermal management technologies
and with which the Company had an existing agreement since 1991. The TRDC
License gives the Company the exclusive worldwide right to develop and
commercialize this technology with respect to certain applications in exchange
for royalties that range from 1% to 5% of product sales revenue and 12.5% to
50% of license fees and royalty revenues, as defined. Minimum annual payments
are required in accordance with the TRDC License and are payable as follows:
October 1 -- December 31, 1997 $ 8,000
1998 54,000
1999 78,000
2000 102,000
2001 126,000
2002 and thereafter 150,000
The Company is expensing such minimum annual payments on a straight-line
basis over the period in which such payments fluctuate. Accordingly, the charge
was approximately $73,000 for each of the years ended December 31, 1995 and 1996
and $55,000 for each of the nine months ended September 30, 1996 and 1997.
(b) The rights to the TRDC Technology relating to MicroPCM Fibers and
Fabrics were licensed by TRDC to Outlast Technologies, Inc. ("Outlast") prior to
the Company obtaining the TRDC License. In order to expand its rights in the
TRDC Technology, in January 1998, the Company entered into an agreement with
Outlast which expands the rights of the Company to include the combination of
the Company's products with fibers and fabrics. Under the terms of the
agreement, the Company paid Outlast $100,000 as a license payment related to
periods prior to the execution of the agreement and such amount has been charged
to cost of sales for the period ended September 30, 1997. In addition, the
agreement provides for the Company to meet minimum annual payments of $150,000
to $600,000 per year from 1998 through 2002, provided that the Company elects to
maintain the exclusivity granted by the license. If subsequent to the initial
licensing period the Company elects to extend the exclusivity granted by the
license, the minimum annual payment for the five years thereafter will be
$1,000,000.
(c) The Company is obligated under several operating leases for its
operating facility and equipment expiring at various dates through 1998. The
operating facility is leased from Frisby Aerospace (see Note 7). This lease
expired on November 30, 1997 and the Company continues to lease the facility
from Frisby Aerospace on a month to month basis. Rental expense for the years
ended December 31, 1995 and 1996, and the nine months ended September 30, 1996
and 1997 was approximately $52,000, $45,000, $41,000, and $46,000,
respectively.
(d) The Company is a guarantor of a $350,000 obligation of Frisby
Industries, Inc. ("Frisby Industries"), an affiliated company. At September 30,
1997, the outstanding balance of the indebtedness was $235,000. Frisby
Industries has agreed not to increase the current balance of the loan.
Additionally, the Company's Chief Executive Officer has agreed to reimburse the
Company for any payments the Company makes to the lender pursuant to the
guarantee.
9. Retirement Plan
Effective January 1, 1997, the Company adopted a 401(k)/Profit Sharing
Plan (the "Plan") for the benefit of all its eligible employees. The Plan is
funded from contributions by employees for their own account and does
F-11
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
9. Retirement Plan -- (Continued)
not provide for any mandatory or matching contributions by the Company. All
employees of the Company on the effective date of the Plan immediately became
eligible. An employee who became employed after January 1, 1997 will become
entitled to participate in the Plan after the completion of six months of
service and the attainment of 21 years of age. Under the Plan, participants
will be permitted to contribute from their compensation any amount up to the
lesser of 20% of their annual gross salary or the maximum deferral allowed
under the Internal Revenue Code. The Company will be entitled to make optional
profit sharing contributions for any plan year in its discretion. During the
nine months ended September 30, 1997, the Company did not make any
contributions to the Plan.
10. Private Placement -- Unaudited
On December 29, 1997, the Company sold 441,327 shares of its Common Stock
and an option to purchase 587,500 shares of the Company's Convertible Preferred
Stock at an exercise price of $4.26 per share until February 28, 1998 to a
foreign investor for an aggregate purchase price of $2,500,000. This
transaction resulted in net proceeds of approximately $1,600,000, after the
payment of related costs and expenses. Approximately $100,000 of such costs
were paid during the nine months ended September 30, 1997. The Convertible
Preferred Stock is convertible into Common Stock at the election of the
investor for a 60-day period commencing on the 370th day following the
Offering.
F-12
<PAGE>
- --------------------------------------------------------------------------------
Photograph of Flame testing of Heat Shield Products
- --------------------------------------------------------------------------------
Active product development and testing of the Company's products
being conducted at the Company's in-house research and
development facilities.
- --------------------------------------------------------------------------------
Photograph of Hot and Cold Chamber testing
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized in connection with any offering made
hereby to give any information or to make any representation other than those
contained in this Prospectus in connection with the Offering made hereby, and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or any Underwriter. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the shares of Common Stock offered hereby, nor does it
constitute an offer to sell or a solicitation of any offer to buy any of the
securities offered hereby to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any time
subsequent to the dates as of which such information is furnished or that there
has been no change in the affairs of the Company since such date.
-----------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ....................... 3
Risk Factors ............................. 9
Use of Proceeds .......................... 20
Dividend Policy .......................... 21
Dilution ................................. 22
Capitalization ........................... 23
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................ 24
Business ................................. 30
Management ............................... 47
Certain Transactions ..................... 52
Principal Stockholders ................... 54
Description of Securities ................ 55
Shares Eligible for Future Sale .......... 57
Underwriting ............................. 59
Legal Matters ............................ 60
Experts .................................. 60
Change in Independent Auditors ........... 61
Additional Information ................... 61
Index to Financial Statements ............ F-1
-----------------------------------
Until _____, 1998 (25 days after the date hereof), all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as Underwriter
and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,600,000 Common Shares
[GRAPHIC OMITTED]
FRISBY
TECHNOLOGIES, INC.
Common Stock
----------------------------------------
Prospectus
----------------------------------------
BARINGTON CAPITAL GROUP
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers provided that this provision
shall not eliminate or limit the liability of a directors: (i) for any breach
of the director's duty of loyalty to the Company or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law; (iii) arising under Section 174 of the DGCL; or
(iv) for any transaction from which the director derived an improper personal
benefit.
The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the Company's By-Laws, any agreement, vote of
stock or otherwise.
The Company's Certificate of Incorporation eliminates the personal
liability of directors to the fullest extent permitted by Section 102(b)(7) of
the DGCL.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such
persons in their official capacities if such person acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the applicable provisions, the Company has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Other Expenses of Issuance and Distribution
The following table sets forth the various expenses payable by the Company
in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and the Underwriter's non-
accountable expense allowance. All of the amounts shown are estimated except
the Securities and Exchange Commission registration fee and the NASD filing
fee.
Total
---------------
SEC registration fee ........................ $ 4,795.52
Nasdaq SmallCap Market listing fee .......... 6,840.00
NASD filing fee ............................. 2,125.00
PacEx application fee ....................... 20,000.00
Printing and engraving expenses ............. 120,000.00
Legal fees and expenses ..................... 225,000.00
Accounting fees and expenses ................ 145,000.00
Transfer agent and registrar fee ............ 3,500.00
Miscellaneous ............................... 72,739.48
------------
Total ..................................... $ 600,000.00
============
II-1
<PAGE>
Exhibits
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Underwriter's Option Agreement
3.1.1 Articles of Incorporation (North Carolina)
3.1.2 Articles of Amendment to Articles of Incorporation dated December 23, 1997 (North Carolina)
* 3.1.3 Form of Certificate of Incorporation (Delaware)
3.2.1 By-Laws (North Carolina)
* 3.2.2 Form of By-Laws (Delaware)
* 4.1 Form of Common Stock Certificate
* 4.2 Option Agreement dated December 1997 between MUSI Investments, S.A. and the Company
* 5.1 Opinion of Ruskin, Moscou, Evans & Faltischek, P.C.
*10.1 Stock Option Plan
*10.2 Employment Agreement dated December 8, 1997 between the Company and Gregory S. Frisby
*10.3 Employment Agreement dated December 6, 1997 between the Company and Douglas J.
McCrosson
*10.4 Shareholder Agreement dated December 10, 1997 between Gregory S. Frisby and Jeffry D. Frisby
*10.5 Stockholders Agreement between Gregory S. Frisby, Jeffry D. Frisby and MUSI Investments, S.A.
*10.6 Line of Credit Agreement with European American Bank
*10.7.1 License Agreement dated May 1, 1995 between the Company and TRDC
*10.7.2 Assignment of License Agreement effective January 3, 1997 from TRDC to Delta Thermal Systems,
Inc.
*10.8 License Agreement effective January 1, 1998 between the Company and Outlast Technologies, Inc.
*10.9 License Agreement dated March 31, 1997 between the Company and Fly Technologies, Inc.
*10.10 License Agreement dated January 23, 1997 between the Company and Wells Lamont Division, Mar-
mon Holdings, Inc.
*10.11 License Agreement dated February 1, 1997 between the Company and Cove Shoe Company, Inc.
*10.12.1 License Agreement dated May 22, 1996 between the Company and Thermo Solutions, Inc. (f/k/a
Temptop Container Systems, Inc.) ("Thermo Solutions")
*10.12.2 Memorandum of Understanding dated January 22, 1998 between the Company and Thermo Solu-
tions
*10.13 License Agreement dated February 10, 1997 between the Company and Genfoot, Inc. and Genfoot
America, Inc.
*10.14 Contract No. 00178-96-C-3014 between the Company and the United States of America (Naval Sur-
face Warfare Division)
*10.15 Contract No. F08637-97-C-6017 between the Company and the United States of America (325th
Contracting Squadron/LGCX)
*10.16 Contract No. F33615-93-C-3409 between the Company and the United States of America (Depart-
ment of Air Force Material Command (ASC) Wright Laboratory (WL/FLKF))
*10.17 Letter Agreement dated January 21, 1998 between the Company and Minnesota Mining & Manufac-
turing, Inc.
*10.18 Memorandum of Understanding dated October 23, 1997 between the Company and Lendell Manu-
facturing, Inc.
*10.19 Memorandum of Understanding dated April 14, 1997 between the Company and Bell Sports Corp.
*10.20 Memorandum of Understanding dated July 9, 1997 between the Company and CamelBak/FasTrak
Systems, Inc.
*10.21 Memorandum of Understanding dated December 11, 1997 between the Company and Foamex Inter-
national, Inc.
*10.22 Memorandum of Understanding dated January 15, 1998 between the Company and LaCrosse Foot-
wear, Inc.
*10.23 Memorandum of Understanding dated December 4, 1997 between Piedmont Institute for Research
& Technology II, LLC, as landlord, and the Company, as tenant
*10.24 Lease dated January 13, 1993 between Frisby Aerospace, as landlord, and the Company, as tenant
*10.25 Lease dated September 1, 1994 between Charles Winburn, as landlord, and the Company, as tenant
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
24.1 Consent of Ernst & Young LLP
24.2 Consent of KPMG Peat Marwick LLP
*24.3 Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit 5.1)
25.1 Power of Attorney (included on signature page)
</TABLE>
- ------------
*to be filed by amendment
All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements or notes thereto.
Recent Sales of Unregistered Securities
In December 1997, the Company sold 441,327 shares of its Common Stock to
MUSI in a privately negotiated transaction under Section 4(2) of the Securities
Act, the Private Placement for a purchase price of $2,500,000. MUSI is
beneficially owned by a single accredited non-U.S. investor. In connection with
the Private Placement, the Company granted to MUSI an option to purchase up to
587,500 shares of Convertible Preferred Stock for an exercise price of $4.26
per share expiring on February 28, 1997. The Convertible Preferred Stock has a
preference in dividends and liquidation and is convertible at the election of
MUSI into an equal number of shares of Common Stock during a 60-day period
commencing on the 370th day following completion of an initial public offering
by the Company.
Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that, 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 Company
of expenses incurred or paid by a director, officer or controlling person of
the Company 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 Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of 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 issues.
The undersigned Company hereby undertakes to provide to the Underwriter,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Company 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 by the Commission.
(2) For the purpose of determining any liability under the Securities Act,
each Post-Effective Amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable ground to believe that it meets all of
the requirements of filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on January 29, 1998.
FRISBY TECHNOLOGIES, INC.
By: /s/ Gregory S. Frisby
--------------------------
Gregory S. Frisby,
President
Dated: January 29, 1998
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. Each person whose signature appears below hereby authorizes
Gregory S. Frisby with full power of substitution to execute in the name of
such person and to file any Amendment or Post-Effective Amendment to this
Registration Statement making such changes in this Registration Statement as
the Company deems appropriate and appoints Gregory S. Frisby with full power of
substitution, attorney-in-fact to sign and to file any amendment and
Post-Effective Amendment to this Registration Statement.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- ------------------------------------------------- ----------------
<S> <C> <C>
/s/ Gregory S. Frisby
- ----------------------- Chairman of the Board of Directors, President, January 29, 1998
Gregory S. Frisby Chief Executive Officer and (Principal Financial
Officer)
/s/ Jeffry D. Frisby
- ----------------------- Director January 29, 1998
Jeffry D. Frisby
/s/ Pietro A. Motta
- ----------------------- Director January 29, 1998
Pietro A. Motta
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Page No.
- ---------------------- ---------
<S> <C> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Underwriter's Option Agreement
3.1.1 Articles of Incorporation (North Carolina)
3.1.2 Articles of Amendment to Articles of Incorporation dated December 23, 1997 (North
Carolina)
* 3.1.3 Form of Certificate of Incorporation (Delaware)
3.2.1 By-Laws (North Carolina)
* 3.2.2 Form of By-Laws (Delaware)
* 4.1 Form of Common Stock Certificate
* 4.2 Option Agreement dated December 1997 between MUSI Investments, S.A. and the
Company
* 5.1 Opinion of Ruskin, Moscou, Evans & Faltischek, P.C.
*10.1 Stock Option Plan
*10.2 Employment Agreement dated December 8, 1997 between the Company and Gregory S.
Frisby
*10.3 Employment Agreement dated December 6, 1997 between the Company and Douglas J.
McCrosson
*10.4 Shareholder Agreement dated December 10, 1997 between Gregory S. Frisby and Jeffry D.
Frisby
*10.5 Stockholders Agreement between Gregory S. Frisby, Jeffry D. Frisby and MUSI
Investments, S.A.
*10.6 Line of Credit Agreement with European American Bank
*10.7.1 License Agreement dated May 1, 1995 between the Company and TRDC
*10.7.2 Assignment of License Agreement effective January 3, 1997 from TRDC to Delta
Thermal Systems, Inc.
*10.8 License Agreement effective January 1, 1998 between the Company and Outlast
Technologies, Inc.
*10.9 License Agreement dated March 31, 1997 between the Company and Fly Technologies, Inc.
*10.10 License Agreement dated January 23, 1997 between the Company and Wells Lamont
Division, Marmon Holdings, Inc.
*10.11 License Agreement dated February 1, 1997 between the Company and Cove Shoe
Company, Inc.
*10.12.1 License Agreement dated May 22, 1996 between the Company and Thermo Solutions
*10.12.2 Memorandum of Understanding dated January 22, 1998 between the Company and Thermo
Solutions
*10.13 License Agreement dated February 10, 1997 between the Company and Genfoot, Inc. and
Genfoot America, Inc.
*10.14 Contract No. 00178-96-C-3014 between the Company and the United States of America
(Naval Surface Warfare Division)
*10.15 Contract No. F08637-97-C-6017 between the Company and the United States of America
(325th Contracting Squadron/LGCX)
*10.16 Contract No. F33615-93-C-3409 between the Company and the United States of America
(Department of Air Force Material Command (ASC) Wright Laboratory (WL/FLKF))
*10.17 Letter Agreement dated January 21, 1998 between the Company and Minnesota Mining &
Manufacturing, Inc.
*10.18 Memorandum of Understanding dated October 23, 1997 between the Company and
Lendell Manufacturing, Inc.
*10.19 Memorandum of Understanding dated April 14, 1997 between the Company and Bell Sports
Corporation
*10.20 Memorandum of Understanding dated July 9, 1997 between the Company and
CamelBak/FasTrak Systems, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibits Page No.
- ---------- ---------
<S> <C> <C>
*10.21 Memorandum of Understanding dated December 11, 1997 between the Company and
Foamex International, Inc.
*10.22 Memorandum of Understanding dated January 15, 1998 between the Company and
LaCrosse Footwear, Inc.
*10.23 Memorandum of Understanding dated December 4, 1997 between Piedmont Institute for
Research & Technology II, LLC, as landlord, and the Company, as tenant
*10.24 Lease dated January 13, 1993 between Frisby Aerospace, as landlord, and the Company, as
tenant
*10.25 Lease dated September 1, 1994 between Charles Winburn, as landlord, and the Company,
as tenant
24.1 Consent of Ernst & Young LLP
24.2 Consent of KPMG Peat Marwick LLP
*24.3 Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit 5.1)
25.1 Power of Attorney (included on signature page)
</TABLE>
- ------------
*to be filed by amendment
<PAGE>
1,600,000 Shares of Common Stock
FRISBY TECHNOLOGIES, INC.
UNDERWRITING AGREEMENT
____________, 1998
Barington Capital Group, L.P.
888 Seventh Avenue
New York, New York 10019
Dear Sirs:
The undersigned, Frisby Technologies, Inc., a Delaware
corporation (the "Company"), hereby confirms its agreement with you (the
"Underwriter") and any other selling group members named in Schedule I hereto in
connection with the proposed offering of certain of its securities to the public
(the "Offering") as follows:
1. Introductory. The Company proposes to issue and sell to the
Underwriter 1,600,000 shares of Common Stock, par value $.01 per share, of the
Company (the "Common Stock"). In addition, solely for the purpose of covering
over-allotments, the Company proposes to grant the Underwriter the option to
purchase from it up to an additional 240,000 shares of Common Stock (the
"Additional Stock") identical to the Common Stock. The Common Stock is more
fully described in the Prospectus referred to below.
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriter that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), a registration statement, and may have filed one
or more amendments thereto, on Form SB-2 (Registration No. 333-______),
including in such registration statement and each such amendment and
related preliminary prospectus (a "Preliminary Prospectus") the
registration of (i) the 1,600,000 shares of Common Stock (the "Firm
Stock"), (ii) the Additional Stock and (iii) the shares of Common Stock
(the "Underwriter's Stock") issuable upon exercise of the Common Stock
purchase options referred to in Section 5(t) (the "Underwriter's
Options") (the Firm Stock, the Additional Stock, the
<PAGE>
Underwriter's Options and the Underwriter's Stock are collectively
referred to as the "Securities"). As used in this Agreement, the term
"Registration Statement" means such registration statement, as amended,
on file with the Commission at the time such registration statement
becomes effective (including the prospectus, financial statements,
exhibits, and all other documents filed as a part thereof), provided
that such Registration Statement, at the time it becomes effective, may
omit such information as is permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A
of the General Rules and Regulations promulgated under the Act (the
"Regulations"), which information ("Rule 430 Information") shall be
deemed to be included in such Registration Statement when a final
prospectus is filed with the Commission in accordance with Rules 430A
and 424(b)(1) or (4) of the Regulations; the term "Preliminary
Prospectus" means each prospectus included in the Registration
Statement, or any amendments thereto, before it becomes effective under
the Act, the form of prospectus omitting Rule 430A Information included
in the Registration Statement when it becomes effective, if applicable
(the "Rule 430A Prospectus"), and any prospectus filed by the Company
with your consent pursuant to Rule 424(a) of the Regulations; and the
term "Prospectus" means the final prospectus included as part of the
Registration Statement, except that if the prospectus relating to the
securities covered by the Registration Statement in the form first
filed on behalf of the Company with the Commission pursuant to Rule
424(b) of the Regulations shall differ from such final prospectus, the
term "Prospectus" shall mean the prospectus as filed pursuant to Rule
424(b) from and after the date on which it shall have first been used.
(b) When the Registration Statement becomes effective, and at
all times subsequent thereto and including the Closing Date (as defined
in Section 3) and each Additional Closing Date (as defined in Section
3), and during such longer period as the Prospectus may be required to
be delivered in connection with sales by the Underwriter or a dealer,
and during such longer period until any post-effective amendment
thereto shall become effective, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment or supplement to the Registration Statement or the
Prospectus) will contain all statements which are required to be stated
therein in accordance with the Act and the Regulations, will comply
with the Act and the Regulations, and will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no event will have occurred which should
have been set forth in an amendment or supplement to the
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Registration Statement or the Prospectus which has not then been set
forth in such an amendment or supplement; if a Rule 430A Prospectus is
included in the Registration Statement at the time it becomes
effective, the Prospectus filed pursuant to Rules 430A and 424 (b) (1)
or (4) will contain all Rule 430A Information and all statements which
are required to be stated therein in accordance with the Act or the
Regulations, will comply with the Act and the Regulations, and will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and each Preliminary Prospectus, as
of the date filed with the Commission, did not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading; except that no representation or warranty is
made in this Section 2(b) with respect to statements or omissions made
in reliance upon and in conformity with written information furnished
to the Company as stated in Section 8(b) with respect to the
Underwriter by the Underwriter expressly for inclusion in any
Preliminary Prospectus, the Registration Statement, or the Prospectus,
or any amendment or supplement thereto.
(c) Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction has issued an order (a "Stop Order")
suspending the effectiveness of the Registration Statement, preventing
or suspending the use of any Preliminary Prospectus, the Prospectus,
the Registration Statement, or any amendment or supplement thereto,
refusing to permit the effectiveness of the Registration Statement, or
suspending the registration or qualification of any of the Securities,
nor has any of such authorities instituted or threatened to institute
any proceedings with respect to a Stop Order.
(d) Any contract, agreement, instrument, lease, or license
required to be described in the Registration Statement or the
Prospectus has been properly described therein. Any contract,
agreement, instrument, lease, or license required to be filed as an
exhibit to the Registration Statement has been filed with the
Commission as an exhibit to the Registration Statement.
(e) The Company has no subsidiaries (as defined in the
Regulations). The Company is a corporation duly organized, validly
existing, and in good standing under the laws of Delaware, with full
corporate power and authority, and all necessary consents,
authorizations, approvals, orders, licenses, certificates, and permits
of and from, and declarations and filings with, all federal, state,
local, and other governmental authorities and all courts and other
tribunals, to own, lease, license, and use its properties and assets
and to carry on its business in the manner
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described in the Prospectus. The Company is duly qualified to do
business and is in good standing in every jurisdiction in which its
ownership, leasing, licensing, or use of property and assets or the
conduct of its business makes such qualification necessary except where
the failure to be so qualified does not now have and cannot be expected
in the future to have a material adverse effect on the operations,
business, properties, or assets of the Company.
(f) As of the Closing of the sale of the Firm Stock, the
authorized capital stock of the Company will consist of 10,000,000
shares of Common Stock, of which ______________ shares will be issued
outstanding and 1,000,000 shares of preferred stock, of which ___
shares have been designated Series __ Convertible Preferred Stock
("Series __ Preferred"), of which ___ shares of Series __ Convertible
Preferred will be issued and outstanding. Each outstanding share of
Common Stock and Series __ Preferred is validly authorized, validly
issued, fully paid, and nonassessable, without any personal liability
attaching to the ownership thereof, and has not been issued and is not
owned or held in violation of any preemptive rights of stockholders.
There is no commitment, plan, or arrangement to issue, and no
outstanding option, warrant, or other right calling for the issuance
of, any share of capital stock of the Company or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for, capital stock of the Company, except as may be
properly described in the Prospectus. There is outstanding no security
or other instrument which by its terms is convertible into or
exchangeable for capital stock of the Company, except as may have been
properly described in the Prospectus. As of the Closing (as hereinafter
defined), there shall be outstanding no indebtedness of the Company
other than (i) trade payables incurred and unpaid in the ordinary
course of business consistent with past practice, (ii) capital lease
obligations properly described in the Prospectus, and (iii) an
aggregate principal amount of indebtedness for borrowed money
outstanding to a bank or other financial institution of not exceeding
$.5 million.
(g) The financial statements of the Company included in the
Registration Statement and the Prospectus fairly present the financial
position, the results of operations, and the other information
purported to be shown therein at the respective dates and for the
respective periods to which they apply. Such financial statements have
been prepared in accordance with generally accepted accounting
principles (except to the extent that certain footnote disclosures
regarding any period may have been omitted in accordance with the
applicable rules of the Commission under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) consistently applied throughout
the periods involved, are correct and complete, and are in accordance
with the
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books and records of the Company. The accountants whose report on the
audited financial statements is filed with the Commission as a part of
the Registration Statement are, and during the periods covered by their
report(s) included in the Registration Statement and the Prospectus,
were independent certified public accountants within the meaning of the
Act and the Regulations. No other financial statements are required by
Form SB-2 or otherwise to be included in the Registration Statement or
the Prospectus. There has not been a material adverse change in the
financial condition, results of operations, business, properties,
assets, liabilities, or prospects of the Company from the latest
information set forth in the Registration Statement or the Prospectus
except as may be properly described in the Prospectus.
(h) There is no litigation, arbitration, claim, governmental
or other proceeding (formal or informal), or investigation pending,
threatened, or in prospect (or any basis therefor) with respect to the
Company, or any of its operations, businesses, properties, assets, or
liabilities or future prospects, except as may be properly described in
the Prospectus or such as individually or in the aggregate do not now
have and cannot be expected in the future to have a material adverse
effect upon the operations, business, properties, or assets of the
Company. The Company is not in violation of, or in default with respect
to, any law, rule, regulation, order, judgment, or decree except as may
be properly described in the Prospectus or such as in the aggregate do
not now have and cannot be expected in the future to have a material
adverse effect upon the operations, business, properties, assets,
liabilities or prospects, of the Company; nor is the Company required
to take any action in order to avoid any such violation or default.
(i) The Company does not own any real property. The Company
has good title to all properties and assets which the Prospectus
indicates are owned by it, free and clear of all liens, security
interests, pledges, charges, encumbrances, and mortgages (except as may
be properly described in the Prospectus). No real property owned,
leased, licensed, or used by the Company lies in an area which is, or
to the knowledge of the Company will be, subject to zoning, use, or
building code restrictions which would prohibit, and no state of facts
relating to the actions or inaction of another person or entity or his
or its ownership, leasing, licensing, or use of any real or personal
property exists or will exist which would prevent, the continued
effective ownership, leasing, licensing or use of such real property in
the business of the Company as presently conducted or as the Prospectus
indicates it contemplates conducting (except as may be properly
described in the Prospectus).
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(j) The Company is not, nor to the knowledge of the Company is
any other party, now or expected by the Company in the future to be in
violation or breach of, or in default with respect to, complying with
any material provision of any contract, agreement, instrument, lease,
license, arrangement, or understanding which is material to the
Company, and each such contract, agreement, instrument, lease, license,
arrangement, and understanding is in full force and is the legal,
valid, and binding obligation of the parties thereto and is enforceable
as to them in accordance with its terms. The Company enjoys peaceful
and undisturbed possession under all leases and licenses under which it
is operating. The Company is not a party to or bound by any contract,
agreement, instrument, lease, license, arrangement, or understanding,
or subject to any charter or other restriction, which has had or may in
the future be expected to have a material adverse effect on the
financial condition, results of operations, business, properties,
assets, liabilities, or prospects of the Company. The Company is not in
violation or breach of, or in default with respect to, any term of its
articles of incorporation (or other charter document) or by-laws.
(k) The Company owns, possesses or has the right to employ all
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, software, systems or
procedures), trademarks, service marks and trade names, inventions,
computer programs, technical data and information (collectively, the
"Intangibles") presently employed by it in connection with the
businesses now operated by it or that the Company owns or has pending
or has licensed, free and clear of and without violating any right,
claimed right, charge, encumbrance, pledge, security interest,
restriction or lien of any kind of any other person and are in good
standing, and, except as disclosed in the Registration Statement and
the Prospectus, the Company has not received any notice of infringement
of or conflict with asserted rights of others with respect to any of
the foregoing and to the knowledge of the Company, its rights to the
foregoing are uncontested. The use of the Intangibles in connection
with the business and operations of the Company and its Subsidiaries
does not infringe on the rights of any person. The "Frisby
Technologies", "ComforTemp", "Thermasorb" and "Comfort in the Extreme"
names are the only trademarks and service marks used by the Company to
identify its products, and except for "Comfort in the Extreme" as to
which the Company has applied for trademark registration, such
trademarks and service marks are protected by registration in the name
of the Company on the principal register in the United States Patent
and Trademark Office. There is no right under any Intangible necessary
to the business of the Company as presently conducted or as the
Prospectus indicates it
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<PAGE>
contemplates conducting except as may be so designated in the
Prospectus. The Company has not infringed, is not infringing, nor has
received notice of infringement with respect to, asserted Intangibles
of others. To the knowledge of the Company, there is no infringement by
others of Intangibles of the Company. To the knowledge of the Company,
there is no Intangible of others which has had or may be expected to
have in the future a material adverse effect on the financial
condition, results of operations, business, properties, assets,
liabilities, or prospects of the Company except for _____, as is
properly described in the Prospectus.
(l) Neither the Company, nor any director, officer, agent,
employee, or other person associated with or acting on behalf of the
Company has, directly or indirectly, used any corporate funds for
unlawful contributions, gifts, entertainment, or other unlawful
expenses relating to political activity; made any unlawful payment to
foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns from corporate funds; violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended;
or made any bribe, rebate, payoff, influence payment, kickback, or
other unlawful payment.
(m) The Company has all requisite corporate power and
authority to execute, deliver, and perform its obligations under each
of (i) this Agreement, and (ii) the certificate evidencing the
Underwriter's Options (the "Underwriter's Option Agreement" and,
collectively with this Agreement the "Company Documents"). All
necessary corporate proceedings of the Company have been duly taken to
authorize the execution, delivery, and performance of each of the
Company Documents by the Company. This Agreement has been duly
authorized, executed, and delivered by the Company, is the legal,
valid, and binding obligation of the Company, and is enforceable as to
the Company in accordance with its terms. Each of the other Company
Documents has been duly authorized by the Company, and is or, when
executed and delivered by the Company, will be the legal, valid, and
binding obligation of the Company, enforceable against the Company in
accordance with its terms. No consent, authorization, approval, order,
license, certificate, or permit of or from, or declaration or filing
with, any federal, state, local, or other governmental authority or any
court or other tribunal is required by the Company for the execution,
delivery, or performance by the Company of any of the Company Documents
(except filings under the Act which have been or will be made before
the Closing Date and such consents or approvals consisting only of
consents or approvals under "blue sky" or state securities laws). No
consent of any party to any contract, agreement, instrument, lease,
license, arrangement, or understanding to which the Company is a
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<PAGE>
party, or to which any of its properties or assets are subject, is
required for the execution, delivery, or performance of the Company
Documents (except for those consents which have been obtained); and the
execution, delivery, and performance of any of the Company Documents
will not violate, result in a breach of, conflict with, or (with or
without the giving of notice or the passage of time or both) entitle
any party to terminate or call a default under any such contract,
agreement, instrument, lease, license, arrangement, or understanding,
or violate or result in a breach of any term of the certificate of
incorporation (or other charter document) or by-laws of the Company or
violate, result in a breach of, or conflict with any law, rule,
regulation, order, judgment, or decree binding on the Company or to
which any of its operations, businesses, properties, or assets are
subject.
(n) The Firm Stock and the Additional Stock are validly
authorized and, when issued and delivered in accordance with this
Agreement, will be validly issued, fully paid, and nonassessable,
without any personal liability attaching to the ownership thereof, and
will not be issued in violation of any preemptive rights of
stockholders. The Underwriter will receive good title to the Firm Stock
and Additional Stock purchased by it free and clear of all liens,
security interests, pledges, charges, encumbrances, stockholders'
agreements, and voting trusts.
(o) The Underwriter's Stock is validly authorized and reserved
for issuance and, when issued and delivered upon exercise of the
Underwriter's Options in accordance with the Underwriter's Option
Agreement, will be validly issued, fully paid and nonassessable,
without any personal liability attaching to ownership thereof, and will
not be issued in violation of any preemptive rights of stockholders;
and the holders of the Underwriter's Options will receive good title to
the securities purchased by them, respectively, free and clear of all
liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts.
(p) The Securities conform to all statements relating thereto
contained in the Registration Statement or the Prospectus. The
descriptions of any litigation, contract, agreement, instrument lease
or license required to be described in the Registration Statement or
the Prospectus are correct in all material respects. Any litigation
contract, agreement, instrument lease or license required to be filed
as an exhibit to the Registration Statement has been so filed.
(q) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as may otherwise be properly described in the Prospectus, the Company
has not (i) issued
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<PAGE>
any securities or incurred any liability or obligation, primary or
contingent, for borrowed money, (ii) entered into any transaction not
in the ordinary course of business, or (iii) declared or paid any
dividend on its capital stock.
(r) Neither the Company nor any of its officers, directors, or
affiliates (as defined in the Regulations), has taken or will take,
directly or indirectly, prior to the termination of the underwriting
syndicate contemplated by this Agreement, any action designed to
stabilize or manipulate the price of any security of the Company, or
which has caused or resulted in, or which might in the future
reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company, to facilitate
the sale or resale of any of the Firm Stock or Additional Stock, as the
case may be.
(s) The Company has obtained from each of its directors,
officers and affiliates (as defined in the Regulations), and from each
other person or entity who beneficially owned as of the effective date
of the Registration Statement shares of Common Stock of the Company
(each an "Original Stockholder"), enforceable written agreements, in
form and substance satisfactory to counsel for the Underwriter, that
for a period of 24 months from the Closing Date he will not, without
your prior written consent, offer, pledge, issue, sell, contract to
sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Common Stock or any security or
other instrument which by its terms is convertible into, exercisable
for, or exchangeable for shares of Common Stock or other securities of
the Company, including, without limitation, any shares of Common Stock
issuable under any outstanding stock options. Such agreements shall
provide that any such Original Stockholder may sell shares of Common
Stock commencing 12 months after the offering is completed in the event
that the last sales price for the Common Stock on its principal
exchange has been at least 200% of the initial public offering price
per share hereunder for a period of 20 consecutive trading days ending
within 5 days of the date of such sale, and such sale is completed at a
price in excess of 200% of such initial public offering price. Such
agreements shall terminate upon the closing of a follow-on public
offering with at least $20 million in gross proceeds underwritten by a
major bracket or large regional underwriting firm.
(t) Except as may have been registered in the Registration
Statement or already been exercised or waived, no person or entity has
the right to require registration of shares of Common Stock or other
securities of the Company because of the filing or effectiveness of the
Registration Statement.
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<PAGE>
(u) Except as may be set forth in the Prospectus, the Company
has not incurred any liability for a fee, commission, or other
compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement.
(v) Neither the Company nor any of its affiliates is presently
doing business with the government of Cuba or with any person or
affiliate located in Cuba. If, at any time after the date that the
Registration Statement is declared effective with the Commission or
with the Florida Department of Banking and Finance (the "Florida
Department"), whichever date is later, and prior to the end of the
period referred to in the first clause of Section 2(b), the Company
commences engaging in business with the government of Cuba or with any
person or affiliate located in Cuba, the Company will so inform the
Florida Department within ninety days after such commencement of
business in Cuba, and during the period referred to in Section 2(b)
will inform the Florida Department within ninety days after any change
occurs with respect to previously reported information.
(w) The Securities have been approved for quotation on the
NASDAQ SmallCap Market, subject to official notice of issuance.
(x) The Securities have been approved for listing on the
Pacific Stock Exchange (the "PSE"), subject to official notice of
issuance.
(y) Except as contemplated herein or as may have been waived,
no person or entity has any right of first refusal, preemptive right,
right to any compensation, or other similar right or option, in
connection with the Offering, this Agreement, or the Underwriter's
Options, or any of the transactions contemplated hereby or thereby.
3. Purchase, Sale, and Delivery of the Firm Stock and the Additional
Stock. On the basis of the representations, warranties, covenants, and
agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to the Underwriter, and
the Underwriter agrees to purchase from the Company, all of the shares of Firm
Stock.
The purchase price per share of Firm Stock to be paid by the
Underwriter shall be $_______. The initial public offering price per share of
Firm Stock shall be $_______.
Payment for the Firm Stock by the Underwriter shall be made by wire
transfer in immediately available funds to the account or accounts designated by
the Company at the offices of Barington Capital Group, L.P., 888 Seventh Avenue,
New York, New York 10019, or at such other place in the New York City
Metropolitan
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<PAGE>
Area as you shall determine and advise the Company by at least two full days'
notice in writing, upon delivery of the Firm Stock to you for the account of the
Underwriter. Such delivery and payment shall be made at 10:00 A.M., New York
City Time, on the third business day following the commencement of the initial
public offering, as defined in Section 11(a), or at such other time as shall be
agreed upon between you and the Company. Such delivery and payment are herein
called the "Closing," and the time and date of such delivery and payment are
herein called the "Closing Date."
Certificates for the Firm Stock shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the Closing Date. The Company shall permit
you to examine and package such certificates for delivery at least one full
business day prior to the Closing Date.
In addition, the Company hereby grants to the Underwriter the option to
purchase all or a portion of the Additional Stock as may be necessary to cover
over-allotments, at the same purchase price per share to be paid by the
Underwriter to the Company for the Firm Stock as provided for in this Section 3.
This option may be exercised only to cover over-allotments in the sale of shares
of Common Stock by the Underwriter. This option may be exercised by you on the
basis of the representations, warranties, covenants, and agreements of the
Company herein contained, but subject to the terms and conditions herein set
forth, at any time and from time to time on or before the forty-fifth day
following the effective date of the Registration Statement, by written notice by
you to the Company. Such notice shall set forth the aggregate number of
Additional Stock as to which the option is being exercised and the time and
date, as determined by you, when such Additional Stock are to be delivered (such
delivery herein being called an "Additional Closing", and such time and date are
herein called an "Additional Closing Date"); provided, however, that no
Additional Closing Date shall be earlier than the Closing Date nor earlier than
the second business day after the date on which the notice of the exercise of
the option shall have been given nor later than the eighth business day after
the date on which such notice shall have been given.
Payment for the Additional Stock by the Underwriter shall be made by
wire transfer in immediately available funds to the account or accounts
designated by the Company at the offices of Barington Capital Group, L.P., 888
Seventh Avenue, New York, New York 10019, or at such other place in the New York
City Metropolitan Area as you shall determine and advise the Company by at least
two full days' notice in writing, upon delivery of the Additional Stock to you
for the account of the Underwriter.
Certificates for the Additional Stock shall be registered in
such name or names and in such authorized denominations as you
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<PAGE>
may request in writing at least two full business days prior to the Additional
Closing Date with respect thereto. The Company shall permit you to examine and
package such certificates for delivery at least one full business day prior to
the Additional Closing Date with respect thereto.
4. Offering. The Underwriter is to make a public offering of the Firm
Stock as soon, on or after the effective date of the Registration Statement, as
you deem it advisable so to do. The Firm Stock is to be initially offered to the
public at the initial public offering price as provided for in Section 3 (such
price being herein called the "public offering price"). After the initial public
offering, you may from time to time increase or decrease the public offering
price, in your sole discretion, by reason of changes in general market
conditions or otherwise.
5. Covenants of the Company. The Company covenants that it will:
(a) Use its best efforts to cause the Registration Statement
to become effective as promptly as possible. If the Registration
Statement has become or becomes effective with a form of prospectus
omitting Rule 430A Information, or filing of the Prospectus is
otherwise required under Rule 424(b), the Company will file the
Prospectus, properly completed, pursuant to Rule 424(b) within the time
period prescribed and will provide evidence satisfactory to you of such
timely filing.
(b) Notify you immediately, and confirm such notice in
writing, (i) when the Registration Statement and any post-effective
amendment thereto become effective, (ii) of the receipt of any comments
from the Commission or the "blue sky" or securities authority of any
jurisdiction regarding the Registration Statement, any post-effective
amendment thereto, the Prospectus, or any amendment or supplement
thereto, and (iii) of the receipt of any notification with respect to a
Stop Order or the initiation or threatening of any proceeding with
respect to a Stop Order. The Company will use its best efforts to
prevent the issuance of any Stop Order and, if any Stop Order is
issued, to obtain the lifting thereof as promptly as possible.
(c) During the time when a prospectus relating to the Firm
Stock and the Additional Stock is required to be delivered hereunder or
under the Act or the Regulations, comply so far as it is able with all
requirements imposed upon it by the Act, as now existing and as
hereafter amended, and by the Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or
dealings in the Firm Stock or the Additional Stock, as the case may be,
in accordance with the provisions hereof and the Prospectus. If, at any
time when a prospectus relating to the Firm Stock and the Additional
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Stock is required to be delivered hereunder or under the Act or the
Regulations, any event shall have occurred as a result of which, in the
reasonable opinion of counsel for the Company or counsel for the
Underwriter, the Registration Statement or the Prospectus as then
amended or supplemented contains 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 not misleading, or if, in
the opinion of either of such counsel, it is necessary at any time to
amend or supplement the Registration Statement or the Prospectus to
comply with the Act or the Regulations, the Company will immediately
notify you and promptly prepare and file with the Commission an
appropriate amendment or supplement (in form and substance satisfactory
to you) which will correct such statement or omission or which will
effect such compliance and will use its best efforts to have any such
amendment declared effective as soon as possible.
(d) Deliver without charge to the Underwriter such number of
copies of each Preliminary Prospectus as may reasonably be requested by
the Underwriter and, as soon as the Registration Statement, or any
amendment thereto, becomes effective or a supplement is filed, deliver
without charge to you two signed copies of the Registration Statement,
including exhibits, or such amendment thereto, as the case may be, and
two copies of any supplement thereto, and deliver without charge to the
Underwriter such number of copies of the Prospectus, the Registration
Statement, and amendments and supplements thereto, if any, without
exhibits, as you may request for the purposes contemplated by the Act.
(e) Endeavor in good faith, in cooperation with you, at or
prior to the time the Registration Statement becomes effective, to
qualify the Firm Stock and the Additional Stock for offering and sale
under the "blue sky" or securities laws of such jurisdictions as you
may designate; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Company
would be subject to service of general process or to taxation as a
foreign corporation doing business in such jurisdiction to which it is
not then subject. In each jurisdiction where such qualification shall
be effected, the Company will, unless you agree in writing that such
action is not at the time necessary or advisable, file and make such
statements or reports at such times as are or may be required by the
laws of such jurisdiction.
(f) Use its best efforts to keep the Prospectus and the
Registration Statement current and effective by filing post-effective
amendments, as necessary.
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(g) Make generally available (within the meaning of Section
11(a) of the Act and the Regulations) to its security holders as soon
as practicable, but not later than _______________, 1999, an earnings
statement (which need not be certified by independent certified public
accountants unless required by the Act or the Regulations, but which
shall satisfy the provisions of Section 11(a) of the Act and the
Regulations) covering a period of at least twelve months beginning
after the effective date of the Registration Statement.
(h) For the shorter of a period of twenty four months after
the date of the Prospectus or until the closing of a sale of Common
Stock in a follow-on public offering underwritten by a major bracket or
large regional underwriting firm which raises at least $20 million in
gross proceeds, not, without your prior written consent, offer, issue,
sell, contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or other
securities of the Company (or any security or other instrument which by
its terms is convertible into, exercisable for, or exchangeable for
shares of Common Stock or other securities of the Company) except as
provided in Section 3 and except for (i) the grant of options to
purchase an aggregate of up to 250,000 shares of Common Stock under the
Company's 1998 ______________ Plan, which plan is properly described in
the Prospectus, (ii) the issuance of Common Stock issuable upon the
exercise of stock options and warrants and conversion of other
convertible securities outstanding on the date hereof or subsequently
issued pursuant to clause (i) hereof, (iii) the issuance of the
Securities, (iv) the issuance of any securities in connection with any
merger or acquisition approved by a majority of the independent
directors of the Company, or (v) the issuance, commencing twelve months
after the closing of the Offering, of shares of Common Stock to
unaffiliated third parties at fair market value pursuant to a private
placement approved by a majority of the independent directors of the
Company.
(i) For a period of five years after the effective date of the
Registration Statement, furnish you, without charge, the following:
(i) within 90 days after the end of each fiscal year,
three copies of financial statements certified by independent
certified public accountants, including a balance sheet,
statement of income, and statement of cash flows of the
Company and its then existing subsidiaries, with supporting
schedules, prepared in accordance with generally accepted
accounting principles, as at the end of such fiscal year and
for the 12 months then ended, which may be on a consolidated
basis;
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(ii) as soon as practicable after they have been sent
to stockholders of the Company or filed with the Commission,
three copies of each annual and interim financial and other
report or communication sent by the Company to its
stockholders or filed with the Commission;
(iii) as soon as practicable, two copies of every
press release and every material news item and article in
respect of the Company or its affairs which was released by
the Company; and
(iv) such additional documents and information with
respect to the Company and its affairs and the affairs of any
of its subsidiaries as you may from time to time reasonably
request.
(j) Apply the net proceeds received by it from the offering in
the manner set forth under "Use of Proceeds" in the Prospectus.
(k) Furnish to you as early as practicable prior to the
Closing Date and any Additional Closing Date, as the case may be, but
no less than two full business days prior thereto, a copy of the latest
available unaudited interim consolidated financial statements of the
Company and its consolidated subsidiaries which have been read by the
Company's independent certified public accountants, as stated in their
letters to be furnished pursuant to Section 7(e).
(l) File no amendment or supplement to the Registration
Statement or Prospectus at any time, after the effective date of the
Registration Statement, unless such filing shall comply with the Act
and the Regulations and unless you shall previously have been advised
of such filing and furnished with a copy thereof, and you and counsel
for the Underwriter shall have approved such filing in writing.
(m) Comply with all registration, filing, and reporting
requirements of the Exchange Act which may from time to time be
applicable to the Company.
(n) Comply with all provisions of all undertakings contained
in the Registration Statement.
(o) Prior to the Closing Date or any Additional Closing Date,
as the case may be, issue no press release or other communication,
directly or indirectly, and hold no press conference with respect to
the Company, the financial conditions, results of operations, business,
properties, assets, liabilities of the Company, or this Offering,
without your prior written consent.
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(p) File timely with the Commission an appropriate form to
register the Common Stock pursuant to Section 12(b) under the Exchange
Act.
(q) File timely and accurate reports on Form SR with the
Commission in accordance with Rule 463 of the Regulations or any
successor provision.
(r) Use its best efforts to cause the application for
quotation of the Firm Stock and the Additional Stock on The Nasdaq
SmallCap Market ("NASDAQ") to be approved as soon as possible.
(s) Use its best efforts to complete the listing of the
Securities on the PSE.
(t) On or prior to the Closing Date, sell to the Underwriter
(or its designee) the Underwriter's Options to purchase an aggregate of
160,000 shares of Common Stock, which Underwriter's Options shall be
evidenced by the Underwriter's Option Agreement substantially in the
form set forth as an exhibit to the Registration Statement.
(u) Until expiration of the Underwriter's Options, keep
reserved sufficient shares of Common Stock for issuance upon exercise
of the Underwriter's Options.
(v) Until the expiration of three years from the Closing Date,
if you shall so indicate in writing to the Company, use its best
efforts, including, without limitation, the solicitation of proxies, to
cause one individual selected from time to time by Barington Capital
Group, L.P. to be elected as a director of the Company.
(w) Deliver to you, without charge, within a reasonable period
after the last Additional Closing Date or the expiration of the period
in which the Underwriter may exercise the over-allotment option, four
bound volumes of the Registration Statement and all related materials.
(x) For a period of five years after the Closing Date, supply
to the appropriate parties such information as may be necessary or
desirable, and otherwise use its best efforts, so that the Company will
be listed and will maintain its listing in the Corporation Records
Service published by Standard & Poor's Corporation and that at all
times during such period such listing will, at a minimum, contain the
names of the Company's officers and directors, a balance sheet as of a
date not more than 18 months prior to such time, and a statement of
operations for either the fiscal year preceding such date or the most
recent fiscal year of operations.
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(y) Use its best efforts to maintain the quotation on the
Nasdaq SmallCap Market, and the PSE of the Common Stock issued
hereunder.
(z) From the date the Registration Statement becomes effective
and until three years from the Closing Date, procure and maintain
Director and Officer Liability Insurance in the amount no less than
$3.0 million with a reputable insurance carrier.
(aa) From the Closing Date and until three years from the date
the Registration Statement becomes effective, retain a transfer agent
acceptable to the Underwriter. Upon the Underwriter's request, and
provided such request is solely for the purpose of monitoring the
trading of Common Stock, the Company shall provide the Underwriter with
copies of the Company's daily stock transfer sheets and lists of the
beneficial and record holders of the Company, from such transfer agent
and from the Depository Trust Company, at the Company's sole cost and
expense.
(bb) From the date the Registration Statement becomes
effective and until three years from such date, the Company shall
retain a public relations firm reasonably acceptable to the
Underwriter.
6. Payment of Expenses. The Company hereby agrees to pay all expenses
(other than fees of counsel for the Underwriter, except as provided in Sections
6(c) and 6(e)) in connection with (a) the preparation, printing, filing,
distribution, and mailing of the Registration Statement, the Prospectus and the
certificates and agreements representing the Securities and the printing,
filing, distribution, and mailing of this Agreement, any Agreement Among
Underwriters, any selected dealers agreement, any Blue Sky Surveys, and if
appropriate, any Underwriter's Questionnaire and Power of Attorney, the
certificates representing any of the Securities, and related documents,
including the cost of all copies thereof and of the Preliminary Prospectuses and
of the Prospectus and any amendments or supplements thereto supplied to the
Underwriter in quantities as hereinabove stated, (b) the issuance, sale,
transfer, and delivery of the Firm Stock and the Additional Stock, including any
transfer or other taxes payable thereon, (c) the qualification of the Firm Stock
and the Additional Stock under state or foreign "blue sky" or securities laws,
including the costs of printing and mailing the preliminary and final "Blue Sky
Survey" and the fees of counsel for the Underwriter and the disbursements in
connection therewith, up to a maximum of $30,000 in fees and $5,000 in expenses,
(d) the filing fees payable to the Commission, the NASD, and the jurisdictions
in which such qualification is sought, (e) the reasonable fees and disbursements
of the Underwriter relating to all filings with the NASD, (f) the application
fee and fees for the quotation of the Common Stock on the NASDAQ SmallCap Market
and the PSE, (g) the
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fees and expenses of the Company's transfer agent and registrar, (h) the fees
and expenses of the Company's legal counsel and accountants, (i) the fees of an
investigative search firm designated by the Underwriter to conduct a background
check of the principals of the Company, (j) the costs (up to a maximum of
$7,500) of placing "tombstone" advertisements in the national edition of The
Wall Street Journal or other publication acceptable to Barington, and (k) the
costs of preparing a reasonable number of transaction "bibles" or "mementos." In
addition, the Company hereby agrees to pay to the Underwriter a non-accountable
expense allowance equal to 3% of the aggregate gross proceeds received by the
Company from the sale of the Firm Stock and the Additional Stock which amounts
(less $40,000 previously paid to you in respect of such non-accountable expense
allowance) shall be paid to you on the Closing Date (with respect to Common
Stock sold by the Company on the Closing Date) and, if applicable, on any
Additional Closing Date (with respect to Additional Stock sold by the Company on
such Additional Closing Date).
7. Conditions of Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Firm Stock and the Additional Stock, as
provided herein, shall be subject, in their discretion, to the continuing
accuracy of the representations and warranties of the Company contained herein
and in each certificate and document contemplated under this Agreement to be
delivered to you, as of the date hereof and as of the Closing Date (or the
Additional Closing Date, as the case may be), to the performance by the Company
of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective not
later than 6:00 P.M., New York City Time, on the date of this Agreement
or such later date and time as shall be consented to in writing by you.
(b) At the Closing Date and any Additional Closing Date, as
the case may be, you shall have received the favorable opinion of
Ruskin, Moscou, Evans & Faltischek, P.C., counsel for the Company,
dated the date of delivery, addressed to the Underwriter, and in form
and scope satisfactory to counsel for the Underwriter, with such number
of reproduced copies or signed counterparts thereof for the Underwriter
as shall be satisfactory to the Underwriter, to the effect that:
(i) the Company is a corporation, duly organized and
validly existing, and in good standing under the laws of Delaware with
full corporate power and authority, and all consents, authorizations,
approvals, orders, certificates, and permits of and from, and
declarations and filings with, all federal, state, local, and other
governmental authorities and all courts and other tribunals necessary
to own, lease, license, and use its properties and assets and
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to conduct its business in the manner described in the Prospectus. To
the knowledge of such counsel, the Company has no subsidiaries (as
defined in the Regulations). The Company is duly qualified to do
business and is in good standing in every jurisdiction in which its
ownership, leasing, licensing, or use of property and assets or the
conduct of its business makes such qualification necessary except where
the failure to be so qualified does not now have and cannot be expected
in the future to have a material adverse effect of the operations,
business, properties or assets of the Company. The Company has all
necessary governmental authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental
regulatory authorities to own, lease, license and use its properties
and assets and to conduct its business in the manner described in the
Prospectus, except where the failure to have any such authorizations,
approvals, orders, licenses, certificates, franchises and permits,
individually or in the aggregate, have not and cannot be expected in
the future to have a material adverse effect upon the operations,
business, properties, or assets of the Company.
(ii) the authorized capital stock of the Company
consists of 10,000,000 shares of Common Stock, and 1,000,000 shares of
preferred stock, no par value per share of which __ shares and ____
shares are outstanding, respectively. Each outstanding share of Common
Stock is duly authorized, validly issued, fully paid, and
nonassessable, without any personal liability attaching to the
ownership thereof and has not been issued and is not owned or held in
violation of any preemptive right of stockholders. To the knowledge of
such counsel, except for (A) the 250,000 shares of Common Stock
reserved for issuance upon exercise of awards under the Company's
_________ Plan, (B) the shares of Common Stock issuable upon exercise
of the Underwriter's Options, (C) the Additional Stock, and (D)
_________; each of which has been properly described in the prospectus,
there is no commitment, plan, or arrangement to issue, and no
outstanding option, warrant, or other right calling for the issuance
of, any share of capital stock of the Company, or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for, capital stock of the Company or any outstanding
security or other instrument which by its terms is convertible into or
exchangeable for capital stock of the Company;
(iii) to the knowledge of such counsel, there is no
litigation, arbitration, claim, governmental or other proceeding
(formal or informal), or investigation pending or threatened with
respect to the Company, or its operations, business, properties, or
assets except as may be properly described in the Prospectus or as
individually or in the aggregate do not now have and cannot be expected
in the
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future to have a material adverse effect upon the operations, business,
properties, or assets of the Company. To the knowledge of such counsel,
the Company is not in violation of, or in default with respect to, any
law, rule, regulation, order, judgment, or decree, except as may be
properly described in the Prospectus or such as in the aggregate do not
now have and cannot be expected in the future to have a material
adverse effect upon the operations, business, properties, or assets of
the Company, nor is the Company required to take any action in order to
avoid any such violation or default;
(iv) to the knowledge of such counsel, neither the
Company nor any other party is now or is expected by the Company to be
in violation or breach of, or in default with respect to, complying
with any material provision of any contract, agreement, instrument,
lease, license, arrangement, or understanding known to such counsel
which is material to the Company, and each such contract, agreement,
instrument, lease, license, arrangement or understanding is in full
force and is the legal, valid and binding obligation of the parties
thereto and is enforceable as to them in accordance with its terms;
(v) the Company is not in violation or breach of, or
in default with respect to, any term of its certificate of
incorporation (or other charter document) or by-laws;
(vi) the Company has all requisite corporate power and
authority to execute, deliver, and perform each of the Company
Documents. All necessary corporate proceedings of the Company have been
taken to authorize the execution, delivery, and performance by the
Company of the Company Documents. Each Company Document has been duly
executed and delivered by the Company. Each Company Document is the
legal, valid, and binding obligation of the Company, and (subject to
applicable bankruptcy, insolvency, and other laws affecting the
enforceability of creditors' rights generally) is or will be
enforceable as to the Company in accordance with its terms. No consent,
authorization, approval, order, license, certificate, or permit of or
from, or declaration or filing with, any federal, state, local, or
other governmental authority or any court or other tribunal is required
by the Company for the execution, delivery, or performance by the
Company of any of the Company Documents (except filings under the Act
which have been made prior to the Closing Date and consents consisting
only of consents under "blue sky" or state securities laws, as to which
such counsel need not express any opinion). No consent of any party to
any contract, agreement, instrument, lease, license, arrangement, or
understanding known to such counsel and listed as an exhibit to the
Registration Statement, to which the Company is a party, or to which
any of its properties or assets are subject, is required for the
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execution, delivery, or performance of any of the Company Documents;
and the execution, delivery, and performance of the Company Documents
will not violate, result in a breach of, conflict with, or (with or
without the giving of notice or the passage of time or both) entitle
any party to terminate or call a default under any such contract,
agreement, instrument, lease, license, arrangement, or understanding,
or violate or result in a breach of any term of the certificate of
incorporation (or other charter document) or by-laws of the Company, or
violate, result in a breach of, conflict with any law, rule,
regulation, order, judgment, or decree binding on the Company or to
which any of its operations, business, properties, or assets are
subject (assuming compliance with all applicable "blue sky" or state
securities laws);
(vii) the Firm Stock and the Additional Stock are validly
authorized. Such opinion delivered at the Closing Date or any
Additional Closing Date shall state that each share of Firm Stock or
Additional Stock, as the case may be, to be delivered on that date is
validly issued, fully paid, and nonassessable, with no personal
liability attaching to the ownership thereof, and is not issued in
violation of any preemptive rights of stockholders, and the Underwriter
has received good title to the Firm Stock and Additional Stock
purchased by them, respectively, from the Company, free and clear of
all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts;
(viii) the Underwriter's Stock has been duly and validly
reserved for issuance. Such opinion delivered at the Closing Date shall
state that the Underwriter's Options have been duly and validly issued
and delivered. The Underwriter's Stock, when issued and delivered in
accordance with the Underwriter's Option Agreement, will be validly
authorized, validly issued, fully paid, and nonassessable, with no
personal liability attaching to the ownership thereof, and will not
have been issued in violation of any preemptive rights of stockholders;
and the holders of the Underwriter's Options will receive good title to
the securities purchased by them, respectively, free and clear of all
liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts;
(ix) the Common Stock and the Securities conform to all
statements relating thereto contained in the Registration Statement or
the Prospectus;
(x) to the knowledge of such counsel, the
descriptions of any contract, agreement, instrument, lease, or license
required to be described in the Registration Statement or the
Prospectus are correct in all material respects. To the knowledge of
such counsel, any contract, agreement, instrument, lease, or license
required to be
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filed as an exhibit to the Registration Statement has been filed with
the Commission as an exhibit to the Registration Statement;
(xi) insofar as statements in the Prospectus purport to
summarize the status of litigation or the provisions of laws, rules,
regulations, orders, judgments, decrees, contracts, agreements,
instruments, leases, or licenses, such statements have been prepared or
reviewed by such counsel and accurately reflect the status of such
litigation and provisions purported to be summarized and are correct in
all material respects;
(xii) the conditions for use of Form SB-2 have been
satisfied with respect to the Registration Statement;
(xiii) the Common Stock has been approved for quotation on
the NASDAQ SmallCap Market, subject to official notice of issuance;
(xiv) the Common Stock has been approved for listing on
the PSE, subject to official notice of issuance;
(xv) to the knowledge of such counsel, no person or
entity has the right to require registration of shares of Common Stock
or other securities of the Company because of the filing or
effectiveness of the Registration Statement, other than persons or
entities which have waived such rights or whose rights have been
satisfied;
(xvi) the Registration Statement has become effective under
the Act. To the knowledge of such counsel, no Stop Order has been
issued and no proceedings for that purpose have been instituted or
threatened;
(xvii) the Registration Statement, any Rule 430A Prospectus,
and the Prospectus, and any amendment or supplement thereto (other than
financial statements and other financial data and schedules contained
therein, as to which such counsel need express no opinion), comply as
to form in all material respects with the requirements of the Act and
the Regulations;
(xviii) to the knowledge of such counsel, since the effective
date of the Registration Statement, no event has occurred which is
required to be described in an amendment or supplement to the
Registration Statement or the Prospectus which has not been set forth
in such an amendment or supplement; and
(xix) nothing has come to the attention of such counsel
that would lead them to believe that the Registration Statement, any
Rule 430A Prospectus, or the Prospectus, or any amendment or supplement
thereto (other
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than financial statements and other financial data and schedules which
are or should be contained therein, as to which such counsel need
express no opinion), at the time it or they become effective or at the
Closing Date or Additional Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, at the Closing Date or
Additional Closing Date, as the case may be (unless the term
"Prospectus" refers to a Prospectus which has been provided to the
Underwriter by the Company for use in connection with the offering of
the Securities which differs from the Prospectus on file at the
Commission at the Closing Date or Additional Closing Date, as the case
may be, in which case at the time it is first provided to the
Underwriter for such use), or at the Closing Date or Additional Closing
Date, as the case may be, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading (in each case other than the
financial statements and supporting schedules and notes thereto and
other financial or statistical information included therein, as to
which no opinion need be rendered) and such counsel does not know of
any amendment to the Registration Statement required to be filed;
(xx) any right of first refusal, preemptive right,
right to compensation, or other similar right or option, in connection
with the Offering, this Agreement or the Underwriter's Options, or any
of the transactions contemplated hereby or thereby known to such
counsel and not contemplated by the Offering, this Agreement or the
Underwriter's Options has been effectively waived.
In rendering such opinion, counsel for the Company (A) may rely as to matters of
fact, to the extent they deem proper, on certificates of responsible officers of
the Company; and (B) may rely to the extent they deem proper, upon written
statements or certificates of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such opinions, statements or
certificates shall be delivered to counsel for the Underwriter.
(c) At the Closing Date and any Additional Closing Date, as
the case may be, you shall have received the favorable opinion of Fish
& Richardson, intellectual property counsel for the Company, dated the
date of delivery, addressed to the Underwriter, and in form and scope
satisfactory to counsel for the Underwriter, with such number of
reproduced copies or signed counterparts thereof
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for the Underwriter as shall be satisfactory to the Underwriter, to the
effect that:
(i) The statements in the Prospectus and the
Registration Statement under "Risk Factors--Dependence Upon
Intellectual Property," "Business--Strategic Partnerships" and
"Business--Patents/Intellectual Property" insofar as such
statements constitute summaries of legal matters referred to
therein, fairly and adequately present the information called
for with respect to such legal matters and accurately
summarize the matters referred to therein.
(ii) The descriptions of the license agreements of
the Company with its licensors set forth in the Prospectus and
the Registration Statement are complete and accurate in all
material respects.
(iii) such counsel has reviewed the Registration
Statement, any Rule 430A Prospectus or the Prospectus or any
amendment or supplement thereto at the time it or they become
effective or at the Closing Date or Additional Closing Date,
as the case may be, relating to the intellectual property of
the Company and such statements have been and are approved by
such counsel and are accurate in all material respects and
fairly present the information set forth therein;
(iv) nothing has come to the attention of such counsel
that would lead them to believe that the Registration
Statement, any Rule 430A Prospectus, or the Prospectus, or any
amendment or supplement thereto any Rule 430 Prospectus, or
the Prospectus, or any amendment or supplement thereto, at the
time it or they become effective or at the Closing Date or
Additional Closing Date, as the case may be, contained an
untrue statement of a material fact with respect to the patent
or license position of the Company or omitted to state a
material fact relating to the patent or license position of
the Company required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus,
at the Closing Date or Additional Closing Date, as the case
may be (unless the term "Prospectus" refers to a Prospectus
which has been provided to the Underwriter by the Company for
use in connection with the offering of the Securities which
differs from the Prospectus on file at the Commission at the
Closing Date or Additional Closing Date, as the case may be,
in which case at the time it is first provided to the
Underwriter for such use), included or includes an untrue
statement of a material fact with respect to the patent or
license position of the Company or omitted or omits to state a
material fact with respect to the patent or license position
of the
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Company necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading and such counsel does not know of any amendment to
the Registration Statement required to be filed.
In rendering such opinion, counsel for the Company (A) may rely as to matters of
fact, to the extent they deem proper, on certificates of responsible officers of
the Company; and (B) may rely to the extent they deem proper, upon written
statements or certificates of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such opinions, statements or
certificates shall be delivered to counsel for the Underwriter.
(d) On or prior to the Closing Date and any Additional Closing
Date, as the case may be, the Underwriter shall have been furnished
such information, documents, certificates, and opinions as it may
reasonably require for the purpose of enabling it to review the matters
referred to in Section 7(b), and in order to evidence the accuracy,
completeness, or satisfaction of any of the representations,
warranties, covenants, agreements, or conditions herein contained, or
as you may reasonably request.
(e) At the Closing Date and any Additional Closing Date, as
the case may be, you shall have received a certificate of the chief
executive officer and of the chief financial officer of the Company,
dated the Closing Date or such Additional Closing Date, as the case may
be, to the effect that the condition set forth in Section 7(a) has been
satisfied, that as of the date of this Agreement and as of the Closing
Date or such Additional Closing Date, as the case may be, the
representations and warranties of the Company contained herein were and
are accurate, and that as of the Closing Date or such Additional
Closing Date, as the case may be, the obligations to be performed by
the Company hereunder on or prior thereto have been fully performed.
(f) At the time this Agreement is executed and at the Closing
Date and any Additional Closing Date, as the case may be, you shall
have received a letter from Ernst & Young, L.L.P. certified public
accountants, dated the date of delivery, and addre/ssed to the
Underwriter, and in form and substance satisfactory to you, with
reproduced copies or signed counterparts thereof for the Underwriter.
(g) All proceedings taken in connection with the issuance,
sale, transfer, and delivery of the Firm Stock and the Additional Stock
shall be satisfactory in form and substance to you and to counsel for
the Underwriter, and the Underwriter shall have received from such
counsel for the Underwriter a favorable opinion, dated as of the
Closing
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Date and the Additional Closing Date, as the case may be, with respect
to such of the matters set forth under Section 7(b), and with respect
to such other related matters, as you may reasonably request.
(h) The NASD, upon review of the terms of the public offering
of the Firm Stock and the Additional Stock, shall not have objected to
the Underwriter's participation in such offering.
(i) Prior to or on the Closing Date, the Company shall have
entered into the Underwriter's Option Agreement with the Underwriter.
(j) Prior to or on the Closing Date, the Company shall have
provided to you copies of the agreements referred to in Section 2(s).
Any certificate or other document signed by any officer of the Company
and delivered to you or to counsel for the Underwriter shall be deemed a
representation and warranty by such officer individually and by the Company
hereunder to the Underwriter as to the statements made therein. If any condition
to the Underwriter's obligations hereunder to be fulfilled prior to or at the
Closing Date or any Additional Closing Date, as the case may be, is not so
fulfilled, you may terminate this Agreement or, if you so elect, in writing
waive any such conditions which have not been fulfilled or extend the time for
their fulfillment.
8. Indemnification and Contribution. (a) Subject to the conditions set forth
below, the Company agrees to indemnify and hold harmless the Underwriter, its
respective officers, directors, partners, employees, agents, and counsel, and
each person, if any, who controls the Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any and all loss,
liability, claim, damage, and expense whatsoever (which shall include, for all
purposes of this Section 8, but not be limited to, attorneys' fees and any and
all expense whatsoever incurred in investigating, preparing, or defending
against any litigation, commenced or threatened, or any claim whatsoever and any
and all amounts paid in settlement of any claim or litigation) as and when
incurred arising out of, based upon, or in connection with (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in any
Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement, or
the Prospectus (as from time to time amended and supplemented), or any amendment
or supplement thereto or (B) in any application or other document or
communication (in this Section 8 collectively called an "application") executed
by or on behalf of the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to qualify any of
the Securities under the
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"blue sky" or securities laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company as stated in
Section 8(b) with respect to any Underwriter by or on behalf of such Underwriter
through the Underwriter or its counsel expressly for inclusion in any
Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement, or
the Prospectus, or any amendment or supplement thereto, or in any application,
as the case may be, or (ii) any breach of any representation, warranty,
covenant, or agreement of the Company contained in this Agreement. The foregoing
agreement to indemnify shall be in addition to any liability the Company may
otherwise have, including liabilities arising under this Agreement.
If any action is brought against the Underwriter or any of its
respective officers, directors, partners, employees, agents, or counsel, or any
controlling persons of the Underwriter (an "indemnified party") in respect of
which indemnity may be sought against the Company pursuant to the foregoing
paragraph, such indemnified party or parties shall promptly notify the Company
in writing of the institution of such action (but the failure so to notify shall
not relieve the Company from any liability it may have other than pursuant to
this Section 8(a), except to the extent it may have been prejudiced in any
material respect by such failure) and the Company shall promptly assume the
defense of such action, including the employment of counsel (reasonably
satisfactory to such indemnified party or parties) and payment of expenses. Such
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless the employment of such
counsel shall have been authorized in writing by the Company in connection with
the defense of such action or the Company shall not have promptly employed
counsel reasonably satisfactory to such indemnified party or parties to have
charge of the defense of such action or such indemnified party or parties shall
have reasonably concluded that there may be one or more legal defenses available
to it or them or to other indemnified parties which are different from or
additional to those available to the Company, in any of which events such fees
and expenses shall be borne by the Company and the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties. Anything in this paragraph to the contrary notwithstanding, the Company
shall not be liable for any settlement of any such claim or action effected
without its written consent, which shall not be unreasonably withheld. The
Company shall not, without the prior written consent of each indemnified party
that is not released as described in this sentence, settle or compromise any
action, or permit a default or consent to the entry of judgment in or otherwise
seek to
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<PAGE>
terminate any pending or threatened action, in respect of which indemnity may be
sought hereunder (whether or not any indemnified party is a party thereto),
unless such settlement, compromise, consent, or termination includes an
unconditional release of each indemnified party from all liability in respect of
such action. The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of the Firm Stock or the
Additional Stock, any Preliminary Prospectus, any Rule 430A Prospectus, the
Registration Statement, or the Prospectus, or any amendment or supplement
thereto, or any application.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who
shall have signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to the Underwriter in Section
8(a), but only with respect to statements or omissions, if any, made in
any Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement, or the Prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or in any
application in reliance upon and in conformity with written information
furnished to the Company as stated in this Section 8(b) with respect to
any Underwriter by or on behalf of such Underwriter through the
Underwriter or its counsel expressly for inclusion in any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement, or
the Prospectus, or any amendment or supplement thereto, or in any
application, as the case may be; provided, however, that the obligation
of the Underwriter to provide indemnity under the provisions of this
Section 8(b) shall be limited to the amount which represents the
underwriting discounts received by the Underwriter hereunder. For all
purposes of this Agreement, the amounts of the selling concession and
reallowance set forth in the Prospectus constitute the only information
furnished in writing by or on behalf of any Underwriter expressly for
inclusion in any Preliminary Prospectus, any Rule 430A Prospectus, the
Registration Statement, or the Prospectus (as from time to time amended
or supplemented), or any amendment or supplement thereto, or in any
application, as the case may be. If any action shall be brought against
the Company or any other person so indemnified based on any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement, or
the Prospectus, or any amendment or supplement thereto, or in any
application, and in respect of which indemnity may be sought against
any Underwriter pursuant to this Section 8(b), such Underwriter shall
have the rights and duties given to the Company, and the Company and
each other person so indemnified shall have the rights
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<PAGE>
and duties given to the indemnified parties, by the provisions of
Section 8(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section
8(a) or 8(b) (subject to the limitations thereof) but it is found in a
final judicial determination, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this
Agreement expressly provides for indemnification in such case or (ii)
any indemnified or indemnifying party seeks contribution under the Act,
the Exchange Act, or otherwise, then the Company (including for this
purpose any contribution made by or on behalf of any director of the
Company, any officer of the Company who signed the Registration
Statement, and any controlling person of the Company), as one entity,
and the Underwriter (including for this purpose any contribution by or
on behalf of an indemnified party), as a second entity, shall
contribute to the losses, liabilities, claims, damages, and expenses
whatsoever to which any of them may be subject, so that the Underwriter
is responsible for the proportion thereof equal to the percentage which
the underwriting discount per share of Firm Stock set forth on the
cover page of the Prospectus represents of the initial public offering
price per share set forth on the cover page of the Prospectus and the
Company is responsible for the remaining portion; provided, however,
that if applicable law does not permit such allocation, then other
relevant equitable considerations such as the relative fault of the
Company and the Underwriter, in connection with the facts which
resulted in such losses, liabilities, claims, damages, and expenses
shall also be considered. The relative fault, in the case of an untrue
statement, alleged untrue statement, omission, or alleged omission,
shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information
supplied by the Company or by the Underwriter, and the parties'
relative intent, knowledge, access to information, and opportunity to
correct or prevent such statement, alleged statement, omission, or
alleged omission. The Company and the Underwriter agree that it would
be unjust and inequitable if the respective obligations of the Company
and the Underwriter for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims,
damages, and expenses (even if the Underwriter and the other
indemnified parties were treated as one entity for such purpose) or by
any other method of allocation that does not reflect the equitable
considerations referred to in this Section 8(c). No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this
Section 8(c), each person, if any, who
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<PAGE>
controls the Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner,
employee, agent, and counsel of the Underwriter shall have the same
rights to contribution as such Underwriter 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, each officer of the Company who
shall have signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company,
subject in each case to the provisions of this Section 8(c). In no case
shall the Underwriter be liable or responsible for any amount in excess
of the Underwriting discount applicable to the Firm Stock purchased by
such Underwriter hereunder. Anything in this Section 8(c) to the
contrary notwithstanding, no party shall be liable for contribution
with respect to the settlement of any claim or action effected without
its written consent. This Section 8(c) is intended to supersede any
right to contribution under the Act, the Exchange Act, or otherwise.
9. [Reserved]
10. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Underwriter and
the Company, including the indemnity and contribution agreements contained in
Section 8, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any indemnified person,
or by or on behalf of the Company or any person or entity which is entitled to
be indemnified under Section 8(b), and shall survive termination of this
Agreement or the delivery of the Firm Stock and the Additional Stock to the
Underwriter. In addition, the provisions of Sections 6, 8, 10, 11, and 13 shall
survive termination of this Agreement, whether such termination occurs before or
after the Closing Date or any Additional Closing Date.
11. Effective Date of This Agreement and Termination Thereof.
(a) This Agreement shall become effective at 9:30 A.M., New
York City Time, on the first full business day following the day on
which the Registration Statement becomes effective or at the time of
the initial public offering by the Underwriter of the Firm Stock,
whichever is earlier. The time of the initial public offering shall
mean the time, after the Registration Statement becomes effective, of
the release by you for publication of the first newspaper advertisement
which is subsequently published relating to the shares or the time,
after the
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<PAGE>
Registration Statement becomes effective, when the Firm Stock are first
released by you for offering by the Underwriter or dealers by letter or
telegram, whichever shall first occur. You or the Company may prevent
this Agreement from becoming effective without liability of any party
to any other party, except as noted below in this Section 11, by giving
the notice indicated in Section 11(c) before the time this Agreement
becomes effective.
(b) In addition to the right to terminate this Agreement
pursuant to Section 7 hereof, you shall have the right to terminate
this Agreement at any time prior to the Closing Date or any Additional
Closing Date, as the case may be, by giving notice to the Company if
any domestic or international event, act, or occurrence has materially
disrupted, or in your opinion will in the immediate future materially
disrupt, the securities markets; or if there shall have been a general
suspension of, or a general limitation on prices for, trading in
securities on the New York Stock Exchange, the Nasdaq SmallCap Market,
the American Stock Exchange, the _____ PSE or in the over-the-counter
market; or if there shall have been an outbreak of major hostilities or
other national or international calamity; or if a banking moratorium
has been declared by a state or federal authority; or if a moratorium
in foreign exchange trading by major international banks or persons has
been declared; or if there shall have been a material interruption in
the mail service or other means of communication within the United
States; or 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 your opinion, make it
inadvisable to proceed with the offering, sale, or delivery of the Firm
Stock or the Additional Stock, as the case may be; or if there shall
have been such change in the market for securities in general or in
political, financial, or economic conditions as in your judgment makes
it inadvisable to proceed with the offering, sale, and delivery of the
Firm Stock or the Additional Stock, as the case may be, on the terms
contemplated by the Prospectus.
(c) If you elect to prevent this Agreement from becoming
effective, as provided in this Section 11, or to terminate this
Agreement pursuant to Section 7, or this Section 11, you shall notify
the Company promptly by telephone, telex, facsimile or telegram,
confirmed by letter. If the Company elects to prevent this Agreement
from becoming effective, as provided in this Section 11, the Company
shall notify you promptly by telephone, telex, facsimile, or telegram,
confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding
other than Section 11(e), if this Agreement
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<PAGE>
shall not become effective by reason of an election pursuant to this
Section 11 or if this Agreement shall terminate or shall otherwise not
be carried out within the time specified herein by reason of any
failure on the part of the Company to perform any covenant or agreement
or satisfy any condition of this Agreement by it to be performed or
satisfied, the sole liability of the Company to the Underwriter, in
addition to the obligations the Company assumed pursuant to Section 6,
will be to reimburse the Underwriter for such out-of-pocket expenses
(including the fees and disbursements of their counsel) as shall have
been incurred by them in connection with this Agreement or the proposed
offer, sale, and delivery of the Firm Stock and the Additional Stock,
and the Company agrees to pay promptly upon demand the full amount
thereof to you for the account of the Underwriter less amounts
previously paid to you in reimbursement of such expenses.
(e) Notwithstanding any election hereunder or any termination
of this Agreement, and whether or not this Agreement is otherwise
carried out, the provisions of Sections 6, 8, 10, and 15 shall not be
in any way affected by such election or termination or failure to carry
out the terms of this Agreement or any part hereof.
12. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
by letter, to such Underwriter, to Barington Capital Group, L.P., 888 Seventh
Avenue, New York, New York 10019, Attention: Marc Cooper; or if sent to the
Company, shall be mailed, delivered, or telexed or telegraphed and confirmed by
letter, to the Company, 417 South Main Street, Freeport, NY 11520, Attention:
Greg Frisby. All notices hereunder shall be effective upon receipt by the party
to which it is addressed.
13. Parties. You represent that you are authorized to act on behalf of
the parties named in Schedule I hereto, and the Company shall be entitled to act
and rely on any request, notice, consent, waiver, or agreement purportedly given
on behalf of the Underwriter when the same shall have been given by you on such
behalf. This Agreement shall inure solely to the benefit of, and shall be
binding upon, the Underwriter and the Company and the persons and entities
referred to in Section 8 who are entitled to indemnification or contribution,
and their respective successors, legal representatives, and assigns (which shall
not include any buyer, as such, of the Firm Stock or the Additional Stock), 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
provision herein contained.
14. Construction. This Agreement shall be construed in accordance with
the laws of the State of New York, without giving
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effect to conflict of laws. TIME IS OF THE ESSENCE IN THIS AGREEMENT.
15. Consent to Jurisdiction. The Company irrevocably consents to the
jurisdiction of the courts of the State of New York and of any federal court
located in such State in connection with any action or proceeding arising out of
or relating to this Agreement, any document or instrument delivered pursuant to,
in connection with or simultaneously with this Agreement, or a breach of this
Agreement or any such document or instrument. In any such action or proceeding,
the Company waives personal service or any summons, complaint or other process
and agrees that service thereof may be made in accordance with Section 12.
Within 30 days after such service, or such other time as may be mutually agreed
upon in writing by the attorneys for the parties to such action or proceeding,
the Company shall appear or answer such summons, complaint or other process.
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If the foregoing correctly sets forth the understanding between you 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,
FRISBY TECHNOLOGIES, INC.
By:____________________________
Name: Greg Frisby
Title: President and Chief Executive
Officer
Accepted as of the date first above written.
New York, New York
BARINGTON CAPITAL GROUP, L.P.
By: LNA CAPITAL CORP.,
General Partner
By:_____________________________
Marc Cooper, Executive Vice-
President
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<PAGE>
THE SHARES ISSUABLE UPON EXERCISE OF THE OPTION
REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. HOWEVER, NEITHER
THIS OPTION NOR SUCH SHARES MAY BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO
SUCH REGISTRATION STATEMENT, (ii) A SEPARATE
REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
THE TRANSFER OF THIS
OPTION IS RESTRICTED AS
DESCRIBED HEREIN.
FRISBY TECHNOLOGIES, INC.
Option for the Purchase of
Common Stock
No. _ 160,000 Shares
THIS CERTIFIES that, for receipt in hand of $160.00 and other value
received, BARINGTON CAPITAL GROUP, L.P., 888 Seventh Avenue, New York, New York
10019 (the "Holder"), is entitled to subscribe for and purchase from Frisby
Technologies, Inc., a Delaware corporation (the "Company"), upon the terms and
conditions set forth herein, at any time or from time to time after the date
hereof, and before 5:00 P.M. on _____ __, 2003 New York time (the "Exercise
Period"), up to 160,000 shares (the "Option Shares") of the Company's common
stock, par value $.01 per share ("Common Stock") at a price of $___ (120% of the
public offering price) per Option Share (the "Exercise Price"). This Option is
the option or one of the options (collectively, including any options issued
upon the exercise or transfer of any
<PAGE>
such options in whole or in part, the "Options") issued pursuant to the
Underwriting Agreement, dated _____ __, 1998 between the Company, Barington
Capital Group, L. P., as Underwriter (the "Underwriting Agreement"). As used
herein the term "this Option" shall mean and include this Option and any Option
or Options hereafter issued as a consequence of the exercise or transfer of this
Option in whole or in part. This Option may not be sold, transferred, assigned
or hypothecated until one year after the Effective Date except that it may be
transferred, in whole or in part, to (i) one or more officers or partners of the
Holder (or the officers or partners of any such partner); (ii) any other
underwriting firm or member of the selling group which participated in the
public offering of 1,600,000 shares of the Company's Common Stock which
commenced on _____ __, 1998 (or the officers or partners of any such firm);
(iii) a successor to the Holder, or the officers or partners of such successor;
(iv) a purchaser of substantially all of the assets of the Holder; or (v) by
operation of law; and the term the "Holder" as used herein shall include any
transferee to whom this Option has been transferred in accordance with the
above.
1. (a) This Option may be exercised during the Exercise Period, as to
the whole or any lesser number of whole Option Shares, by the surrender of this
Option (with the election at the end hereof duly executed) to the Company at its
office at 417 S. Main Street, Freeport, NY 11520,or at such other place as is
designated in writing by the Company, together with a certified or bank
cashier's check payable to the order of the Company in an amount equal to the
Exercise Price multiplied by the number of Option Shares for which this Option
is being exercised.
(b) All or any part of this Option may be exercised on a
"cashless" basis, by stating in the exercise notice such intention, and the
maximum number (the "Maximum Number") of shares of Common Stock the optionee
elects to purchase pursuant to such exercise. The number of shares of Common
Stock the optionee shall receive (the "Cashless Exercise Number") shall equal
the Maximum Number minus the quotient that is obtained when the product of the
Maximum Number and the then current Exercise Price is divided by the then
Current Market Price per share (as hereinafter defined).
2. Upon each exercise of the Holder's rights to purchase Option Shares,
the Holder shall be deemed to be the holder of record of the Option Shares
issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Option Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Option, the Company shall issue and
deliver to the Holder a certificate or certificates for the Option Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Option should be exercised in part only, the Company shall,
upon surrender of this Option for cancellation, execute and deliver a
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new Option evidencing the right of the Holder to purchase the balance of the
Option Shares (or portions thereof) subject to purchase hereunder.
3. Any Options issued upon the transfer or exercise in part of this
Option shall be numbered and shall be registered in an Option Register as they
are issued. The Company shall be entitled to treat the registered holder of any
Option on the Option Register as the owner in fact thereof for all purposes and
shall not be bound to recognize any equitable or other claim to or interest in
such Option on the part of any other person, and shall not be liable for any
registration or transfer of Options which are registered or to be registered in
the name of a fiduciary or the nominee of a fiduciary unless made with the
actual knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with the knowledge of such facts
that its participation therein amounts to bad faith. This Option shall be
transferable only on the books of the Company upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment, or authority to
transfer. In all cases of transfer by an attorney, executor, administrator,
guardian, or other legal representative, duly authenticated evidence of his or
its authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Option or Options to the person entitled thereto. This
Option may be exchanged, at the option of the Holder thereof, for another
Option, or other Options of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Option
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Options to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder or applicable state securities or "blue sky" laws.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the Options, such number of shares of Common Stock as shall,
from time to time, be sufficient therefor. The Company covenants that all shares
of Common Stock issuable upon exercise of this Option, upon receipt by the
Company of the full payment therefor, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
5. (a) Subject to the provisions of this Section 5, the Exercise Price
in effect from time to time shall be subject to adjustment, as follows:
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In case the Company shall at any time after the date hereof
(A) declare a dividend on the outstanding Common Stock payable in
shares of its capital stock, (B) subdivide the outstanding Common
Stock, (C) combine the outstanding Common Stock into a smaller number
of shares, or (D) issue any shares of its capital stock by
reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), then, in each case, the
Exercise Price, and the number of shares of Common Stock issuable upon
exercise of the Options in effect at the time of the record date for
such dividend or of the effective date of such subdivision,
combination, or reclassification, shall be proportionately adjusted so
that the Exercise Price shall equal the price determined by multiplying
the Exercise Price by a fraction, the denominator of which shall be the
number of shares of Common Stock outstanding after giving effect to
such action, and the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to such action. Such
adjustment shall be made successively whenever any event listed above
shall occur. Whenever the Exercise Price is adjusted as set forth
above, the number of shares of Common Stock issuable upon exercise of
the Options in effect at such time shall simultaneously be adjusted by
multiplying the number of shares of Common Stock initially issuable
upon exercise of the Options by the Exercise Price in effect prior to
such action and dividing the product so obtained by the Exercise Price,
as adjusted.
(b) No adjustment in the Exercise Price shall be required if
such adjustment is less than $.05; provided, however, that any adjustments which
by reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest cent or to the nearest one thousandth of
a share, as the case may be.
(c) In any case in which this Section 5 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the holders of the Option, if any holder has exercised an
Option after such record date, the shares of Common Stock, if any, issuable upon
such exercise over and above the shares of Common Stock, if any, issuable upon
such exercise on the basis of the Exercise Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such exercising
holder a due bill or other appropriate instrument evidencing such holder's right
to receive such additional shares upon the occurrence of the event requiring
such adjustment.
(d) In case of any capital reorganization, other than in the
cases referred to in Section 5(a) hereof, or the consolidation or merger of the
Company with or into another corporation
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(other than a merger or consolidation in which the Company is the continuing
corporation and which does not result in any reclassification of the outstanding
shares of Common Stock or the conversion of such outstanding shares of Common
Stock into shares of other stock or other securities or property), or the sale
of the property of the Company as an entirety or substantially as an entirety
(collectively such actions being hereinafter referred to as "Reorganizations"),
there shall thereafter be deliverable upon exercise of any Option (in lieu of
the number of shares of Common Stock theretofore deliverable) the number of
shares of stock or other securities or property to which a holder of the number
of shares of Common Stock which would otherwise have been deliverable upon the
exercise of such Option would have been entitled upon such Reorganization if
such Option had been exercised in full immediately prior to such Reorganization.
In case of any Reorganization, appropriate adjustment, as determined in good
faith by the board of directors of the Company, shall be made in the application
of the provisions herein set forth with respect to the rights and interests of
Option holders so that the provisions set forth herein shall thereafter be
applicable, as nearly as possible, in relation to any shares or other property
thereafter deliverable upon exercise of Options. Any such adjustment shall be
made by and set forth in a supplemental agreement between the Company, or any
successor thereto, and ______________1 and shall for all purposes hereof
conclusively be deemed to be an appropriate adjustment. The Company shall not
effect any such Reorganization, unless upon or prior to the consummation thereof
the successor corporation, or if the Company shall be the surviving corporation
in any such Reorganization and is not the issuer of the shares of stock or other
securities or property to be delivered to holders of shares of the Common Stock
outstanding at the effective time thereof, then such issuer, shall assume by
written instrument the obligation to deliver to the registered holder of the
Options such shares of stock, securities, cash or other property as such holder
shall be entitled to purchase in accordance with the foregoing provisions. In
the event of sale or conveyance or other transfer of all or substantially all of
the assets of the Company as a part of a plan for liquidation of the Company,
all rights to exercise any Option shall terminate 30 days after the Company
gives written notice to each registered holder of a Option Certificate that such
sale or conveyance of other transfer has been consummated.
(e) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of the Options (other than a change in par
value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), the holders of the Options shall have the
right thereafter to receive upon exercise of the
- --------
1 Transfer Agent.
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<PAGE>
Options solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such reclassification
or change by a holder of the number of shares of Common Stock for which the
Options might have been exercised immediately prior to such reclassification or
change. Thereafter, appropriate provision shall be as nearly equivalent as
practicable to the adjustments in Section 5. The above provisions of this
subsection 5(e) shall similarly apply to successive reclassifications and
changes of shares of Common Stock.
(f) Whenever the Exercise Price is adjusted as provided in
this Section 5, the Company will promptly obtain a certificate of a firm of
independent public accountants of recognized standing selected by the Board of
Directors (who may be the regular auditors of the Company) setting forth the
exercise price as so adjusted and a brief statement of the facts accounting for
such adjustment, and will make available a brief summary thereof to the holders
of the Option Certificates, at their addresses listed on the register maintained
for the purpose by the Company.
(g) Whenever any adjustment is made pursuant to this Section
5, the Company shall cause notice of such adjustment to be mailed to each
registered holder of an Option Certificate within 15 Business Days (as
hereinafter defined) thereafter, such notice to include in reasonable detail (i)
the events precipitating the adjustment, (ii) the computation of any
adjustments, and (iii) the Exercise Price, the number of shares or the
securities or other property purchasable upon exercise of each Option after
giving effect to such adjustment. For purposes hereof, "Business Day" shall mean
any day other than a Saturday, a Sunday, or a day on which banking institutions
in the State of New York are authorized or obligated by law or executive order
to close.
(h) Irrespective of any adjustments pursuant to this Section
5, Option Certificates theretofore or thereafter issued need not be amended or
replaced, but certificates thereafter issued shall bear an appropriate legend or
other notice of any adjustments.
(i) The Company shall not be required upon the exercise of any
Option to issue fractional shares of Common Stock which may result from
adjustments in accordance with this Section 5 to the Exercise Price or number of
shares of Common Stock purchasable under each Option. If more than one Option is
exercised at one time by the same registered holder, the number of full shares
of Common Stock which shall be deliverable shall be computed based on the number
of shares deliverable in exchange for the aggregate number of Options exercised.
With respect to any final fraction of a share called for upon the exercise of
any Option or Options, the Company shall pay a cash adjustment in respect of
such final fraction in an amount equal to the same
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<PAGE>
fraction of the Current Market Price of a share of Common Stock calculated in
accordance with Subsection 5(j).
(j) For the purpose of any computation under this Section 5
the Current Market Price per share of Common Stock on any date shall be deemed
to be the average of the daily closing prices for the 30 consecutive trading
days immediately preceding the date in question. The closing price for each day
shall be the last reported sales price regular way or, in case no such reported
sale takes place on such day, the closing bid price regular way, in either case
on the principal national securities exchange (including, for purposes hereof,
the NASDAQ National Market or Small Cap Market) on which the Common Stock is
listed or admitted to trading or, if the Common Stock is not listed or admitted
to trading on any national securities exchange, the highest reported bid price
for the Common Stock as furnished by the National Association of Securities
Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer
reporting such information. If on any such date the Common Stock is not listed
or admitted to trading on any national securities exchange and is not quoted by
NASDAQ or any similar organization, the fair value of a share of Common Stock on
such date as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error.
6. (a) In case of any consolidation with or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Option solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Option might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments provided for in Section 5.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Option (other than a change in par
value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which
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<PAGE>
there is a reclassification or change (including a change to the right to
receive cash or other property) of the shares of Common Stock (other than a
change in par value, or from no par value to a specified par value, or as a
result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), the Holder shall have the right
thereafter to receive upon exercise of this Option solely the kind and amount of
shares of stock and other securities, property, cash, or any combination thereof
receivable upon such reclassification, change, consolidation, or merger by a
holder of the number of shares of Common Stock for which this Option might have
been exercised immediately prior to such reclassification, change,
consolidation, or merger. Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly
apply to successive reclassifications and changes of shares of Common Stock and
to successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of
Common Stock in shares of Common Stock or make any other distribution (other
than regularly scheduled cash dividends which are not in a greater amount per
share than the most recent such cash dividend) to all holders of Common Stock;
or
(b) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding
shares of Common Stock, or any consolidation, merger, sale, lease, or conveyance
of property, described in Section 6; or
(d) to effect any liquidation, dissolution, or winding-up of
the Company; or
(e) to take any other action which would cause an adjustment
to the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Option Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance
- 8 -
<PAGE>
of property, liquidation, dissolution, or winding-up is expected to become
effective, and the date as of which it is expected that holders of record of
shares of Common Stock shall be entitled to exchange their shares for securities
or other property, if any, deliverable upon such reclassification, change of
outstanding shares, consolidation, merger, sale, lease, conveyance of property,
liquidation, dissolution, or winding-up, or (iii) the date of such action which
would require an adjustment to the Exercise Price pursuant to Section 5 hereof.
8. The issuance of any shares or other securities upon the exercise of
this Option, and the delivery of certificates or other instruments representing
such shares or other securities, shall be made without charge to the Holder for
any tax or other charge in respect of such issuance. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. (a) If, at any time prior to _____ __, 2005 (seven years from the
"Effective Date", as such term is defined in the Underwriting Agreement), the
Company shall file a registration statement (other than on Form S-4, Form S-8,
or any successor form) with the Securities and Exchange Commission (the
"Commission") while this Option or any Underwriter's Securities (as hereinafter
defined) are outstanding, the Company shall give all the then holders of this
Option or any Underwriter's Securities (collectively, the "Eligible Holders") at
least 45 days prior written notice of the filing of such registration statement.
If requested by any Eligible Holder in writing within 30 days after receipt of
any such notice, the Company shall, at the Company's sole expense (other than
the fees and disbursements of counsel for the Eligible Holders and the
underwriting discounts, if any, payable in respect of the Underwriter's
Securities sold by any Eligible Holder, register or qualify all or, at each
Eligible Holder's option, any portion of the Underwriter's Securities of any
Eligible Holders who shall have made such request, concurrently with the
registration of such other securities, all to the extent requisite to permit the
public offering and sale of the Underwriter's Securities through the facilities
of all appropriate securities exchanges and the over-the-counter market, and
will use its best efforts through its officers, directors, auditors, and counsel
to cause such registration statement to become effective as promptly as
practicable. Notwithstanding the foregoing, if the managing underwriter of any
such offering shall advise the Company in writing that, in its opinion, the
distribution of all or a portion of the Underwriter's Securities requested to be
included in the registration concurrently with the securities being
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<PAGE>
registered by the Company would materially adversely affect the distribution of
such securities by the Company for its own account, then any Eligible Holder who
shall have requested registration of his or its Underwriter's Securities shall
delay the offering and sale of such Underwriter's Securities (or the portions
thereof so designated by such managing underwriter) for such period, not to
exceed 90 days (the "Delay Period"), as the managing underwriter shall request,
provided that no such delay shall be required as to any Underwriter's Securities
if any securities of the Company are included in such registration statement and
eligible for sale during the Delay Period for the account of any person other
than the Company and any Eligible Holder unless the securities included in such
registration statement and eligible for sale during the Delay Period for such
other person shall have been reduced pro rata to the reduction of the
Underwriter's Securities which were requested to be included and eligible for
sale during the Delay Period in such registration. As used herein,
"Underwriter's Securities" shall mean the Option Shares, which have not been
previously sold pursuant to a registration statement or Rule 144 promulgated
under the Act.
(b) If, at any time during the five-year period commencing one
year after the Effective Date, the Company shall receive a written request, from
Eligible Holders who in the aggregate own (or upon exercise of all Options then
outstanding would own) a majority of the total number of shares of Common Stock
then included (or upon such exercises that would be included) in the
Underwriter's Securities (the "Majority Holders"), to register the sale of all
or part of such Underwriter's Securities, the Company shall, as promptly as
practicable, prepare and file with the Commission a registration statement
sufficient to permit the public offering and sale of the Underwriter's
Securities through the facilities of all appropriate securities exchanges and
the over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable; provided, however, that the Company shall
only be obligated to file one such registration statement for which all expenses
incurred in connection with such registration (other than the fees and
disbursements of counsel for the Eligible Holders and underwriting discounts, if
any, payable in respect of the Underwriter's Securities sold by the Eligible
Holders) shall be borne by the Company and one additional such registration
statement for which all such expenses shall be paid by the Eligible Holders.
Within three business days after receiving any request contemplated by this
Section 9(b), the Company shall give written notice to all the other Eligible
Holders, advising each of them that the Company is proceeding with such
registration and offering to include therein all or any portion of any such
other Eligible Holder's Underwriter's Securities, provided that the Company
receives a written request to do so from such Eligible
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<PAGE>
Holder within 30 days after receipt by him or it of the Company's notice.
(c) In the event of a registration pursuant to the provisions
of this Section 9, the Company shall use its best efforts to cause the
Underwriter's Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Holder or
such holders may reasonably request; provided, however, that the Company shall
not be required to qualify to do business in any state by reason of this Section
9(c) in which it is not otherwise required to qualify to do business.
(d) The Company shall keep effective any registration or
qualification contemplated by this Section 9 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication for such period of
time as shall be required to permit the Eligible Holders to complete the offer
and sale of the Underwriter's Securities covered thereby. The Company shall in
no event be required to keep any such registration or qualification in effect
for a period in excess of nine months from the date on which the Eligible
Holders are first free to sell such Underwriter's Securities; provided, however,
that, if the Company is required to keep any such registration or qualification
in effect with respect to securities other than the Underwriter's Securities
beyond such period, the Company shall keep such registration or qualification in
effect as it relates to the Underwriter's Securities for so long as such
registration or qualification remains or is required to remain in effect in
respect of such other securities.
(e) In the event of a registration pursuant to the provisions
of this Section 9, the Company shall furnish to each Eligible Holder such number
of copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Eligible Holder may reasonably request to
facilitate the disposition of the Underwriter's Securities included in such
registration.
(f) In the event of a registration pursuant to the provisions
of this Section 9, the Company shall furnish each Eligible Holder of any
Underwriter's Securities so registered with an opinion of its counsel
(reasonably acceptable to the Eligible Holders) to the effect that (i) the
registration statement has become effective under the Act and no order
suspending the effectiveness of the registration statement, preventing or
suspending the use of the registration statement, any preliminary prospectus,
any final prospectus, or any amendment or supplement thereto has been issued,
nor has the Commission or any securities or blue sky authority of any
jurisdiction instituted or threatened to institute any
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<PAGE>
proceedings with respect to such an order, (ii) the registration statement and
each prospectus forming a part thereof (including each preliminary prospectus),
and any amendment or supplement thereto, complies as to form with the Act and
the rules and regulations thereunder, and (iii) such counsel has no knowledge of
any material misstatement or omission in such registration statement or any
prospectus, as amended or supplemented. Such opinion shall also state the
jurisdictions in which the Underwriter's Securities have been registered or
qualified for sale pursuant to the provisions of Section 9(c).
(g) In the event of a registration pursuant to the provision
of this Section 9, the Company shall enter into a cross-indemnity agreement and
a contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, but not limited to, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Underwriter's
Securities.
(h) The Company agrees that until all the Underwriter's
Securities have been sold under a registration statement or pursuant to Rule 144
under the Act, it shall keep current in filing all reports, statements and other
materials required to be filed with the Commission to permit holders of the
Underwriter's Securities to sell such securities under Rule 144.
(i) Except for rights granted to holders of the Options and
rights existing prior to the issuance of the Options, the Company will not,
without the written consent of the Majority Holders, grant to any persons the
right to request the Company to register any securities of the Company, provided
that the Company may grant such registration rights to other persons so long as
such rights are subordinate to the rights of the Eligible Holders.
10. (a) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 10, but not be
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), as and when incurred,
arising out of, based
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<PAGE>
upon, or in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement,
preliminary prospectus, or final prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, relating to the sale of
any of the Underwriter's Securities, or (B) in any application or other document
or communication (in this Section 10 collectively called an "application")
executed by or on behalf of the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
register or qualify any of the Underwriter's Securities under the securities or
blue sky laws thereof or filed with the Commission or any securities exchange;
or any omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company with respect to such Eligible
Holder by or on behalf of such person expressly for inclusion in any
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Option. The foregoing agreement to indemnify shall be
in addition to any liability the Company may otherwise have, including
liabilities arising under this Option. The Company shall not be liable for
losses based on untrue statements or omissions contained in Preliminary
Prospectuses if an Underwriter failed to deliver a final Prospectus prior to or
simultaneously with the delivery of written confirmation of any public sale of
the Underwriter's Securities and a court of competent jurisdiction in a judgment
not subject to appeal or final would have corrected such untrue statement or
omission.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability other than pursuant to this Section 10(a)) and the
Company shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such indemnified party or
parties) and payment of expenses. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action or the
Company shall not have promptly employed counsel reasonably satisfactory to such
indemnified party or parties to have charge of the defense of such action or
such indemnified party or parties shall have reasonably concluded
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<PAGE>
that there may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those available to
the Company, in any of which events such fees and expenses shall be borne by the
Company and the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties. Anything in this Section
10 to the contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written consent,
which shall not be unreasonably withheld. The Company shall not, without the
prior written consent of each indemnified party that is not released as
described in this sentence, settle or compromise any action, or permit a default
or consent to the entry of judgment in or otherwise seek to terminate any
pending or threatened action, in respect of which indemnity may be sought
hereunder (whether or not any indemnified party is a party thereto), unless such
settlement, compromise, consent, or termination includes an unconditional
release of each indemnified party from all liability in respect of such action.
The Company agrees promptly to notify the Eligible Holders of the commencement
of any litigation or proceedings against the Company or any of its officers or
directors in connection with the sale of any Underwriter's Securities or any
preliminary prospectus, prospectus, registration statement, or amendment or
supplement thereto, or any application relating to any sale of any Underwriter's
Securities.
(b) The Holder agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who shall
have signed any registration statement covering Underwriter's Securities held by
the Holder, each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and its
or their respective counsel, to the same extent as the foregoing indemnity from
the Company to the Holder in Section 10(a), but only with respect to statements
or omissions, if any, made in any registration statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, or in any application, in reliance upon
and in conformity with written information furnished to the Company with respect
to the Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this Section 10(b), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
10(a).
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<PAGE>
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the
Underwriter's Securities included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an indemnified
party), as a second entity, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations such as the relative fault of the
Company and such Eligible Holders in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses. The relative fault, in
the case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information supplied
by the Company or by such Eligible Holders, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement, alleged statement, omission, or alleged omission. The Company and the
Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Eligible Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Holder and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations referred
to in this Section 10(c). In no case shall any Eligible Holder be responsible
for a portion of the contribution obligation imposed on all Eligible Holders in
excess of its pro rata share based on the number of shares of Common Stock owned
(or which would be owned upon exercise of all Underwriter's Securities) by it
and included in such registration as compared to the number of shares of Common
Stock owned (or which would be owned upon exercise of all Underwriter's
Securities) by all Eligible Holders and included in such registration. No person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. For purposes of this Section 10(c), each
person, if any, who controls any Eligible Holder within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act and each officer, director,
partner, employee, agent, and counsel of each such Eligible Holder or control
person
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<PAGE>
shall have the same rights to contribution as such Eligible Holder or control
person 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, each officer of the
Company who shall have signed any such registration statement, each director of
the Company, and its or their respective counsel shall have the same rights to
contribution as the Company, subject in each case to the provisions of this
Section 10(c). Anything in this Section 10(c) to the contrary notwithstanding,
no party shall be liable for contribution with respect to the settlement of any
claim or action effected without its written consent. This Section 10(c) is
intended to supersede any right to contribution under the Act, the Exchange Act
or otherwise.
11. Unless registered pursuant to the provisions of Section 9 hereof,
the Option Shares issued upon exercise of the Options shall be subject to a stop
transfer order and the certificate or certificates evidencing such securities
shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. HOWEVER, SUCH SHARES MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE
AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE
REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Option (and upon surrender of any
Option if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder thereof
a new Option of like date, tenor, and denomination.
13. The Holder of any Option shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Option.
14. This Option shall be construed in accordance with the laws of the
State of New York applicable to contracts made and performed within such State,
without regard to principles of conflicts of law.
15. The Company irrevocably consents to the jurisdiction of the courts
of the State of New York and of any federal court located in such State in
connection with any action or proceeding arising out of or relating to this
Option, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Option, or a breach of this Option or
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<PAGE>
any such document or instrument. In any such action or proceeding, the Company
waives personal service of any summons, complaint or other process and agrees
that service thereof may be made in accordance with Section 12 of the
Underwriting Agreement.
Within 30 days after such service, or such other time as may be mutually agreed
upon in writing by the attorneys for the parties to such action or proceeding,
the Company shall appear to answer such summons, complaint or other process.
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<PAGE>
Dated: _________, 1998
FRISBY TECHNOLOGIES, INC.
By: ________________________
Greg Frisby
Chief Executive Officer
- ----------------------
Secretary
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<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Option.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers unto _________________ an Option to purchase __________ shares of
common stock of the Company, par value $0.01 per share, together with all right,
title, and interest therein, and does hereby irrevocably constitute and appoint
___________ attorney to transfer such Option on the books of the Company, with
full power of substitution.
Dated: _________________
Signature_______________________
<PAGE>
NOTICE
The signature on the foregoing Assignment must correspond to the name
as written upon the face of this Option in every particular, without alteration
or enlargement or any change whatsoever.
To: Frisby Technologies, Inc.
417 South Main Street
Freeport, NY 11520
<PAGE>
ELECTION TO EXERCISE
The undersigned hereby exercises his, her or its rights to
purchase _______ Option Shares covered by the within Option and tenders payment
herewith in the aggregate amount of $_________ including (i) $_________ by
certified or bank cashier's check, and (ii) cancellation of Options to purchase
Option Shares, based upon a Maximum Number (as therein defined) of ________, in
accordance with the terms thereof, and requests that certificates for such
securities be issued in the name of, and delivered to:
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Option Shares shall not be all the Option Shares covered
by the within Option, that a new Option for the balance of the Option Shares
covered by the within Option be registered in the name of, and delivered to, the
undersigned at the address stated below.
Dated: _____________________
Name________________________
(Print)
Address:
(Signature)
<PAGE>
ARTICLES OF INCORPORATION
OF
FRISBY TECHNOLOGIES, INC.
The undersigned, being of the age of eighteen (18) years or more, does
hereby make and acknowledge these Articles of Incorporation for the purpose of
forming a business corporation under and by virtue of the laws of the State of
North Carolina:
ARTICLE I
The name of the corporation is FRISBY TECHNOLOGIES, INC.
ARTICLE II
The period of duration of the corporation is perpetual.
ARTICLE III
The corporation is organized to engage in any lawful act or activity
for which corporations may be organized under Chapter 55 of the General Statutes
of North Carolina.
ARTICLE IV
The corporation shall have authority to issue 100,000 shares with a par
value of One Dollar ($1.00) per share.
ARTICLE V
The minimum amount of consideration to be received by the corporation
for its shares before it shall commence business is One Hundred Dollars
($100.00) in cash or property of equivalent value.
<PAGE>
ARTICLE VI
The shareholders of the corporation shall have no pre-emptive right to
acquire additional or treasury shares of the corporation.
ARTICLE VII
The address of the initial registered office of the corporation in the
State of North Carolina is 1001 West Fourth Street, Winston-Salem, Forsyth
County, North Carolina, 27101 and the name of its initial registered agent at
such address is Richard E. Glaze, Jr.
ARTICLE VIII
The number of directors constituting the initial board of directors
shall be two (2); and, the names and addresses of the persons who are to serve
as directors until the first meeting of shareholders or until their successors
are elected and qualified are:
NAME ADDRESS
---- -------
JEFFRY D. FRISBY 417 South Main Street
Freeport, NY 11510
GREGORY S. FRISBY 417 South Main Street
Freeport, NY 11510
ARTICLE IX
The name and address of the incorporator are:
NAME ADDRESS
---- -------
RICHARD E. GLAZE, JR. 1001 West Fourth Street
Winston-Salem, NC 27101
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand this the 1st day of
November, 1989.
/s/Richard E. Glaze, Jr.
------------------------------
RICHARD E. GLAZE, JR.,
INCORPORATOR
- --------------------------------------------------------------------------------
STATE OF NORTH CAROLINA )
)
COUNTY OF FORSYTH )
I, Ellen Mary Nase, a Notary Public, do hereby certify that RICHARD E.
GLAZE, JR., personally appeared before me this the 1st day of November, 1989,
and acknowledged the execution of the foregoing Articles of Incorporation.
/s/Ellen Mary Nase
------------------------------
Notary Public
My Commission Expires:
June 29, 1992
<PAGE>
STATE OF NORTH CAROLINA
DEPARTMENT OF THE SECRETARY OF STATE
ARTICLES OF AMENDMENT
Pursuant to ss.55-10-06 of the General Statutes of North Carolina, the
undersigned corporation hereby submits the following Articles of Amendment for
the purpose of amending its Articles of Incorporation:
1. The name of the Corporation is: Frisby Technologies, Inc.
2. The text of each amendment adopted is as follows:
Article IV of the Articles of Incorporation is amended in its
entirety to read as follows:
"ARTICLE IV
The Corporation shall have authority to issue:
(a) Ten Million (10,000,000) shares of Common Stock, par value
$.001 per share; and
(b) One Million (1,000,000) shares of preferred stock (the
"Preferred Stock") issuable from time to time in one or more classes or one or
more series within any class thereof, in any manner permitted by law, as may be
determined from time to time by the Board of Directors of the Corporation and
having such rights and privileges as may be stated in the resolution or
resolutions providing for the issuance of such shares adopted by the Board of
Directors pursuant to the authority hereby vested in it. Each class or series to
be appropriately designated, prior to the issuance thereof, by some
distinguishing letter, number, designation or title. All shares of Preferred
Stock in any such class or series may be issued for such consideration and have
such voting powers, full or limited, or no voting powers, and shall have such
designations, preferences and relative, participating, optional, or other
special rights, and qualifications, limitations or restrictions thereof,
permitted by law, as shall be stated and expressed in the resolution or
resolutions, providing for the issuance of such shares adopted by the Board of
Directors pursuant to the authority hereby vested in it. The number of shares of
preferred stock of any class or series within any class, so set forth in such
resolution or resolutions may be increased or decreased (but not below the
number of shares thereof then outstanding) by further resolution or resolutions
adopted by the Board of Directors pursuant to authority hereby vested in it."
3. If an amendment provides for an exchange, reclassification or
cancellation of issued shares, provisions for implementing the
amendment, if not contained in the amendment itself, are as
follows:
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Page 2
4. The date of adoption of each amendment was as follows: December 19,
1997.
5. (Check either a, b, c or d, whichever is applicable)
a. _____ The amendment(s) was (were) duly adopted by the
incorporators prior to the issuance of shares.
b. _____ The amendment(s) was (were) duly adopted by the board of
directors prior to the issuance of shares.
c. _____ The amendment(s) was (were) duly adopted by the board of
directors without shareholder approval as shareholder
approval was not required because (set for a brief
explanation of why shareholder action was not required)
___________________________________________________________
___________________________________________________________
___________________________________________________________
d. __x__ The amendment(s) was (were) approved by shareholder
action, and such shareholder approval was obtained as
required by Chapter 55 of the North Carolina General
Statutes.
6. These articles will be effective upon filing, unless a delayed time
and date is specified: _______________________
This is the 19th day of December, 1997.
FRISBY TECHNOLOGIES, INC.
By: /s/ Gregory S. Frisby
-------------------------------
Gregory S. Frisby, President
<PAGE>
B Y L A W S
OF
FRISBY TECHNOLOGIES, INC.
* * * * * * * * * * * * * * * * * * * *
ARTICLE I.
OFFICES
Section 1. Registered Office: The registered office of the corporation
shall be located at 1001 West Fourth Street, Winston-Salem,
North Carolina 27101.
Section 2. Principal Office: The principal office of the corporation
shall be located at 2520 Hampton Road, Clemmons, North
Carolina 27012, or at such other place as may be designated
by the Board of Directors.
Section 3. Other Offices: The corporation may have offices at such
other places, either within or without the State of North
Carolina, as the Board of Directors may from time to time
determine, or as the affairs of the corporation may require.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings: All meetings of shareholders shall be
held at the principal office of the corporation, or at such
other place, either within or without the State of North
Carolina, as shall be designated in the notice of the
meeting or agreed on by a majority of the shareholders
entitled to vote thereat.
Section 2. Annual Meetings: The annual meeting of shareholders for the
election of Directors and the transaction of other business
shall be held in March of each year on any day except a
Saturday, Sunday or legal holiday in that month as
determined by the Board of Directors.
Section 3. Substitute Annual Meeting: If the annual meeting shall not
be held on the day designated by these bylaws, a substitute
annual meeting may be called in accordance with the
provisions of Section 4 of this Article. A meeting so called
shall be designated and treated for all purposes as the
annual meeting.
<PAGE>
Section 4. Special Meetings: Special meetings of the shareholders may
be called at any time by the President, Secretary or Board
of Directors of the corporation, or by any shareholder
pursuant to the written request of the holders of not less
than one-tenth of all the shares entitled to vote at the
meeting.
Section 5. Notice of Meetings: Written or printed notice stating the
time and place of the meeting shall be delivered not less
than ten nor more than fifty days before the date thereof,
either personally or by mail, by or at the direction of the
President, the Secretary, or other person calling the
meeting, to each shareholder of record entitled to vote at
such meeting.
In the case of an annual or substitute annual meeting, the
notice of meeting need not specifically state the business
to be transacted thereat unless it is a matter, other than
election of Directors, on which the vote of shareholders is
expressly required by the provisions of the North Carolina
Business Corporation Act. In the case of a special meeting,
the notice of meeting shall specifically state the purpose
or purposes for which the meeting is called.
When a meeting is adjourned for thirty days or more, notice
of the adjourned meeting shall be given as in the case of an
original meeting. When a meeting is adjourned for less than
thirty days in any one adjournment, it is not necessary to
give any notice of the adjourned meeting other than by
announcement at the meeting at which the adjournment is
taken.
Section 6. Voting Lists: At least ten days before each meeting of
shareholders, the Secretary of the corporation shall prepare
an alphabetical list of the shareholders entitled to vote at
such meeting, with the address of and number of shares held
by each, which list shall be kept on file at the registered
office of the corporation for a period of ten days prior to
such meeting, and shall be subject to inspection by any
shareholder at any time during the usual business hours.
This list shall also be produced and kept open at the time
and place of the meeting and shall be subject to inspection
by any shareholder during the whole time of the meeting.
Section 7. Quorum: The holders of a majority of the shares entitled to
vote, represented in person or by proxy, shall constitute a
quorum at meetings of shareholders. If there is no quorum at
the opening of a meeting of shareholders, such meeting may
be adjourned from time to time by the vote of a majority of
the shares voting on the motion to adjourn; and, at any
adjourned meeting at which a quorum is present, any business
may be transacted which might have been transacted at the
original meeting.
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The shareholders at a meeting at which a quorum is present
may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to
leave less than a quorum.
Section 8. Voting of Shares: Each outstanding share having voting
rights shall be entitled to one vote on each matter
submitted to a vote at a meeting of shareholders.
Except in the election of Directors the vote of a majority
of the shares voted on any matter at a meeting of
shareholders at which a quorum is present shall be the act
of the shareholders on the matter, unless the vote of a
greater number is required by law. In the election of
Directors those receiving the greatest number of votes shall
be deemed elected even though not receiving a majority.
Voting on all matters except the election of Directors shall
be by voice vote or by a show of hands unless the holders of
one-tenth of the shares represented at the meeting shall,
prior to the voting on any matter, demand a ballot vote on
that particular matter.
Section 9. Informal Action by Shareholders: Any action which may be
taken at a meeting of the shareholders may be taken without
a meeting if a consent in writing, setting forth the action
so taken, shall be signed by all of the persons who would be
entitled to vote upon such action at a meeting, and filed
with the Secretary of the corporation to be kept in the
Corporate Minute Book.
Section 10. Proxies: At all meetings of shareholders, shares may be
voted either in person or by one or more agents authorized
by a written proxy executed by the shareholder or his duly
authorized attorney-in-fact. A telegram, cablegram, wireless
message or photogram appearing to have been transmitted by a
shareholder, or a photographic, photostatic or equivalent
reproduction of a writing appointing one or more agents
shall be deemed a written proxy within the meaning of this
section.
ARTICLE III.
DIRECTORS
Section 1. General Powers: The business and affairs of the Corporation
shall be managed by the Board of Directors.
Section 2. Number, Term and Qualifications: The number of Directors
constituting the Board of Directors shall not be fewer than
three, except that if and so long as all of the shares of
the corporation are owned of record by either one or two
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shareholders, the number of Directors may be fewer than
three but not fewer than the number of such shareholders.
The authorized number of Directors, within the limits above
specified, shall be determined by the affirmative vote of a
majority of the whole Board given at a regular or special
meeting of the Board of Directors; provided that if the
number so determined is to be increased, or decreased,
notice of the proposed increase or decrease shall be
included in the notice of such meeting or all of the
Directors in office at that time shall be present at such
meeting or those not present at any time shall waive notice
thereof in writing; and provided, further, that the number
of Directors which shall constitute the whole Board shall
not be less than three nor shall it be reduced to a number
less than the number of Directors then in office unless such
reduction shall become effective only at and after the next
ensuing meeting of shareholders for the election of
Directors. Each Director shall hold office for a period of
one year or until his death, resignation, retirement,
removal, disqualification, and until such successor is
elected and qualified. Directors need not be residents of
the State of North Carolina or shareholders of the
corporation.
Section 3. Election of Directors: Except as provided in Section 5 of
this Article, the Directors shall be elected at the annual
meeting of shareholders; and those persons who receive the
highest number of votes shall be deemed to have been
elected. If any shareholder so demands, election of
Directors shall be by ballot.
Section 4. Removal: Directors may be removed from office with or
without cause by a vote of shareholders holding a majority
of the shares entitled to vote at an election of Directors.
However, unless the entire Board is removed, an individual
Director may not be removed if the number of shares voting
against the removal would be sufficient to elect a Director
if such shares were voted cumulatively at an annual
election. If any Directors are so removed, new Directors may
be elected at the same meeting.
Section 5. Vacancies: A vacancy occurring in the Board of Directors may
be filled by a majority of the remaining Directors though
less than a quorum, or by the sole remaining Director; but a
vacancy created by an increase in the authorized number of
Directors shall be filled by election at an annual meeting
or at a special meeting of shareholders called for that
purpose. The shareholders may elect a Director at any time
to fill any vacancy not filled by the Directors.
Section 6. Compensation: The Board of Directors may compensate
Directors for their services as such and may provide for the
payment of all expenses incurred by the Directors in
attending regular and special meetings of the Board.
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ARTICLE IV.
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment: The Board of Directors, by resolution adopted
by a majority of the number of Directors then in office, may
designate from among its members an Executive Committee or
one or more other committees, each consisting of two or more
Directors. The designation of any such committee and the
delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any
responsibility or liability imposed upon it or him by law.
Section 2. Authority: Any such committee shall have and exercise all
authority of the Board of Directors in the management of the
corporation except to the extent, if any, that such
authority shall be limited by the resolution appointing such
committee and except also to the extent limited by law.
Section 3. Tenure and Qualifications: Each member of any such committee
shall hold office until the next regular annual meeting of
the Board of Directors following his designation and until
his successor is designated as a member of any such
committee and is elected and qualified.
Section 4. Meetings: Regular meetings of any such committee may be held
without notice at such time and place as such committee may
fix from time to time by resolution. Special meetings of any
such committee may be called by any member thereof upon not
less than one day's notice stating the place, date and hour
of such meeting, which notice may be written or oral, and if
mailed, shall be deemed to be delivered when deposited in
the United States mail addressed to any member of the
Executive Committee at his business address. Any member of
the Executive Committee may waive notice of any meeting and
no notice of any meeting need be given to any member thereof
to attend in person. The notice of a meeting of the
Executive Committee need not state the business proposed to
be transacted at the meeting.
Section 5. Quorum: A majority of the members of any such committee
shall constitute a quorum for the transaction of business at
any meeting thereof, and actions of such committee must be
authorized by the affirmative vote of a majority of the
members present at the meeting at which a quorum is present.
Section 6. Informal Action: Action taken by a majority of the members
of any such committee without meeting is nevertheless action
of such committee if written consent to the action in
question is signed by all of the members of such committee
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and filed with the minutes of the proceedings of the
committee, whether done before or after the actions so
taken.
Section 7. Removal: Any member of any such committee may be removed at
any time with or without cause by resolution adopted by a
majority of the Board of Directors.
Section 8. Vacancies: Any vacancy in any such committee may be filled
by resolution adopted by a majority of the Board of
Directors.
Section 9. Procedure: Any such committee shall elect a presiding
officer from among its members and may fix its own rules of
procedure which shall not be inconsistent with these bylaws.
It shall keep regular minutes of its proceedings and report
the same to the Board of Directors for its information at
the meeting thereof held next after the proceedings shall
have been taken.
Section 10. Meeting by Telephone: Any one or more members of any such
committee may participate in a meeting of the committee by
means of a conference telephone or similar communications
device which allows all persons participating in the meeting
to hear each other and such participation in a meeting shall
be deemed presence in person at such meeting.
ARTICLE V.
MEETINGS OF DIRECTORS
Section 1. Regular Meetings: A regular meeting of the Board of
Directors shall be held immediately after, and at the same
place as, the annual meeting of the shareholders. In
addition, the Board of Directors may provide, by resolution,
the time and place, either within or without the State of
North Carolina, for the hold in 4 of additional regular
meetings.
Section 2. Special Meetings: Special meetings of the Board of Directors
may be called by or at the request of the President or any
two Directors. Such meetings maybe held within or without
the State of North Carolina.
Section 3. Notice of Meetings: Regular meetings of the Board of
Directors may be held without notice.
The person or persons calling a special meeting of the Board
of Directors shall, at least two days before the meeting,
give notice thereof by any usual means of communication.
Such notice need not specify the purpose for which the
meeting is called.
6
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Attendance by a Director at a meeting shall constitute a
waiver of notice of such meeting, except where a Director
attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting is not
lawfully called.
Section 4. Quorum: A majority of the Directors fixed by these bylaws
shall constitute a quorum for the transaction of business at
any meeting of the Board of Directors.
Section 5. Manner of Acting: Except as otherwise provided in this
section, the act of the majority of the Directors present at
a meeting at which a quorum is present shall be the act of
the Board of Directors.
Section 6. Informal Action by Directors: Action taken by the required
majority of the Directors without a meeting is nevertheless
Board action if written consent to the action in question is
signed by all the Directors and filed with the minutes of
the proceedings of the Board, whether done before or after
the action so taken.
Section 7. Meeting by Telephone: Any one or more Directors may
participate in a meeting of the Board of Directors by means
of a conference telephone or similar communications device
which allows all persons participating in the meeting to
hear each other and such participation in a meeting shall be
deemed presence in person at such meeting.
ARTICLE VI.
INDEMNIFICATION
Section 1. Expenses and Liabilities: The corporation shall have the
power to indemnify any present or former Director, officer,
employee or agent or any person who has served or is serving
in such capacity at the request of the corporation in any
other corporation, partnership, joint venture, trust or
other enterprise or as a trustee or administrator under an
employee benefit plan, with respect to any liability or
litigation expense, including reasonable attorneys' fees,
incurred by any such person to the extent and upon the terms
and conditions provided by law.
To the extent and upon the terms and conditions provided by
law, the corporation shall indemnify any and all of its
officers and Directors against liability and litigation
expense, including reasonable attorneys' fees, arising out
of their status as such or their activities in any of the
foregoing capacities (excluding, however, liability or
litigation expense which any of the foregoing may incur on
account of his activities which were at the time taken known
or believed by him to be clearly in conflict with the best
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interests of the corporation), and said officers and
Directors shall be entitled to recover from the corporation,
and the corporation shall pay, all reasonable costs,
expenses, and attorneys' fees in connection with the
enforcement of rights to indemnification granted herein. Any
person who at any time after the adoption of this bylaw
serves or has served in either of the aforesaid capacities
for or on behalf of the corporation shall be deemed to be
doing or to have done so in reliance upon and as
consideration for the right of indemnification provided
herein. Such right shall inure to the benefit of the legal
representatives of any such person and shall not be
exclusive of any other right to which such person may be
entitled apart from the provisions of this bylaw.
Section 2. Advance Payment of Expenses: Expenses incurred by a
Director, officer, employee, or agent in defending a civil
or criminal action, suit, or proceeding may be paid by the
corporation in advance of the final disposition of such
action, suit or proceeding as authorized by the Board of
Directors in the specific case or as authorized or required
under any charter or bylaw provision or by any applicable
resolution or contract upon receipt of an undertaking by or
on behalf of the Director, officer, employee or agent to
repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the corporation
against such expenses.
Notwithstanding the provisions of the preceding paragraph,
the corporation shall, upon receipt of an undertaking by or
on behalf of the Director or officer involved to repay the
expenses described in Article VI, Section 1, Paragraph 2
unless it shall ultimately be determined that he is entitled
to be indemnified by the corporation against such expenses,
pay expenses incurred by such Director or officer in
defending a civil or criminal action, suit or proceeding in
advance of the final disposition of such action, suit or
proceeding.
Section 3. Insurance: The corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was
a Director, officer, employee, or agent of the corporation,
or is or was serving at the request of the corporation as a
Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or as
a trustee or administrator under an employee benefit plan
against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to
indemnify him against such liability.
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ARTICLE VII.
OFFICERS
Section 1. Number: The officers of the corporation may consist of a
Chairman of the Board, a President, a Secretary, a
Treasurer, and such Vice Presidents, Assistant Secretaries,
Assistant Treasurers and other officers as the Board of
Directors may from time to time elect to the extent provided
or allowable by the laws of the state of North Carolina. Any
two or more offices may be held by the same person, except
the offices of President and Secretary.
Section 2. Election and Term: The officers of the corporation shall be
selected by the Board of Directors. Such elections may be
held at any regular or special meeting of the Board. Each
officer shall hold office for a period of one year or until
his death, resignation, retirement, removal,
disqualification, or his successor is elected and qualifies.
Section 3. Removal: Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board with or
without cause; but such removal shall be without prejudice
to the contract rights, if any, of the person so removed.
Section 4. Chairman of the Board: The Chairman of the Board shall
preside at all meetings of the Board of Directors at which
he shall be present, and shall have such other powers and
duties as he shall be called upon to perform by the Board of
Directors.
Section 5. President: The President and the Chief Executive Officer
shall be the principal executive officers of the corporation
and, subject to the control of the Board of Directors, they
shall supervise and control the management of the
corporation in accordance with these bylaws. They shall
perform all duties incident to the offices of President and
Chief Executive Officer and such other duties as may be
prescribed by the Board of Directors from time to time.
The President shall, when present, preside at all meetings
of shareholders. He shall sign, with any other proper
officer, certificates for shares of the corporation and any
deeds, mortgages, bonds, contracts, or other instruments
which may be lawfully executed on behalf of the corporation,
except where required or permitted by law to be otherwise
signed and executed and except where the signing and
execution thereof shall be delegated by the Board of
Directors to some other officer or agent.
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Section 6. Vice Presidents: The Vice Presidents in the order of their
election, unless otherwise determined by the Board of
Directors, shall, in the absence or disability of the
President, perform the duties and exercise the powers of
that office. In addition, they shall perform such other
duties and have such other powers as the Board of Directors
shall prescribe.
Section 7. Secretary: The Secretary shall keep a correct record of all
the proceedings of the meetings of the shareholders and
Directors. He shall attend to the giving of notices, have
custody of the corporate seal, and affix it to all
instruments required to be executed under seal as authorized
by the Board of Directors. He shall perform such other
duties as are incident to the office of Secretary, and shall
have such other powers and duties as may be conferred upon
him by the Board of Directors.
Section 8. Treasurer: The Treasurer shall have charge of all the moneys
and securities belonging to the corporation. He shall
deposit said property with such banks as the Board of
Directors shall designate and in the name of the
corporation. He shall keep a record of all receipts and
disbursements, and shall have charge of all records of the
corporation relating to its finances. He shall perform such
other duties as are incident to the office of Treasurer, and
shall have such other powers and duties as may be conferred
upon him by the Board of Directors.
Section 9. Assistant Secretaries and Treasurers: The Assistant
Secretaries and Assistant Treasurers shall, in the absence
or disability of the Secretary or the Treasurer,
respectively, perform the duties and exercise the powers of
those offices, and they shall, in general, perform such
other duties as shall be assigned to them by the Secretary
or the Treasurer, respectively, or by the President or the
Board of Directors.
Section 10. Bonds: The Board of Directors may by resolution require any
or all officers, agents and employees of the corporation to
give bond to the corporation, with sufficient sureties,
conditioned on the faithful performance of the duties of
their respective offices or positions, and to comply with
such other conditions as may from time to time be required
by the Board of Directors.
Section 11. Vacancies: A vacancy in any office because of the death,
resignation, removal, disqualification, or otherwise, may be
filled by the Board of Directors for the unexpired portion
of the term.
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ARTICLE VIII.
CONTRACTS, CHECKS AND DEPOSITS
Section 1. Contracts: The Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract or
execute and deliver any instrument on behalf of the
corporation and such authority may be general or confined to
specific instances.
Section 2. Checks and Drafts: All checks, drafts or other orders for
the payment of money issued in the name of the corporation
shall be signed by such officer or officers, agent or
agents, of the corporation and in such manner as shall from
time to time be determined by resolution of the Board of
Directors.
Section 3. Deposits: All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit
of the corporation in such depositories as the Board of
Directors shall direct.
ARTICLE IX.
CERTIFICATES FOR SHARES AND TRANSFER THEREOF
Section 1. Certificates for Shares: Certificates representing shares of
the corporation shall be issued, in such form as the Board
of Directors shall determine, to every shareholder for the
fully paid shares owned by him. These certificates shall be
signed by the President or any Vice President, and the
Secretary, Assistant Secretary, Treasurer or Assistant
Treasurer. They shall be consecutively numbered or otherwise
identified; and the name and address of the persons to whom
they are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the
corporation.
Section 2. Transfer of Shares: Transfer of shares shall be made on the
stock transfer books of the corporation only upon surrender
of the certificates for the shares sought to be transferred
by the record holder thereof or by his duly authorized
agent, transferee or legal representative. All certificates
surrendered for transfer shall be cancelled before new
certificates for the transferred shares shall be issued.
Section 3. Closing Transfer Books and Fixing Record Date: For the
purpose of determining shareholders entitled to notice of or
to vote at any meeting of shareholders or any adjournment
thereof, or entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any
other proper purpose, the Board of Directors may provide
that the stock transfer books shall be closed for a stated
period but not to exceed, in any case, fifty days. If the
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stock transfer books shall be closed for the purpose of
determining shareholders entitled to notice or to vote at a
meeting of shareholders, such books shall be closed for at
least ten days immediately preceding such meeting.
In lieu of closing the stock transfer books, the Board of
Directors may fix in advance a date as the record date for
any such determination of shareholders, such record date in
any case to be not more than fifty days and, in case of a
meeting of shareholders, not less than ten days immediately
preceding the date on which the particular action, requiring
such determination of shareholders, is to be taken. If the
stock transfer books are not closed and no record date is
fixed for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders, or
shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on
which the resolution of the Board of Directors declaring
such dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders.
Section 4. Lost Certificates: The Board of Directors may authorize the
issuance of a new certificate in place of a certificate
claimed to have been lost or destroyed, upon receipt of an
affidavit of such fact from the person claiming the loss or
destruction. When authorizing such issuance of a new
certificate, the Board may require the claimant to give the
corporation a bond in said sum as it may direct to indemnify
the corporation against loss from any claim with respect to
the certificate claimed to have been lost or destroyed; or
the Board may, by resolution reciting that the circumstances
justify such action, authorize the issuance of a new
certificate without requiring such a bond.
ARTICLE X.
GENERAL PROVISIONS
Section 1. Dividends: The Board of Directors may from time to time
declare, and the corporation may pay, dividends on its
outstanding shares in the manner and upon the terms and
conditions provided by law and by its charter.
Section 2. Seal: The seal shall be in the form of a circle with the
name of the corporation and N. C. on the circumference and
the word "SEAL" in the center. Such seal may be an
impression or stamp and may be used by the officers of the
corporation by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
Section 3. Waiver of Notice: Whenever any notice is required to be
given to any shareholder or Director under the provisions of
the North Carolina Business Corporation Act or under the
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provisions of the charter or bylaws of this corporation, a
waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time
stated therein, shall be equivalent to the giving of such
notice.
Section 4. Fiscal Year: The fiscal year of the corporation shall be a
year ending December 31.
Section 5. Amendments: Except as otherwise provided herein, these
bylaws may be amended or repealed and new bylaws may be
adopted by the affirmative vote of a majority of the
Directors then holding office at any regular or special
meeting of the Board of Directors.
The Board of Directors shall have no power to adopt a bylaw:
(1) requiring more than a majority of the voting shares for
a quorum at a meeting of shareholders or more than a
majority of the votes cast to constitute action of the
shareholders, except where higher percentages are required
by law; and (2) providing for the management of the
corporation other than by the Board of Directors or a
committee thereof.
No bylaw adopted or amended by the shareholders shall be
altered or repealed by the Board of Directors.
No alteration, amendment or rescission of a bylaw shall be
voted upon unless notice thereof has been given in the
notice of the meeting or unless all of the Directors of the
corporation execute a written waiver of notice stating that
action upon the bylaws is to be taken at the meeting, and
the original of such waiver shall be recorded in the
Corporate Minute Book.
13
<PAGE>
Exhibit 24.1 - Consent of Independent Auditors
The Stockholders
Frisby Technologies, Inc.:
We consent to the reference to our firm under the headings "Experts"
and "Change in Independent Auditors" and to the use of our report dated April
10, 1997 (except Note 1, as to which the date is December 23, 1997), in the
Registration Statement (Form SB-2 No. 333-00000) and related Prospectus of
Frisby Technologies, Inc. dated January 29, 1998.
/S/ ERNST & YOUNG LLP
Melville, New York
January 28, 1998
<PAGE>
Exhibit 24.2 - Consent of Independent Auditors
The Stockholders
Frisby Technologies, Inc.:
We consent to the use of our report included herein and to the
reference to our firm under the headings "Experts" and "Change in Independent
Auditors" in the Prospectus.
/S/ KPMG PEAT MARWICK LLP
Jericho, New York
January 28, 1998
